https://www.forbes.com/sites/jeremybogaisky/2023/08/07/meet-the-billionaire-who-built-a-fortune-price-gouging-customers-like-the-pentagon/?sh=56c0e2b41658
Lawmakers had a lot of questions at a January 2022 congressional hearing into what they called price-gouging in military contracting, featuring parts-supplier TransDigm Group.
Nicholas Howley, the company’s cofounder, board chair and former CEO, didn’t have a lot of answers.
One question: Did your company refuse to give pricing data to the military?
“I don’t know,” Howley replied.
Was Howley aware that his compensation as CEO was more than the CEOs of Raytheon, Boeing and Lockheed Martin combined?
“I don’t know.”
Seventeen times Howley ended up answering, “I don’t know.” Which infuriated Rep. Katie Porter (D-Calif.). “For $68 million a year,” she told Howley, referring to his 2020 compensation, “you need to know what’s going on in your company.”
What Porter and everybody else didn’t know: Howley has made out much better than that.
Since TransDigm went public in 2006, Forbes estimates that Howley has amassed a fortune of $1.1 billion. That’s based on his disclosures of TransDigm stock sales and publicly reported CEO compensation before he stepped down to become board chair in 2018.
To critics, TransDigm is a symbol of corporate greed. Its playbook: buy companies that are the only ones that make particular aircraft parts and jack up prices for customers who don’t have alternatives. Reviews by the Pentagon’s inspector general in 2019 and 2021 found that immediately after acquiring a company, TransDigm raised prices on 44 of 46 items, and reaped profit margins as high as 4,436% over the 15% that investigators deemed reasonable. It was all legal. Still, a former employee described TransDigm as a “cancer.” Another told Forbes that the company is the “Satan of aircraft parts.”
To investors, however, TransDigm’s business model has proven ingenious. The Cleveland-based company has rung up a total return (stock-price appreciation plus dividends) of 29% annually since its IPO, according to FactSet data, with revenue growing over tenfold to $5.6 billion in fiscal 2022. That total return is No. 1 by a wide margin among U.S.-listed aerospace and defense companies over that span, roughly a third better than the next closest, rival parts-maker HEICO.
To taxpayers, TransDigm is a boondoggle. With $816 billion in funding, the Pentagon is the fifth-largest line item in the U.S. government’s $5.8 trillion budget for fiscal 2023. Overcharging for spare parts alone may have inflated defense spending by billions over the past two decades, according to Pentagon audits that looked at a universe of companies beyond just TransDigm. A review of a 2018 contract with a TransDigm unit found that the military would pay $119.3 million over 10 years for 100 parts that should have cost $28.3 million — $9 million a year up in smoke. Air travelers, too, pay higher fares due to what the House Oversight committee has called TransDigm’s “abusive pricing practices.” Airlines are the company’s biggest customers.
In a statement, the company said, “The Department of Defense audits of select contracts consistently concluded that TransDigm businesses followed all laws and regulations.” It also said, “The DoD typically receives a substantial discount to commercial market prices where available.”
Howley, 71, has generally avoided talking to the media. He didn’t respond to requests to speak to Forbes.
Howley isn’t the only TransDigm executive who’s gotten rich. The company awards big stock-option packages to executives, including the managers of its subsidiaries, contingent on meeting ambitious financial goals.