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Honeywell Predicts Stable Copter Demand

Zacks Equity Research

Honeywell International Inc. (HON) predicted a buoyant five-year outlook for the global helicopter industry, with considerable demand from high-growth regions such as Latin America and China balancing the steady growth in Europe and North America.

Honeywell anticipates that 4,800–5,500 civilian helicopters will be delivered during 2014–2018. According to the 2014 Honeywell survey, mounting large fleet operator demand will compensate for a moderate softening in new helicopter purchase plans, ensuring persistent strength in projected demand in the succeeding years.

Key Demand Drivers

When evaluating usage trends across segments, the oil and gas industry took the centre-stage, recording an annual average of roughly 720 hours per aircraft, followed by law enforcement at over 400 hours per year. Tourism, emergency medical services and general utility had annual usages of approximately 375–400 hours. Corporate segment operators had lowest average use at just over 300 hours per helicopter per year.

With recession hurting demand in the aviation sector, the oil and gas industry has emerged as the likely savior for global commercial helicopter manufacturers. As energy companies seek to exploit more remote reserves, demand for medium-sized and heavy helicopters is expected to increase significantly.

Helicopter replacement cycles and increased operating hours in the law enforcement and oil & gas industries contribute to sustained demand in those sectors. With utility helicopter purchase interest inching upward and new platforms scheduled to enter operations in the upcoming years, overall demand looks well set to increase compared with 2013.

Geographic Concentration    

Latin America continues to lead in new purchase rates, with nearly 32% of respondent fleets scheduled for turnover with a new helicopter addition or replacement. The demand for civil, turbine-powered helicopters over the next five years in the U.S. and Canada are expected to rise 26%, which aggregated with Latin America, is expected to account for half of the total global demand. Europe's share closely trails with 23%, with the Asia-Oceania region representing 19%, while Africa and the Middle East recording under 8% growth.

A considerable part of a decline in European demand is attributable to a large slump in Russian buying plans in the coming years. With regard to the emerging nations, China’s numbers were the strongest in the 2014 survey, while Brazilian expansion plans looked quite stable and Indian respondents reported more conservative purchase plans.
With the highest fleet of replacement numbers, Latin America looks set to surpass Europe and affirm its place as the world’s second-largest regional market, following North America.
Demand Pull

Operators who plan to purchase a helicopter within the next five years stated the key decision drivers to be the maturity of their current aircraft, contracted replacement cycle and expiration of warranty. Honeywell appears well-equipped to cater to the operators’ needs relating to new installations as well as fleet upgrades.

The light single-engine helicopter maintained its outstanding popularity, with the intermediate/medium twin-engine helicopter coming a close second as it won favors with 33% respondents. The light twin helicopter class seized 26% of total operator purchase plans in the 2014 survey. Heavy multi-engine helicopters are expected to ride high on continued expansion plans from the oil and gas sector.

Per the survey, the models that achieved the maximum operator approval are AW139, Bell 407, Bell 412, EC120, EC130/EC350 series and Sikorsky S-76.

Honeywell’s Forte

Honeywell’s fleet operations are set to expand this year, with primary contributions from operators in Latin America, Asia and Europe. The company has continually invested in technological upgradation to provide increased power, reliability and fuel efficiency to helicopter operators.

Honeywell’s Enhanced Ground Proximity Warning System (:EGPWS) has nearly eliminated controlled flight into terrain (:CFIT), improving situational awareness in helicopter operations. This is imperative given the fact that the helicopters spend most of their flight time operating at low altitudes in all kinds of weather conditions and often in rough terrain to perform critical operations like search and rescue, homeland security and law enforcement along with oil and gas operations.

Honeywell's access to advanced safety systems such as Health and Usage Monitoring Systems (:HUMS) and Sky Connect Tracker III have proven successful in addressing requirements of helicopter operators. These offer enhanced systems that diminish CFIT and mechanical failures, increase situational awareness and reduce the frequency of pilot error.

Honeywell currently holds a Zacks Rank #3 (Hold). Other stocks in the industry that look promising and are worth a look include 3M Company (MMM), Hutchison Whampoa Ltd (HUWHY) and Marubeni Corp. (MARUY), each carrying a Zacks Rank #2 (Buy).

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