Vail Resorts
Business Overview
Vail Mountain Resorts (ticker: MTN) owns and operates 42 ski resorts that are primarily located in North America and of the 42, it owns the three most popular in the US — Breckenridge, Park City, and Vail — and five of the top ten. North America makes up 93% of total revenue but the company is actively acquiring international resorts.
Note: For simplicity, I’m just going to use the word “ski” instead of ski/snowboard throughout.
For 2023, Vail’s North American resorts had over 17 million ski visitors, accounting for 20% of all skiers in the region.
The company has two main business segments: Mountain and Lodging. Mountain consists of the lift ticket sales, Epic Pass sales, ski school, rentals, and dining. Lift tickets actually only make up 56% of this segment. Interestingly, the mountain segment makes up almost all of the EBITDA of the company.
Lodging is a bit more complicated as Vail Resorts owns several hotels under the RockResorts brand, a transportation company, and many condos near their ski resorts. It seems like they run these business units on a breakeven basis to drive Mountain EBITDA. I’m curious what the returns on invested capital calculations are here as I’m sure there are plenty of developers and hotels that would want prime real estate close to a mountain so it’s not like Vail necessarily needs to run these properties. I just don’t know if vertical integration makes the most sense here as a monopoly on a mountain would likely have much better margins than a somewhat commoditized hotel experience. I wonder what the business profitability would look like if the company sold off all of the lodging businesses and focused exclusively on mountain revenues.
Management makes the case that providing lodging gives them more data and upsell opportunities. However, the fact that EBITDA margins are about breakeven, and of course, that’s before any maintenance capex, weakens the argument. I also don’t know if vertical integration is crucial in this type of business. Where vertical integration makes the most sense is when your supply chain is fragile and it would add to the resiliency of the business despite suboptimal ROIC. In Vail’s case, the hotels could just continue to raise prices to the point that it wouldn’t even make economic sense for customers to go skiing. But that’s not really in the best interest of the hotels if their visitor numbers drop off a cliff. If hotels keep prices reasonable, then the overall value of a ski trip increases. Using this example, for the hotels that Vail owns, their incentive is to not raise prices too much that it would discourage customers from even thinking about a ski trip. So it makes sense why they run these hotels at breakeven. In essence, it seems like in specific geographies, the price elasticity for lodging is strong so Vail would rather absorb the extra margin there to incentivize visitors. This actually bears out in the numbers as well. Visitor growth has driven more topline growth than ticket prices, which runs very counter to anecdotal experience (visitors are in thousands of units).
In the “supply chain” of ski trips, lodging makes up a huge chunk of customers’ budgets. So it seems as if Vail Resorts subsidizes lodging in some areas to drive traffic. I make sure to say “some areas” because coveted mountains like Vail or Park City likely have plenty of demand from outside hotel companies so Vail Resorts doesn’t have to vertically integrate there. Plus, my sense is that ETP (effective ticket price) in the most visited areas is vastly higher than the average ETP of all the mountains. It would be my guess then that with higher prices and lower lodging costs that Vail’s profitability depends on its very best performing resorts. The company makes sure to not break any of this out since it would likely reveal concentration in a few geographies.
While slightly lower lodging costs may be a strategy for Vail Resorts, the main reason for strong visitor growth over the last decade is the acquisitions of more resorts. The visitor numbers don’t normalize per resort but rather include total visitors. So it’s possible that most resorts haven’t grown attendance much but MTN has just bought more resorts in general.
It would be a key data point to see the visitor numbers of for the top performing resorts but the overall industry certainly doesn’t have a tailwind. In the US alone, there were a little over 65 million visitors (20 million in Canada which makes up 85 million for North America) and there were 50 million visitors in the 70’s. That’s a whopping 0.6% CAGR! As the sport has gotten more expensive, it seems like the TAM hasn’t even increased as fast as the population has grown.
Daily lift ticket prices in Park City, Breckenridge, and Heavenly, routinely go for more than $250 these days. That is far higher than the $73 ETP for 2023. But one factor to consider is that Epic Pass holders now account for 75% of visits and 73% of lift revenue.
The ETP looks so low because Epic Pass holders can visit an unlimited number of times per year. ETP is just mountain revenue divided by visitors. So this is not a fair representation of the real daily cost to visit a Vail Resorts mountain.
It would, however, be very helpful to know what percentage of that 75% is from Epic Pass Unlimited holders. This pass for the 2025 ski season will be just about $1,000 but customers can ski as many days as they want at any of the 42 resorts. The breakeven for the customer ends up being about four days so they are better off by getting an unlimited pass if they intend on skiing more than four days. The folks who live close to the mountain who ski 50+ days are getting an incredible deal and Vail Resorts is losing money on them. But it’s hard to understand exactly how many visitors are from this population.
Over the last 15 years, Epic Pass prices have gone up about 4% annually. At a certain point, the question must be asked — is this pricing power sustainable? In the year 2040, do you think an Epic Pass will cost $2,000? It’s quite possible!
Each year that wage growth is less than 4%, the Epic Pass is getting disproportionately more expensive. So more and more folks would get priced out of skiing, narrowing the total addressable market. Basically, the bear case would be that skiing gets so expensive that the market just dwindles. The bull case is that skiing is a Veblen good that may actually increase in demand as it gets more “high-status” due to the prohibitive price tag. In the future, an Instagram selfie on the mountain may be considered even more of a luxury good than it already is.
Industry Overview
Despite the strong pricing power, the industry also has several downsides. The industry is highly capital intensive as many expensive pieces of equipment are required to run a ski resort. Building a singular quad chair lift can cost a mountain around $7 million. Operating it is expensive as well. Whistler Blackcomb, one of Vail’s resorts, spends around $5 million just on operating lifts. Many mountains also invest heavily in their snow-making abilities. Mount Snow, another Vail Resort, announced a $5 million dollar investment in snowmaking technology in 2008 prior to acquisition. Resorts also need to invest in snowcats to groom trails. For example, a snowcat can cost up to $500,000. As you can see, ski resorts have high upfront costs.
Further, revenue is highly seasonal. While many ski resorts do have summer activities like golf and mountain biking, the vast majority of their revenue comes in the winter. One crazy stat is that Vail’s best performing quarter is typically five times greater than their worst-performing quarter during the year. Now that's seasonality! On the other hand, Vail is better able to mitigate this issue due to their Australian ski resorts (June to October ski season) than single location ski resorts.
Variability in revenue is a big issue for ski resorts. During powder days, ski mountains fill to capacity and generate lots of profit. However, skier attendance drops by 10% on average during low snowfall years. During poor snowfall years, mountains also have to close early or open late and their capital investments are unrecoverable. A concerning trend is that the average snow season has been shortened since 1970, hurting ski resorts’ profits (there are various studies out there but it seems likely that we’ve lost between 5-7 days over that period). Vail mitigates this risk to some extent by having resorts with different weather patterns and making artificial snow, but they are still exposed to this risk.
Further, as mentioned previously, the industry hasn’t grown a whole lot, even adjusting for fewer ski days, over the past 50 years.
Competitive Advantage
There are three main advantages that Vail has – their locations/scale, their ability to bundle for higher LTVs and their capital intensity which keeps out entrants. Skiers buy an Epic season pass, which allows them to ski at any of Vail’s 42 resorts. The cost is similar to other resort passes, but Vail’s pass offers more value as skiers can “chase storms” or try out new mountains. Once a customer buys the Epic Pass, they are incentivized to ski at Vail resorts as they do not need to pay for incremental lift tickets.
But the Epic Pass also has a few more advantages. For one, it improves cash flow dynamics immensely. Vail Resorts gets the money upfront and then they can determine how many upgrades they need to make to their mountains. That is way better for financial planning than last minute purchases.
This also helps with scaling up and down temporary work staff. MTN knows when the vast majority of skiers are going to hit the slopes so they can be prepared with more staff to handle the crowds and they can personalize the contract length of workers to optimize profits.
As the number of resorts on the Epic Pass increases, customers also get a better deal. While most customers don’t travel the world to ski at all of the different resorts, it does provide a switching cost, making it unlikely that a customer would ski a day at an Ikon Pass resort. Further, customers tend to like specific places so if you really enjoy Breckenridge, you’ll buy an Epic Pass annually.
To continue building out its option, Vail has grown through strategic acquisitions. Many ski resorts are operationally inefficient. When Vail runs them properly it immediately makes the resort more valuable. They tend to use fewer employees, but keeping the trails in better shape, due to enhanced monitoring, metrics, and investing in automation (things like automated snowblowers for artificial snow).
The only other pass similar to the Epic Pass is the Ikon pass. An unlimited Epic Pass costs $1,004 compared to the Ikon’s $1,359. The Epic Pass gives skiers access to 42 mountains while the Ikon Pass only gives access to 14 mountains. The Ikon Pass is fairly California-centric with Mammoth, Palisades (formerly Squaw) and Big Bear being the main attractions. The Epic pass has more skiable acres and the Epic resorts are more popular than the Ikon resorts. In short, the Epic Pass value proposition for skiers is unmatched but if someone lives near Mammoth, then the Ikon it is!
Risks
The biggest company-specific risk Vail faces is overcrowding of the mountains. Many of their customers have become frustrated with long lines and overcrowded slopes. These customers have become so frustrated they have taken to social media to complain about the lines. An Instagram account dedicated to Vail’s “irresponsible crowds'' has over 40,000 followers on Instagram. Customer loyalty and satisfaction are an important part of any subscription-based renewal model and Vail needs to figure this out.
Therefore, there is no incentive to lower prices. If prices decrease, then lift lines will just get longer! So Vail Resorts will keep raising prices, angering middle class folks who love skiing. It’s sort of a tricky situation. That’s why the company spends over $100 million per year upgrading lifts to make them faster and carry more people. It’s one way that actually solves both problems of widening the TAM and making more money. But it’s very expensive and time consuming to do that. The better ROI decision in the short term would just be the raise prices and price people out until skiing because the ultimate status symbol.
And of course, there are the climate change issues. I’m by no means a climate expert but if there has been a week less of skiing, on average, over the past 50 years, that doesn’t help the industry. It’s hard to predict how this risk will manifest but I don’t personally feel that skiing will disappear in the next few decades like some have suggested. The point is that the industry itself isn’t necessarily growing. As skiing gets more expensive, lots of folks are being priced out. Vail Resorts has lowered the effective ticket price through its Epic Pass model, which has improved cash flow, but eventually even some pass holders will be priced out. But lowering ticket prices would anger loyal customers since lift lines would be super long. The only answer seems to be buying more resorts and upgrading the ski lifts to increase TAM and throughput.
Conclusion
After studying Vail Resorts, it seems clear it’s the leader in a tough industry. The moat, itself, is incredibly strong as the Epic Pass has the best value prop out there, with some of the most well-known resorts in the world. You’ve got brand, switching costs, barriers to entry, and scale advantages. Stacking those moats is pretty impressive! However, potential climate change, extreme seasonality, price elasticity, and capex requirements all add up to rather unfavorable industry characteristics. Sure, it’s incredibly fun to ski but at some point, paying $400/day is going to price a lot of people out of the market. That’s the main reason why the industry has grown at less than 1% for the last 50 years. To offset this, Vail Resorts leaned into the Epic Pass to lower the effective ticket price but eventually, the pricing power will be too much for some people. For the truly wealthy, it won’t matter and maybe you can model Vail’s growth as the pool of rich people that ski and then add 4-5% every year of price increases.
In the meantime, Vail Resorts will just continue buying up more resorts and deepen its moat. At some point, maybe there is an anti-trust case but that’s still a long ways off at 20% penetration in North America. However, I don’t see anyone else that can compete with the company. It will buy up many European and Asian resorts over the coming decades as, combined, these locations are 4x bigger than the US in terms of visitors. That will be the next leg of growth, meanwhile, people will complain about long lift lines and high prices to ski. But many will complain, beneath smiles as they rip along the fresh powder tracks.