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May 2006

Third Year Was the Charm

This year's Economic Analysis shows that many ski areas are learning how to improve their bottom line.

Written by Andy Daly, President, Gore Peaks Investments | 0 comment

On balance, the 2005 NSAA Economic Analysis presents a positive picture of the 2004-05 season. While the season did not bring forth the much-sought-after skier day growth, it was a third year of solid financial performance.

The best measure of success is the 2.4 percent improvement in average operating profits (EBITDA), from 24.5 percent to 25.1 percent, as a percentage of overall sales. A 25 percent margin is about the minimum one should be willing to accept, given the risk levels involved in a weather-dependent industry that is also incredibly capital- and labor-intensive, such as the ski business. Not that our industry has achieved this level regularly in the past: for reference, EBITDA as a percentage of revenue was 19.2 percent in 2001-2002. EBITDA has increased 30.7 percent since that time. That perspective makes 2004-05 especially noteworthy.

Other measures are equally encouraging. Pre-tax profit margin grew a remarkable 22.9 percent in 2004-05, to 11.8 percent from 9.6 percent the prior season (Table 1). Actual average pretax profit has grown from $1.028 million in 2001-02 to $2.479 million in 2004-05, an increase of 242 percent from 2001-02. This is a dramatic improvement which directly evidences the increased stability of the industry, although the improvement is restricted to the Northeast and the Rocky Mountains. The other three regions suffered during 2004-05, with pretax profits dropping by 14 to 25 percent, the latter occurring in the Pacific West (Table 2).

And there are other warning signs as well. The continuing lack of real skier growth for our industry limits our potential. The reality is that new skiers are merely replacing Baby Boomers as they age and reduce their ski days or retire from the sport altogether. Technological advances such as shaped skis, improved grooming and high-speed lifts have kept the Baby Boomers skiing longer, but this has only slowed the inevitable. Despite heady efforts, we have made dismal progress at introducing skiing to a broader audience and converting them to the level of loyal participants.

In his 2003-04 SAM review of the NSAA Economic Analysis, Chris Brink admonished the industry for not expending enough marketing dollars to grow, but merely to sustain itself. That trend has continued. This does not bode well for shareholders of public companies or for the next generation in closely-held, family-owned resorts. The lack of new skiers results in too much emphasis on market steal vs. market growth. In the long run, the industry has to break this cycle.

What’s Driving EBITDA Growth?
In the short run, the industry has been making the necessary moves to shore up the balance sheet. Since EBITDA is the best barometer for tracking fiscal condition and the most significant measure for lenders to the industry, let’s look at the trends that are driving the strong improvement in EBITDA performance.

Before we do so, though, we should remember that growth occurred principally in the Northeast and Rocky Mountains, and among the largest and smallest resorts. Mid size resorts (4,500 to 16,999 VTFH--VTFH being expressed in thousands) did not share in the improved financial performance. In addition, ­EBITDA for the Southeast, Midwest and Pacific West was down roughly 10 percent—although the abysmal season in Washington probably masked a stronger performance in California.

Diversification of revenue streams fueled much of the EBITDA growth in the Northeast and Rocky Mountains. Diversification has been a critical business strategy to offset the lack of nationwide skier day growth and a key factor in improving EBITDA. And it will continue to be important as more and more resorts strive to capture a greater proportion of each visitor’s vacation expenditures through larger and more competitive restaurant, retail, lodging and other offerings.

In 2004-05, integrating much of the resort experience under the ownership of the resort operator resulted in strong revenue per skier growth of 4.5 percent, from $64.24 to $67.14, which offset an average decline in skier days this year of 0.3 percent. Even so, the industry’s revenue growth of 10.7 percent from 2000-01 through 2004-05 barely exceeds inflation over this period.

Diversification has been underway for several years. In the 1997-1998 NSAA Economic Analysis, tickets accounted for 51 percent of total revenue, while in 2001-2002 they accounted for just 47.4 percent, and in 2004-05, 45.8 percent. How low can it go? In the Northeast, the percentage of total revenue represented by tickets this past season was 41.4 percent, with the Southeast even lower at 34.5 percent. The Rocky Mountain region was at the average at 45.8 percent.

Ticket Pricing Trends
Another important trend is the change in ticket yield, defined as the ratio of per-visit ticket revenue to the reported adult weekend ticket price. Fortunately, RRC has given us ample data (see Table 3), allowing us to dig deeply into the components of ticket yield. For this past season, average national ticket yield was flat at 60.4 percent, versus 60.3 percent prior season. Average ticket prices were up 4.4 percent (with the Rocky Mountains showing the greatest increase, at 6.1 percent, to $57.27), and average ticket revenue rose 4.9 percent.

However, season pass cost and usage are important components of ticket yield, and pass prices declined an average of 6.5 percent, to $624 from $667. RRC noted that “the industry as a whole has moved to lower season pass pricing,” particularly in the Northeast and Rocky Mountain regions. Keep in mind that the season’s-pass price is not a weighted average. If weighted, it would likely be considerably lower, since a significant number of $300-$350 “buddy passes” were sold in the large Colorado Front Range market.

Over the past 10 years, the growth in season pass usage as a percentage of total skier days is remarkable: it has jumped from 6 percent in 1994-95 to 29.5 percent in 2004-05. Resorts have built skier-days through promotion of less expensive season passes and, in markets such as Colorado, filled the gap created by the loss of destination skiers by selling discounted season passes to local and regional skiers.

Looking at the detailed breakouts, the deterioration in ticket yield at large resorts was from 53.6 percent to 52.4 percent, and was particularly severe among the Rocky Mountain resorts, decreasing from 54 percent to 50.1 percent. The days of a ticket yield target of 70 to 75 percent of window price are long past.

The inescapable conclusion is that ticket yields are under a lot of pressure from inexpensive season passes, particularly among the Rocky Mountain resorts. The dichotomy between season pass revenue yield per day and window pricing is growing, and not producing improvement in overall ticket yield. Further study is needed of the destination (ticket-window) market to determine whether the price elasticity from which the industry has benefited over the past 20 years may be approaching inelasticity in some regions.

The “Peace Dividend”
On a more positive note, there is evidence that resorts are paring down debt and taking advantage of very attractive interest rates, thereby reducing interest payments. That in turn is strengthening their balance sheets and improving EBITDA (Tables 4 and 5).

What many characterized as an “arms race”—the drive to install high speed lifts and intensify grooming production through purchase of additional groomers, intended to steal market share and to keep the Baby Boomers skiing—has passed, and is not likely to start again. There are no new technologies on the horizon that are as capital-intensive or as impactful to the skier experience. Nor has much been spent on resort expansion, as shown by the slight 1.2 percent increase in terrain this year and the fact that average gross fixed assets have decreased. All this reinforces the notion that resorts are being far more restrained in capital expenditures.

Another key trend: the reduction in average assets. This is likely the result of either the substantive sale of assets and/or the removal from the balance sheet of fully depreciated assets by large resort(s) in the Rocky Mountain region. Yet there were only modest increases in the other regions. This anomaly in the historic upward trend for fixed assets makes it difficult and unreliable to use the asset-based ratios, such as return on assets, to measure performance this year.

The drop in debt is another component of the improved performance in 2004-05. Long term and subordinated debt is down from an average of $7,720,000 in 2003-04 to $7,343,000, a 5 percent reduction, and down from $8,742,000 in 2001/2002—a 16 percent drop (Table 4). Similarly, interest expense is down 16.2 percent, from $716,000 to $600,000 on average, The most dramatic decrease occurred in the Rocky Mountains, as resorts sold assets to pay down debt and refinanced to reduce interest expense by 27 percent, from $1.4 million to less than $1.1 million.

Curbing Operating Expenses
A final trend that deserves mention is the continued success at controlling operating expenses relative to revenue, with the latter growing an average of 6.1 percent while expense growth tracked at a 5.3 percent. But general and administrative expenses still grew at 6.3 percent, absorbing some for the labor and operating expense savings.

Nationally, direct labor declined slightly, to 25.1 percent of revenue from 25.3 percent, while other direct expenses were flat (Table 5). Areas have achieved significant success at controlling benefits such as healthcare and reducing year-round staff.

Some may argue that the industry is doing itself a disservice by not retaining more of its talented young staff on a year round basis. I agree that the inability to keep more of these folks employed increases the management challenge, and also makes succession planning tougher. However, it is a reality that the industry cost structure demands lean staffing. This will require a far more strategic selection process to identify those capable of growing into solid managers and, therefore, most deserving of fuller employment.

An additional challenge is arising from the pressure on so many young people to seek full-time employment immediately out of college. Historically, many recent grads have wandered into our valleys looking for a winter of skiing and adventure. Now, more seek to start careers immediately, in order to pay off educational loans and to gain “legitimate” work experience in an increasingly competitive job market. We all know that this challenge can be met through further diversification during the off season, which has the dual benefit of providing more employment opportunities and increasing cash flow.

In sum, our industry has substantially increased its fiscal stability over the past three years. The stronger balance sheet reflects a trend toward reduced debt due to slowed rates of capital expenditure. The growth in working capital that stems from increased profitability, along with the resulting improvement in the current ratio, speaks to the industry’s improved stability.

The income statement also reflects notable improvements, including the trend toward increased diversification and a reduced dependence on ticket sales. The lack of growth in ticket yield further highlights the need for, and the significance of, diversification in revenue sources. Clearly, diversification will be critical for achieving continued growth and profitability.

At the same time, we must recognize that improved operating results tend to be regionalized. The Northeast and the Rocky Mountain regions showed improvement, indicating greater predictability and highlighting the usual vulnerability of smaller and mid-sized operations in the other regions. This will likely become a greater issue in the future.

For 2004-05, though, the bottom line is that revenues grew faster than expenses. We experienced reasonable revenue growth, albeit with no additional skier days, with reasonable increases in revenue per skier. This revenue growth was complemented by diligent expense and labor cost management, except in the area of G & A expenses—which continues to be problematic.

Andy Daly, longtime industry executive and former president of Vail, is now a knowledgeable and independent observer of the resort business.