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April 18, 2006

The Economics of the Ski Industry

You can tell a lot about a company by reading their financials... matter of fact, you can tell almost everything about a company by reading them. Let's have a look at American Ski Company, who runs Steamboat, the Canyons, and several resorts back east:

PARK CITY, UTAH – March 15, 2006 – American Skiing Company (OTCBB: AESK) today announced its financial results for the second quarter of fiscal 2006. The Company reported strong results in its Christmas/New Years and Presidents' Day holiday periods, and slightly lower skier visits than in the prior fiscal year in the East in January (excluding New Years) due principally to weather related difficulties at its eastern resorts. At Steamboat and The Canyons in the West, the Company recorded a 12% increase in skier visits for the winter operating season to date thru January 29, 2006, due to strong booking patterns and favorable weather creating excellent skiing and riding conditions. The company's eastern resorts were negatively impacted by rain events in January, and recorded a 3% decrease in skier visits for the winter operating season to date thru January 29, 2006.

Despite these challenges, the company achieved a record high level of resort revenues on a same-resort basis for each of the second quarter (an increase of 6% over the prior fiscal year quarter) and first six months of fiscal 2006. Other highlights included a fiscal 2006 year to date increase in cash provided by operating activities of nearly 9% over the 27 weeks ended January 30, 2005.

Interesting. But the numbers get more interesting from there:

On a GAAP basis, net loss attributable to common shareholders for the second quarter of fiscal 2006 was $11.3 million, or $0.36 per basic and diluted common share, compared with a net loss attributable to common shareholders of $22.1 million, or $0.70 per basic and diluted common share for the second quarter of fiscal 2005. Total consolidated revenue was $112.5 million for the second quarter of fiscal 2006, compared with $106.1 million for the second quarter of fiscal 2005. Revenue from resort operations was $109.9 million for the second quarter of fiscal 2006 compared with $103.4 million for the second quarter of fiscal 2005. The $109.9 million in resort revenues represents a record level on a same-resort basis, since the sale of the Heavenly and Sugarbush resorts in fiscal 2002. The increase in resort revenues reflects the higher business volumes in December of fiscal 2006 relative to the prior fiscal year. Revenue from real estate operations was $2.6 million for the quarter versus $2.7 million for the comparable period in fiscal 2005. Excluding other items (for a reconciliation of other items, please see the tables following this discussion), the net loss was $11.3 million, compared to a net loss of $16.2 million for the second quarter of fiscal 2005.

It is a strange sport. Over half of the income is from Lift Ticket revenue. Lift Ticket revenue has a huge fixed cost component and very little variable costs. Most of the industry is structured this way. Huge capital investment. Incremental returns on long term use of that investment. But these resorts are consistently losing money (or at very least breaking even when you factor in Depreciation, etc.).

I make this point because we have heard a lot of folks in the Snowbowl, Arizona Debate think that a resort can continue to operate when they do not have a consisten season. Let's think about this. Let's say you run an amusement park. (Not Neverland Ranch mind you) You invest $100M into the new Gizmatronic Roller Coaster. You have to sell a lot of tickets to recoup the investment. There are only a few costs associated with it--taking tickets, repair, occasionally painting it, cleaning up vomit, electricity, wear and tear, etc.--so your variable costs or cost per rider are low, but your fixed costs of the $100M investment are high. You depend on being able to get riders. If you have a coaster that breaks down frequently and is inoperable most of the time, it is next to impossible to recover your fixed capital investment. You have a break even point in number of visits and if you cannot hit that point, you operate at a loss.

We all want every lift to be a high speed quad and every day to be a powder day. If companies are not recovering their fixed costs for these kind of improvements, you end up on a 30 year old double chair that breaks down. The ability to operate snowmaking allows the resort to ensure a more consistent season and therefore justify improving the quality of their fixed investments. Without snowmaking, the season is even more unpredictable and one disasterous winter can put a small resort or company that does not have 20 resorts spread across both coasts out of business.

Snowmaking and multiple resorts in different geographic areas is a hedge against a bad winter. Vermont is a hedge against Utah and Colorado having a bad winter and vice versa. Snowbowl has no hedge. They have no snowmaking.

For those of you that think they are just in it for the "profit" and are another evil corporation trying to destroy the environment to make an almighty buck, think again. Resorts that have huge real estate operations and are diversified do well. But the smaller companies don't have the deep pockets to endure droughts or low turnout due to bad conditions. All of their revenue is generated by skier visits.

It is an ugly sport for investors. Sure, there is something sexy about having investments in real estate or in the ski industry, but the resort side of things is icky. Most industry companies are privately held, so they do not release their financials, but think about making gigantic fixed cost investments and having to depend on the weather to determine if you make a profit or not. In that sense, we are lucky to have ski resorts at all, especially the ones that are not MEGA-Corporate resorts. See what is happening to the small resorts in Switzerland.

In Switzerland the European problem can be seen in microcosm. There are around 600 ski lift companies spread across more than 200 resorts in the country, and only a dozen of the latter ? according to analysts ? have growth potential.

Since most Swiss resorts are small and located in peripheral regions, they have low cash flow, an inability to attract investment capital, and are crippled by high costs of labour, services and food, according to professor Thomas Bieger of St Gallen University.

"The Swiss ski industry is split into two camps: bigger companies [in large resorts] that are innovative and can keep pace with global developments, and too many operators in small ski areas who don't have the means to invest."

Bieger told swissinfo that consolidation is one of the answers to the problem. "Only then do you have enough money to make investments."

This is the McDonaldsization effect. Consolidation to the point where every resort appears the same and is owned by only a few huge companies. Little guys cannot compete. Think Walmart and Target and maybe a Sears or K-Mart are the only place to shop for anything. I don't argue that it is good or bad for the industry, only that the folks that are hating on Snowbowl--namely the Sierra Club and other Liberal Environmental Lobbying Groups--are the same ones that are hating on Walmart and corporations consistently. But by fighting against snowmaking and shutting down Snowbowl, which is a very real possibility based on the economics of it, they are in fact making the ski industry even more like the small town that gets overrun by Walmart, only this time it is the Vails and the Aspens and the Keystones and the operating companies of the US Mega-resorts that will soon be the only place to ski when all the smaller areas are gone.

Considering what an Environmental Impact Study and fighting against Lawsuits in Federal Court costs, instead of spending money on lifts and snowmaking equipment to keep a small resort viable, Snowbowl is spending money fighting for their very life. That is the landscape in Arizona and if you like skiing at all in Flagstaff, be prepared for what will happen if Snowbowl loses this battle. They will no longer be able to justify the fixed investment and the entire experience will deteriorate to the point that it is not worth going or worth Snowbowl operating. There is no choice. It is snowmaking or drive to a Colorado Mega-resort.

Posted by Justin at April 18, 2006 02:11 PM


For one the peaks are a church to many Native American tribes, 13 to be exact. Not only are Navajos involved they feel the mountain is sacred almost like a church not a shrine. I have grown up here in AZ and I feel that the Snowbowl should just be left alone. Economically it is irrelevent. Many Native tribes come to Flagstaff to shop and that is where their economy is built. I think it would be interesting to see what a boyocott of Native Tribes would do. Snowbowl makes money yes but statitics don't show enough to make it bigger! This whole thing is about money and politics. No one is even considering....okay what if they do the whole snowmaking....what else will they expand. Pretty soon the whole mountain will be a stupid ski resort making no money. The environment will also pay.

Posted by: kizzy at April 19, 2006 02:18 PM

I can declare any location that the Federal or State government owns to be my own personal shrine too. But that does not give me the right to dictate that no one else can enjoy that area.

Snowbowl has the right to expand as dicated by the Federal Government and Forest Service hearing process. Whether the Native Tribes think the area is sacred or not or whether the slippery slope argument that they will expand to cover the entire mountain holds or not, this has nothing to do with "what else might they expand later?"

Your argument that pretty soon the entire mountain will be a ski slope would require the Forest Service to assess those changes in the future and this whole process to occur again. And so what if it does turn into one huge resort? If we have already scarred the Native Americans by spreading soiled wastewater on it or hell, by skiing on it to begin with, is it gonna be even less holy if it is one huge resort?

Why don't you propose just shutting it down? That is what just leaving it alone amounts to. And the Native Americans don't shop in Flag because they love the white man, it is out of necessity. They could boycott anytime, but they don't. Ask yourself why. If it is all about politics and money, ask what makes money for Flag. Tourism or Lawyers for the Environmental Movement and the Tribes. Preserving it as is does not help anyone, save a few environmentalists and the Native People to use it as a shrine. Their wants are only one part of the equation, especially since in 1979, the Federal Government ruled that these needs were subserviant to the legal obligations and lease of the ski resort.

Posted by: Justin B at April 19, 2006 07:59 PM