Read the full interview HERE
We recently interviewed a Former President at TransDigm on the company's value-based pricing strategy.
- Why TransDigm's culture is unique
- How TransDigm streamline inventory of acquired assets to increase capital efficiency
- Two-tiered OE pricing strategy and how OEM's view TransDigm
- Aftermarket pricing and value-based pricing logic
- How OEM's suck margin from the supply chain
- Risks for TransDigm's pricing and M&A strategy
The next area that they are very focused on, in that first five years of an acquisition, is where is the pricing for their products. Actually, that’s usually the first vision. Understanding how the products go to market. There is an OEM portion of that, there is a direct to airlines portion of that and then there is a direct to MRO maintenance providers portion of that. They look at the three paths to market and, again, they go through similar rationalizations.
OEM, to TransDigm, is pretty strict and people like Honeywell follow this, people like UTAS follow this, people like GE Aviation and Rolls Royce follow this, very strictly, as well. OEM, in their minds, only relates to a product that will go onto a new airframe, rolling off the production line. That is the definition of OEM. If an OEM, like Boeing, is procuring a product and it’s not utilized for a new airframe, it’s not OEM; it’s aftermarket. So the other thing that TransDigm is very strict about doing is, understanding what’s called pass through or leakage, to the aftermarket. They will go to their OEM customers, because again, they have a relationship with the airframers, so they know how many engines rolled off Rolls Royce’s engine line and how many of those engines were actually utilized on A320s or A350s. Then they will go to the OEM that they have, as their supply chain to the market and say, okay, last year, 10 aircraft rolled out. That means that 20 engines were OEM. You purchased 42 engines’ worth. Therefore, there is a difference between the pricing for the 20 engines that were OEM, for new airframes and the remaining 22 engines that you procured.
Often, they will go in and fix contracts, fix pricing, to established two tiers. One tier for an OEM, for brand new engines and another tier for the OEM doing aftermarket work. Basically, what happens is, they level the playing field, so the MRO shop, the airline and the OEM doing that service work, almost have price parity, which for a lot of businesses, immediately raises the revenue and profitability. They were, basically, allowing the OEM to have 100% share in that and they had zero percent share in that aftermarket.
Why do the existing companies have that structure?
I never could understand that. Even when I moved to Triumph Group, I couldn’t understand that, either. I don’t know.
They let the OEM own part of the aftermarket, for the parts?
Yes. Recently, in aerospace terms, 2008 to 2012, Airbus and Boeing went on a very rigid campaign, to change their contracts, to remove two-tier aftermarket pricing from a lot of their OEM contracts. But prior to 2008, the language didn’t even exist, in many of the contracts that said, regardless of the in-market use, you will sell all products to me at a fixed price. That didn’t even exist in some of the contracts but yet, people allowed them to procure spare components at production OEM prices. That put a big strain on a lot of the supply chain and that’s why some of the businesses were available. They couldn’t maintain and support their business, when it made a big switch from in-production aircraft to out-of-production aircraft. Now, instead of manufacturing for 150 aircraft per year, you’re manufacturing for three aircraft per year being produced but yet, 300 aircraft per year are being serviced in the aftermarket. But you can’t contribute; you can’t participate.
That put a huge financial strain on a number of people, in the supply chain. Those are some of the reasons that people just walked away from different product lines or businesses, because they deemed them to be unprofitable but they didn’t understand why. They weren’t really digging in.
Read the full interview HERE