Howmet Aerospace Pricing Spineometer: 2 of 5 Vertebrae

Howmet Aerospace, a global provider of advanced engineered solutions for the aerospace and transportation industries, had a positive Q3 2024. Revenue rose 11% to $1.8 billion and earnings before interest and taxes rose 37% to $421 million over the same period last year.

A review of Howmet’s 6 November 2024 earnings call and associated financial reports provided insight regarding the importance of pricing on performance.

Howmet operates with four lines of business: Engine Products, Fastening Systems, Engineered Structures, and Forged Wheels. 65% of revenue is derived from aerospace customers, 21% from commercial transportation, and the remainder from other industrial markets.

Pricing itself was not a major discussion point during the earnings call. Rather, changes in demand from major customers such as Boeing, defense, and airline aftermarket parts dominated the commercial aspects of the call.

Industry benchmarks suggest Howmet should employ 14 to 70 professionals pricing out of a workforce of 23,200 employees.

• The concept of Economic Value to the Customer and the 50/30/15 heuristic should dominate pricing decisions at Howmet. Their strategy is focused on producing highly engineered, and therefore high benefit, offerings. Due to limitations in who is buying Howmet offerings (small number of potential customers for many products), market research techniques such as conjoint analysis, Gabor-Granger, and van Westendorp Price Sensitivity Meters may be of limited applicability.
• Index-Based Pricing may be used to service long-term contracts as costs for energy, nickel, titanium, aluminum, cobalt, rhenium, and other raw materials fluctuate widely over the periods of months. This is likely to be used with contracts to supply major customers such as Boeing or the elements of the defense department.
• In winning contracts with customers, price guidance based on historical analysis and elements of AI would be useful for high-powered salespeople in negotiating contracts. Similarly, profit-based incentives would align decision-making with the company’s financial performance.
• Applied economists can help Howmet manage economic shocks. Howmet reports that many economic factors impact demand for changes in demand for finished goods by customers, exchange rates, interest rates, inflation, and energy prices. Demand in commercial aerospace has influenced commercial airlines’ profitability. Demand in defense aerospace is influenced by government funding, acts of terrorism, and geopolitical conflict.
• Howmet reports operating in over 20 countries. Due to the wide disparity in their customer base and commercial activities, we would expect their pricing professionals to be geographically dispersed.
• Financial statements report recent competitors have taken foot from China, Taiwan, India, and South Korea. Pricing strategy and Competitive-Price-Reaction matrices may be of value in averting unnecessary price wars and navigating new challenges.

Research into the investment by Howmet in pricing yielded underwhelming results.

1. Though commercial members of the product and sales team often listed pricing as a skill or their professional responsibility, the size of the dedicated pricing professional team did not meet the minimum requirements nor was it as global as expected.
2. Those identifying pricing as their responsibility described themselves as pricing and contract managers and analysts.

Given the importance and capability of pricing at Howmet as indicated in financial reports, management statements, and our pricing team research, and given their performance, we have come to the following conclusion as of January 2025.

Howmet Pricing Spineometer: 2 out of 5 Vertebrae.

While Howmet does not appear to be making bad pricing decisions, we strongly believe there is a large opportunity to improve performance with a stronger team of pricing professionals focused on price setting and price getting. Given the increased frequency of unprecedented economic disruptions, such a team would be of great value over the coming economic cycle.

HWM (Howmet Aerospace Inc.) rose from 102 the day prior to their earnings call to 113 one week later. FY 2023 revenue of $6.6 billion with an 18% operating margin and P/E ratio near 47.

For FY 2023, a 1% improvement in price would yield a 5.5% improvement in operating profits holding all else constant at Howmet.