1. Chapter 3 Mountain-Based Resorts: Managing the Operation

2. Identify the changing trends in and demographic profiles of the snowsports market. Changing Trends: Skis first became used for recreational purposes in the mid-1800’s. First demand stimulating innovation was the stiff toe-and-heel binding –allowed for long, gliding turns –developed by a Norwegian

3. Changing Trends (cont.) Austrian’s developed the basic technique for alpine/downhill skiing The first ski lift consisted of a rope and Model T that dragged people up the slope for a dollar a day In the 1930’s and 40’s modern bindings with steel edges gave the skiers more control and led to easier turns.

4. Changing Trends (cont.) Development of ski resorts halted during WWII –During this time the Tenth Mountain Division developed a significant reputation for its skiing activities –Many of Europe’s best skiers and instructors migrated to the U.S. Many innovations in the 1950’s helped popularize the sport, such as: –Easier-turning metal skis, buckled ski boots, step-in bindings, slope-grooming machines, stretch pants, and the inauguration of the interstate highway system

5. Changing Trends (cont.) Condominiums helped cement the relationship between skiing and real estate development. In 1962 Vail, Colorado became the first planned destination ski resort. Great growth occurred in the next decades and by 1960 there were over 600 ski resorts

6. Changing Trends (cont.) In the 1970’s development was slowed by high land prices, significant interest rates, and the time and money required to obtain development approval due to an increased concern for the environmental impact of large-scale developments.

7. Changing Demographics The rate of skiing participation is a function of age The number of teenagers declined in the 1980’s causing concern throughout the industry. Children of the baby boomers, however, returned to the slopes as downhill skiers and snowboarders

8. Changing Demographics (cont.) Due to the increase in snowboarding, a growing number of resorts are developing runs specifically for snowboarders The male/female ratio of skiers has stayed relatively stable throughout the years –During the 2004-2005 ski season, 59% of the ski participants were male and 41% were female.

9. Changing Demographics (cont.) Males make up the majority of participants who possess the following characteristics: –People who first began skiing or riding on their own (77 percent male) –Advanced/expert ability level (72 percent) –Aged 65 and over (71 percent) –Snowboarders (67 percent) –Ski or ride 30 or more times per season (67 percent) –Wear helmets (63 percent) –Singles with no children (62 percent) –Season pass holders (62 percent)

10. Changing Demographics (cont.) Females, on the other hand, represent the majority who possess the following characteristics: –Beginners, excluding first-time participants (58 percent female) –Participants who first tried skiing/snowboarding with a school group, a ski/snowboard club, or another organized group (48 percent combined) –First-time participants (54 percent) –Lesson takers (57 percent) –People who plan to ski or ride just once in the 2005- 2006 season (52 percent) or two to three times (47 percent)

11. Changing Demographics (cont.) Females, on the other hand, represent the majority who possess the following characteristics: –Renters of equipment (49 percent) –Participants who have dropped out of snowboarding/skiing at least one year out of the five seasons prior to the 2004-2005 season (48 percent) –Participants who visit as a part of an organized group (48 percent) –Couples with no children (46 percent) –Participants who are aged between 35 and 44 (45 percent)

12. Changing Demographics (cont.) The median age of snowsports participants is 36. 48% of skiers and snowboarders are part of a family that has children at home 88% of skiers and snowboarders in 2004- 2005 were white The majority of snowsports participants have an intermediate skill level

13. Identify the critical variables in determining a mountain-based resort’s profit potential.  Four critical variables determine whether or not a resort will make a profit: capacity, the length of the season, the amount of capital investment, and the amount of revenue per visit.

14. Variables of Profit Potential Ski Area Capacity Physical and ecological capacity takes into account the physical and ecological limitations of the site Social or normal capacity is where the majority of skiers do not consider the area overcrowded Maximum capacity is when no more visitors can be served.

15. Ski Area Capacity (cont.) The upper limit for safety can occur when a single element is at maximum use Ski area capacity is a measure of three factors: –The capacity of the terrain, the uphill capacity, and the capacity of the supporting facilities

16. Variables of Profit Potential (cont.) Length of the Season Main determinants are weather and climate Season length is measured in terms of skiing periods (one period = 7hours)

17. Capital Investment Major cost elements that go into a ski resort include: –ski lifts –ski slope and trail construction –snow maintenance equipment –snowmaking equipment –day use lodge building –maintenance center –furniture and fixtures –base area equipment –parking –power and slope lighting –water and sewer –site development –planning –financing –land –access roads

18. Variables of Profit Potential (cont.) Revenue Per Skier Visit This figure is determined by totaling all revenue and dividing it by the number of skier visits Revenue is generated by ski lift tickets and supporting services

19. Identify potential solutions to financial problems faced by mountain-based resorts. Problem: Low Solvency and/or Liquidity –Occurs when current liabilities are too high and/or when short- term funds are used to fund long-term assets. Solution: Move some short-term liabilities to the long term or sell and lease back some fixed assets. Problem: High Debt to Equity –Net worth being too low or liabilities being too high causes a high debt-to-equity ratio. Solution: Capital can be added by selling stock, or company growth can be slowed and profits used to reduce liabilities instead of buying additional assets.

20. Financial Problems and Solutions Problem: Low Operating Income –Results from insufficient revenue and/or costs that are too high relative to the level of revenue Solution: Enhance operating income by pushing sales of the high-margin departments Problem: Low Revenue to Employee –A measure of how efficiently employees are scheduled relative to the volume of business being generated Solution: When this ratio is too low, the number of employees must be reduced or revenue must be increased

21. Financial Problems and Solutions Problem: Low Pretax Profit Margin –Low profits are caused by an operating income that is too low to meet the level of overhead that must be paid. Solution: If the overhead cannot be reduced, the only other solution is to increase revenue to raise the operating income. Problem: Low Revenue to Assets –A low ratio means that revenues are too low or assets are too high Solution: Perhaps unused property can be sold or fixed assets can be sold and leased back. If not, attention must focus on increasing sales.

22. Financial Problems and Solutions Problem: Low Return on Assets –A low return on assets means that net profits are too low and/or assets are too high. Solution: Net profits can be increased by some combination of increasing revenue and lowering costs.

23. Financial Problems and Solutions Problem: Low Return on Investment –Net profit is too low and/or the net worth is too high Solution: Expanding the business using borrowed funds can reduce the relative net worth Problem: Low Accounts Receivable Turnover –If accounts receivable is too high, it may cause a strain on cash flow Solution: Reduce accounts receivable

24. Identify the most important financial ratios relevant to mountain-based resorts. The key to profits is to increase revenue while reducing expenses or keeping them steady.

25. Financial Ratios Net Working Capital –The largest ski areas are the ones with the highest working capital balances Current Ratio –Expresses the relationship between current liabilities and current assets –By resort size, the largest and smallest resorts had the highest ratios, while mid-sized resorts had ratios below one.

26. Financial Ratios Debt Ratio –Indicates the extent to which a company is financed through debt sources like long-term loans or bonds (as opposed to retained earnings or owner’s equity) –The smallest resorts have the highest average debt ratio, whereas larger mid-sized resorts have the lowest. Debt to Cash Flow –Measures the years that would be needed at the current cash flow to eliminate long-term debt

27. Financial Ratios Operating Profit on GFA (Gross Fixed Assets) –Calculated by dividing the operating profit by the GFA Profit, Before Tax, on Equity –Measures stockholder’s or owners return on investment Capital Cost Capacity –This ratio is a relative measure of ski area attributes; calculated by dividing GFA by skier capacity.

28. Financial Ratios Total Revenue per Skier Visit –The actual revenue generated by the ski area for each skier day –Ratio is determined by dividing total revenue from ski lift tickets and other ancillary operations by the number of skier visits. Total Expenses per Skier Visit –The actual expense for each skier day is calculated by dividing all expenses by the number of skier visits

29. Identify the challenges of a seasonal resort, along with possible solutions to stabilizing year-round revenue. Problem: Expenses build up all year round, so most ski resorts simply can’t afford to close down for eight months.

30. Stabilizing Year Round Revenue Ski resorts may offer: –Hiking, mountain biking trails, scenic lift rides, ball courts, mountain bike lift service, fishing, horseback riding, climbing walls, disk golf, and miniature golf.

31. Stabilizing Year Round Revenue Other resorts incorporate summer revenue boosters such as: –Alpine slides, waterparks, summer camps, bungee trampolines, canoeing, kayaking, mountain scooters, wagon/carriage rides, ropes courses, all-terrain vehicle tours, skate parks, paintball, driving ranges, cable rides, mountain boards, rock climbing, rafting, orienteering, human mazes, go-karts, riverboat cruises, paddleboats, and skating schools.

32. Stabilizing Year Round Revenue Ski resorts may also be transformed into indoor or outdoor waterparks –Camelback Ski Resort transformed into Camelbeach Waterpark and now has a positive cash flow during the summer. Four-Season Resorts –These resorts must expand and create winter and summer facilities and activities –They must also attract groups to fill the spring and fall seasons

33. Stabilizing Year Round Revenue Convention Centers –Can provide a year round attraction to meet the needs of group meetings. Base Village Resorts –A year round village where skiing is not always the main attraction

34. Stabilizing Year Round Revenue Problems can arise when converting a winter-only ski resort into a useful summer time attraction. –Housing Crunch Many resort employees must seek housing far away from the resort town because of the real estate boom. This can lead to traffic problems in the area.

35. The End!