Spare parts are defined as repair parts and components, including kits, assemblies, and subassemblies required for the maintenance of all equipment. Repair parts and components can include repairable parts, which are returned to the supply system to be fixed when they are no longer in working condition, and consumable parts, which cannot be repaired cost-effectively. The Navy owns and operates about 4,000 aircraft. These aircraft contain about 70,000 repairable spare parts, such as landing gear, navigational computers, and hydraulic pumps. These spare parts, in turn, consist of thousands of individual parts or items. When any of these spare parts or individual items fails to perform properly, or reaches the end of its service life, it must be replaced with a repaired or newly purchased part. This maintenance work takes place at government repair facilities and commercial contractor facilities across the country. Providing logistics support for these aircraft is the responsibility of the Naval Air Systems Command and the Naval Supply Systems Command. Overall Navy logistics policies and procedures are the responsibility of the Deputy Chief of Naval Operations (Logistics). The Navy’s repairable spare parts are managed under the Navy Working Capital Fund. This is a revolving fund that relies on revenues generated from the sale of parts and services to customers, which are then used to finance subsequent operations. The fund is expected to generate sufficient revenues to cover the full cost of operations and to break even over time— that is, not to have a gain or a loss. Customers order parts from the Navy’s supply system and pay the working capital fund from their budgets. Each fiscal year, the Navy establishes the prices for spare parts, setting them to correspond with the customers’ aggregate budgeted amounts. This concept, in theory, ensures that customers have, in the aggregate, sufficient funds budgeted to purchase their anticipated requirements of spare parts. The process of setting prices for spare parts begins 2 years before the fiscal year in which the prices take effect and involves customers, a number of Navy entities, and the Office of the Under Secretary of Defense (Comptroller). During this process, the customer price is set on the basis of projected customer requirements, as well as anticipated repair costs and management overhead fees. Figure 1 shows the major elements that are considered in developing the customer price for Navy spare parts. In our recent review of prices for a selected group of spare parts for three Navy aircraft and their engines that we examined in the November 2000 report, we found that prices continued to rise. Our analysis suggested that the major factor driving these increases was the cost of the materials used to repair spare parts, while other factors, such as higher overhead fees and growing labor costs, also contributed. However, because of the lack of relevant information in the Navy’s maintenance and repair databases, we were unable to determine what the underlying reasons were for the increases and as a result, what management action might be appropriate to reduce or stabilize the prices. The prices of repairable aviation spare parts continued to increase dramatically. Between fiscal year 1999 and 2002, the total cost of spare parts increased from $1.6 billion to $2.7 billion. Of this total, the repair portion rose from $1.2 billion to $1.8 billion, an increase of 50 percent and represented 6.6 and 8.3 percent, respectively, of the Navy and Marine Corps’ operation and maintenance funds that are used to sustain the readiness of the operating forces. Our analysis of 453 selected spare parts showed that the prices paid by customers increased an average of 37 percent between fiscal year 1999 and 2002 (see app. II). We looked at these because they were the most costly repair parts from three aircraft (the H-53 helicopter, the F/A-18 Hornet fighter and attack aircraft, and the AV-8B Harrier attack aircraft) and their engines. We found that the prices for 195 of the 453 parts dropped an average of almost 35 percent (see app. III) due to reductions in both repair costs and overhead fees. The prices for the remaining 258 parts, however, spiraled dramatically—an average of 91.5 percent during the 3-year period (see app. IV). The price hikes for 233 of the 258 spare parts (90 percent) were primarily due to higher repair costs, while those for the remaining 25 (10 percent) were due to higher management overhead fees. We selected 31 spare parts from the total population of 453 to identify the factors driving increases in repair costs. These parts were all repaired at government depots. As table 1 shows, the average increases in total repair costs for these 31 parts varied widely—from a modest 8 percent for the F/A-18 Hornet aircraft to more than 200 percent for two engine systems (F-402 and T-64). A closer look at the repair data indicated that the largest increases were generally attributable to the higher costs of the materials used to repair the spare parts, while a smaller increase resulted from higher labor costs. For example, one of the parts, a rotor compressor for the F-402 engine, increased over 86 percent in price from $48,890 in fiscal year 1999 to $91,060 in fiscal year 2002. The material portion of the costs for repair had increased from $16,386 to $57,727 (over 252 percent), while labor had decreased from $10,739 to $9,092 (approximately 15 percent) and overhead had increased less than 12 percent from $21,765 to $24,241. (See app. V for detailed repair cost data for each part.) Figure 2 shows how the cost components contributed to the price that customers paid for another of these parts, a $45,120 turbine rotor for the F-404 engine in fiscal year 2002. It shows that a significant portion ($30,893, or 69 percent) of the price stemmed from the cost of the materials used to fix the rotor. A recent Naval Air Systems Command study underscored that rising material costs used in repairing spare parts are a contributing factor to price increases. The study compared repair costs in its maintenance facilities for the first quarter of fiscal year 1997 with those for the first quarter of fiscal year 2000. It concluded that while the average annual repair costs for more than 26,000 parts increased by 5 percent, the cost of materials rose by 8 percent; in contrast, labor costs rose less than 1 percent. Furthermore, the study showed that in the case of 105 high- demand parts material costs jumped by about 16 percent while labor costs increased by 3 percent. We found a similar link between higher material costs and repairable spare parts price increases. Our examination of the aggregate prices of individual repair items used in the 31 spare parts indicated that three factors may have contributed to higher material costs for 25 of these parts: (1) higher prices for individual repair parts used, (2) the use of more parts in the repair process, and (3) changes in the mix of repair parts used. Another possible factor identified through discussions with Navy officials was that some repairs used new, more expensive repair parts. However, the Navy’s data systems did not provide sufficient information on each repair event to allow us to determine why the prices increased for each spare part. For example, we could discern that more material had been used in a repair, but we could not determine why this had happened: Had maintenance procedures changed? Was the repairable part in unusually poor condition? Had there been extensive cannibalization of the part’s components? Or were there other reasons? Without more specific information on each spare part or repair event, management would not be able to determine—or address—the reasons for rising repair costs. As noted above, our ability to determine the reasons for rising spare part costs was impaired because the Navy lacked an effective data system to collect and analyze information relevant to material costs and usage. The current data system tracks repair costs for groups of spare parts but not for individual parts. The costs are accumulated for the group, divided by the number of spare parts in the group and analyzed as an average cost per item in the group. As a result, government repair facilities cannot determine the cause of significant increases in repair costs for an individual spare part. For example, the average reported material cost for individual repair parts needed to repair compressors for the F-402 engine increased from $14,269 in fiscal year 1998 to $65,494 in fiscal year 2000. While the detailed requisition data identifies what materials were ordered, it is impossible to determine—when more than one repair is associated with the requisition—how much of the material was used in a specific repair. Consequently, the fact that more material is being used on multiple repairs can be discerned, but not the reason for the increased usage. In addition, there is no indication of whether the differences in materials ordered are due to the repair of one part or to the group as a whole. The Navy has made little progress in identifying the underlying causes of spare parts price increases. While it has various initiatives aimed at reducing overall costs, it does not have a planned set of actions to identify the underlying causes of price increases. The Navy has only partially implemented a recommendation we made in our November 2000 report to identify and implement solutions to reduce and stabilize prices. It has undertaken several initiatives to control repair costs, but these have centered on enhancing the reliability and maintenance process, which could help stabilize prices for repairable parts. However, they do not deal with the underlying reasons for cost increases. One new initiative, which will allow the Navy to track individual spare part items by their serial numbers, may provide the tool it needs to effectively monitor and control its spare part prices. Also, the Navy might learn from DLA’s efforts to address price increases for consumable spare parts. Of three recommendations we made in our November 2000 report, the first one, which was directly concerned with investigating why prices were rising, has been only partially implemented.