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May 2010

Resort Economics 101

Despite the recession, the 2008/2009 season held up because of decent snowfall. Still, there are areas of concern.

Written by Ted Farwell, MAI-MBA, Winterstar Valuations, Inc. | 0 comment

The arrival of the 2008/09 Economic Analysis of U.S. Ski Areas in February made it yet again time to review the economic principles of the ski industry and to re-establish the business we are in.

The questions on everybody’s mind are, “What effect did the recession have on the ski industry?” and “What do I need to do to compensate?”

The answers are “surprisingly little” and “stick to the knitting.” In evaluating ski areas, I like to prepare a five-year synopsis of appropriate size and/or geographic models where I have adjusted the data to reflect inflation and to create a reasonable model in current dollars. For this I rely on both the Kottke Study and the Economic Analysis.

We can use three critical measures to illustrate the magnitude of the change last season and to reveal the very steady nature of our basic business. Although any national measure will be tainted by varying weather patterns, it still shows the big picture.

Over the past five seasons, skier visits have varied from 96.8 percent to 106.1 percent in relation to their five-year average. This has resulted in a 96.4 percent to 108.3 percent range in gross revenues, and a 92.1 percent to 116.4 percent range in EBITDA. In spite of the poor snow season in 2006-07, the national ski industry performed close to average. I have graphed this five-year analysis below.

The big actor in the strong 2007-08 season was the excellent snowfall, when skier visits and revenue/skier visit hit all-time highs. That high visitation created the spike in EBITDA due to the economic nature of the industry, wherein fixed and semi-variable costs create greater growth in the operational cash flow.

For 2008-09, take a look at the behavior of the critical revenue/skier visit vs. the 5-year average. During the worst recession in 75 years, the only significant departure from the average is in the retail department, where the revenue/skier visit is only 84.1 percent of average.

Nationally, a drop in skier visits would be expected due to a lesser snowfall, while the drop in revenue/skier visit can be attributed to the economy. (I have treated the accommodations margin separately, as many ski areas have no accommodations attached.)

These conclusions are further borne out by looking at both geographical and size categories.

The Southeast ski areas are showing growth in all three factors in spite of the economy; 2008-09 was the region’s best season of the past five.

The Southeast ski area sample shows less departure from the five-year average than the national figures. In the Southeast, the growth in skier visits created growth in revenues and EBITDA as revenue/skier visit held steady.

Snowfall is less a factor in the Southeast because the areas all have significant snowmaking, and customers do not have to see snow in their back yards to know that it will be good at the resort.

This evidence also suggests that the economy encouraged southeastern skiers/snowboarders to participate locally. Further, the accommodations margin shows even greater growth, supporting the observation that the market stayed closer to home.

Next, look at the larger Rocky Mountain areas, where there are 16 resorts that have more than 17,000,000 VTF/hr. These big destination resorts were, unlike local and regional resorts, more deeply affected by the economy in 2008-09, as the data show. But even so, gross revenues were above the five-year average.

These ski areas show even smaller percentage differences between the five seasons, although the 2008/09 season illustrates some effect from the economic downturn—especially in retail sales.

While skier visits to the large Rockies resorts were down slightly, revenue/skier visit was up slightly. A 10.5 percent-above-average price increase yielded 6.5 percent growth in average lift ticket/visit revenue, and an overall 3.9 percent revenue increase. Again, the retail department took the largest hit. But the accommodations margin was slightly better than average.

For a final example, let’s evaluate the performance of the smallest ski areas.

The small ski areas have benefited from the recession. They have increased their average skier visits significantly over the last two seasons.

The increase in skier visits came while also increasing lift prices and with only minor impacts to most supporting departments. Here, the accommodations margin showed great growth.

This analysis illustrates that the ski industry has reached a relatively mature level of development, where revenues and expenses have stabilized proportionately, and the major factors in profits are snowfall and snowcover.

In short, the past winter’s results have removed the major concern over how our consumers will react. While skier visits were off slightly, some of this decrease was related to snowfall. The local and regional ski areas have benefited in relation to the large destination resorts, but the shift is slight.

That is, until you add in the effects of real estate. But that is another story entirely.

Reflecting economic and snow conditions, the NSAA Economic Analysis 2008/09 Season reported a decline in revenues and profits for the first time since the 2001-02 season. Skier visits hit 57.4 million—fourth highest on record—a 5.2 percent decline from 2007-08. Average gross revenue was down 7.3 percent, and profits slumped even more (see the Five Year Financial Data chart for details).

The relative success of smaller, less expensive, more convenient areas is visible throughout the 2008-09 results. Some of these areas posted increases in visits and revenues. By size, the smallest ski areas were flat on gross revenue, while the largest ski areas experienced the largest declines (down 9.2 percent). But resorts of all types and locations reported declines in ancillary revenues (ski school, food & beverage, retail, etc.).

On a positive note, total revenue per skier visit declined by just 1.4 percent. Ticket revenue per skier visit dropped just 0.1 percent. Again, smaller areas performed best on a per visit basis (up 4.7 percent), large areas the worst (down 2.1 percent). See “Resort Economics 101” for a closer look at the per-visit numbers.

Gross revenues: the overall decline in visits in 2008-09 led to year-over-year revenue declines in most major departments, including lift tickets (5.9 percent), rental shops (down 7.9 percent), food & beverage (down 9.1 percent), accommodations/lodging (down 11.1 percent), retail stores (down 12.4 percent), and lessons (down 15.3 percent). Revenues rose, though, for snowplay and other winter operations (up 5.0 percent) and “other” departments (up 6.9 percent).

Other notable results:
• The ticket yield ratio fell to 58.3 percent, from 61.9 percent in 2007-08, indicating that price increases didn’t stick.

• Lesson revenue was up in the Southeast and Midwest regions, but declined sharply where lessons are traditionally strongest: in the Rocky Mountain region (down 19.7 percent) and at the largest areas (down 18.2 percent).

• Unit season-pass sales during the spring period accounted for a significant 39 percent of the total for those resorts that offered them (60 out of 99 areas in the 2008-09 study).

• Among ski areas that report revenue from summer operations (72 of the 99 ski areas in this year’s report), average summer revenue was $2.9 million, down 5.4 percent from a year ago. The average percent of total revenue from summer ops was 9.6 percent, up slightly from 9.4 percent.

On the other side of the ledger, total resort expenses fell 1.3 percent nationally. Many line items declined, including direct labor (down 2.5 percent), cost of goods sold (down 6.4 percent), and marketing/ advertising (down 12.1 percent). General & administrative, taxes, insurance, interest and depreciation all rose.

Not surprisingly, operating profit fell—but remained close to its recent historical range of 24 to 26 percent (see the Five-Year Financial Data chart for details). Operating profit margin actually increased at the smaller two resort size groups, was down slightly at the larger mid-sized areas, and declined sharply at the largest group.