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The School of Knowledge is the weekly newsletter for SME owners and investors who want frameworks they can actually use — frameworks, checklists, and operating manuals every weekend, built to read on Sunday and use on Monday.
You might have heard about the Boeing 737 that crashed a few weeks ago on a routine flight from New York to Seattle. From early investigations, a small component failed resulting in the death of all 197 passengers and crew onboard. Even worse, the component in question was swapped out a couple of months before for a cheaper alternative because the airline carrier was unhappy with the consistent uplift in price. The Federal Aviation Administration (FAA), and families of the deceased are rightfully demanding justice (and the head), of the greedy capitalist responsible for making such a shortsighted decision.
Thankfully, everything I’ve just said was a lie—but the scenario, could very well happen.
The Department of Defense (DOD) and commercial airlines must conduct regular maintenance on their aircrafts to avoid the exact scenario I’ve just fictionalised. For commercial airlines, the investigation and compensation would be damaging. For the U.S government to lose some of its warfighters this way: insurrection.
Switching Costs, one of Hamilton Helmers 7 Powers, form a powerful economic and psychological moat by making it painfully difficult for a customer to abandon a product or service once they’re embedded into that ecosystem. Think Apple users vs Android. This friction casts doubt in the end user’s mind—often summarised as “better the devil you know”—protecting the incumbent from challengers. In the SAAS industry, Switching Costs are sticky, annoying and time consuming. In the aerospace industry it can be matter of life and death.
No company understands this and has used it to their benefit more than TransDigm. Today, let’s look at how robust those Switching Costs really are.
Company Profile
TransDigm Inc is a leading global designer, producer and supplier of highly engineered aircraft components that are critical to the safe and effective operation of nearly all commercial and military aircraft worldwide. Approximately 90% of net sales for fiscal year 2025 was generated from proprietary products—components or products of which they are the exclusive owner of the intellectual property. Once their parts are designed into and sold on an aircraft, they generate net sales from aftermarket consumption (maintenance and repair schedules) over the life of that aircraft, and results in significant aftermarket revenue for approximately 25-30 years. A typical platform can be produced for 20-30 years, giving an estimated product lifecycle in excess of 50 years. Over 55% of net sales for fiscal year 2025 were generated from commercial and military aftermarkets.
TransDigm predominantly serve customers in the commercial, regional, business jet and general aviation aftermarket, which generally account for 30% to 35% of their annual net sales; the commercial aerospace OEM (Original Equipment Manufacturer) market, comprising large commercial transport manufacturers and regional and business jet manufacturers, which generally account for 25% to 30% of annual net sales; and the defence market (which includes defence OEMs and aftermarket sales to the U.S. and friendly foreign governments), which generally account for approximately 35% to 40% of annual net sales.
Their customers include: 1) distributors of aerospace components; 2) worldwide commercial airlines, including national and regional airlines; 3) large commercial transport and regional and business aircraft OEMs; 4) various armed forces of the United States and friendly foreign governments; 5) defence OEMs; 6) system suppliers; and 7) various other industrial customers.
Value-Driven Operating Strategy
Their business strategy is made up of two key strengths: 1) successful execution of their value-driven operating strategy, which is focused around three core value drivers and, 2) selective acquisition. The three value-drivers are; they look to acquire profitable companies, improve their cost structure and provide highly engineered value-added products to customers. Their selective acquisition strategy focuses on companies that manufacture proprietary components in the commercial aerospace and defense industry that have significant aftermarket content whereby they can implement their three core value drivers. They have successfully acquired over 100 businesses that operate as 55 independently run companies.
It’s this “value-driven” operating strategy that has brought TransDigm under some scrutiny. Former CEO Nick Howley insists that for customers, pricing is a “distant third or fourth” priority compared to safety, reliability, and on-time delivery. It’s hard to disagree. But other’s do disagree, including Charlie Munger, who believe TransDigm’s pricing strategy is predatory and “price gouging.” Take for example the Whippany Motor Rotor which increased from $654 to $5,474.
A 736% rise.
So why does TransDigm get away with pricing that would be called predatory in almost any other industry?
TransDigm’s Switching Costs aren’t contractual—they’re regulatory.
FAA Certification
The aerospace industry is governed by stringent safety regulations overseen by agencies such as the Federal Aviation Administration (FAA) and European Union Aviation Safety Agency (EASA). Once an aircraft manufacturer or airline integrates a TransDigm component into an aircraft, replacing it with a competitors part requires a lengthy, arduous and highly expensive process of reverse engineering, testing and securing certification. Over 80% of the products that TransDigm markets are sole source. TransDigm cleverly sells these initial components at moderate margins to then jack-up the price in the aftermarket. This is commonly known as a “Razor and Blade” pricing model. Razors are initially sold for a modest price compared to the price of replacement blades—which is enough to make your eyes bleed. Thankfully, I don’t shave.
If TransDigm’s Switching Costs rest primarily on regulatory re-certification friction, how durable is it if the FAA simplifies its procurement process?
Well, they already have.
PMA’s
A PMA (Parts Manufacturer Approval) allow for the approval of “generic”
components to be manufactured and sold by companies who do not own the intellectual property of that component. Wait, but didn’t I say before that nobody else can sell TransDigm’s products? I did, and that’s still true—sort of.
In practical terms, PMA’s function as “generic” or “OEM alternative” replacement parts. Once a manufacturer obtains PMA approval for a part, they are legally permitted to produce and sell that component to airlines and maintenance providers. So, while they do not own the IP to the comparable TransDigm component, what they have done is meticulously reverse engineer and proved by way of testing—that their product can offer a cheaper alternative to TransDigm’s component typically in the region of 40%to 80%/
However, acquiring a PMA certificate isn’t a walk in the park.
For starters, you have to try and reverse engineer a component. This could pay off, but it also could fail, and the resources and upfront capital would have been for nothing. Even then, the submission of what you deem a successful, or indeed improved alternative, requires detailed documentation including drawings and specifications. This is followed by proven manufacturing processes and quality control systems as-well as comprehensive test reports and computations proving its airworthiness. Lastly there’s extensive oversight and ongoing FAA inspections once approved.
The impact of this makes it economically unviable for most. Not only that, volumes for certain components are often low or cyclical, meaning significant on-going costs for keeping the product lines going to get what..a few orders worth thousands of pounds that took you 24 months and $1 million dollars to produce? And that’s just for one component. TransDigm has a catalog of over 400,000 SKUs.
The Barrier
Stringent regulatory approval creates a sufficient barrier to protect TransDigm’s margins.
TransDigm’s Switching Costs are durable primarily because they are regulatory rather than contractual. In fact, in their latest 10-K they explicitly list the lack of contracts as a business risk. But, once a component is FAA-certified and designed into an aircraft platform, the re-certification cost and timeline for a substitute makes displacement economically irrational for most.
As Nick Howley stated:
“These are little things going into big things. What matters is they don’t foul the big thing up. They work and you get them there on time. And if something goes wrong with that, you fix it fast”
Which of Helmers Broad Categories do TransDigm Have?
TransDigm’s benefits from strict regulatory oversight, turning all three of Helmers Switching Cost categories into a defendable moat.
Financial: The cost of a replacement aircraft component is often insignificant compared to the financial loss commercial airlines would face for downtime, which typically results in them paying whatever price TransDigm sets. For military aircraft, the potential repercussions aren’t much better. If they decide not to replace or repair their serviceable aircrafts, it’s not only the service men and women who are in danger—but international policy. For a competitor to take OEM and aftermarket share away from TransDigm would take significant upfront—and risk-loaded capital. The growing PMA market (of which TransDigm has now fully entered by acquiring Jet Parts Engineering and Victor Sierra), does offer a financially cheaper option and will be interesting to see how it develops, but the typically insignificant cost of a component—relative to the potential loss of revenue from aircraft downtime—mean TransDigm will continue to have maximum pricing power.
Procedural: Approval to design, manufacturer and supply aircraft components comes under strict oversight from the FAA, EASA, and other global agencies. Through decades of quality management; from commodity resourcing, production manufacturing and the engineering of proprietary best-in-class components, TransDigm has consistently delivered and defended their reputation as being a reliable tier 1 supplier. For a competitor seeking to replicate TransDigm’s processes, intellectual property and catalog would not only take extensive time—but capital. Even then, reputation is a hell of a thing.
Relational: Through their decades of trading in the industry of aircraft components, TransDigm has built a trusted reputation for quality, safety and deliverability that makes it hard not only for competitors to match—but for the Department of Defense (DOD), and commercial airlines to want to completely shake up the industry’s procurement practices.
Final Thoughts
Switching Costs are most powerful when the customer is fully aware of them, but stays anyway. Conscious lock-in is a stronger moat than invisible lock-in because it signals the embeddedness is structural, not accidental. And while there have been investigations, hearings and short sellers all wanting to tear apart TransDigm’s value-driven pricing model—none have yet to be successful. They have previously swatted questions about the potential threat PMA companies pose, but their recent acquisitions of two significant players in that market show not necessarily a pivot in strategy—but situational awareness. TransDigm are awake.
Because TransDigm’s Switching Costs are regulatory in nature—they’re durable. For now at least. A crack down by the U.S government would certainly put pressure on their revenue and margins should they have to lower their prices when dealing with the DOD. Entry into the PMA market brings with it lower margins, yes—but improved volume. A counter argument TransDigm have used at hearings regarding price-gouging is the unpredictable orders and low volumes the DOD typically purchase. After all, who’s supposed to keep the product lines going when no one’s buying anything? But, conscious lock-in could also bring resentment and accelerate defection should the FAA or DOD decide to crack down on TransDigm.
Until next time, Karl.
The School of Knowledge is the weekly newsletter for SME owners and investors who want frameworks they can actually use — frameworks, checklists, and operating manuals every weekend, built to read on Sunday and use on Monday.
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Sources:
TransDigm 10-K 2025
TransDigm earnings call Q2 2026
TransDigm earnings call Q1 2026
TransDigm earnings call Q4 2025