May 9, 2008

Theme parks preparing for long, dry summer  

No hard times yet, but some operators already are cutting prices 

By Russ Britt, MarketWatch

While theme-park operators have yet to feel a full-throated assault on their revenue from a sluggish economy, trouble could be just around the corner.

Gas price increases show no signs of letting up, and there seems to be little evidence of renewed prosperity on the horizon. It's all likely to hit theme-park numbers at some point, industry professionals say.


Against the backdrop of a weaker economy and higher gas prices, U.S. theme parks will rely on discounts or other incentives to keep up traffic. MarketWatch's Russ Britt visits parks in the Los Angeles area.

Walt Disney Co. and Six Flags Inc. both just reported quarterly results this past week, and neither one gave investors any trouble signs. Yet each could face their own hurdles down the road if the economy erodes even further, and Six Flags already has launched a pre-emptive strike, lowering prices to bring in volume.

"We're not seeing any good information out there that points to a stellar season," said Dennis Speigel, president of International Theme Park Services, an industry consultant. "We're putting our chips on a flat-to-down season."

It's unclear, though, that there will be trouble for the parks, which so far are off to a good start. Disney reported an 11% rise in parks revenue and a more than 30% leap in operating income for the division during its fiscal second quarter, which ended in March. The company said its parks also got a lift from Easter being at an earlier point on the calendar this year.

Consultants say Disney benefits from operating "destination" parks in California and Florida that attract tourists from across the country and overseas. The same is true for Universal Studios parks in both regions. Officials from Universal, a unit of General Electric Co. , would not comment for this story.

Plus, overseas tourists are taking advantage of a weak dollar, and Disney is benefitting from that. But Disney also is better positioned to absorb economic shocks than it has in recessions past, company officials say. It's not just domestic theme parks anymore; Disney also has facilities in Hong Kong and Paris, as well as its cruise-ship business and vacation business, a spokesman said.

Disney had high attendance even when gas prices spiked during 1999 and 2000, as fuel costs often have little bearing on pilgrimages to a Disney park, the company says. It was the travel scare following the Sept. 11, 2001, terror attacks that took a bite out of Disney's business, particularly at Walt Disney World in Orlando, Fla.

Fear factor

John Gerner, an industry consultant, concurs. Gerner, the managing director of Leisure Business Advisors LLC of Richmond, Va., said that gas spikes usually have little to do with vacation planning. It was only the gas shortages of the 1970s that caused some to cut their vacation plans.

"They were much more concerned about being able to get gas than how much it was," Gerner said.


In a conference call last week with analysts, Disney Chief Executive Robert Iger also pointed out that in Orlando, the company's hotel room inventory has multiplied, leaving 75% of the rooms available at a mid-priced or "value" rate.

During the 1990-91 recession, Disney's parks felt more of an impact because more than half the rooms at its Orlando resort were categorized as "premium" priced. Iger was quick to add that a family of four can stay and visit Walt Disney World for a week for around $1,600.

It's uncertain whether that kind of thinking will be enough to keep the parks hopping, says Thor Degelmann, CEO of Leisure Entertainment Development & Operations in Newport Beach, Calif.

While international tourism seems to be keeping Disney's numbers up, that may not last. If that segment of the business -- normally comprising a single-digit percentage of sales -- starts to falter then Disney may have to rely more heavily on cross-country tourism.

Should gas prices continue to rise and perhaps hit the $5 threshold, that could scare away visitors, Degelmann said.

"That would scare me if I committed to driving 2,000 miles round-trip to get there," Degelmann said.

Closer to home

Families planning long excursions to a Disney or Universal facility might be tempted to stick closer to home, which in turn could benefit "regional" theme parks, he adds. Along with Six Flags, others in this segment include Anheuser-Busch's array of Busch Gardens, Sea World and other parks. Busch officials would not comment.

There's also Cedar Fair Entertainment Co. , whose operations include Knott's Berry Farm and accompanying parks in Southern California, Great America in Santa Clara, Calif., and Cedar Point near the corporate headquarters in Sandusky, Ohio.

Six Flags officials say, however, they're not taking any chances. The amusement park giant, which has been on a financial rollercoaster in recent years, is lowering prices at several of its parks in an effort to keep business hopping. Six Flags was forced to sell seven parks identified as "non-core" assets last year.

"We actually think we're in a good position," company spokeswoman Sandra Daniels said of Six Flags' pricing plans. "You still want to do something fun with the family every summer."

Six Flags has cut one-day admission prices by $5 to $10 at many of its 16 parks throughout the U.S. At the company's Magic Mountain facility north of Los Angeles, it's offering a one-day admission of $26.99 until Memorial Day, less than half the $59.99 the park usually charges. It's also extended the deadline for a special price on season passes, which also is $59.99.

At Cedar Fair, the company isn't cutting prices, but instead is "adding value" to the fees it does charge, said spokeswoman Stacy Frole. Park hours are being extended by roughly two hours in most cases, and the company -- which usually closes down most of its parks in cold-weather states before Halloween -- is extending its season by a week.

Further, Cedar Fair is offering an all-park season pass that includes parking and other amenities for $150. Season passes at its flagship Cedar Point facility go for $110 and don't include parking.

"We feel we're there for families that want to stay closer to home," Frole said. "We believe we run a business that can handle economic conditions the way they are."

She says Cedar Point, situated between Toledo and Cleveland in northern Ohio, is in an area where the job market is declining yet the park had record profits and sales last year.

No scrimping

And neither company is scrimping in order to offset lower prices. Daniels said Magic Mountain is unveiling a refurbished rollercoaster known as X2 as well as a play area for smaller children based on characters from the Thomas the Tank Engine franchise. Two other new Dark Knight rollercoasters will start running at the company's facilities in New Jersey and Illinois.

There also will be more summer concerts at some of the company's parks, according to Frole.

She said Cedar Fair increased its capital spending to $88 million from last year's level of $83 million.

That illustrates the tightrope amusement park operators have to walk during troubled times, said Gerner, the consultant at Leisure Business Advisors. They can't really cut personnel or capital spending, because it quickly becomes evident to patrons.

Park operators need to give patrons a reason to keep coming. So a new or refurbished attraction is necessary every year or two to keep customers interested.

And if they cut personnel, lines will be longer and facilities won't be as clean. Ultimately, business will slide.

"I think parks want to avoid that kind of knee-jerk reaction," Gerner said. "I've learned from first-hand experience it's not going to make you more profitable."

 
       

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