The TransDigm Equation

You can get the price up, you can get the cost down and you can generate new business. Almost anything else is tertiary at best.

Private equity roots

Nick Howley learned his trade at Odyssey Partners, a private equity firm that specialised in leveraged buyouts. In 1993, he and co-founder Doug Peacock acquired a small aerospace parts business called TransDigm. The playbook they applied — focus relentlessly on a few value drivers, use leverage aggressively, align compensation with ownership — never changed.

Thirty years later, TransDigm has returned 1,750x on the original equity. The 36% IRR held remarkably steady: 37% during the private years, 35% after the 2006 IPO. The company now generates $8 billion in revenue with 54% EBITDA margins — roughly double the aerospace industry average.

The model that produced these returns is distinctive. It’s also controversial.

Three value drivers

Howley reduced operations to a formula: “You can get the price up, you can get the cost down and you can generate new business. Almost anything else is tertiary at best.”

Three levers. Everything else is noise.

This creates extraordinary organisational clarity. Every business unit, every manager, every quarterly review focuses on the same three questions. The simplicity is deliberate. As Peacock put it: “If you want to confuse, you conglomerate. If you want to illuminate, desegregate things.”

TransDigm runs over 50 operating units with minimal corporate overhead. Each unit has its own P&L, its own leadership, its own accountability to the three drivers. Headquarters allocates capital and monitors results. It doesn’t run operations.

Owning the installed base

TransDigm manufactures aerospace components — actuators, pumps, valves, latches, cockpit controls. The products are small. Their strategic position is not.

Ninety percent of TransDigm’s products are proprietary. Eighty percent are sole-source — meaning TransDigm is the only approved supplier. Once a part is designed into an aircraft, it stays there for the aircraft’s 30-year lifespan. Every replacement, every repair, every overhaul flows back to TransDigm.

The company splits roughly 55/45 between aftermarket and OEM revenue. But the aftermarket generates approximately 75% of profits. OEM contracts — selling parts for new aircraft — often carry thin margins. The value comes later, from decades of captive aftermarket demand.

Howley on the business model: “You don’t see a lot of distress in this industry. We’re buying proprietary, sole-sourced aerospace parts businesses with a lot of aftermarket. Unless you get yourself way over-levered, it’s hard to lose money.”

Private equity in public markets

TransDigm explicitly describes itself as “a private equity-like model being run in the public market.” The implications are specific.

Leverage stays high — typically 5-7x EBITDA. Where most public companies treat debt as risk to minimise, TransDigm treats it as a tool to maximise returns on equity. The debt funds acquisitions and, periodically, special dividends.

Since 2009, TransDigm has paid over $14 billion in special dividends — funded almost entirely by debt. The logic is PE logic: if you can borrow at 6% and generate returns above 20%, returning capital to shareholders while maintaining leverage creates value.

Compensation aligns with ownership. Howley: “If you want people to act like owners, you have to treat them like owners and pay them like owners.” Equity grants vest based on intrinsic value growth, not stock price movements. The distinction matters — it focuses management on building long-term value rather than managing quarterly expectations.

Acquisitions face PE-style hurdles: “No credit for some vague concept of strategic fit… You had to see a clear path to a more than 20% IRR on a five-year hold.” TransDigm has completed over 90 acquisitions. Leadership claims none have failed to meet return targets.

Value-based pricing

The first of the three value drivers — “get the price up” — is where TransDigm’s model generates both its extraordinary margins and its critics.

Howley’s philosophy: “Price the product not to the cost, but price it to what we thought the value we provided to the customer.”

In practice, this means charging what the market will bear. When you’re the sole-source supplier of a part that grounds an aircraft if unavailable, the market will bear quite a lot. TransDigm’s 54% EBITDA margins — roughly double the industry — reflect this pricing power.

The approach is legal. Proprietary aftermarket parts for commercial aviation operate in a free market. Airlines and MRO providers can negotiate, or they can wait for competitors to emerge — which, given certification requirements and small market sizes, rarely happens.

Whether the approach is ethical is a different question.

The controversy

In 2019, the Department of Defense Inspector General reported that TransDigm had earned $20.8 million in “excess profits” on contracts examined. Profit margins on individual parts ranged from 2.8% to 3,850%. A cable assembly that cost $1,737 before TransDigm’s acquisition sold for $7,863 after.

The findings triggered Congressional hearings where both Nick Howley and CEO Kevin Stein testified. Under bipartisan pressure, TransDigm refunded $16.1 million.

The company’s defence rested on several points. Direct Department of Defense contracts represent only about 6% of revenue — TransDigm is primarily a commercial aerospace supplier. Unlike cost-plus defence contractors, TransDigm funds its own R&D without government support. The 15% “excess profit” threshold used by investigators was characterised as arbitrary.

A follow-up investigation in 2021 found similar pricing patterns. TransDigm did not offer voluntary refunds.

Charlie Munger, Warren Buffett’s longtime partner, was blunter than the investigators: “They figure out something that has a little monopoly due to the defence department regulations, and they raise the price 10 times. And they’re famous for it… I regard that as immoral.”

TransDigm’s shareholders have a different view. The stock has compounded at 25% annually since the IPO.

What the numbers say

The track record is difficult to argue with on its own terms.

From 1993 to 2025: 1,750x return on primary equity. From the 2006 IPO to today: roughly 7,000% total return, a 25% compound annual growth rate. Market capitalisation grew from $1 billion to $75 billion. EBITDA margins expanded from the low 30s to the mid-50s.

The acquisition machine has been relentless — over 90 deals, each held to the same IRR hurdle, each integrated into the three-value-driver framework. The model scales because it’s simple. New acquisitions don’t require new playbooks.

Howley built something that works. Whether it should work is a question the numbers don’t answer.

Connects to Library: Switching Costs · Counter-Positioning · The Value Stick

See also: The Heico Playbook — A different approach to aerospace aftermarket: employee ownership, collaborative pricing, similar returns. The Roper Model — Another PE-influenced compounder with radical decentralisation.