Eaton has not forgotten about aerospace and defense (A&D). That’s the message from Sandy Cutler, the chairman and CEO of the 72,000-employee industrial conglomerate. After moving aggressively to create a leading supplier of aircraft hydraulic, fuel, motion control and propulsion/air management systems, Cutler might be accused of turning his attention elsewhere. Eaton has not made an A&D acquisition in five years, and the sector accounted for just 10% of the company’s $16 billion in sales last year, down from 13% two years earlier. That share will almost certainly decline further after the Cleveland-based company closes on its recent $11.8-billion deal to buy electrical equipment supplier Cooper Industries.
But Cutler waves off a suggestion that his interest in A&D has waned. «We’re still anxious to add to our aerospace franchise,» he says in a wide-ranging interview. And he believes his company is poised to prosper as output of Boeing 737 and Airbus A320 jets grows and Boeing ramps up production of its long-delayed 787. Eaton Aerospace has a lot of content on those three aircraft, along with the upcoming Airbus A350 and new narrowbody offerings such as the Chinese Comac C919 and Russian Irkut MS-21.
Questions abound about whether the aerospace supply chain will be able to keep up with a production pace that will see Boeing and Airbus deliver close to 1,000 narrowbodies in 2014, up from 754 in 2010. But Cutler isn’t losing any sleep. He says the two airframers have given suppliers ample notice. «We’re pretty comfortable at this point.» Then there is the question of whether airlines—especially weaker ones—will take delivery of all of the state-of-the-art jets they have ordered. «We too are surprised» at the orders, Cutler says. «They are coming in hunks. You used to worry about whether [airlines] would buy eight aircraft or 10.»
So is the industry in an order bubble? Cutler says it’s difficult to tell. «The hardest thing for anybody to see is when you’re in a bubble,» he says. «At some point, there will probably be an overbuild.»
But the Eaton chief also believes high fuel prices provide a solid rationale for the torrid demand for new jets. He suspects that the introduction of new technologies that make aircraft cheaper to operate may have permanently shortened their economic life-cycles. That would be good for airframers but bad for lessors, who are seeing demand for older aircraft evaporate much more quickly than they had expected.
Of course, some of the new revenues Eaton rakes in from higher commercial output will be offset by a decline in military business, which still accounts for 40% of the company’s aerospace sales. Eaton is a supplier on big-ticket platforms such as the Locktheed Martin F-35 Joint Strike Fighter, Boeing KC-46A tanker and Sikorsky CH-53K heavy-lift helicopter. «Our assumption has been that the military markets will have negative growth,» Cutler says. «But we’re on programs that we know will go forward.»