When we last visited Honeywell’s corporate offices in Phoenix in early 2000, a lot was happening. The company had just merged with AlliedSignal; a new division, Honeywell Aerospace Electronic Systems (AES), was being formed; and adjustments were being made under new leadership. During the visit, we interviewed AES’ new president, Mike Smith, and the Honeywell Aerospace group’s chief operating officer and Honeywell Inc.’s executive vice president, Bob Johnson. We were in Smith’s new office; unopened boxes were scattered on the floor (April 2000).
Now, some two years later, we visit Honeywell AES’ top official again–in the same office. But now the boxes are unpacked and, because Smith recently decided to retire, a new person occupies the president’s chair, Dean Flatt.
And, still, a lot is happening at Honeywell. The board of directors of Honeywell Inc. has just named a new president and chief executive officer, David Cote (pronounced Koe-ty). Cote and Flatt must deal with the aftermath of the unsuccessful acquisition of Honeywell by General Electric (GE), as well as a slumping airline market due to a downturn in the world economy and the tragedy of Sept. 11, 2001.
Flatt is in the center of this whirlwind. He seems to take it in stride. He heads a $4-billion business that employs about 20,000 persons located in nine major U.S. sites and 16 service and repair facilities worldwide. Perhaps Flatt maintains his cool because he can draw from a wealth of experience. Avionics Magazine began its interview with Flatt by asking about his diverse professional background.
Flatt: I went to the Naval Academy, and the Navy sent me to a school for a year to learn nuclear engineering. Then I was on a sub for four years–which, with relationship to aviation, is like going IFR for 80 days at time. I was with GE for 10 years. About six years of that was in various manufacturing quality and sales jobs for big power generation plants, then four years in the lighting business. Then I went to a commercial refrigeration company [Hill Refrigeration, Trenton, N.J.] that was owned by venture capitalists out of Chicago.
And then AlliedSignal gave me a call and asked me to run the defense and space avionics business out of Teterboro [N.J.]. I did that in ’96. As AlliedSignal was changing its portfolio, I got more pieces of the defense and space business. It got bigger.
Then came the Honeywell/Allied deal. I wound up working for Mike [Smith], running Honeywell’s new defense and space business, which is about 65 percent Honeywell and about 35 percent AlliedSignal. That was until July 2000. Then [Honeywell chairman] Mike Bonsignore and Gianntonio Ferrari [Honeywell president and chief operating officer] asked me to run the chemical and process polymer business, called Specialty Materials. It was an interesting time for that business because it sees bad markets first, before anyone else.
Avionics Magazine: Why is that?
Flatt: They are in the most basic substances–composites for whatever is made. They are in the materials business for the Intels [computer makers, such as Intel Corp.] and for PC [personal computer] boards and in base additives and chemicals for a broad cross-section of industry. When [the PC producers] decide that they will cut back, they cut back on materials first.
Avionics Magazine: Is there an advantage to such a varied background?
Flatt: There are advantages. One, the nuclear business helps me think from a systems engineering standpoint. That’s a big help. Plus dealing in that [nuclear] regulatory environment helps me think about issues as we’re dealing with different regulatory environments, whether it be military or the FAA [Federal Aviation Administration].
When you’ve been in these different businesses, you ask different questions, as you learn about things. You can maybe help see a problem from a different way and help solve it. The years I spent on subs and then in defense and space with Allied have been a big help.
Avionics Magazine: And now you work with Bob Johnson and with Honeywell’s new president and chief executive officer, David Cote.
Flatt: Our business is the third-largest in Honeywell. There’s the Automation & Control business, the engines business [Engines & Systems] and then my business. Or if you take the aerospace business and put that all together [Engines & Systems and Aerospace Electronic Systems], that’s the largest single segment of Honeywell. So we do a lot of work with Dave and Bob. Bob consolidates the aerospace business, so it presents one face to the marketplace and to the customer. A lot of times, for internal issues, we might work with Dave or Dave’s people directly.
Avionics Magazine: And you work well with Cote?
Flatt: We’re thrilled to have Dave Cote here [with Honeywell]. He knows the aerospace business really well. He started as an hourly worker in aircraft engines with GE. He worked six years as an hourly worker, making turbine blades and wiring harnesses for GE engines in New Hampshire. He worked second and third shift and went to school during the day at the University of New Hampshire, and then went to GE engines in the finance program. He had a number of other senior-level jobs in GE and then went to TRW. So he knows our business, and we’re glad to have him.
Avionics Magazine: You’re Honeywell’s third-largest business. What does that represent?
Flatt: It’s about a $4-billion business. Honeywell’s total business is about $24 billion, so we represent about a sixth of the business. If you talk of Aerospace, that’s worth about $9 billion or a little less than 40 percent of the total [of Honeywell’s annual revenue].
Avionics Magazine: Has your contribution to the company been quite consistent over recent years?
Flatt: Yes. The avionics business was growing until 2001 on a fairly steady basis.
Avionics Magazine: What about recent adjustments since 9/11 and because of the economic slowdown?
Flatt: Honeywell Aerospace, as a whole, has reduced the number of business units mostly by reorganization and re-aligning people. It represents some restructuring, for two reasons: One is for efficiency’s sake and where it makes more sense to streamline. And one of the added benefits is reduced cost. We needed to do that as our markets went down.
Avionics Magazine: Honeywell planned to eliminate 19,000 jobs. How did that impact your business?
Flatt: We announced 4,500 jobs last fall in Aerospace. That’s about 10 percent of the total population. And with transfers and retirements, there weren’t really that many jobs that went away. We’re down to 40,500 in Aerospace right now. And our [Aerospace Electronic Systems] business is proportional to aerospace, about 10 percent of the total workforce.
Avionics Magazine: Are you finished with your adjustments?
Flatt: Yes. Of course, businesses are never finished restructuring, re-sizing and taking a look at what they’re doing. Never. We’re stepping up our programs with regard to Six Sigma. We’re taking the process improvements we got with Six Sigma and getting it computerized. We’re improving delivery for our customer, and we’re improving the way people do their work here. Those are things we’re doing to improve ourselves. We have no plans for major restructuring of any kind.
Avionics Magazine: How has your Six Sigma business philosophy been progressing since the Honeywell/AlliedSignal merger?
Flatt: Here, in the aerospace electronics business, is where the merger really took place, where you had a Honeywell person and an AlliedSignal person working side by side. Here is where the cultural mix occurred. That’s what Mike was working on–making sure his people took the good things in HQV [Honeywell Quality Value, in former Honeywell] and Six Sigma in AlliedSignal and blended them into a "Six Sigma Plus" concept.
Then the GE deal happened, and that caused some arrest in development. We had Phoenix busy working with Redmond [AlliedSignal Air Transport] to get best practices in air transport. We had Albuquerque [Honeywell Defense Avionics Systems] working with Teterboro [AlliedSignal Defense & Space Systems] to get some best practices in defense and space. We had Minneapolis [Honeywell Inc.] working with everybody because they’re a big supplier of nav equipment. And then, all of a sudden, we had everyone trying to figure out how to work with Evendale [GE Aircraft Engines, near Cincinnati]. That kind of slowed the maturation process down.
Now that that’s done and we’re on our way, we’re reinvigorating [the Six Sigma concept] in a big way. When you look at a Six Sigma process, you’re not just going after a cost; you’re looking at the whole process. If I’m an engineer and you’re in finance, we can talk the same language because we’re using the same process tools and same data, and it’s data-driven decision making. It helps people do their work because it gets rid of the waste, and no one likes to spin his wheels.
If we can do those things now, during a downturn in certain parts of our industry, those processes will be that much more robust, as we start to come back up.
Avionics Magazine: How do you see the market for 2002?
Flatt: We see the air transport business, itself, going down about 21 percent this year. We see regional airline business going down about 20 percent.
Our business has fared pretty well. It’s down a little in some areas. But at the same time, we have a broad enough portfolio, so we have been able to see some uptick. Defense and space is up about 10 percent. That has compensated for some of our air transport and regional jet fallout–as has the aftermarket; we’ve broadened our parts and repair and overhaul business. So our fallout has only been at a single digit percentage over the course of the year.
Avionics Magazine: How about the corporate aircraft market?
Flatt: The business jet market is only down between 6 and 8 percent and [the decline’s constraint] is because of fractionals.
We’ve revised our business aircraft forecast. It’s only going to be down about 6 percent this year. There will be some 740 [business] airplanes delivered this year against an expected 800 that we predicted last year.
Avionics Magazine: Do you see a recovery in the commercial market?
Flatt: What we need–everybody needs–is a second-half recovery and a full head of steam by the fourth quarter. We’ve seen some hopeful signs. When we went to the Asian Aerospace show, we saw customers who were saying that [airline] traffic is up and the number of people traveling is up, and they’re seeing encouraging signs in the economy.
Avionics Magazine: Are there any regions of the world that show more promise than others?
Flatt: The U.S. is getting healthier. Europe seems to be in good shape. And Asia, outside of Japan, seems to be pretty optimistic.
Avionics Magazine: Honeywell appears to have made some inroads into the Airbus A380 program.
Flatt: I think that’s a reflection of the strength of our Aerospace Electronics Systems business now after merging Honeywell and AlliedSignal together and of our willingness to spend money on technologies. We’re going to spend for this $4 billion business about $420 million this year on technology development. That’s over 10 percent.
What’s even more interesting is that our customers like what they see, and they say they would like to share in that development, so they are spending another $350 million. So as a business, we’re really spending three-quarters of a billion dollars on new technology. Some of the work with customers is traditional, government acquisition arrangements of an EMD [engineering manufacturing development] phase of some aircraft. We also have cost sharing and other arrangements with commercial customers.
Avionics Magazine: The GE deal didn’t succeed, but could another suitor emerge?
Flatt: There aren’t many GEs. And there are not many companies that can absorb a $24-billion, Fortune 100, Dow Jones-traded leader in many marketplaces. When you start ticking off companies that can fit the bill, there aren’t many on the horizon. And I don’t think the board would have gone to the effort of bringing Larry Bossidy back [as Honeywell’s chairman] and put him on a track to find a president and CEO [and successor as chairman] if the thought was to sell the company. The board of directors and Cote are on record, saying that we’re going to be an independent company.
Avionics Magazine: Can we say AlliedSignal and Honeywell are truly merged? At one time, there still was some division in your field organization.
Flatt: When I came back to Aerospace Electronic Systems in December [2001], that was the first thing that I noticed: that [division in the field] was not an issue. The friction that many have alluded to just doesn’t exist. I was thrilled to death. The field [organization] is integrated inside the businesses; the businesses use the field organization for information, to handle the customer relationships and work as a team to make sure we’re going to get as much business as we can get and keep our customers as happy as we can.
What I think has helped is that people have taken on different jobs, regardless of where they are from. You might have a guy who is a marketing leader in our [electronics] business and who was primarily an engine person before. And it doesn’t matter that people have moved around because that’s helped transmit the benefits of both organizations [Honeywell and AlliedSignal].
Avionics Magazine: When we last visited Honeywell, we were told that 20 percent of your business was in general aviation (GA); 45 percent, regional and air transport; and 35 percent, defense and space. Does that still apply?
Flatt: About 35 percent of the business is in defense and space, 35 percent in air transport, about 30 percent in business and GA. And that includes aftermarket in all those businesses. The total aftermarket is between 15 and 20 percent of the business, which is about $600-800 million.
Avionics Magazine: There obviously is more emphasis among avionics manufacturers on the aftermarket?
Flatt: It’s really providing total value. I have a phrase I use when I’m talking to my guys: You may turn one person’s cost center into someone else’s profit center, and both of you can benefit.
Our organization offers everything [in aftermarket services], whether it’s a flight hour agreement, service agreement, parts-and-exchange or a logistics deal; we’re on every level. And the goal is to offer services where it’s appropriate with the right customer. When you do that, there is a much better growth pattern, and again it’s taking someone’s cost center and turning it into a profit center for us, and both of us make out better at the end of the day. We’re looking at a 4 percent growth in our customer service organization.
Avionics Magazine: You have an alliance with Matsushita and you have various technologies of your own for cabin communications. How do you see the in-flight entertainment (IFE) market?
Flatt: On the air transport side, we’re out of the cabin system business, and we’re mostly looking at the business aviation side. That’s where we’re going to play.
Avionics Magazine: So you see the IFE market in air transport as being challenging?
Flatt: It’s a tough market. The value proposition for us is much clearer in business aviation–the need for the bigger bandwidth and a market that you can be assured will need [sophisticated cabin systems].
Avionics Magazine: Meanwhile, the air travel security market is hot, but does that market have legs?
Flatt: I think so. We are as well fixed to work on this security question as anyone else. In the business I came from–special materials–we have a material that provides ballistic protection and is used to secure cockpit doors.
The automation and controls business is in about 240 airports today with some form security control. At the Munich airport, they designed the whole system. They also can make things like an identification system or door-access system.
We say the market has legs, but the standard deviation–if I could use my Six Sigma terms–is huge, from $700 million to $4.2 billion [annual sales], because it’s unclear how the market will respond. Each airport is run in a different way, and they have very different needs. Right now, the new [federal] agency for security [Transportation Safety Administration] is focusing on the law enforcement side of security. But once they get their feet on the ground, they’re going to be looking at how they can digitize security and control it, and that’s when the security business will really have legs.
We look at safety and security. The things that we traditionally do, like enhanced ground prox [EGPWS]–we still have a lot of retrofits to do there. We’ve already done a billion dollars worth of business from ’97 to ’02 [with enhanced ground proximity warning systems], and we’re probably only halfway there. The same is true with TCAS [traffic alert and collision avoidance system]. And then there are things coming up, like runway incursion and turbulence, and they have some legs.
If you look historically, many safety issues took a while to form. I remember the enhanced ground prox in the mid to late ’90s took a while [to reach widespread use]. All of a sudden there were a series of issues and incidents, and the technology was at the right place at the right time, and it all broke at once. I’m sure the same will be true in the security area.
But one of the problems is there is not a single source of funding [for air travel security], which is why we have the wide spread of $700 million to $4.2 billion. But as the new agency becomes formed, it eventually will have to get more sophisticated systems.
Avionics Magazine: We talked about General Electric trying to acquire you. Let’s turn things around. Are you looking to make acquisitions?
Flatt: We’re very interested in growth acquisitions. We’re looking at several candidates. There are some reasonably priced companies out there, but they will have to meet our value proposition.