Problems at TransDigm (TDG)
TransDigm (NYSE: TDG — $72.7 billion) describes itself as “a leading global designer, producer and supplier of highly engineered aircraft components that are critical to the safe and effective operation of nearly all commercial and military aircraft worldwide.” TransDigm has grown through dozens of acquisitions, largely focused on being the sole-source producer of small airplane parts (e.g., handles and bolts), and aggressively raising prices for customers like commercial airliners and the Department of Defense. In some cases, prices for TransDigm parts have increased 40%+ per year for decades and the company has faced numerous allegations of price gouging the U.S. government as well as allegations of accounting fraud. The Bear Cave believes TransDigm’s model is enabled by burdensome regulation and bureaucratic negligence. The Bear Cave also believes this will change under the incoming Trump Administration and that TransDigm should be target #1 for the Department of Government Efficiency.
Last week, President-elect Trump announced the Department of Government Efficiency, an advisory body with the mandate to help “dismantle Government Bureaucracy, slash excess regulations, cut wasteful expenditures, and restructure Federal Agencies.” The Department of Government Efficiency, sometimes abbreviated DOGE, will be led by Vivek Ramaswamy and Elon Musk, who added DOGE “will send shockwave through the system, and involve anyone involved in Government waste, which is a lot of people!”
Mr. Ramaswamy has hinted at starting weekly podcasts with Mr. Musk about government “waste, fraud, and abuse” and Mr. Musk has posted several times about waste at the Pentagon.
Other interactions show that TransDigm’s alleged price gouging is squarely within the focus area of the Department of Government Efficiency.
Two days ago, Donald Trump Jr. highlighted that “Boeing overcharged the Air Force by 8,000% for cargo plane soap dispensers” and added, “This is why we need DOGE.” Mr. Musk replied, “Wow!”
And in a Wall Street Journal Op-Ed yesterday, Mr. Musk and Mr. Ramaswamy wrote, in part,
“The federal government’s procurement process is also badly broken. Many federal contracts have gone unexamined for years. Large-scale audits conducted during a temporary suspension of payments would yield significant savings. The Pentagon recently failed its seventh consecutive audit, suggesting that the agency’s leadership has little idea how its annual budget of more than $800 billion is spent.”
Any DOGE audit of TransDigm contracts would likely lead to significant savings given the recent conduct exposed in a 2022 House Oversight Hearing on TransDigm. (Readers can view the full hearing here, transcript here, and Inspector General report here.)
Chairwoman Carolyn Maloney (D-NY) opened the hearing by highlighting:
“TransDigm manufactures a product called the linear actuating cap, which was used in the Eagle F–15 and C–125 transport aircraft. According to TransDigm, the part only cost $189 to make, but the company charged the Defense Department over $7,000.”
Chairwoman Maloney also shared a graphic showing TransDigm charged the Department of Defense a 549% to 3,850% markup for certain replacement aircraft parts.
Another example was highlighted by Congresswoman Robin Kelly (D-IL) who said:
“TransDigm sells a part called the Plain Encased Seal that is used on the B–22 Osprey aircraft. According to TransDigm’s own data, it costs $125 to make the seal, but they charge DOD more than $1,600, which translates to an excess profit of more than 1,000 percent.”
Below is an image of the $1,6000 Plain Encased Seal:
While TransDigm gives several public reasons for the high prices, in private TransDigm seems to have a different tune. Representative Katie Porter (D-CA) produced an internal TransDigm email where TransDigm sales staff said, “I am just full of B.S.” when discussing pricing with the government. Ms. Porter said to TransDigm founder Nick Howley:
“‘We don’t have to give up a dime.’ Your salesperson said, ‘I am just full of B.S., and they’—being the DOD and taxpayers—‘took the bait.’ Mr. Howley, does TransDigm have a code of business ethics and conduct?”
In a rare area of agreement, Republicans seem to have equal disdain for TransDigm. Following the hearing, Senator Chuck Grassley (R-IA) wrote “Our tax dollars should go toward supporting the warfighter, not paying thousands of dollars for a simple spare part that costs peanuts to make.”
In a May 2019 hearing about TransDigm, Representative Ro Khanna (D-CA) highlighted that TransDigm often acquires sole-source aircraft part suppliers and then raises prices – meaning that without TransDigm customers like the Department of Defense would have been able to purchase the parts at cheaper prices from the legacy suppliers. Mr. Khanna asked:
“One final question: When you purchase these companies [and] increased prices, what value are you adding? I mean, for example, you purchased a company that made a part for $5,500, solenoid, and then after you bought it the price went up to $11,790. The part only cost $3,000. So what is the additional value when you’re purchasing this and raising the price?”