We take our annual look at NSAA's Economic Analysis and find a few surprises...and some major holes.
According to the NSAA's "Economic Analysis of United States Ski Areas," there were more people on the mountain in the 2010-11 season-both more skiers and more employees-and with those people came both increased revenue and increased expenses. But profits fell, proving once again that more is not always better.
That fall came despite record attendance numbers. The 2010-11 season set a record of 60.54 million skier visits, a tick up from the previous record of 60.5 million skier visits tallied during the 2007-08 season. The average resort in 2010-11 saw 2.4 percent more skier visits than in 2009-10, but also had a season that was 4 percent longer.
On the national level, both operating profit margin and pre-tax profit margin were down compared to 2009-10, as operating profit margin fell to 24.4 percent from 26.1 percent, and pre-tax profit margin fell to 9 percent from 13.3 percent.
You don't have to look far to see why: Average operating profit increased 1.1 percent, but average operating expenses were up 10.3 percent, depreciation jumped 32.3 percent, operating leases climbed 17.2 percent, and interest leaped 30.8 percent.
That's a lot of information all at once, and it already seems at least a little contradictory. It's vitally important to remember that the results of this report are skewed heavily towards large ski areas, and to the Rocky Mountains and Pacific South region (California, Arizona, and Nevada): the average resort in the analysis reported total visits of 332,478, while the average U.S. ski resort sees about 125,000 visits. The report's national averages are significantly influenced by what goes on at the large resorts, and most of those are located in the Rocky Mountain region and the newly-created Pacific South region. It's also important to remember that this report includes data from only the 107 resorts that returned both the 2009-10 and the 2010-11 surveys.
This year's report incorporates a change in regions. For some time, resorts in what is now the Pacific North region-which includes Washington and Oregon (and would include Alaska, had any surveys from Alaska been returned)-have asked to have their data presented separately because their operations and resort characteristics are significantly different than those in the Pacific South. Those differences include a higher proportion of day skiers, far less snowmaking, and more night skiing. RRC Associates, which puts together the report, needed enough data to make such a division statistically reliable, and this year's report is the first one that had enough of the right data for RRC to do it.
The major differences among resorts, which those Pacific North resort operators were pointing to as a reason for having their own region, show up again and again in this report, as we shall see as we look at the good and bad news.
THE GOOD NEWS
Increased visits brought increased revenue, both ticket and non-ticket. Average total revenue per skier visit was up 5.4 percent, a positive development. Ticket revenue was up 4 percent, and non-ticket revenue was up 6.7 percent. The report states that "revenue per visit from all major revenue departments (lessons, food & beverage, accommodations/lodging, retail stores, and rental shops)" increased. That's probably because spending on non-ticket items continued to recover from the squeeze on these revenues that took place during the recession.
All six of the geographic areas saw increases in total revenue per visit, as did three of the four size categories. The smallest and largest size categories saw increases of 3.9 percent and 6.6 percent, respectively, while larger mid-sized areas saw increases of 3.5 percent. Smaller mid-sized areas saw no change in this metric.
In absolute dollar terms, the smallest and largest size categories again do the best, with the smallest areas averaging $64.69 in total revenue per visit and the largest averaging $90.95 per visit. Resorts in the smaller mid-sized category averaged $52.83 per visit in total revenue, and those in the larger mid-sized category averaged $59.85.
More reporting resorts earned a profit, despite the overall drop in profit margins. Of the 107 resorts the report covers, two more were profitable in 2010-11 than in 2009-10. That information is actually buried in the Appendix, in Table A2: Average Ski Area Characteristics by Profitability. Again, size is a factor. The table breaks the resorts into three categories: Top Half Profit (i.e., the most profitable), Bottom Half Profit, and Loss. The top half profit resorts had average skier visits of 554,967, the bottom half profit had average skier visits of 183,395, and the loss had average skier visits of 265,016. Just as in total revenue, the resorts in the middle size categories get squeezed.
It's interesting, and perhaps instructive, to note that resorts in the top half of the profit pyramid saw a decline in the average number of employees (both year-round and seasonal), while those resorts that showed a loss saw increases in employee numbers. However, there's no data on which resorts moved up or down the profit/loss scale, so it's hard to draw too many conclusions from the changes in these individual categories.
The report shows some movement toward summer operations. More resorts reported summer revenue: 72 percent, up from 69 percent, and summer revenue was up 2.7 percent at the 77 areas that reported it. At those areas, summer operations accounted for an average of 9.7 percent of revenue, about flat from the previous year, when it was 9.8 percent.
Bear this in mind, too: real estate is essentially excluded from the economic analysis. So, for those resorts that operate under a REIT financing model, RRC calculates which assets belonging to the REIT ought to be reflected in the resorts' asset figures so that accurate comparisons can be made. But some resorts do indeed depend on real estate as part of their business model, so again, much of the value of the report depends on exactly which sort of resort you are running.
THE BAD NEWS
Not all the news regarding last season is good. Worst of all: All sorts of expenses rose.
Direct labor, the largest expense in absolute terms, was up 7.8 percent. However, since revenues increased, too, direct labor equaled 24.4 percent of total revenue-same as in 2009-10. General and administrative expenses were stable at 10.3 percent of revenue, too.
What expense categories ate up more revenues than they had the previous year? Depreciation increased to 10.5 percent of revenues from 8.5 percent (more on depreciation in a bit), cost of goods sold increased to 6.9 percent of revenue from 6.6 percent, payroll taxes increased to 5.5 percent of revenue from 5.2 percent, and other direct expenses increased to 12.4 percent of total revenue, up from 11.6 percent.
The report includes information on other expenses as well, including electric power/fuel expense, which was up as a share of revenue to 3.9 percent from 3.7 percent. Interest expense increased to 2.8 percent from 2.3 percent of revenue, and maintenance and repairs increased to 2.4 percent of revenue from 2.2 percent.
The news on the depreciation front is probably better than it looks at first glance. It's very possible that resorts simply took advantage of provisions in recent stimulus legislation that allowed for accelerated depreciation and "bonus depreciation" on certain qualified capital expenditures. Similar provisions have been in place since 2008, and they have been extended and expanded over time. The report itself doesn't identify the reasons for the depreciation increase, and isn't designed to do that.
What the report will show you, if you look carefully, is that the largest increases in depreciation as a share of revenue were in the Rocky Mountain (up to 12.6 percent from 9.4 percent) and Pacific South (up to 12 percent from 9.2 percent) regions and-no surprise here-in the largest size category (up to 11.3 percent from 8.3 percent). In the Midwest and Northeast, depreciation fell as a share of revenue, and the Pacific North and the Southeast both had small increases. So again, the largest resorts are influencing the national numbers.
The increase in depreciation, whatever its source, largely explains why profit before tax as a share of revenues dropped. Depreciation is a non-cash expense, of course, but it's also a necessary expense in a business like the ski industry.
So let's ignore depreciation for a minute and look at operating expenses as a share of revenue. Overall, they increased, and they increased in each of the four size categories. On a regional basis, though, they decreased in the Northeast, Midwest, and Pacific North; they increased in the Southeast (which didn't see an increase in season length), the Rocky Mountains, and the Pacific South. In other words, many areas did a good job of controlling operating expenses.
If we zoom in on just the largest resorts in the Rocky Mountains and the Pacific South, the big influencers of the national numbers, and look at operating expenses as a share of revenues, we see that the metric increased to 71.8 percent from 70.6 percent in the Rockies and to 78.9 percent from 69.3 percent in the Pacific South. The Pacific South got hit with a lot of snow last season, which increased snow removal costs and other expenses.
Does this mean that the big resorts exert so much influence on the overall report that they skew the results? That's hard to say.
Consider this parallel. While I was working diligently on this report, I took a break to attend my Monday night French class at L'Alliance Française de Berkeley. One of my fellow students was explaining the plot of the movie "Hugo" to the rest of us, and he expressed surprise that Sacha Baron Cohen, who is perhaps best known as Borat, was so convincing as a World War I veteran overseeing security at a Paris train station.
Our teacher, a Belgian woman named Ingrid, asked, "Who is Borat?" Despite our relatively solid ability to speak French, we were not able to give her a clear picture.
I feel a little bit like that about this report: it's useful, like our explanation to Ingrid that "Borat" the movie is most definitely not a documentary (she had asked), but incomplete. For her to understand who Borat is, she needs to see the movie. For us to understand what's really going on in the winter resort industry, we need more information.
To be clear, I am not belittling the Economic Analysis. As someone whose job it once was to run a survey project, collect and analyze data, and then write a report about the results, I know how difficult and time-consuming these projects can be. It's just that this report's data is heavily influenced by the big resorts in the Rockies and the Pacific South, and that allows us to be only so specific.
So, to recap: More people were on the mountain during more of the year, and those people were spending more money on both tickets and other items, which is good news, but that good news did not translate into increased profit margin.
Why not? Depreciation was up quite a bit, but it doesn't seem like that's indicative of any problems. Operating expenses were up, but some of that was due to unusual conditions at some of the big resorts in the Pacific South.
The question that looms in my mind is whether the increases in operating expenses were temporary, or indicative of the fact that the skiing industry is becoming increasingly expensive to operate in. If I were a resort operator, I would start thinking carefully about which of those operating expense increases I experienced last season are things that I can exert more control over in the future. Then I would start thinking about how to exert that control. The Economic Analysis report is not designed to answer questions like these, but it is certainly a useful tool in pointing out that you need to start asking them.
Considering that the weather has not been especially cooperative this season, I would also start thinking now about how I can encourage visitors to think of my resort as a summer destination, not just a winter one. Doing so will help cash flow now and in the near future. And, since summer operations generate less than 10 percent of current resort revenues, there's surely room for growth. It doesn't take more research to demonstrate the benefits of that.
The author wishes to express her gratitude to Dave Belin at RRC Associates and Jim MacInnes of Crystal Mountain, Mich., for their kind assistance.