GAO

United States General Accounting Office

Report to Congressional Requesters

November 1999 CONTRACT 

MANAGEMENT

A Comparison of DOD 

and Commercial 

Airline Purchasing 

Practices

GAO/NSIAD-00-22

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United States General Accounting Office

Washington, D.C. 20548

National Security and

International Affairs Division

B-280496 Letr

November 29, 1999

The Honorable James Inhofe

Chairman

The Honorable Charles Robb

Ranking Minority Member

Subcommittee on Readiness and Management Support

Committee on Armed Services

United States Senate

The Department of Defense (DOD) is increasing the use of commercially 

available products and services. While the current level of commercial 

purchasing is relatively small—about 5 percent of the $2.6 billion spent on 

aircraft spare parts in fiscal year 19981

—the Department expects such 

purchases to increase in the future and believes determining fair and 

reasonable prices for commercial sole-source items will be particularly 

challenging.

Because of concerns over the pricing of spare parts for DOD aircraft, you 

requested that we compare the purchasing and pricing practices of selected 

commercial passenger and freight airline companies with those of DOD. 

We placed particular emphasis on how airlines and Defense ensure that 

they are obtaining reasonable prices when buying commercial items from 

sole-source suppliers. 

Our analysis of airline practices is based on discussions with officials from 

10 airlines. Our analysis of DOD’s buying practices is based on a case study 

review of 65 sole-source purchases at 7 Department buying centers.2

 The 

assessment of DOD’s buying practices differs from the assessment of 

airline practices in that the Defense assessment covers both procurement 

1 From the Department’s DD 350 procurement database, which covers contract actions over 

$25,000. Aircraft parts were defined as covering the following federal supply classes: 1560 

(aircraft structural components); 16xx (aircraft components and accessories); 2620 (aircraft 

pneumatic tires and tubes); and 2915, 2925, 2935, 2945, 2950, and 2995 (aircraft engine 

accessories).

2

 See Contract Management: DOD Pricing of Commercial Items Needs Continued Emphasis

(GAO/NSIAD-99-90, June 24, 1999).
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policies and their implementation. The airline assessment covers only 

procurement policies. 

Results in Brief Airlines use a variety of practices to obtain spare parts at reasonable 

prices. These practices include analyzing prices, procuring competitively, 

utilizing catalog prices (commonly discounted), negotiating long-term 

agreements, purchasing new surplus or reconditioned parts, and 

sometimes asking for justifications of price increases. When faced with a 

sole-source supplier demanding a price that they believe is unreasonable, 

some airlines will consider re-engineering the part and establishing a 

second source. 

Department of Defense policies call for using similar practices when 

buying commercial spare parts. Contracting officers often rely on 

competition to ensure reasonable prices: about 42 percent of fiscal year 

1998 spending on commercial spare parts for aircraft was awarded through 

full and open competition. The Department frequently receives discounts 

on catalog prices from suppliers, including sole-source suppliers. It has 

also begun to negotiate longer-term agreements that set prices. In solesource situations, contracting personnel perform some price analyses, but 

our recent review of these analyses indicated they could be very limited in 

scope. Less commonly, the Department will purchase surplus parts or 

consider re-engineering a part. 

Background In the absence of competition, DOD has traditionally been able to rely on 

cost data to ensure that the prices it pays for spare parts are fair and 

reasonable. When DOD purchases noncommercial items, contractors may 

be required to provide certified cost or pricing data.3

 In fiscal year 1998, 

DOD obtained certified cost and pricing data for two-thirds of contract 

dollars awarded (for noncommercial aircraft parts) without full and open 

competition.4

 By statute, suppliers of commercial items are not required to 

submit certified cost or pricing data.

3 10 U.S.C. 2306a defines cost or pricing data as all facts that prudent buyers and sellers 

would reasonably expect to significantly affect price negotiations. 

4

 From the DD 350 database, based on dollar value of contracts awarded.
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Commercial airlines buy spare parts to support aircraft maintenance and 

use a variety of methods to service and maintain aircraft. Nearly all the 

airlines we contacted said they perform 90 to 100 percent of routine aircraft 

maintenance in-house. Most airlines we surveyed buy the bulk of their 

spare parts (80-90 percent) to support these operations directly from 

suppliers rather than through third parties. Some larger airlines also do 

heavy maintenance, overhauls, and major modifications in-house, buying 

spare parts for these tasks. Several smaller airlines contract these services 

out using contracts that sometimes include spare parts. In addition, 

airlines’ contracts for service on repairable parts often include new parts. 

A majority of the airlines we contacted also participate in component 

lease/service arrangements such as “power-by-the-hour,” “cost-perlanding,” and “cost-per-cycle.” Under these agreements, major components 

such as engines, wheels and brakes, and other components are leased from 

a provider that charges by the hours of use or by the number of landings or 

cycles. These agreements may include parts as well as service, but the 

specific arrangements vary among the airlines. For example, some airlines 

contract for a total parts and service package, while others allow the 

service provider to supply only the less costly consumable parts. The latter 

airlines purchase the more expensive spare parts themselves. Still other 

airlines contract for a maintenance service package that may or may not 

include parts but do some of the maintenance themselves.

Balancing the need to maintain minimum inventory with the need to avoid 

aircraft grounded by the unavailability of spare parts is the key challenge 

for spare parts management. Airlines reported using just-in-time inventory 

procedures to eliminate excessive inventories and reduce costs. Under 

just-in-time inventory management, parts are held by the supplier and 

delivered just prior to scheduled maintenance. At the same time, to 

minimize the possibility of an emergency aircraft-on-the-ground situation 

due to unavailability of parts, some airlines stock a limited number of 

critical items in case the supplier cannot rapidly deliver them. 
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Purchasing Practices 

of Commercial Airlines

In interviews with 10 airlines,5 we were told that airlines employ a variety 

of practices to obtain spare parts at reasonable prices. These practices 

include

• price and part analyses,

• competitive procurements,

• relying on catalog prices (commonly discounted to airlines),

• long-term agreements with suppliers, and

• obtaining new surplus or reconditioned parts.

Airline officials said that when they are faced with purchasing parts from a 

sole-source supplier at a price they determine to be excessive, in addition 

to trying to negotiate long-term agreements or searching for surplus parts, 

they may

• request cost and pricing data or justifications and/or 

• re-engineer the part and develop a second source.

In some instances, these strategies are not feasible or not effective in 

obtaining reasonable prices from sole-source suppliers. Although they 

attempt to use the leverage of future business to encourage concessions, 

airlines are sometimes forced to pay the price demanded by the sole-source 

supplier. 

All airlines we talked with said they buy some of their parts from solesource suppliers. Their estimates of how frequently they buy from such 

suppliers varied from 5 to 75 percent. Those airlines flying older aircraft 

tend to rely less on sole-source suppliers. 

Several factors influence the purchasing practices employed by airlines. 

Airlines that fly newer aircraft tend to be limited to purchases from the 

original part manufacturer. They often rely on catalog prices or negotiate 

long-term agreements with suppliers. Airlines flying older aircraft have 

additional options. They may use manufacturers other than the original 

equipment manufacturer or purchase surplus parts from other airlines or 

brokers. When parts are available from multiple sources, competitive 

5

 Airborne Express, Alaska Airlines, American Airlines, Aloha Airlines, Delta Air Lines, 

Federal Express, Hawaiian Airlines, Polar Air Cargo, United Airlines, and United Parcel 

Service. 
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procurement is feasible. Airline policies also affect the choice of 

procurement practices. Some airlines are reluctant to buy surplus or 

reconditioned parts and prefer original equipment manufacturers to ensure 

quality; they use other sources only as an exception. 

Airlines also said they will pay a premium price for a part if they have an 

extremely urgent requirement. When an aircraft-on-the-ground situation 

occurs, airlines will pay premiums of 15 to 25 percent to get the part within 

hours. This premium does not include the cost of delivery, which can be 

substantial. However, an aircraft that remains grounded can lead to the loss 

of significant revenues. Airline inventory management practices aim to 

minimize or avoid aircraft-on-the-ground situations while simultaneously 

minimizing the resources tied up in inventory. 

Several airline officials commented that while the greatest price leverage is 

available when they purchase aircraft or major components (i.e., engines), 

it is rarely used. These officials said that it was in their best financial 

interest to get the lowest possible price for the initial purchase and that 

negotiating a reduction in future spare parts prices usually means 

increasing the cost of the initial buy. However, some airline officials 

commented that they encourage aircraft manufacturers to provide direct 

access to suppliers or to dual-source important components and parts. 

Price and Part Analyses Airlines uniformly reported that they analyze price histories of parts they 

have bought to assess the reasonableness of a price. Airlines track price 

histories and review them when procuring a particular part. They also 

compare the offered price against the price of similar parts. Airlines also 

said they search various electronic databases to research offered prices. 

Airline officials emphasized that they examine non-price factors such as 

delivery time and technical support in assessing the value of a part. The 

assessment of reasonableness is thus based on overall value, including 

price, quality, quantity, availability, location, delivery time, technical 

support, warranty, and (if it is a used part) documentation and certification 

of the part’s history. 

Airlines may also involve their engineering staff in analyzing how much a 

part should cost to manufacture. Purchasing staff are generally aware of 

trends in material and other costs that affect manufacturing costs. These 

analyses may be used to challenge the offered price and negotiate a lower 

one.
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Competitive Procurement Some airlines emphasized that they rely on competition to ensure 

reasonable prices. These airlines establish thresholds governing when 

competition is required. For example, several airlines said they solicit three 

offers for all procurements over $10,000.

Catalog Prices Virtually all airlines pay catalog prices for some parts, and they usually 

receive discounts on the catalog price. Some airline officials stated that 

they pay catalog prices for a majority of their spare part purchases. These 

airlines tend to fly newer aircraft and rely on original equipment 

manufacturers. In contrast, some airlines report buying less than

20 percent of their parts on the basis of catalog prices. These airlines have 

other agreements with suppliers or use alternative manufacturers and new 

surplus or reconditioned parts. Some parts are only available from a single 

source and are catalog-priced. 

Several airline officials emphasized that they carefully scrutinize what is 

included in the catalog price, which may include shorter delivery times or 

more support services than they require. Others said they accept the 

catalog price and negotiate for additional services. Some said they analyze 

the reasonableness of a catalog price and sometimes challenge it if they 

conclude it is out of line.

Airlines, as final users (rather than distributors), commonly receive a 

discount off the catalog price. Discounts can vary from 5 to 40 percent, 

with deeper discounts resulting from high usage, dollar value of business, 

or long-term agreements. Some airlines said they could find lower prices on 

low-usage items from distributors, who have a larger business base and can 

buy in larger quantities. Airline officials said they pay full catalog prices on 

some sole-source items.

Long-term Agreements Many airlines stated they negotiate long-term agreements with their more 

frequent suppliers. These agreements vary in length. Some cover a 1- to

2-year period, while others cover 3 to 5 years. 

Agreements that are shorter in length (1 to 2 years) usually lock in prices 

and delivery schedules. The longer 3- to 5-year agreements tend to involve 

an exclusive buying commitment. These longer-term agreements tend to 

cover prices, delivery schedules, and support and may also have provisions 

for the supplier to hold inventory for the airline. Agreements can aid 
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airlines in obtaining lower prices based on the quantities procured or can 

induce a sole-source supplier to lower prices to obtain more business. 

Airlines differ in their reliance on long-term supplier agreements. One 

airline said it tries to put many of its regular suppliers under agreements 

and sees the agreements as an effective arrangement for obtaining 

reasonable prices from sole-source suppliers. Others have few such 

agreements.

Surplus and Reconditioned 

Parts

Some airlines said they use new surplus and/or reconditioned spare parts 

to control costs. These airlines use such parts as alternatives to high-cost 

sole-source items. Airline officials said that surplus and reconditioned 

parts are more readily available for older aircraft. 

Cost and Pricing Data Few airlines request cost or pricing data, saying that suppliers are generally 

unwilling to supply such data. Those that have requested data reported that 

suppliers are usually not cooperative in providing it. According to an airline 

association official, airlines may be successful in obtaining some data if 

there is a reliability or quality issue prompting the request.

Some airlines stated they do request cost or pricing justifications and are 

successful in obtaining them. Suppliers may sometimes provide 

information on changes in material or labor costs that can trigger price 

increases. 

Re-engineering Parts In selected circumstances, airlines will reverse-engineer a part (i.e., 

develop engineering or design specifications) and establish a second 

source for it or manufacture the part themselves. Airline officials said it is 

expensive to create a new manufacturing source and that long lead times 

are required. The price of the part has to be excessively high and future 

purchases substantial enough to justify the expense. They said that most of 

the time, other strategies are successful in obtaining more reasonable 

prices. Even when negotiations are unsuccessful, airline officials said that 

the airlines may be better off accepting the offered price.
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DOD Practices DOD employs many of the same practices used by commercial airlines in 

procuring spare parts. Like commercial airlines, DOD has limited leverage 

in negotiating with sole-source suppliers. 

The Federal Acquisition Regulation (FAR) requires contracting officers to 

perform sufficient price analyses to determine whether offered prices are 

fair and reasonable, while at the same time granting them wide latitude in 

the types of analysis techniques and extent of analysis they carry out. The 

FAR defines price analysis as the process of examining and evaluating a 

proposed price without evaluating its separate cost elements or profit. 

Price analysis techniques include (1) comparing proposed prices in 

response to a competitive solicitation; (2) comparing a currently offered 

price to previously paid prices if both the validity of the comparison and 

the reasonableness of the previous prices can be established; (3) using 

parametric methods such as dollars per pound or other measurement units; 

(4) comparing offers to competitive published price lists, published market 

prices, and discount or rebate arrangements; (5) comparing proposed 

prices with independent government cost estimates; and (6) comparing 

proposed prices with prices obtained through market research for the same 

or similar items. The FAR allows contracting officers to ask contractors to 

provide (when needed) sales prices for the same or similar items, an 

explanation of their discount policy, or cost data (but not certified cost and 

pricing data). Thus, the range of actions called for in the FAR covers many 

of the practices employed by airlines, including analyses of price histories, 

market research, independent cost analyses, and competitive procurement. 

Because of concerns about excessive price increases, each of the military 

services and the Defense Logistics Agency issued additional guidance 

between June and August 19 on the pricing of commercial items. The 

guidance cautions contracting officers on the need to fully understand the 

basis of commercial catalog prices and not assume that prices are fair and 

reasonable just because they are in a published commercial catalog. The 

guidance also stresses the importance of negotiating prices when buying 

commercial items. 

In practice, contracting officers tend to rely to a significant degree on 

competition to ensure price reasonableness. About 42 percent of fiscal year 

1998 contract dollars spent on commercial spare parts for aircraft were 

awarded through full and open competition. In contrast, only 9 percent of 

contract dollars spent on noncommercial aircraft parts were awarded 

through full and open competition.
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While the FAR and other guidance allow the use of a variety of other 

practices to ensure price reasonableness, contracting officers tend to rely 

on a more limited range of practices. In our June 1999 report, we discussed 

the extent of price analysis performed by DOD contracting personnel when 

procuring commercial sole-source items. We reported that in 33 of the 65 

purchases we reviewed, price analysis consisted of comparing the offered 

price with an offeror’s catalog or price list and/or with the prices the 

government previously paid for the same or similar items. Contracting 

officers accepted the offered price in 30 of the 33 purchases and negotiated 

lower prices in only 3 cases. In the other 32 purchases, contracting 

personnel used one or more additional price analysis tools such as 

commercial sales information. Contracting officers accepted the offered 

price in 19 of the 32 purchases and negotiated lower prices in 13 cases.

We also found that the price analyses performed by contracting personnel 

were often too limited to ensure that prices were fair and reasonable. For 

example, some contracting personnel believed that when the offered price 

was the same as the catalog or list price, it could be considered fair and 

reasonable. In several cases, contracting personnel did not use pertinent 

historical pricing information (in the contract files) that could have been 

used to raise questions about the reasonableness of offered prices. In one 

instance, the offered price increased 548 percent from the price paid

9 years earlier, while in another case, the offered price increased

475 percent. We also identified cases in which contracting officers paid 

prices that included unneeded services such as rapid delivery. Moreover, 

contracting officers generally did not include a clause in the solicitation 

requiring offerors to provide, upon request, information other than certified 

cost and pricing data, such as sales data or the basis of the offered price, in 

support of their offered prices. Defense Logistics Agency guidance 

recommends this clause in all solicitations and contracts for sole-source 

commercial items.

Of the 65 cases we reviewed, a catalog or list price was available for 48 

items. In 10 cases, DOD received no discount, while in the remaining 38 

cases, DOD received discounts ranging from 5 percent to 73 percent off the 

catalog price. The discounts were based primarily on the quantities 

purchased. 

DOD activities are also beginning to make use of long-term agreements to 

take advantage of the Department’s leverage as a large customer. For 

example, the Defense Logistics Agency uses long-term agreements known 

as corporate contracts for a number of different engine and aircraft spare 
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parts. These contracts aggregate the requirements of one or more supply 

centers with a single supplier of multiple items. The contracts cover not 

only pricing but also distribution and delivery services. They may address 

specific spare parts or include a manufacturer’s entire commercial price 

list. By using these contracts, the Defense Logistics Agency expects to 

lower its costs, obtain better delivery times, and reduce its customer 

support infrastructure.

The Defense Logistics Agency makes limited use of surplus parts. It buys 

such parts infrequently and usually for older aircraft.

DOD policy allows the re-engineering of parts when significant savings can 

be demonstrated. Officials stated that this is an expensive undertaking and 

is rarely used. However, DOD can determine how much a part should cost. 

For example, one Navy unit6

 provides “should-cost” and other price 

analyses for Navy and Defense Logistics Agency contract officers on 

request. This unit can also re-engineer simple parts.

Agency Comments We requested comments from the Department of Defense on 

September 30, 1999. On October 26, 1999, we were told by DOD’s Office of 

Inspector General that DOD concurs with the report and would not be 

providing further comments. We also shared the draft report with airline 

officials who had participated in our review. These officials commented 

that the report accurately captures the set of tools that airlines use to 

acquire spare parts.

Scope and 

Methodology

To identify the spare parts purchasing and pricing practices of commercial 

airlines, we contacted 10 commercial air carriers, including the largest 

passenger and cargo air carriers. We visited three airlines to observe and 

discuss their spare parts buying operations and contacted the others by 

telephone. We obtained much of the data through interviews with 

commercial airline spare parts buyers, purchasing supervisors, managers, 

and directors. The fleet size of the airlines we contacted ranged from 13 to 

over 600 aircraft, and sales volumes ranged from approximately $250 

million to $25 billion.

6 Price Fighters Department, Fitting Out and Supply Support Assistance Center, Navy Supply 

Systems Command.
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In addition, we discussed commercial practices with officials of four 

aircraft industry trade associations: the Air Transport Association of 

America, the Airline Suppliers Association, the Aerospace Industries 

Association, and the National Defense Transportation Association. The first 

2 represent 95 percent of U.S. passenger and cargo air traffic and over 200 

airline suppliers, respectively.

We also reviewed a comparative analysis of commercial buying practices 

prepared by Arthur Andersen’s Government Services Division to crosscheck the information we obtained. The report, titled World Class 

Commercial Buying Practices Review for Defense Contract Management 

Command, was published September 17, 1998. 

We compared the information obtained from commercial airline companies 

and organizations with the results of a review we recently completed 

involving case studies of 65 contract actions undertaken at 7 DOD buying 

centers:

• Air Force Air Logistics Center, San Antonio, Texas;

• Air Force Air Logistics Center, Oklahoma City, Oklahoma;

• U.S. Special Operations Command, Fort Eustis, Virginia;

• Defense Supply Center, Columbus, Ohio;

• Defense Industrial Supply Center, Philadelphia, Pennsylvania; 

• Defense Supply Center, Richmond, Virginia; and

• Naval Inventory Control Point, Philadelphia, Pennsylvania.

The first six were selected because they were major purchasers of 

commercial sole-source parts for aircraft. The seventh was selected 

because it was located at the same address as the Defense Industrial 

Supply Center in Philadelphia. 

We judgmentally selected for review 65 sole-source commercial purchases 

of over $100,000 where the price was negotiated during fiscal years 1997-98. 

For each purchase, we reviewed information in the contract file, including 

the price analysis and negotiation memorandums, and discussed this 

information with contracting personnel.
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We are sending copies of this report to the Honorable William Cohen, 

Secretary of Defense; the Honorable Jacob Lew, Director, Office of 

Management and Budget; and Lieutenant General Henry T. Glisson, 

Director, Defense Logistics Agency. Copies will also be made available to 

others on request. 

If you have any questions regarding this report, please contact me at

(202) 512-4841. Key contact and contributors to this report are listed in 

appendix I. 

David E. Cooper

Associate Director

Defense Acquisition Issues
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Appendix I

GAO Contact and Staff Acknowledgments ApApenednxidexiIs

GAO Contact Karen S. Zuckerstein (202) 512-6785

Acknowledgments In addition to the name above, Dorian Dunbar, Paul Greeley, Paula 

Haurilesko, and Thaddeus Rytel made key contributions to this report. 

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