Vail Ski Resorts (NYSE: MTN) – 792 words
Vail Ski Resorts (“MTN”) is the largest publically traded operator of ski resorts in North America, generating $1.6bn of Net Revenue and $455mm of EBITDA in FY 2016 (1). The Company manages nine mountain resorts and two urban ski areas, including five of the top 10 most visited ski properties in the US (Breckenridge, Vail, Park City, Keystone, and Beaver Creek) (1). MTN’s operations are highly subject to the impact of climate change as rising temperatures and declining snowfall put pressure on ski resort operators to adapt their business models. Ski resorts are seasonal businesses that rely on 4-5 months of prime skiing conditions to generate the entire year’s worth of profit. Thus, the success of MTN’s business is closely linked to the number of skiable days in a season.
Impact of Climate Change
In recent years, changing weather patterns have resulted in record low snowfalls and draughts in some of MTN’s key markets. For example, from 2012-2014 California experienced the worst draught in its history and annual snowfall 60% below average (2). Unseasonably warm weather results in limited natural snowfall, thereby reducing skiable terrain and increases MTN’s reliance on snowmakers to artificially create viable skiing conditions for its customers.
The primary financial impacts of climate change are twofold. First, poor weather conditions drive shorter ski seasons which limits MTN’s ability to attract customers and results in lower revenue due to (i) a decline in lift ticket / season pass sales and (ii) lower hotel occupancy. Second, a decline in snowfall drives higher operating expense in the form of energy consumption due to increased use of snowmakers. Energy is MTN’s second highest operating cost category after labor and snowmaking is a primary driver of energy expense (+~50% of energy use) (2). Finally, climate change driven draughts create an additional element of operational risk due to limited supply of water, a key ingredient for snowmaking (for example, an acre of 1 foot deep snow requires 160,000 gallons of water) (3).
MTN is actively adapting its strategy and operations to contend with the impact of climate change and unpredictable, volatile weather patterns. One strategy the company is implementing to blunt the impact of shorter ski seasons is the development of new product offerings that attract customers to the resort during the off-season. For example, MTN invested $25mm to develop and launch Epic Discovery, a set of mountain coasters, ziplines, and hiking trails in Vail to draw customers into the area during summer months, thereby increasing revenues and hedging against weather seasonality (4). From a revenue mix perspective, MTN is also focused on increasing the sale of season passes instead of individual day lift tickets to mitigate revenue loss due to unfavorable weather. Another focus area for management is to increase the efficiency of snowmaking equipment, a key energy-consuming variable expense that is projected to increase due to lesser natural snow. Over the last five years, MTN has invested millions of dollars in newer energy efficient snow makers and snow guns. For example, a new snow compressor installed at Vail saved over 1.2mm kilowatt hours annual in energy usage (5). Finally, Vail Ski Resorts has also relied on portfolio diversification to insulate itself from the impact of weather-related issues in its Colorado and California properties. For example, MTN recently closed on a $1bn acquisition of Whistler Blackcomb resorts in Canada. Increasing geographic diversification in light of the growing impact of climate change was cited as one of the key pieces of strategic rationale for the merger (5).
MTN should focus on further diversifying its revenue base beyond winter sports to hedge against unpredictable weather impacts. The introduction of summer activities is a good start, but MTN should also develop additional programming to attract non-skiing customers during winter months. For example, one customer segment they could focus on is attracting business clientele through hosting conferences. They could also develop more non-skiing programming such as yoga retreats or trips for families to go out into the wild and spot animals. MTN could also host other non-skiing winter events such as cider festivals or holiday festivals. Creating other revenue lines that are uncorrelated with snow levels and independent of the weather would help diversify MTN’s revenues. Another strategy MTN could employ is to build capacity for winter activities that can be conducted without as much snow such as such as non-alpine skiing, sledding, or ice skating. Given warmer temperatures are the new normal, MTN should conduct analysis to understand at what temperature break points it makes sense to operate snowmakers vs close the mountain. Finally, MTN should focus on developing alternate low cost sources of energy to power their resort operations (e.g. solar) given growing demand for energy in low snow environments.