Commercial Practices: Opportunities Exist to Enhance DOD's Sales of
Surplus Aircraft Parts (Letter Report, 09/23/94, GAO/NSIAD-94-189).

In fiscal year 1993, the Defense Department's (DOD) proceeds from the
sale of commercial-type surplus aircraft parts averaged less than one
percent of what DOD paid for them. In contrast, commercial airlines
realized proceeds on the order of 40 to 50 percent from the sale of
comparable parts. The large difference in proceeds reflects the
different incentives and marketing practices at work within DOD and the
private sector. DOD's system for selling surplus aircraft parts is
largely driven by policies designed to dispose of the parts quickly.
Maximizing sales proceeds is of lesser importance. Although not always
directly comparable to DOD, commercial airlines have a system for
selling surplus aircraft parts that reflects the profit incentive.
Progressive commercial airlines provide the tools for their staff to
maximize sale proceeds in the form of both the training and resources
needed to effectively sell the property. Commercial companies also use
marketing techniques that substantially enhance the visibility and
marketability of their parts. Although it may not be practical for DOD
to duplicate commercial marketing techniques, it appears that DOD could
substantially increase its proceeds by adopting some basic marketing
practices. Critical to the success of such practices, however, will be
some establishment or realignment of incentives.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  NSIAD-94-189
     TITLE:  Commercial Practices: Opportunities Exist to Enhance DOD's 
             Sales of Surplus Aircraft Parts
      DATE:  09/23/94
   SUBJECT:  Spare parts
             Military inventories
             Surplus federal property
             Aircraft components
             Equipment inventories
             Inventory control systems
             Sales
             Property disposal
             Government owned equipment
             Federal property management
IDENTIFIER:  Defense Business Operations Fund
             KC-135 Aircraft
             
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Cover
================================================================ COVER


Report to the Chairman, Subcommittee on Oversight of Government
Management, Committee on Governmental Affairs, U.S.  Senate

September 1994

COMMERCIAL PRACTICES -
OPPORTUNITIES EXIST TO ENHANCE
DOD'S SALES OF SURPLUS AIRCRAFT
PARTS

GAO/NSIAD-94-189

Commercial Practices


Abbreviations
=============================================================== ABBREV

  DOD - Department of Defense
  DRMO - Defense Reutilization and Marketing Offices
  FAA - Federal Aviation Administration

Letter
=============================================================== LETTER


B-257675

September 23, 1994

The Honorable Carl Levin
Chairman, Subcommittee on
 Oversight of Government Management
Committee on Governmental Affairs
United States Senate

Dear Mr.  Chairman: 

As you requested, we reviewed how the Department of Defense (DOD)
markets and sells its surplus and scrap aircraft parts to the general
public.  Our objectives were to (1) compare DOD's practices for
selling usable surplus parts with those used by the private sector
and (2) identify any private sector practices DOD could adopt to
maximize sales of usable aircraft parts and minimize improper use of
scrap parts once they are sold. 


   BACKGROUND
------------------------------------------------------------ Letter :1

In fiscal year 1993, DOD sold about 15 million usable aircraft parts
with an acquisition value of over $1.8 billion to the general public
through its surplus sales program.  Usable aircraft parts are those
that have value greater than their basic material content and have
potential to be used for the originally intended purpose.  DOD also
sold over 45 million pounds of scrap aircraft parts to the general
public--parts that are not intended for use and are sold for their
metal content value.  DOD's proceeds from the sale of both usable and
scrap aircraft parts during fiscal year 1993 were about $23 million. 

DOD's surplus sales program is managed by the Defense Reutilization
and Marketing Service, a part of the Defense Logistics Agency.  Once
military aircraft parts are declared excess to DOD's needs, they are
sent to one of DOD's approximately 200 worldwide Defense
Reutilization and Marketing Offices (DRMO), or disposal yards, where
they are made available for reutilization, transfer, donation, and
sale.  According to DOD officials, the five DRMOs in the United
States that handle the largest volumes of excess aircraft parts are
located in Warner Robins, Georgia; San Antonio, Texas; Oklahoma City,
Oklahoma; Ogden, Utah; and Sacramento, California.  Once usable and
scrap aircraft parts become available for sale, they are termed
surplus and are generally advertised nationally in catalogs and sold
through sealed bids or auction methods by the National Sales Office. 

Some usable aircraft parts DOD sells as surplus are military-unique
parts while others (referred to as commercial-type parts) have
applications to aircraft used in civil aviation.  For example, the
Air Force's KC-135 air refueling tanker is essentially a modified
commercial Boeing 707 that has many of the same engine and airframe
parts.  Many private sector companies, such as commercial airlines
and aircraft parts manufacturers, also sell surplus aircraft parts as
usable and scrap when they are no longer needed. 

All parts used in civil aviation are required to be certified by the
Federal Aviation Administration (FAA), meaning that the design for
the part and the manufacturer's production process met FAA's
approval.  While many military parts are the same as their commercial
counterparts, they are not generally FAA certified because DOD
specifies requirements for the design, production, and acquisition of
parts used on military aircraft.  According to FAA and engine
manufacturing officials, many DOD commercial-type parts have the
potential to be retroactively certified once the parts have been
determined to conform to the FAA-approved design and manufacturing
process. 


   RESULTS IN BRIEF
------------------------------------------------------------ Letter :2

In fiscal year 1993, DOD's proceeds from the sale of commercial-type
surplus aircraft parts averaged less than 1 percent of what DOD paid
for them.  In contrast, commercial airlines realize proceeds on the
order of 40 to 50 percent (based on the price of the part brand new)
from the sale of comparable parts.  The large difference in proceeds
reflects the different incentives and marketing practices at work
within DOD and the private sector.  DOD's system for selling surplus
aircraft parts is largely driven by policies and procedures designed
primarily to dispose of the parts quickly.  Maximizing sales proceeds
is of lesser importance.  There are few incentives for DOD,
particularly the disposal staff, to effectively market and optimize
the prices received for the parts.  Currently, proceeds from the sale
of surplus parts are deposited in the U.S.  Treasury Defense Business
Operations Fund and are not returned to the disposal offices to
enhance their operations.  Similarly, little emphasis is placed on
the training of disposal staff on the parts they are selling and the
markets they are selling to. 

While not always directly comparable to DOD, commercial airlines have
a system for selling surplus aircraft parts that reflects the profit
incentive.  The airlines we interviewed expect to obtain reasonable
rates of return on the surplus aircraft parts they sell.  They are
concerned less with how quickly the property moves off the warehouse
shelves.  Officials from one airline told us they often receive as
much as 50 percent of the manufacturer's list price (the price of the
parts brand new) from the sale of their surplus aircraft parts. 
Progressive commercial airlines provide the tools for their staff to
maximize sales proceeds in the form of both the training and the
resources required to effectively sell the property. 

Commercial companies use marketing techniques that substantially
enhance the visibility and marketability of their parts, including
(1) identifying highly marketable commercial-type parts, (2) selling
the parts as FAA certified, (3) arranging parts into sales groupings
that meet buyer needs, and (4) actively marketing the parts to a full
spectrum of civil aviation buyers. 

While it may not be practicable for DOD to duplicate commercial
marketing techniques, it appears that DOD could substantially
increase its proceeds by adopting some basic marketing practices. 
Critical to the success of such practices, however, will be some
establishment or realignment of incentives. 

During our review, we also uncovered an opportunity for DOD to
minimize improper use of scrap parts by adopting private sector
practices.  The U.S.  Department of Transportation has found
instances where DOD aircraft parts, sold as scrap, illegally
reentered civil aviation as usable.  Unlike some progressive
commercial companies, DOD does not have procedures to prevent the
improper use of scrap once it is sold.  Also, DOD does not mutilate
or destroy many of the flight-critical scrap parts that it sells and
does not require the buyer to warranty or certify that all scrap
parts purchased will be used only as such.  Adopting similar
processes and procedures of progressive commercial firms could
possibly minimize this risk. 


   DIFFERENCES BETWEEN DOD AND
   PRIVATE SECTOR DISPOSAL SYSTEMS
------------------------------------------------------------ Letter :3

DOD maintains a complex disposal system that is characterized by
massive volumes of excess property.  DOD's primary disposal objective
is to maximize the reuse of surplus property within the military
services, various levels of government, and with authorized donees
before offering the property for sale to the general public.  Despite
this goal, DOD actually sells most of its surplus property to the
general public as shown in figure 1. 

   Figure 1:  DOD's Methods of
   Disposing Surplus Property in
   Fiscal Year 1993

   (See figure in printed
   edition.)

In practice, DOD's disposal system is often geared more toward moving
the property within established time frames.  Less emphasis is placed
on maximizing proceeds for the surplus parts being sold.  With
increasingly large volumes of surplus property being disposed, a
priority at the four DRMOs we visited was to move property as quickly
as possible to make room in the warehouses for incoming property. 
DOD recently instituted the single-cycle process which, among other
things, reduced the time frames for storing and selling surplus
property, leaving less time to effectively market the property. 

DOD disposal staff also lack sufficient resources and incentives to
effectively market and sell the surplus property.  DOD's disposal
system is not designed to recognize the worth of the parts disposed
and to maximize proceeds from the sale of such parts.  DOD disposal
staff are not specialized in selling strictly aircraft parts and have
limited training and technical knowledge of such property entering
the disposal system for sale. 

Proceeds obtained from the sale of surplus parts are deposited in the
U.S.  Treasury Defense Business Operations Fund.  Thus, individual
disposal offices do not benefit monetarily for extra efforts made to
enhance sales.  According to one supervisor we interviewed, DRMOs
could benefit from increased funding to purchase updated equipment
and hire additional staff. 

The disposal systems of commercial airlines and other private sector
companies that we interviewed are much different than DOD's system,
which is based on statutory requirements.  For example, the airlines
we interviewed place special emphasis on selling surplus property and
create incentives for employees to maximize the action on sales. 
These companies expect to obtain reasonable proceeds from the surplus
aircraft parts they sell, and are less concerned with how quickly the
property moves off the warehouse shelves.  To maximize sales
proceeds, staff are trained to understand aircraft parts terminology
and the applications that exist for various parts.  This training and
experience makes it more likely that highly marketable parts will be
identified and marketed appropriately.  Further, the staff often
specialize in selling a specific category of part, such as engine
parts, to promote a better understanding of the parts and the markets
to which they sell. 

In addition, progressive commercial companies provide employees with
the resources to effectively sell the property.  Marketing staff are
provided a wide range of sales tools and techniques and are held
accountable for the property they intend to sell.  At one airline,
for example, sales personnel are responsible for the sale of the
surplus property and are rated on how well they maximize sales
proceeds. 


   COMMERCIAL AIRLINES REALIZE
   HIGHER PROCEEDS FROM THE SALE
   OF SURPLUS PARTS
------------------------------------------------------------ Letter :4

Commercial companies have been far more successful than DOD in
maximizing proceeds from the sale of surplus aircraft parts.  For
example, United Airlines officials said that they often receive 50
percent of the manufacturers' list price, the price of the part brand
new, from the sale of their surplus aircraft parts.  While this basis
for calculating the rate of return is not directly comparable to
DOD's, a United Airlines official said that in many instances their
rate of return would be even higher if it was based on a part's
acquisition cost because the price of a brand new part at the time of
sale is often higher than what the airline originally paid for it. 
Similarly, Delta Airlines officials said that they generally receive
40 to 50 percent of the manufacturers' list price from the sale of
their surplus parts.  According to company officials, Delta Airlines
has a pricing policy for surplus aircraft parts and will scrap
certain parts if the company cannot obtain a minimally set rate of
return. 

In fiscal year 1993, DOD's rate of return from such parts--expressed
as the ratio of sales proceeds to the part's acquisition cost--has
been low, averaging less than 1 percent (see table 1 for examples). 
This rate for aircraft parts is lower than the average 2-percent
return DOD received for all of its surplus property. 



                           Table 1
           
            Examples of Commercial-Type DOD Parts
           Obtaining Less Than a 1-Percent Rate of
                            Return

Quantity and description of   Acquisitio     Sales   Rate of
part                              n cost  proceeds    return
----------------------------  ----------  --------  --------
8,258 Turbine engine sets     $1,041,417    $2,890     0.28%
 (never used)
72 Turbine shafts (never         785,952     1,529     0.19%
 used)
22,479 Vane compressor           271,023       669     0.25%
 stators (never used)
117 Shaft outputs (never         488,007     1,633     0.33%
 used)
------------------------------------------------------------
For several reasons, it may be difficult for DOD to match the surplus
part prices obtained by the commercial airlines or surplus parts
dealers.  The airlines have an inherent marketing advantage because
their surplus parts are, by definition, all commercial-type and FAA
certified, whereas many of DOD's parts are not.  Nonetheless, higher
sales proceeds appear possible for DOD's parts.  Data we obtained
suggests a sizable portion of DOD's surplus aircraft parts have
applications to civil aircraft--the types of parts commercial
airlines sell.  At our request, the Air Force identified, in one of
DOD's 1993 sales catalogs, that 20 out of 108 different type parts
offered (or about 18 percent) were commercial-type.  Examples of such
parts are shown in table 2. 



                           Table 2
           
             Examples of DOD Parts Found to Have
                   Commercial Applications

DOD part and part   Military            Commercial
number              application         application
------------------  ------------------  --------------------
Blade sets (part    TF-33 jet engine    JT-3D jet engine
number 410033)

Support assemblies  H-1 helicopter      Bell Model 205 and
(part number 204-                       214B helicopters
001-178-11)

Adapter input       H-60 helicopter     Sikorsky S-70C
control (part                           helicopter
number 70301-
02115-102)

Tail boom ballast   OH-58 helicopter    Bell Jet Ranger B
(part number 206-                       model and L-1 model
032-420-3)

Spacer airseal      TF-33 jet engine    JT-3D jet engine
(part number
777883CL3)
------------------------------------------------------------
In addition, many of the surplus parts DOD sells have never been used
and some are still in their original packaging from the manufacturer. 
Our review of three 1993 sales catalogs showed that over 89 percent
of the parts being sold had never been used. 

To test whether DOD could get better prices for its parts, we
requested private sector quotes for 10 different (but never used)
commercial-type parts that DOD sold in 1993.  In all instances, the
private sector asking price was much higher than what DOD obtained
for the same parts.  For example, DOD sold

  238 unused jet engine combustion chamber liners for $6.78 each, the
     surplus market price quoted for the same part was $900 each;

  72 unused turbine shafts for $21 each, the quoted surplus market
     price for the same part was $8,910 each;

  8,258 unused helicopter blade sets for 35 cents each, the quoted
     surplus market price for these blade sets was $185 a set; and

  3,400 unused servocylinder assemblies for $2.22 each, the quoted
     surplus market price for these assemblies new was $2,155 each. 


   ADOPTING PRIVATE SECTOR
   PRACTICES COULD ENHANCE SALES
   PROCEEDS
------------------------------------------------------------ Letter :5

Commercial airlines and other private sector companies use marketing
techniques that significantly enhance the visibility and
marketability of its parts.  Opportunities exist for DOD to increase
proceeds from the sale of surplus aircraft parts by adopting these
kinds of practices, including

  identifying highly marketable commercial-type parts and the civil
     applications to which they apply,

  informing buyers about whether the parts have potential for FAA
     certification and providing buyers with necessary documentation
     to assist in this process,

  keeping parts separate at the time of sale or grouping like parts
     together, and

  using active marketing techniques that reach a wide audience. 


      IDENTIFYING COMMERCIAL-TYPE
      PARTS AND APPLICATIONS
---------------------------------------------------------- Letter :5.1

Commercial airlines have adopted practices that help identify those
parts having the highest sales potential.  While all the surplus
parts airlines sell are commercial-type, United Airlines officials
told us that special efforts are made to identify the most highly
marketable parts prior to sale.  Warehouse personnel, largely through
their specialized experience and training in aircraft parts, identify
parts that have a high demand or command a high price and place them
on a special listing for marketing purposes.  This information is
provided to the marketing staff so they will know what parts to
highlight in their sales efforts. 

Although DOD sells both commercial-type and military-unique parts as
surplus, its procedures do not require that both types of parts be
differentiated in the national sales catalogs that are sent to
prospective bidders.  We found that commercial-type and
military-unique parts are sold in the same manner, frequently
advertised in the sales catalog on the same page and sometimes even
in the same sales lot.  As a result, commercial-type parts with high
sales potential may be lost in the advertising of all parts and not
recognized by prospective bidders.  This practice could impact
adversely on the sales value of many of DOD's commercial-type parts
because buyers often must take considerable time and effort to
identify such parts and many buyers are not willing to go through
this effort. 

Even though DOD guidance suggests that civil applications of parts be
identified for prospective buyers, the sales catalogs only disclose
the military applications of parts.  One 1993 sales catalog we
reviewed did not have any instances where the civil application was
provided with the description of the commercial-type part.  Without
information on civil applications, fewer bidders may be interested in
participating in the sale because they will have to determine the
applications for themselves. 

Disposal staff mostly rely on information provided by the military
services when the parts are disposed to help them determine what
information should be included in the sales catalogs.  Such
information generally includes part name, part number, national stock
number, military application, condition, quantity, acquisition cost,
weight, and location.  The services are not required, however, to
identify the commercial-type parts and their applications and do not
provide this information at the time of disposal.  According to DOD
officials, this type of information is not formally maintained by the
military services; however, it could be pulled together from several
different sources, starting with contracting officials, item
managers, and equipment specialists.  They were concerned about the
additional costs that would be required to do this. 


      IDENTIFYING FAA CERTIFIED
      PARTS
---------------------------------------------------------- Letter :5.2

DOD disposal staff are not required to identify those parts that are
FAA certified or have the potential to be retroactively certified by
the buyer.  Presently, DOD disposal staff leave it up to the buyer to
determine whether a part is certified or can be made so
retroactively.  United Airlines and Delta Airlines officials told us
that they believe DOD is greatly diminishing the value of the parts
that are certified (or could readily be made so) when remaining
silent with regard to FAA certification.  Without DOD's assessment,
prospective buyers must devote time and resources to determine
whether parts can be certified and assume risks that they may not be. 

Buyers' efforts to have a part recertified can also be made more
difficult because DOD does not provide documentation, such as
manufacturer records or, in many instances, operation and maintenance
records that help with this process.  Over 75 percent of 17 buyers we
interviewed that resell DOD parts to U.S.  civil markets indicated
that DOD did not provide enough documentation.  Without such
information, buyers are left not knowing whether a part can be
certified, thereby increasing the risks to the buyer, which is often
reflected in lower bids for the parts. 

FAA officials and aircraft manufacturers that we interviewed also
expressed views that DOD could obtain higher sales proceeds from the
parts that are certified or can be made so.  These officials,
however, were less optimistic about those parts that could not be
certified and did not believe such parts should enter the civil
aviation market. 


      PLACING LIKE PARTS TOGETHER
      IN THE SAME SALES LOTS
---------------------------------------------------------- Letter :5.3

To enhance sales value potential and increase sales proceeds,
commercial airlines we visited place similar parts into sales lots or
groupings that allow greater buyer flexibility.  For example, Delta
Airlines and United Airlines officials told us that they rarely mix
used and unused property together for sale.  A Delta Airlines
official estimated, from past experience, that mixing used and unused
parts together could reduce the value of the sales lot by as much as
15 percent because buyers generally prefer either used or unused
parts, but generally not both. 

Further, these airlines rarely mix parts produced by different
manufacturers in the same sales lots because buyers tend to
specialize by a single manufacturer.  According to a Delta Airlines
official, mixing parts from unlike manufacturers reduces the value of
the lot because buyers will often base their bid on only those parts
from the manufacturers in which they specialize, ignoring the value
of the parts that are not of interest to them. 

Currently, DOD's procedures allow the placement of multiple parts
into a sales lot when it is uneconomical to sell the parts
individually.  Our review of three 1993 DOD sales catalogs showed
that over 50 percent of the parts offered for sale were lotted in
this way.  For example, one DOD sales lot contained 71 total parts
consisting of 7 different types of parts.  DOD requires that bids be
made on the complete lot and does not allow the grouping to be broken
up when a bidder is only interested in a few of the parts.  While
DOD's procedures allow for sales lotting, the procedures stipulate
that DOD not mix property with unlike conditions and different
manufacturers together for sale.  Despite this, our review of the
three catalogs, representing 219,686 parts with acquisition values
totaling about $151 million, showed that 17 percent of the sales lots
mixed used and unused parts together and 21 percent of the lots
consisted of parts produced by different manufacturers. 


      IDENTIFYING AND ATTRACTING
      MORE DIVERSE BUYERS
---------------------------------------------------------- Letter :5.4

Both private sector sellers of surplus aircraft parts and commercial
airlines have employed various successful strategies for identifying
new customers and seeking a wider spectrum of potential civil
aviation buyers.  For example, private sector sellers we interviewed
are more active than DOD in marketing and contacting prospective
customers to generate interest in their parts.  These companies sell
to brokers as well as other types of buyers, such as manufacturers
and end users.  One private sector seller--57th Aerospace
Group--targets its marketing strategies to those buyers who will most
likely have an interest in the part being offered for sale. 
According to a company official, the marketing staff research the
part to identify civil aviation buyers who use or resell the part and
then contact such potential buyers to generate interest and inform
them of their sales offering.  Delta Airlines also uses the same
approach in that it often uses targeted mailings to those customers
that typically buy the type of surplus being offered. 

Private sector sellers of surplus aircraft parts also rely heavily on
computerized inventory locator systems to gain widespread visibility
in marketing their surplus.  57th Aerospace Group makes use of an
automated inventory locator service and finds it to be a cost-cutting
tool because it provides an instantly accessible market that is
available 24 hours a day, making it easier to locate potential buyers
for their parts.  For a fee, the on-line system facilitates the
selling of surplus aircraft parts by matching prospective buyers with
companies that are selling the parts.  According to Delta Airlines
and Trans World Airlines officials, their companies also use an
automated inventory locator system and find it to be highly effective
in finding buyers who are interested in the parts being sold. 

DOD officials told us that basically the same buyers repeatedly
participate in DOD sales.  Active bidders comprise less than 1
percent of prospective buyers on DOD's mailing list.  Furthermore,
DOD attracts mostly brokers and dealers who are more willing to
conduct the research on the parts and take the risks associated with
buying uncertified parts.  We interviewed 26 buyers of DOD surplus
aircraft parts and found that 88 percent of the buyers resell them as
usable property.  While our analysis represents only a sample of
buyers from one sale, DOD officials told us that brokers and
distributors are the major buyers of their surplus parts. 

DOD disposal staff often do not have the time or resources needed to
generate interest from prospective buyers who already are on their
mailing list and others that are not on the list.  DOD's marketing
initiatives are often limited to sending out sales catalogs to
bidders on its mailing list.  According to one DOD official, this
approach, used by itself, ignores potential customers that are not on
the mailing list. 


   DOD INITIATIVES TO IMPROVE
   SALES
------------------------------------------------------------ Letter :6

DOD is reevaluating its marketing program for all surplus property,
including aircraft parts.  DOD has explored a number of initiatives
to improve sales, such as (1) increasing advertising in trade
journals and on radio and television, (2) expanding the use of credit
card sales, (3) offering simpler sales terms and conditions, (4)
conducting "how to buy" seminars, and (5) establishing customer
surveys and a toll-free information number.  DOD has also developed
long-range plans that include identifying commercial practices for
its sales program. 

Even though DOD is making efforts to improve its marketing of surplus
property, we believe it will continue to realize low sales proceeds
from the sale of commercial-type aircraft parts unless additional
steps are taken to (1) identify and actively market such parts, (2)
provide buyers with important information on commercial applications
and FAA certification potential, and (3) separate unlike parts prior
to a sale.  DOD officials have told us they have begun to explore
some of these practices. 

We believe the previously mentioned practices are feasible for the
commercial-type parts that DOD sells, especially since most of the
practices involve obtaining information that already exists at the
military services' level.  By adopting commercial practices, DOD will
likely benefit by obtaining much higher sales proceeds for its parts. 


   ADOPTING PRIVATE SECTOR
   PRACTICES FOR SCRAP PARTS
------------------------------------------------------------ Letter :7

During our review, we also noted that an opportunity existed for DOD
to minimize improper use of scrap parts by adopting private sector
practices that control such parts.  Typically, the service life of
such parts has expired, or the parts have been damaged, thereby
rendering them unusable.  FAA and DOD officials believe that scrap
parts could pose safety hazards and should not be used on civil
aircraft. 

While DOD has provisions to ensure that aircraft parts posing a
national security risk are mutilated and parts posing a product
safety risk are destroyed prior to sale, thousands of scrap aircraft
parts do not fall under these provisions.  According to DOD
officials, no controls exist for the scrap aircraft parts that, on
the surface, do not pose a safety risk, but which may in fact present
a risk if improperly used or misrepresented by the purchaser as
usable.  According to officials from FAA and the Department of
Transportation's Office of Inspector General, financial motives can
lead unscrupulous individuals to illegally refurbish or clean up DOD
scrap aircraft parts and pass them off in the civil aviation market
as usable.  Such parts, which would cost thousands of dollars if
usable, can be acquired for pennies per pound as scrap. 

According to the Transportation Inspector General officials, specific
cases have been found where scrap military aircraft parts have been
made to look usable and were resold in the civil aviation market as
such.  For example, a federal indictment issued in 1991 charged that
an aircraft parts distributor misrepresented severely worn military
aircraft parts as usable.  According to a Transportation Inspector
General official, the parts were bought as scrap.  The aircraft parts
distributor, who pleaded guilty to the charges, took ownership of
several military combustion liner assemblies in scrap condition.  The
distributor attempted to refurbish these assemblies by welding the
cracks and in other ways making the assemblies appear serviceable. 
According to a Transportation Inspector General official, the company
also modified the assemblies by drilling an additional hole in the
liners so that they would fit the civil version of the jet engine and
sold them to a civil aviation industry customer for reuse. 

FAA officials told us they believe that DOD could take additional
precautions to ensure that its scrap parts do not reenter the civil
aviation market as usable.  DOD is not required to and does not
mutilate many of the flight-critical scrap parts that it sells.  This
sometimes leaves scrap parts with the appearance of being in good
condition and usable.  One disposal yard we visited had piles of
scrap parts that appeared as if they were usable, as shown in figure
2.  The supervisor told us that improper reuse of the parts could
potentially occur because some of the parts looked as if they had
never been used. 

   Figure 2:  Scrap Pile of
   Surplus Aircraft Parts

   (See figure in printed
   edition.)

DOD also does not require a scrap warranty from its buyers of scrap
parts.  Scrap warranties are contractual documents signed by the
buyer, which certify that scrap parts will be used only as scrap and
will not be resold as usable.  While DOD requires its defense
contractors to obtain these warranties for the military aircraft
parts they sell as scrap, DOD does not require the DRMO to obtain
them from buyers of scrap parts because, according to DOD officials,
the agency does not view these parts to be at risk of misuse. 

In contrast, officials from United Airlines and Pratt & Whitney, an
aircraft engine manufacturer, told us they require that scrap
warranties be completed for all aircraft scrap leaving their
facilities.  According to a United Airlines official, the company
obtains legally binding scrap warranties from scrap purchasers,
giving the company some control over the final disposition of the
scrap parts it sells.  The agreement guarantees that scrap will be
used only as such and provides a vehicle through which United
Airlines could pursue legal remedies if scrap parts are sold as
usable.  United Airlines also goes one step further by having an
employee monitor the status of the scrap by visiting the buyer. 

In addition to obtaining scrap warranties, United Airlines and Pratt
& Whitney require that good condition and high-risk scrap, such as
engine parts, be mutilated prior to sale.  In-house mutilation of
critical scrap parts provides further safeguards that such parts can
never be reused and pose a threat to civil aviation safety.  To help
its disposal officials better mutilate scrap engine parts, Pratt &
Whitney created a guide to parts mutilation.  This guide demonstrates
through diagrams how certain important engine parts should be
mutilated prior to sale as scrap.  Such practices guarantee that
scrap parts are not salvaged from scrap piles and misrepresented as
usable.  According to DOD officials we interviewed, the time and cost
of mutilating all DOD scrap aircraft parts would be prohibitive. 


   RECOMMENDATIONS
------------------------------------------------------------ Letter :8

We recommend that the Secretary of Defense explore ways of providing
greater financial incentives to enhance proceeds from the sale of
usable surplus parts.  One alternative would be to return a portion
of the proceeds, generated from the sale of such parts, to both DRMOs
and the National Sales Office to help them carry out the operation of
disposal activities more effectively.  The additional funds could be
used to enhance the expertise of disposal staff and familiarize them
with all aspects of the surplus aircraft parts market that commercial
airlines have found to be successful. 

We also recommend that the Secretary of Defense direct the Director
of the Defense Logistics Agency, in conjunction with the military
services, to conduct a program to determine how (1) commercial-type
aircraft parts and their civil applications can best be identified
for DOD disposal staff and (2) parts that conform to an existing FAA
certification or have potential to be FAA certified can be identified
for DOD disposal staff and relevant information forwarded with the
part.  DOD could take a phased approached by initially testing these
practices at a few DRMOs before determining their applicability to
DOD's entire disposal system. 

In addition, we recommend that the Director of the Defense Logistics
Agency conduct a program to test commercial marketing practices that
could enhance sales of surplus aircraft parts.  Among the practices
that the agency should include in its test are

  separating commercial-type parts into sales lots that do not mix
     unlike conditions and manufacturers,

  actively marketing these parts to a wide spectrum of potential
     customers, and

  providing the technical training necessary for staff so they will
     know the parts they are selling and the markets they are selling
     to. 

Because it is possible that DOD may incur additional costs in
applying these practices, this program could also initially test them
at a few DRMOs with the goal of identifying and selecting those that
will yield the greatest benefits at the minimum cost. 

With respect to DOD's scrap parts, we also recommend that the
Director of the Defense Logistics Agency (1) secure from buyers a
warranty that stipulates DOD parts sold as scrap will be used only as
such and not resold as usable and (2) assess the cost-effectiveness
of mutilating scrap parts in-house, especially those most vulnerable
to being reused in the civil aviation market. 


   AGENCY COMMENTS AND OUR
   EVALUATION
------------------------------------------------------------ Letter :9

In commenting on a draft of this report, DOD agreed with all of our
findings and recommendations.  DOD pointed out that, although there
are inherent differences in the disposal of surplus property between
DOD and the commercial sector, the agency has begun addressing many
of the recommendations for increasing sales proceeds.  For example,
during fiscal year 1995, the Defense Reutilization and Marketing
Service is expected to assess the feasibility of identifying parts
with potential commercial application or for FAA certification. 

In addition, DOD has changed lotting techniques and marketing
strategies to open new market opportunities, including direct buys by
original equipment manufacturers and airlines.  A statement of work
has been issued to commercial contractors for the marketing of
aircraft parts at several locations.  In the area of scrap aircraft
parts, the Defense Reutilization and Marketing Service has developed
warranty language covering both the sale and resale of scrap and is
assessing the cost-effectiveness of mutilating scrap aircraft parts
on a continuing basis. 

While DOD agreed with the overall recommendation of exploring ways to
increase sales proceeds, it voiced several concerns regarding the
practicality of returning proceeds to individual DRMOs.  DOD
officials cited concerns that DRMOs selling large quantities of
surplus aircraft parts would have an advantage over and would be
rewarded at the expense of smaller DRMOs.  We believe that this
obstacle could be overcome by, for example, linking incentives to
increased rates of return from the sale of surplus parts as well as
to the volume of proceeds. 

Also, DOD stated that most surplus parts are sold centrally by the
National Sales Office rather than by individual DRMOs.  In our
opinion, both DRMOs and the National Sales Office play different, yet
important, roles in their efforts to enhance proceeds from the sale
of surplus parts.  Therefore, any incentives that DOD explores should
be attractive to both offices in the capacity in which they currently
operate.  We have recognized these roles in the recommendations
section of the report. 

We recognize that DOD is faced with inherent difficulties in trying
to balance the competing disposal objectives of maximizing sales
proceeds, reusing surplus parts and equipment effectively, and moving
surplus property quickly.  Nonetheless, we believe that by exploring
different ways of incentivizing disposal activities, even on a
limited test basis, DOD could realize the desired financial benefits. 
DOD's complete comments are provided in appendix II. 


---------------------------------------------------------- Letter :9.1

Unless you announce its contents earlier, we plan no further
distribution of this report until 30 days after its issue date.  At
that time, we will send copies to the Secretaries of Defense, the Air
Force, the Army, and the Navy; the Directors of the Defense Logistics
Agency and the Defense Reutilization and Marketing Office; and
interested congressional committees.  We will also make copies
available to others on request. 

Please contact me at (202) 512-8412 if you or your staff have any
questions concerning this report.  Other major contributors to this
report are listed in appendix III. 

Sincerely yours,

Donna M.  Heivilin
Director, Defense Management and
 NASA Issues


SCOPE AND METHODOLOGY
=========================================================== Appendix I

To identify how the Department of Defense (DOD) sells and markets its
surplus aircraft parts, we performed work at the Office of the
Assistant Secretary of Defense, Production and Logistics, Washington,
D.C.; the Defense Logistics Agency, Alexandria, Virginia; the Defense
Reutilization and Marketing Service, Battle Creek, Michigan; and the
Defense Reutilization and Marketing Service National Sales Office,
Memphis, Tennessee.  To obtain information on how surplus parts are
received and arranged for sale, we performed work at four Defense
Reutilization and Marketing Offices (DRMO), located in Memphis,
Tennessee; Oklahoma City, Oklahoma; Warner Robins, Georgia; and
Wurthsmith, Michigan.  In addition, we met with officials from the
Federal Aviation Administration (FAA) and the U.S.  Department of
Transportation to discuss the legal and regulatory issues that may
affect the selling of DOD surplus aircraft parts to the civil
aviation market. 

To determine what information the military services had on surplus
aircraft parts, we visited the Wright-Patterson Air Force Base,
Dayton, Ohio; the Warner Robins Air Logistics Center, Warner Robins,
Georgia; and the Army's Tank-Automotive Command, Warren, Michigan. 
To identify commercial-type surplus aircraft parts from one 1993 DOD
sales catalog, we contracted with the U.S.  Air Force Materiel
Command Cataloging and Standardization Center, Battle Creek,
Michigan.  The methodology it used in assessing the parts included

  reviewing Air Force technical orders to obtain information on the
     military uses of the parts,

  reviewing vendor catalogues for (1) interchangeability on the parts
     and (2) other information suggesting a commercial application
     exists for the parts,

  contacting manufacturers of the parts, and

  contacting distributors of new aircraft parts. 

To obtain buyer views of DOD's selling and marketing practices, we
contacted 26 buyers that often buy DOD surplus aircraft parts.  These
buyers, listed in table I.1, represented individuals or companies
that purchased aircraft parts during DOD's July 1993 national sale. 



                          Table I.1
           
            List of 26 DOD Surplus Aircraft Buyers
                         We Contacted

-----------------------------  -----------------------------
Aeronautical Instrument and    Consolidated Aeronautics
Radio (New Jersey)             (California)

Air Technology, Inc.           D G Airparts (Oregon)
(Florida)

Alamo Aircraft Supply, Inc.    El Dorado Aircraft Supply
(Texas)                        (California)

Alden Sales Co. (Virginia)     Equipment and Supply Co.
                               (North Carolina)

Allstate Helicopters, Co.      General Electric Co.
(Texas)                        (Massachusetts)

American Aerial Sales, Inc.    Lee Air Company, Inc.
(Texas)                        (California)

American Jet Engine Co. (New   Linsmeyer Machine, Inc.
York)                          (Indiana)

Brown Helicopter, Inc.         Performance Enterprises
(Florida)                      (Texas)

C&C Alloys Corp. (Oklahoma)    R & D Aero Engine Co. (Texas)

Charlotte Aircraft Corp.       Rilpa Enterprises Ltd.
(North Carolina)               (Connecticut)

Chrisbarry Aircraft Corp.      Service and Sales, Inc.
(California)                   (Arizona)

Coast Helicopter and Air       Sky Control, Inc.
Craft (Texas)                  (California)

Columbia Helicopters, Inc.     Transupport, Inc. (New
(Oregon)                       Hampshire)
------------------------------------------------------------
To determine the nature and extent of private sector marketing and
selling of surplus aircraft parts, we visited Delta Airlines,
Atlanta, Georgia.  We also interviewed officials from United
Airlines, San Francisco, California; Trans World Airlines, Kansas
City, Missouri; and 57th Aerospace Group, Prior Creek, Oklahoma.  To
obtain information on private sector policies for scrapping surplus
aircraft parts, we contacted aircraft part manufacturers--Pratt &
Whitney, Meriden, Connecticut; and McDonnell Douglas, Tulsa,
Oklahoma.  We chose these companies because they were identified by
two aviation trade associations and one aviation industry newsletter
as being leaders in marketing and selling usable and scrap aircraft
parts. 

As part of our review, we interviewed officials from the Air
Transport Association, Washington, D.C.; and Inventory Locator
Services, Memphis, Tennessee; to obtain information on their
automated marketing services.  We also met with representatives from
Aerospace Industries Association, Inc., Washington D.C.; and some of
their members, including Bell Helicopter, Fort Worth, Texas; General
Electric, Cincinnati, Ohio; General Motors-Allison Gas Turbine
Division, Indianapolis, Indiana; Lockheed, Marietta, Georgia; Lucas
Aerospace, Stamford, Connecticut; and United Technologies
Corporation, Washington, D.C; to discuss how DOD surplus parts can
best enter the civil aviation market. 

We conducted our review from January 1993 through December 1993 in
accordance with generally accepted government auditing standards. 




(See figure in printed edition.)Appendix II
COMMENTS FROM THE DEPARTMENT OF
DEFENSE
=========================================================== Appendix I



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)


MAJOR CONTRIBUTORS TO THIS REPORT
========================================================= Appendix III


   NATIONAL SECURITY AND
   INTERNATIONAL AFFAIRS DIVISION,
   WASHINGTON, D.C. 
------------------------------------------------------- Appendix III:1

David R.  Warren
Kenneth R.  Knouse, Jr.
Thomas W.  Gosling


   OFFICE OF GENERAL COUNSEL
------------------------------------------------------- Appendix III:2

John A.  Carter


   DETROIT REGIONAL OFFICE
------------------------------------------------------- Appendix III:3

Robert W.  Herman
Louise N.  Roy-O'Connell
Daniel J.  Martin
Audrea L.  Buck

