Economic Analysis: Profits Still Strong

Winter resorts profited surprisingly well from the winter of 2003-04. The NSAA Economic Analysis of U.S. Ski Areas (EA) suggests that areas improved their performance for the second year in a row. Despite weather challenges on the East and West coasts and a slight decline in skier visits, revenues rose, and at a faster clip than expenses. Profits grew as a result. Operating profit margin (EBITDA) rose to 24.5 percent, from 23.3 percent.

Of course, the NSAA EA provides a raft of useful data arrayed by resort size, region, and size within region, and these data provide valuable benchmarks for individual resorts. But the national figures provide a snapshot of the industry as a whole.

It is not a perfect picture, to be sure. As was the case with last year's report, the larger resorts are over-represented in the study, and they reported the strongest performance. And as we also reported last year, some of this improvement stemmed from changes in the way a few large resorts did, or did not, allocate corporate overhead and other expenses to their resorts. Further, Rocky Mountain resorts comprised more than 30 percent of all respondents, and this skews results also. Nonetheless, a good portion of the improvement in the national figures is real. For example, all regions of the country, and all size groups, posted positive profit levels.

On the Plus Side
Revenue per visitor rose an impressive 6.4 percent, from $59.42 to $63.30. Lift tickets (excluding tubing tickets) accounted for 46 percent of this total. This percentage has been slowing dropping as resorts increase revenues from non-ticket sources. Food and beverage, lessons, and lodging were the biggest sources of non-ticket revenue, followed by retail and rental operations. However, costs for these non-ticket revenue sources also rose, by 6.8 percent. As a result, they contributed less to the bottom line, in percentage terms, than they did in 2002-03.

One source of good news was lift ticket revenues, which rose faster than mountain ops expenses. Average ticket yield rose 5.1 percent, to $29.10. Yield was nearly flat, up .1 percent at 61.2 percent. Even though skier visits dropped by an average of 1.3 percent, total ticket revenue rose 3.7 percent. Discounted passes have not only failed to hurt revenues, they appear to have raised them. Mountain ops expenses were up just 2.3 percent; as a result, the contribution from mountain ops to the bottom line increased.

The admirable performance on the expense side for mountain ops was outdone only by the reduction in G&A (General and Administrative) costs. These dropped from 10.2 percent of revenues to 8.2 percent, a rather significant achievement. Without it, the bottom-line improvement for 2003-04 would be much smaller. It's also worth noting that areas which reduced G&A costs in 2003-04 tended to have higher profitability than areas whose G&A increased.

The reduction in G&A is part of an overall reduction in total resort employment, which dropped three percent, on average, from 728 employees to 706. Full-time employment plunged much more: by nearly one-third, from 135 to 91 on average. Areas have successfully focused on right-sizing and just-in-time staffing. Associated with this shift from full-time to part-time staffing, payroll taxes also declined. Since many of the costs of doing business are not directly within the control of area managers-insurance rates, for example-it's critical that areas do exert control over the expenses they can.

Departmental Review
A look at the performance of the average area by department shows just how critical cost control can be.

Tubing is proving a highly profitable business. Revenues rose rapidly-up 25 percent from the previous year-while costs actually dropped, as resorts become more efficient with staffing and maintenance. Gross margins were the best in the industry, at a rather shocking 81.8 percent. Though tubing is small as a percentage of revenue for the "average" resort, at just 1.8 percent of total revenue, remember that only about half of all resorts offer it, and primarily smaller areas. Since the "average" area in this report racks up 296,000 skier visits, nearly three times the 115,000 average reported in the more representative Kottke End-of-Season survey, the impact of tubing operations on many resorts is understated in the Economic Analysis.
Ski and ride schools performed particularly well in 2003-04. There was a 5.9 percent rise in revenues and lesson costs rose only half as fast, at 2.7 percent. The gain in retail sales (more than 20 percent), and a slight improvement in retail margin, is a positive sign as well.

Marketing expenses increased by 9.3 percent, and rose to 5.2 percent of revenue, up slightly from 5.0 percent. However, current levels of marketing, aimed primarily at existing downhillers, may be less than is needed to tap the new markets that are crucial to long-term growth.

But there's still room for improvement in several other departments. For the second year in a row, rental revenues are down (though rental shops are operating very efficiently). If the industry was doing a superb job of attracting newcomers, this number should be increasing.

While food and beverage revenues were up substantially, so were costs-with the result that margins and net revenue were both down. F&B revenues were up 7.9 percent nationwide, while costs rose 12.7 percent. A similar pattern holds for lodging operations: revenues rose 5.2 percent, but expenses were up 13.2 percent.

The worst performer by far is property operation, making this the greatest drain on profitability. Property operation cost the average EA resort nearly half a million dollars in 2003-04.

The Bottom Line
So how did gross margins and EBITDA increase? Largely due to reduced G&A costs. On average, these declined by nearly $300,000 per resort, to $1.533 million. That accounts for two-thirds of the improvement in EBITDA, and half the improvement in gross margin. A similar story is true for before-tax profits.

Mountain ops also contributed to the bottom-line growth, as the increase in lift-ticket revenue more than offset a slight rises in expenses.
All of the above is especially impressive because comparisons are to the record-skier-visit winter of 2002-03. The EA for the first time includes a small taste of five-year data to chew on, and in it, 2003-04 compares favorably to the previous three seasons, in which visits have regularly approached or exceeded 57 million. For example, even though gross revenues were higher in 2000-01 (the first year in which visits topped 57 million), at an average of $19.1 million compared to $18.8 million in 2003-04, the average resort cut expenses by nearly $800,000 in 2003-04. As a result, both EBITDA and profit before taxes were up substantially. There are no better measures of the benefits of cost control than these.

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