A Different look at Disney...

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There's potentially big news in today's update that may affect many of your upcoming vacations, if it comes to fruition.

Let's start with the crowds at Disney World. Presently, they are still there! Hordes of folks still clamor for FastPass, huddle for parades, and snap up them restaurant reservations. Disney has indeed weathered the looming (present?) recession relatively well so far. As Iger noted recently, Disney parks are well-positioned for an economic downturn, in part because of programs like Magic Your Way tickets (which make extra-day tickets so ridiculously cheap you dare not go to Universal instead) and the Disney's Magical Express shuttles (which move you from airport to Disney hotel for free, so you dare not waste money on a car). Disney still has a pretty lock-solid captive audience, even more than ever before.

But scratch under the surface and you'll begin to see the faintest signs of decay. The reservations desks are a lot quietier than was the case in previous years. Don't take my word for it; talk to any travel agent. People aren't booking travel and buying packages like they used to.

We don't have to stretch our imaginations to see why. A flight from LAX to Orlando used to run about $200; now a check reveals most flights in October on that same route going for $400. With transportation costs going through the roof, and the price of a barrel of oil setting new records every week (if not every day), people just aren't looking to travel.

As you might imagine, people staying home isn't part of the business plan for Walt Disney World. Projects to be built in the coming years, some of them cataloged in the recent Rumor Rundown, are suddenly questionable. It's not that things are being cancelled, but there's no particular rush forward at this point. MiceChat user WDW1974 called them the administrative equivalent to the "creep" mode you might have seen on the Haunted Mansion: you click a button and things dramatically slow down, but still creep forward, centimeter by centimeter.

I wonder if we’ll still get mega-attractions like Expedition Everest if attendance drops
significantly. Might we get MORE attractions in such a downturn, or FEWER?

There have been some contingency plans assembled, in case this fall looks more dicey than Disney had originally planned for. One major push that probably will see the light of day is the reduction of operating hours, starting right after the summer season. Parks will close an hour or two earlier, and some may even open an hour later… and this is on top of the usual shifting of operating hours that occurs every autumn. That saves Disney quite a bit of money on operating expenses, and they still reap the same income from ticket sales, at least theoretically. In the back of my mind I'm already grumbling about the Decline by Degrees (Disney saves money while you pay the same, but get a lessened experience).

There are other plans afoot. One of them is to maybe offer the Free Dining program to Disney hotel guests even beyond the usual autumn time slot, perhaps even into the start of the winter months and the hallowed Christmas season. That's unheard of. Offering Free Dining is one of Disney's big guns, and usually brings stampedes of visitors to Disney's hotels (and to its parks). Will it work this time? Even if airline flights cost so darn much? (Not to mention the minivan fill-up!)

The hope is that it works to bring a rush of visitors. Because otherwise, another contingency plan may be enacted - brace yourself - to close down one Disney World theme park at least one day per week. The Magic Kingdom (MK) appears safe (it's such a big draw) as Epcot (E) (it has so many corporate sponsors that would demand otherwise), but Disney's Animal Kingdom (DAK) and Disney's Hollywood Studios (DHS) may well be dark, locked, and inaccessible one day a week, starting in early 2009 if attendance levels get bad enough. Obviously, the plan would be to take turns. Perhaps Monday would see DAK go dark, and more people would rush into MK, E, and DHS as a result. Then, on Tuesday, DHS would stay locked, and MK, E, and DAK would get increased traffic.

Monday or Tuesday closings for the Studios park? Or both?

There are positives, to be sure. Disney could use this time to paint and refurbish the parks. I have not one doubt in my mind that they say they will do that anyway, but it will only be beneficial if they REALLY do that. If they do seize the chance, patrons might actually benefit. The parks would be spotless, well-painted, and well-maintained. Besides, the argument goes, the same thing used to happen at Disneyland. During its first years, the Anaheim park was closed on Mondays and Tuesdays during the off season, and this down time was used to paint and refresh the park (and let the employees have a "weekend"). No doubt the WDW Press and Publicity department will latch onto this Walt factoid as justification for doing it in Orlando too.

If the parks do close on a rotating basis, the Cast Members would likely be rotated around and put to work cross-training. Since this isn't a simple one-park operation like Walt's Disneyland, they can't all be just given the day off (and some presumably wouldn't want that). The effect of a rotational schedule would be pretty significant even on the parks that don't close. Have you ever seen how the crowds at SeaWorld just move in unison, from one show to another? That's what would happen on a macro scale at Disney World. The parks left open would be more crowded on a Monday because the visitors, lessened in total number though they may be, will be squeezed into three parks instead of four. Disney likely saves money, but will the customers understand?

A competing school of thought within Disney wonders if the problem might be self-correcting. If the downturn continues, as most are expecting for this fall and beyond, it will probably drive a whole bunch of Orlando-area businesses right out of the marketplace. The smaller ones, that is. The midways, the dinner-theaters, and the like may not be able to compete. Disney has deeper pockets, and can endure more before crying uncle, so it's likely the smaller attractions around here might buckle long before Disney has to, even if fewer people fly to Orlando this year. They may not have to close Disney parks to make up for it, since folks will simply stay with Disney and not venture off to the dinner theaters and small attractions. So goes the theory, anyway. My answer is: "Maybe." I suspect the smaller operators really will feel the pain first, and I suppose this effect may delay the pain Disney feels. But I don't think it will be a pronounced enough counter-effect to stave off the need to conserve money on Disney's end, and that probably does mean closed parks.

Clearly, the idea is that this would be temporary, until attendance bounces back. But it's at this point when I'm inclined to consider the worst-case scenario. What if oil, gas, and jet fuel prices never really come back down?

If oil and jet fuel prices keep visitors away, will crowded days be a thing of the past?

Several months ago, I used this space to muse about "peak oil," a phenomenon of the world starting to run out of petroleum and the effect on prices in general and Disney World in particular. Disney had commissioned a study, and if oil stays above $160/barrel, Disney was advised to sell off the WDW parks and just collect a licensing fee. The parks would still eke out a profit, but not as much of a profit margin as Disney wants and the parks would be a drag on the company's bottom line. Here's what I wrote about this, when breaking the story back in September of 2007:

There are wildly different accounts and interpretations of what kind of future we might be facing regarding oil. There are prognosticators who confidently predict that not only has the world used up less than half of the 'proven reserves' out there, but that we're finding more all the time (indeed, that's almost a direct quote from Bill Nye in Epcot's Energy pavilion). But at the other end of the spectrum, people are making more and more noise about 'peak oil', also called Hubbert's Peak, named after a Shell geologist who predicted, correctly, that US production of oil would peak and then decline in the 1970s, and predicted a world peak in 1995. Hubbert was obviously off about world production, which is still climbing, but some experts warn that the 1970s oil instability caused the delay, and that the peak will be reached any day now (indeed, some claim it's happened already).

Big deal, you may be thinking, we still have half the oil left! Not so fast. China, India, and the emerging countries now gobble oil, whereas before they only sipped. Much worse is the fact that the remaining oil is much harder to obtain and much, MUCH more costly. The result, these folks claim, is that oil prices could rise sharply higher, and the entire economy take a turn for the worst. On a dime. Permanently. We're talking $200 barrels of oil (it's around $70 now, and was at $40 only a few years ago, and an incredible $10 in the late 1990s). The news only gets worse--as inventories shrink and demand STILL goes up, remembering that other countries will continue to need more energy, the prices will soar ever more. The really bad predictions say all this could occur in the span of just a year or two, once it starts. Remember, experts vary wildly on whether this event will even occur.

But Disney, understandably, is nervous. Shortly after 9/11 rocked the economy and put a very sizeable dent in airline travel, Disney re-examined its assumptions about the business it was in, and commissioned an internal study in the past couple of years, hiring a major investment banking and consulting firm to help them drum up scenarios. Not wanting to repeat the tourist shock of 9/11, Disney wanted to know what the future might bring. What's the worst-case scenario, they asked?

Turns out there are some pretty bad scenarios. The hired accountants brought back a picture of Disney World that no one wanted to hear. As you might suspect, there does come a time at which point oil is so expensive that Disney World ceases to make money. That part is intuitive enough--just imagine oil costing a hypothetical $2,000 per barrel, and a flight from Los Angeles costing $40,000. No one would fly to Disney World, right? To bring the numbers back to reality, the breaking point at which Disney World would no longer make [enough] money is much closer than we think: something less than $200/barrel of oil, perhaps as low as $160/barrel. True, that's more than twice the current level. But if you'd told me in 1999 that oil would vault from $10 to $70 in less than a decade, a seven-fold increase, and people would simply accept it, then I wouldn't have believed that either.

Since posting that about nine months ago, the price for a barrel of oil has moved from $70 to $130 (and above). I took some heat in the discussion boards and emails as being a bit alarmist, and yet oil has risen substantially. I think that kind of trend, even a micro trend, means it might be worthwhile thinking about what happens if it continues. And it's just not a pretty picture.

Here in Orlando, Universal Studios may actually be better positioned than Walt Disney World. They don't pay as much in gas and transportation. At Uni, there are a couple of boats, but mostly, people walk from their cars to the parks, and they walk from park to park. At Disney, the scale hurts. No one can walk from park to park, and few can walk from hotel to park. Instead, Disney has to pay enormous fortunes in gas money every day. Every single hotel has a fleet of busses to take those patrons to their desired parks using 17,000 gallons of diesel a week. And Disney has all that space filled with asphalt that must be maintained, or concrete that must be painted, or grass that must be mowed. The upkeep costs are enormous at Disney.

If Uni-Orlando is the big winner in a downturn, we might all end up eating at Mel’s Diner.

The costs are such, in fact, that some folks internally are beginning to wonder if there's any possible way to start charging for riding the hotel busses. They know that's an uphill battle as they are already not universally popular, as they can be noisy, overcrowded, and often late.

No, Disney World is stuck between the proverbial rock and a hard place. The real winners in an environment like this are the regional parks: Dollywood, Kennywood, and Hersheypark. All of them are near a large population base that will keep coming even with high gasoline prices. To that list we must responsibly add Anaheim's Disneyland. The SoCal market is sprawling, sure, but by and large it's just one big city, and people will still come to Disneyland. There's even a railroad connecting the area to Northern California.

None of the same demographics apply to Central Florida. The parks are way too large to be filled up by locals (heck, we all work there, or did once). WDW is stuck.

Not so, I hear you say. The international and overseas visitors will still pour into WDW. They will do it even more than before, in fact, because the dollar is so low! To that I answer: not in the numbers needed to maintain Disney's profit margin. Don't forget that Homeland Security and its procedures aren't welcoming to a lot of foreign visitors, and many tell their friends not to bother as it can be so difficult. Meanwhile other opportunities beckon elsewhere. (Dubai, anyone??)

The situation makes you appreciate that Disney does have overseas parks of its own: Disneyland Paris (DLP) and Hong Kong Disneyland (HKD). Hmm. Suddenly, the propensity for duplicating ride experiences exactly at international locations doesn't seem so stupid. This move was done to save development money, and many (including me) decried it as cannibalizing Orlando's business. If people can easily afford to visit the Paris park, they will just do without Orlando. This strategy is possibly going to pay off for Disney, even though they weren't trying to make it happen that way. Now Europeans really may go to DLP rather than WDW.

I might even draw a connection out to the Location-Based-Entertainment (LBE) concept that Jay Rasulo wants to spread across the globe. Think of these as hotels plus a single ride. Jay wanted to save money and take the cheap direction to getting Disney's name everywhere, but his mismanagement may actually end up, ironically, saving Disney by accident. If "peak oil" occurs and people only travel locally from then on, Disney may still be a leader. But the concept of a destination resort, like Walt Disney World, definitely depends on the presence of affordable airline tickets. If that changes, watch out WDW; they may have to call in Wall·E to clean it all up and cart it away.

Disney is in a frenzy of building DVC units – will that continue if bookings dry up?
If oil is really expensive, will DVC stop minting money for the Mouse?

Another thought here: WDW's big sales lately have also been built on the destination concept. I'm thinking here about Disney Vacation Club (DVC), the timeshares in Disney hotels. Will these folks have buyer's remorse if airline tickets spiral toward infinity and flying becomes a luxury item? Will they feel cheated for spending tens of thousands of dollars on something they now can't afford to visit? Or if they do come, what will these frequent visitors think about DAK being closed on a Monday to save Disney some costs? Could those DVC folks sue, arguing that they bought into the contract with the understanding that parks would remain open?

I'm only a local, and I only visit on weekends, so these one-day closures won't affect me personally. I won't see a surge of visitors on the "remaining three" parks because I won't be there on a day when one is closed. In theory, this closing of parks is great news for me. The parks may be more spruced up.

But what about the tourists Disney makes its money on? What will they think?

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© 2008 Kevin Yee

A Different look at Disney...
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