1974-75 saw a welcome return to generally profitable operations by the ski industry as profitability returned to the levels established in 1971-72, the last good snow season. Table I relates ski area returns to those reported leisure-time industries and the recreation sub-category in the 1975 “Forbes,” 27th Annual Report on American Industry, (January 1, 1975).
Table 1
| Five-Year Return on: Equity | Five-Year Return on: Total Capital | Latest 12-Month Return on: Equity | Latest 12-Month Return on: Total Capital | |
|---|---|---|---|---|
| All Industry Medians | 11.6% | 8.7% | 13.3% | 9.6% |
| Leisure Industry | 13.0% | 9.8% | 12.5% | 8.6% |
| Recreation sub-group | 13.9% | 10.3% | 8.5% | 6.7% |
| Ski Area Industry | 8.0% | 6.0% | 11.4% | 7.9% |
(Note: Return on this Table is after tax return. Thus ski industry data, measured in before tax dollars has been adjusted by assuming a rete of 22% on the first $25,000 and 48% on the balance, and no state income tax liability. Total capital as defined by Forbes includes both equity and debt capital and return includes both ter-tax profits and interest.)
Table II illustrates the variation in ski area profitability over the past five seasons.
Table II
| Some Basic Measure of Profitability | 1974-75 | 1973-74 | 1972-73 | 1971-72 | 1970-71 |
|---|---|---|---|---|---|
| Operating Profit on G.F.A. | 11.3% | 7.5% | 5.6% | 11.6% | 7.6% |
| Profit (after tax on Equity* | 11.4% | 6.1% | 3.4% | 12.0% | 7.3% |
| Profit (b.t.) (000) | $181 | $107 | $45 | $155 | $88 |
| Percent of Ski Areas reporting profits | 73% | 46% | 52% | 71% | 67% |
These two tables indicate that while current returns are a healthy improvement over the past two disastrous seasons, the industry still has a way to go to become competitive in the investment market. One healthy trend that we all recoonized last year was that skiing continued during the recession. This welcome sign can be seen in the comparison of the past years’ returns to those recorded in the recreation sub-group.
For the first time we now have five-year data. By any measure this five-year return is poor, and of course, a measure of the tremendous effect of snow and the weather on the ski business.
Increased Response:
The 1974-75 Economic Analysis of North American Ski Areas is the seventh report on the ski area business. This report has again been produced by the University of Colorado, Business Research Division, in cooperation with the NSAA Economic Studies Committee. This newest study includes data from 140 ski areas and detailed financial results from 100 ski areas with 46.2% of the uphill capacity of the nation. Again the format has been revised, and this 1974-75 study contains much more analysis than past reports. The large detailed report contains chapters on ski area characteristics, average area income statements and balance sheets, the eight critical economic ratios, profitability, and various similarities and differences by geographic region, size, type and utilization.
The Critical Variables — By Profitability
Table III illustrates the wide divergence in the eight critical variables when divided by degrees of profitability.
TABLE III — ECONOMIC RATIOS — BY PROFITABILITY
| Total | Top Half Profit | Bottom Half Profit | Loss | |
|---|---|---|---|---|
| Critical Ratios | ||||
| 1) Health (Debt to Cash Flow) | 4.7X | 2.3X | 3.5X | |
| Profitability: | ||||
| 2) Operating Profit on G.F.A. | 11.3% | 21.1% | 7.2% | Loss |
| 3) Profit (BT) on Equity | 20.4% | 40.3% | 12.1% | Loss |
| Performance: | ||||
| 4) Average Utilization | 36.5% | 37.1% | 36.1% | 33.8% |
| 5) Days of Operation | 130 | 142 | 139 | 103 |
| Policy & Planning: | ||||
| 6) Capital/Capacity Ratio | $944 | $866 | $866 | $1,295 |
| 7) Operating/Capacity Ratio | 1.68 | $1.66 | $1.40 | $2.33 |
| Revenue/Skier-Visit: | ||||
| Ski Lift Gross | $6.04 | $6.61 | $4.88 | $6.0 |
| Ski School Margin | $0.21 | $0.26 | $0.12 | $0.22 |
| Food Service Margin | $0.22 | $0.25 | $0.16 | $0.19 |
| Ski Shop Margin | $0.12 | $0.12 | $0.09 | $0.11 |
| Ski Rental Margin | $0.35 | $0.38 | $0.32 | $0.26 |
| Other Margin | $0.16 | $0.12 | $0.22 | $0.26 |
| 8) Total – Revenus/Skier-Visit | $7.10 | $7.74 | $5.79 | $7.13 |
| Base | (100) | (37) | (36) | (27) |
This comparison with the overall averages reveals the strengths and weaknesses leading to profitable operation. The most telling, to me, is the length of the ski season. The top half of the profitable acreas averaged a 37.9% longer operating season. (142 vs. 103 days) Their 21.1% return to G.F.A. and 40.3% before tax return on equity is by far the bright spot in this good season. The return to G.F.A. of the top half is up slightly from 20.5% last season; however, the return on equity increased a whopping 33.0%. This performance resulted from a drop in utilization (40.7% to 37.1%); an increase in operating days (137 to 142) and a drop in the operating cost/season’s capacity ratio ($1.75 to $1.68). Revenue per skier-visit remained the same at $7.74.
This profile of the 37 top profit-making ski areas illustrates that well managed, properly conceived ski areas can produce profits commensurate with the risks involved. The best profit reported amounted to a 36% operating profit on Gross Fixed Assets, some 218% above the average of 11.3%. Assuming a 50/50 debt equity ratio, an average interest ratio of 10%, and the normal 50% income tax rate, investors received a 31.0% return after tax. This performance, achieved from a 76.7% utilization, at an average revenue of $6.09 per skier-visit, over a 137 day ski season, illustrates the potential to earn returns commensurate with risks. This ski area met investors’ goals with an average capital cost/capacity ratio ($929), and a higher-than-average operating cost/season’s capacity ratio ($1.84). The very high utilization provided the edge, but all other critical factors were in excellent balance and not very far from average.
The major departure causing lower profits for those in the bottom half range was again a low total revenue per skier-visit ($5.79). Areas reporting operating losses have a series of critical problems, adding up to severe consequences. First, the ski season length of 103 days handicaps potential profitability. In isolated cases, perhaps snowmaking will help. Second, the high critical cost/capacity ratio ($1,295), means both higher interest and depreciation costs and lower returns for the same dollar amount of operating profit. Third, and perhaps correctable, is a much higher operating cost/season’s capacity ratio. ($2.33 is 38.7% higher than the average of $1.68).
The Future:
While adequate profits are still elusive for over half of the ski industry, there are some trends that bode well for the future. First, inflation and the recession have slowed the growth in new and expanded ski facilities, while in times of good snow conditions the market demand continues to climb. While this means even more crowded conditions for the peak-period skier, it should lead to a better utilization of ski areas as the disciminating seek ways to ski during the low demand periods.
Second, if the industry price structure can continue to increase only to reflect the changing value of the dollar, and thereby continue to be competitive with other forms of recreation, the increased utilization should mean adequate profits. At least, the potential is there for those whose areas are well conceived, competently constructed and efficiently managed. Unfortunately, with the current cost of capital still anticipating high inflation and discounting for high risk, most current new concepts will not prove economically feasible as ski areas alone. Those projects that can spread the high costs of multiseason facilities such as power, water, sewer, access, the base building complex, and even the major lift system over one or more additional seasons will have a competitive edge.
These economic studies have now reached a degree of sophistication that should provide enlightened management with yet another tool to analyze results and prepare budgets. As the industry adopts a Uniform Chart of Accounts, and as more and more ski areas share their experience through this annual survey, the knowledge and obvious steady performance by the stronger areas, should result in both higher sale values for those strong areas who seek new ownership, and lower costs of capital for well conceived new ski areas because the money market should reassess the risk.
Copies of the 1974-75 Economic Study of North American Ski Areas may be obtained from the Business Research Division, University of Colorado, Boulder, Colorado 80309. The cost is $25.00.
