TransDigm: Aftermarket Pricing Power and OEM-Distributor Dynamics

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Can you walk us through how aftermarket distribution is done? Do OEMs typically sell directly to airlines, or do they usually go through intermediaries? What role do distributors play? Are they just holding inventories for the OEMs and getting slim margins? I'm trying to understand the whole ecosystem and how distribution works for aftermarket parts.

When talking about going to the aftermarket, it depends on the life cycle and the strategy of your company. You might be an OEM company that focuses on designing and manufacturing new components, leaving the whole aftermarket and support to someone else, such as a distributor. More typically, you do it as a combination. For the first few years, you manage the aftermarket yourself as an OEM. Then, when the market starts to mature, you hand it over to distribution. This means you sell the distribution rights for that market to someone, for instance Satair, and they buy the distribution rights for a period of time, like five or 10 years. You typically pay something upfront to buy this, which could be equivalent to two or three years of EBIT of expected demand. You then agree on a pricing level. As mentioned before, the cost price of the part sold into the aftermarket can have a five times uplift. You might make an agreement to sell it with a 20% discount to a distributor, and they could make that 20% or even an uplift. That's roughly how an OEM would treat the aftermarket.

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Regarding aftermarket components, what have you historically observed as the typical year-over-year price increases?

First of all, it depends on whether this is a component where you could have alternative sources. Are there multiple suppliers for the same thing, or are there even PMA copies of the same thing? If that's the case, then that kind of reduces the increase. However, you will still have a price increase of about 5%. If you're dealing with a proprietary sole source, where you don't really have a choice, then you are easily looking at price increases from 5% to 8%, even up to 10%. But the thing is, you don't really have a choice.

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