This week, a House member called on the Department of Defense Inspector General (DoD IG) to investigate an aircraft parts supplier suspected of gouging the Pentagon for many years.
Representative Ro Khanna (D-CA), a member of the House Armed Services Committee, sent a letter to Acting DoD IG Glenn Fine requesting a probe into “potential waste, fraud, and abuse” by TransDigm Group, a Cleveland, Ohio-based conglomerate with a massive footprint in the aviation industry. TransDigm, through the dozens of US and European aircraft part manufacturers it has bought up over the years, provides parts used on nearly every commercial and military aircraft in service today. Most of those parts are proprietary products for which TransDigm owns the design or is the sole supplier.
Khanna is concerned that TransDigm is using its market dominance to take advantage of its customers, including DoD. Recent stories in the financial press have highlighted the company’s tendency to dramatically raise the price of parts after acquiring the manufacturer. For example, Business Insider reported that TransDigm raised the price of Harco Laboratories’ cable assembly 352 percent (from $1,737 to $7,864) after it bought the company in 2011, and two years later raised the price of Aerosonic Corporation’s vibration panel 300 percent after acquiring the company. Khanna’s letter contains other examples of similar post-acquisition price hikes.
TransDigm’s pricing practices have a direct impact on taxpayers. DoD, which accounts for roughly 30 percent of TransDigm’s sales, once paid about $5.3 million more than the fair and reasonable price for some of the company’s parts, according to a 2006 DoDIG audit.
In addition, Khanna asked the IG to look into whether TransDigm “has been operating as a hidden monopolist” by using various methods to conceal from DoD contracting officers that it is a sole-source supplier. For example, TransDigm will sometimes falsely create the appearance of a competitive bid by selling parts through other companies, known as exclusive distributors. The DoD has long known about the perils of buying parts through exclusive distributors. A 2008 IG audit advised the government to avoid this type of purchasing arrangement, warning that it “adds a duplicate layer of administration and shipments to the traditional procurement process” and prevents the government from being able to negotiate fair prices and obtain best value.
Khanna also noted that 12 TransDigm subsidiaries failed to disclose the identity of their corporate parent in the System for Award Management (SAM) contractor registration database. He reminded the IG that posting misleading or inaccurate information in SAM carries serious criminal, civil, and administrative penalties. He further noted that following publication of the inaccurate disclosure, the company amended the SAM data.
Khanna’s letter should resonate with a new president who is not shy about expressing his displeasure with wasteful defense spending. In December, then President-elect Trump took to Twitter to blast the spiraling costs of Boeing’s 747 Air Force One upgrade and Lockheed Martin’s F-35 stealth fighter, both of which use TransDigm parts.
We hope the letter puts pressure on DoD to probe TransDigm’s practices and spurs DoD and Congress to make reforms to the acquisition system. Over the years, the Project On Government Oversight (POGO) has repeatedly documented the problems in that system, which mainly boil down to rules and practices that hamstring the government’s ability to negotiate fair and reasonable prices and get the best deals for taxpayers.
POGO received the following comment from TransDigm:
TransDigm has been and remains committed to conducting business within the framework of the applicable laws and regulations across all areas and geographies in which we operate and we strongly disagree with recent allegations to the contrary. We remain steadfast in our commitment to supplying products that support the critical functions of our armed forces as well as commercial airplanes in use around the world.