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Vail and Alterra: They can’t help themselves.
There has been a lot of Vail and Alterra bashing on social media so I thought I’d dig a bit deeper into how both operate to better understand the source of that dissatisfaction. I am by no means defending either or their actions because as you will read, they brought much of that dissatisfaction upon themselves in ways that were entirely predictable.
The business models Vail and Alterra have implemented make a lot of sense from the point of view of the equity markets and corporate lenders. Their aggregation of resorts, recurring and predictable pass revenue and ancillary revenue from essentially a captive market (visitors) makes Vail and Alterra attractive investments. Lenders view both as safe because of their scale, lower risk (even in bad years some resorts will still do well) and enormous. reliable cash flow from pass sales. Conversely, individual resorts are high risk with unpredictable cash flows and are often too small to attract investment or loans on favorable terms. Many small ski areas shut in the 1990’s not because of lack of demand but because they could not afford the investment in snowmaking required to operate as natural snowfalls declined. Vail and Alterra are theoretically good for the industry because equity and low cost loans enable them to invest in resort improvements that benefit skiers like snowmaking, high-speed lifts and new lodges.
Two additional rationales for aggregating businesses are the reduction in overhead and economies of scale in purchasing. Vail and Alterra may have expected substantial economies but they have not been realized. The ski resort industry is not like manufacturing; most individual ski areas ran with very little corporate overhead because low margins and unpredictable revenues didn’t allow it. Seeing the owner/GM loading chairs or at the ticket window was not uncommon. Thus aggregating ski areas didn’t save much in overhead other than some marketing expense. As for economies of scale, ski areas are individual businesses that incur the vast majority of their costs locally. They pay for water, power, labor and other supplies from local businesses, governments and utilities that don’t serve other Vail or Alterra properties. Thus their is little to no economy in aggregating purchasing. Vail recently made a big deal of an efficiency initiative designed to save about $30M annually which isn’t much in a $2B+business. Even that $30M seems excessive given the biggest cost areas affected are operating software and centralizing customer support into a single call center. Neither will save them much in the big tickets areas of electric and gas, food and beverage, local taxes and labor. So if Vail and Alterra can’t cuts costs, they need to improve revenue to cover all that corporate overhead and necessary resort improvements.
Traditionally resorts expanded their offerings to get more money from each skier visit. That meant on-site ski shops, restaurants, equipment rentals and most importantly on-site lodging. That lodging used to be reasonably competitive with other lodging and a major source of resort revenue. AirBnB and VRBO have significantly impacted that revenue source. A skier can find a short term rental, sometimes even on-site, at a far better rate than the ski area can offer. The only way to compete with this was for the resort to drive up short term ticket prices and then discount them heavily when bundled with their own lodging. This works nicely with the folks who don’t buy a season pass but it is ineffective with pass holders who make up the vast majority of Vail and Alterra skier visits and pass revenue.
Thus Vail and Alterra can’t lower their costs as there are no significant economies of scale. Their lodging revenue is under severe pressure. Ski area and pass revenue now has to cover all the costs of operating the area plus significant corporate overhead, corporate profit, loan interest and return to investors. That means revenue has to increase just to maintain ski area investment levels that pre-existed aggregation. Any further investments require even higher revenue.
So, how else are the resorts going to cover their now higher costs? They really only have three variables to work with:
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Raise prices on all resort-supplied goods and services that are effectively monopolies, like food and ski lessons. This has been done.
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Attract higher income and thus higher spending visitors. Making the offering more appealing to these less frequent but higher income skiers will generate more revenue per visit. We can see evidence of this strategy in the elimination of traditional discounted lift tickets offered to ski clubs, local residents and other groups whose skiing is economically elastic; they will ski more if it costs less; ski less if it costs more. Lodging at the resorts is intentionally targeted at more affluent visitors via amenities, service and pricing. We see this in an emphasis on expanding and opening beginner and intermediate terrain that attracts this overwhelmingly less-skilled visitor. Consequentially we see a willingness to spend less money and time opening advanced terrain. Stowe regulars have witnessed this when snow is being made on beginner and intermediate terrain while the Front Four are ignored.
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The third option is to sell more passes. This both Vail and Alterra have pursued aggressively.
There is plenty in the above to dissatisfy a frequent skier but the most damage is done when skiers can’t experience the mountain because of crowding, be it in access, parking or lift lines. The unavoidable challenge is that most skiers want to ski on the same days, specifically weekends, holidays and the less predictable powder days. Both Vail and Alterra have attempted to manage this with blackout dates, restricted number of days at the most popular resorts and high priced parking. All of these have failed as witnessed by the frequent social media posts of hours-long lift lines. Demand management strategies fail for another reason: Both Vail and Alterra get as much as 70-80% of their revenue from passes and they need to sell even more passes to support their operations in lieu of significant cost savings. Thus Vail and Alterra can’t easily address the overcrowding without sacrificing earnings. Put another way, Vail and Alterra’s attractiveness to the financial markets is the very reason pass holders are starting to hate them. Vail and Alterra have to figure out a way to satisfy both constituencies before one or the other loses confidence and seeks alternatives.
Lastly is the issue of labor. Many horrible ski experiences have been caused or exacerbated by shortages of labor. Personally I experienced this at Park City at the beginning of the 2020 Christmas-New Years holiday. Every lift I rode stopped at least once; the worst was the Town Lift which stopped eight times on my mandatory descent as the mountain didn’t get around to making snow on the route. I spoke to a friend who was a mountain ambassador who reported that they were short on patrollers; short on mountain maintenance to the tune of over a hundred skilled mechanics and maintenance workers and missing over one hundred instructors. When I asked why, he told me that Vail wouldn’t match the wages other resorts in the Salt Lake City area were paying. An MLK weekend at Sugarbush was also frustrating because management didn’t have the labor to properly staff the lifts so empty and under-capacity chairs went up the mountain despite long lift lines.
Vail and Alterra have raised their starting wage but labor is going to continue to be a major problem for two reasons: Affordable housing and real wages.
Affordable housing is pretty much non-existent around most ski areas and is rarely found in sufficient quantities within realistic commuting distances. Short term rentals are the usually the reason given by ski area management which may be true but it is also in Vail and Alterra’s interests to restrict short term rentals so skiers are more likely to rent their more expensive properties. Rising housing costs and shortages of affordable housing are a fact of life everywhere, not just in resort communities. Even if Vail and Alterra significantly raise wages, there just isn’t enough housing to meet demand. The solution is for either the corporation or community to build dedicated worker housing in sufficient quantities to fully staff the resort and support businesses. Very few communities have the public support let alone the revenue to invest in building and maintaining substantial housing assets. Vail and Alterra have access to the necessary capital and as the primary beneficiaries have every reason to invest in affordable worker housing. The fact that they have not taken this obvious step to alleviate their worker shortages is one more reason for local skier community frustration.
Real wages are actual wages adjusted for the cost of living. Increases in wages in the US have not kept pace with consumer price increases since the mid-Sixties. The $20/hour wage now buys far less than the minimum wage of years past. If Vail and Alterra want a reliable and skilled work force, they are going to have to increase wage and benefits significantly and keep raising them to keep up with the cost of living. Some ski areas have gotten around this by importing labor from markets such as South America. That strategy is likely to be challenging under the current Federal administration and doesn’t address specialized skilled positions such as snowmaking and lift maintenance.
Therein lies the conundrum that may well doom Vail and Alterra: They need to invest in labor, housing, parking, lifts and mass transit access in order to continue to grow. They can only pay for these by selling more passes. Selling more passes means more crowds on high demand days which in turn annoys skiers and makes alternative independent ski areas more attractive. How well Vail and Alterra balance those forces will determine their long term economic viability.