Some assets can move, some can’t

It looks like the CNMI’s cold war with Continental has turned hot, as more folks are publically questioning the airline’s dealings with the CNMI market.

In this very column, I warned, a matter of years ago now, that unless the demand for CNMI tourism in Japan was safeguarded, the supply of tourism services would inevitably shrink as well. Airlines are the prime example. Smaller demand, and smaller supply, equals a smaller industry. Hotels can’t very well pick up and run away from a dead market, but airliners sure can. Gear up, flaps up, so long, folks.

Airliners are expensive assets, of course, and leaving them idle on the ground–or worse yet, flying them empty in the air–isn’t such a hot idea.

Indeed, idle assets do the devil’s work. Different airplanes cost different amounts of money, but let’s pick a number out of the air and settle on a price of $40 million, which is my rough guess as to the price of a Boeing 737, along with associated costs of the purchase.

If I was responsible for managing a $40 million asset, I’d have to consider that if we just up and sold the asset and could earn ten percent on investing the cash from the sale, we’d be making $4 million per year. That’s $333,333 a month, every month, month in, month out, rain or shine, tourists or no tourists, without having to actually operate an aircraft, hire pilots and mechanics and flight attendants and dispatchers and schedulers and accountants and marketing people, without having to buy fuel or parts, without paying landing fees, without doing anything but watching the checks roll in from our theoretical investment.

Of course, if Continental, or anyone else, is in the airline business, it’s because they reckon they can take the value of this asset, and employ it such that they earn a higher return than they would if they just sold it and invested the cash. Ok, that’s sort of an oversimplification, but it’s not too far of a stretch. So this airplane, this one, measly airplane, has to generate $333,333 a month in cash after all the bills are paid, merely to hold its own weight.

This, then, is a sort of financial underpinning to the Continental issue. No matter which side of it you prefer to take, you can’t understand any of the issue unless you have some grasp of the fact that expensive assets have to be productive, or they cease to be worth keeping. And, related to that, is that assets are “allocated” where they can be the most productive, at least to the extent that diversification isn’t employed for purposes of risk-aversion, which is a whole different matter.

With hotels, the issue takes on a whole different light. Hotels can’t be moved, and so the basic issue is whether or not they can generate enough cash to simply pay the bills. Airliners can be moved, and the basic issue is where they can be the most productive.

There are some issues pertaining to route authority and such that enter the Continental picture, and we’ll probably see some discussion about such things in the future.
Regulatory stuff. But as far as financial stuff goes, we may want to consider that capital will flow to where it is expected to earn the highest returns. If the CNMI doesn’t appear to understand that fact, investors will become very suspicious of how we do things here.