The Economics of Everyday Things - 87. Ski Areas

0:03Imagine for a moment that you're a venture capitalist and you're looking for your next big investment. And I'm making a pitch to you and I tell you that my business is seasonal, labor intensive, weather dependent, capital intensive and is based on a discretionary recreational activity that has inherent risks. I don't know if the conversation would go much further but that kind of sums up the ski industry.

0:34That's Rob Goodell. He's the Chief Operating Officer of Loveland Ski Area, near Silverthorne, Colorado. Loveland is 11,000 feet up in the Rocky Mountains, just an hour's drive from the Denver Metro area. Been in operation for 85 years. We're owned by one family from Texas. Chet and Virginia up them were investors back in the 50s. And then in the early 70s, 1972, they became the outright owners.

1:03Chet and Virginia's descendants own Loveland today, and Goodell's been working for the family for 32 years. It takes a lot of intestinal fortitude, because there are seasons that are late to get started, early to close, dry spells in between, and you have to be committed to it. Over 70% of ski areas in the United States are independently owned, like Loveland. But the industry has become more consolidated over the years.

1:33And the bigger companies are less vulnerable to the inherent instability of the ski business. Their model is global. They have resorts around the world. So they're kind of hedging their investment by saying that if the eastern part of the United States doesn't have a good winner, hopefully the western part or the Midwest or the southern hemisphere. So what does it take to stay independent?

1:58There is a joke in the industry that says, how do you become a millionaire in the ski industry? You start out as a multi-millionaire and buy a ski area. For the Freakonomics Radio Network, this is the Economics of Everyday Things. I'm Zachary Crockett. Today, ski areas. Recreational skiing and snowboarding generate nearly $60 billion in economic activity in the US each year.

2:29On one end of the industry, you've got giant ski resorts like Veil in Colorado, Palisades in California, and Big Sky in Montana. These places are like Disneyland for snow enthusiasts. They have all kinds of activities. Dog sled rides, snow tubing, ice skating, and with luxury lodges and fine dining on-site, you can stay for a week or more. But ski areas like Loveland, cater to people who just want to enjoy a day of skiing. We pride ourselves in being just a day ski area. We have all the support services to make your day complete from rentals, food and beverage operations, retail sales. A single day adult lift ticket costs $149 at Loveland and a season pass costs $699. Definitely the number one revenue.

3:25Stream for us is the lift revenue which includes season passes the lift tickets 60 to 65 percent comes from lift ticket sales and then food and beverage skiing ride school and rentals probably about 30% all combined Most years we do make money, but you also keep a capital reserve. We call it lack of snow fund Instead of a rainy day fund But from one season to the next, it is fairly sustainable. We do a decent volume in our season pass sales and ticket sales and ancillary revenue that we can make it. Loveland Ski Area faces fierce competition for skiers from conglomerates like Veil Resorts and Altera Mountain Company. Together, those two companies own about 10 percent of the ski areas in the US.

4:18And they offer package deals to skiers who want to try the slopes at more than one resort in a season. Within, you know, that one hour drive from the Denver Metro area, pretty much all the rest of our competition is either with the Icon or Epic Pass, which is Altera and Vale Resorts, really puts us on an island that we don't have that cooperative pass with the big guys. A single day adult lift ticket at a big resort can cost over $300. But many skiers save money buying a season pass. Passes usually go on sale starting at the end of the previous ski season and increase in price through the summer and fall. And they're generally a much better deal. The spring sale price for Veil's Epic Pass is a little more than a thousand bucks. And it gives skiers access to 42 resorts around the world. The smaller independent ski areas

5:19have trouble competing with that kind of offer. Those mega passes are very, very affordable. That's Andrew Gast. He's the general manager of Mount Ashland Ski Area, a small, independently run mountain in Southern Oregon. And often that pass price is comparable to our season pass. And that's just a function of the fact of buying power and us having to be self-sustaining and do everything ourselves. But Rob Goodell...

5:47says there are other dimensions besides price that make independent mountains desirable. We just do not get as crowded as the bigger guys with those that accept those passes. One of our most limiting factors is our parking. Our uphill capacity far exceeds what our parking capacity is. The experience on the hill is not congested at all because everyone spreads out and is able to find their own terrain.

6:14And we are actually looking to expand some parking so we can accommodate more people. In the early 90s, Mount Ashland ski area was on the verge of closure. The owners, a company called Harbor Properties, were tired of losing money during the drier winters. So they planned to shut down operations. The community came together and bought the mountain from that company and formed the nonprofit that operates it today. As a nonprofit corporation, Mount Ashland takes donations, but donations only cover about one percent of their day-to-day costs. Their operating budget is in the millions. In a typical year right now, it's a little over four million dollars. For our particular mountain, the most profitable months are December, January, February is a little bit less so. And then we're actually budgeted to lose about a quarter million dollars in March. We open just because it's a nonprofit mountain and we're there for the community.

7:14Whether a ski area is a nonprofit, an independent business, or a part of a conglomerate, it's a big operation to manage. Thousands of visitors flock to the slopes each day, and they expect to find plowed parking lots, groomed ski slopes, and functioning chairlifts. Goodell says all of those operations require manpower. One of our largest costs is labor. We have about 60 year-round employees.

7:43Then we'll balloon up to just over 600, about 620 to maybe 640, depending upon different department needs in the middle of the season, the peak times. Finding so many seasonal workers can be a challenge, especially when your business is located in an expensive real estate market, like most mountain towns in Colorado. Loveland provides housing for new employees. Over the last five years, six years, we have upped our housing inventory.

8:12Before that we would get applicants from out of state and hope that they could find housing. In the last few years we have been staffed better than we had before. It's so integral. Gast says Mount Ashland has other hiring challenges. Last year we didn't open until January 11th because we got no snow in the month of December. We do our staff orientation in the middle of November.

8:39preparing to operate early December. And if something happens, then those employees are kind of on standby. They're not earning their paychecks. And often they'll start to find other employment. There's another group of employees in a ski area that bring a different kind of operational risk. Our ski patrol not only are emergency outdoor responders, transporters, but they do carry explosives. That's coming up. Loveland ski area opens for business each year around Thanksgiving.

9:13and aims to be open until May. That's usually 180 to 200 days per year that mountain operators pray for snow. But Rob Goodell of Loveland Ski Area says more snow means more preparation for ski areas in the off hours. We have nine snow cats. Very large, powerful, tracked machinery to push and groom snow that cost more than the first house that I owned.

9:41But they're very efficient in what they do. And the operators that we have can take a 16-inch storm and get it ready to open the next day. Snowcat operators navigate massive machines around the mountain at night, sometimes in white-out conditions. They ensure that ski trails are groomed by the time the sun comes up. On the ground, there's another group of staff that makes sure conditions are safe.

10:11We've got about 50 ski patrol and then we also have a large chapter of national ski patrol which are volunteers that work on weekends or holidays over a hundred of those that volunteer throughout the season. Ski patrol are identifiable by their red coats with white crosses. They're trained first responders and medics ready in the event of an emergency on the mountain. They're also the ones responsible for assessing snow conditions.

10:39particularly on the steeper slopes where there's a risk of avalanches. This crew is very well versed in snow science and how to evaluate snow packs, and it's a constant monitoring measuring. The challenge is not to allow really deep snowpack on top of unstable layers that have been there for a long time. At any ski area with advanced steep terrain, ski patrol will set off explosives.

11:08This is to trigger avalanches before skiers hit the slopes. It is a smaller handheld charge that they tie to a rope so they can throw it and know exactly where it will be placed in the trigger zone. And they have the length of the fuse so they know to step back, get into a safe zone. And there's always a remote team watching them from afar to keep contact with them to make sure that they are well beyond harm's way. And then?

11:37Then there's a muffled boom and hopefully snow moves and slides down when and where we want it to go as opposed to when the public is on it. Ski areas are usually located in remote high alpine locations that sometimes require them to source their own water and treat their own sewage. And water at a ski area isn't just for toilets. It's for snow making, particularly in the early season.

12:08when winter storms can be scant. Either need compressed air and water or the power to create the compressed air and the water mix. And so that runs for miles. The pipes and the power lines up all the trails that we have snow making up. These lines connect to fan guns that spray snow over the ski slopes. We start making snow as soon as Mother Nature cooperates and gives us some temperatures.

12:37Typically, we will be ready anytime from the end of September on. We're very jealous of the ski areas back in the Eastern United States that have access to almost unlimited water supplies. But out here in the West, it's all about the water. We do have a finite amount of water that we can use to make snow. And that lasts about two months.

13:06And through the permit, they're granted water rights. But Loveland's water grant isn't enough for their snowmaking operations. We have a certain amount of rights that we own, but then we also purchase some from other right holders in the area, and it's expensive. Ski areas typically own facilities like chairlifts and lodges, but they lease their land from the US Forest Service. Both Loveland in Colorado and Mount Ashland in Oregon have a 40-year special use permit for the land they're on. Again, here's Andrew Gast, General Manager of Mount Ashland Ski Area. That was signed in 2012. The permit costs a percentage of the revenue that we take in. So for every ticket that's bought, there's a part of that that goes back to the forest. Skiing is an inherently risky activity. And with staff members carrying explosives,

14:03Liability insurance becomes a big expense. Our insurance amounts to about 9% of our expenses that we pay annually for the mountain. They will come several times a year that they represent from insurance and look at really the entire operation. The techniques that ski patrol is using, explosives, they look at the maintenance of the chairlifts and are they up to code? Really all of our equipment. Even down to they'll look at in the rental shop, the ski bindings on the skis, have they been tested?

14:33how those things maintain. Property insurance is a major consideration as well. At least a third of our mountain is above tree line, but most gears are very heavily wooded and with the wildfire risk throughout the west and well all across the country, the property insurance is high because it's a large exposure. The equipment that is most exposed to the ski area and that is covered by both property and liability insurance is the chairlift.

15:03A lift involves two loading zones, one at the bottom of the lift and one at the top, with cables and chairs strung between large towers. It's responsible for ushering thousands of people, including young children, up the mountain all day, in all weather conditions. And they can range in costs from hundreds of thousands to over $10 million, depending on their capacity and speed. We have 10 lifts, takes about 70.

15:31employees to man those on a daily basis seven days a week. There's a whole separate lift maintenance staff that is responsible for making sure all safety systems are operational. Traditional chairlifts transport skiers uphill at about 2.8 meters per second. The newer models with detachable chairs are about twice as fast. A faster lift can increase capacity and help us ski areas bottom line.

16:02Some ski areas, like Loveland, are choosing to upgrade their chairs to high-speed lifts. Mount Ashland is not. The high-speed detachable lifts are much more expensive to install. They're more expensive to maintain, and their lifespan is significantly lower. We have one chairlift that's currently 61 years old now, but the lifespan of a high-speed detachable lift is only about 25 years. The capacity of dumping more people onto the top of a chairlift for us is an issue. We're a small mountain and so we want to manage the capacity, the number of people that are getting to that top that chairlift in a certain amount of time. Gast says Mount Ashland recently installed a new chairlift. The nonprofit spent over $3 million total, $2 million for the lift itself, and an additional million for installation, trail breaking, and lighting. It's a really complicated process. It starts with the engineering and having folks who really understand

17:00all the technicalities of hanging chair carriers in the air and moving them in tough conditions. Engineers have to do survey work on the ground to plan the chairlift's route. Then they dig the foundations for the metal towers. The foundations are really, really deep. We'll set the forms, pour concrete in those forms, and then they'll attach to the towers. And those could be either done with cranes, which is what we did on this chairlift because it was really close to our lodge.

17:29We've planned to build two other chairlifts here in the new future and those will use helicopters both for concrete and lowering the towers. Once the chairlift is fully installed, it's checked for safety. We ran it for about a hundred hours with no people to test it to make sure it was safe to operate. When a ski area replaces a chairlift, they can usually part out the old one on the secondary market.

17:53What we can do is basically auction off each of the chairs from those chairlifts to our own community. And we'll probably raise $250,000 to $300,000 just from doing that, which is more than what selling it off privately would earn us. Small mountains like Mount Ashland are always on the lookout for additional revenue streams. Two years ago, the ski area began to keep its restaurants open for summer visitors. There's a lot of trail running. There's a lot of hiking that goes on.

18:24Our goal is to kind of be a hub for all those people. We started introducing summer camps. Those are for kids eight to 13 years old. We did those last year and we'll do more sessions this year. They're also looking into some more inventive sources of revenue. We're finding that axe throwing is actually one of those most popular things. What kind of revenue do you expect axe throwing to bring in? Probably $25,000 to $30,000 this first summer. Even with ancillary axe throwing revenue, ski areas function on tight margins. But Rob Goudel believes the one thing mountains can count on is devotees returning to the snow. It's the pure joy of skiing, snowboarding, being outdoors. It's a family activity. And once people get introduced to it and have that feeling, it's really unsurpassed. For the economics of everyday things, I'm Zachary Crockett. This episode was produced by Morgan Levy and Sarah Lilly.

19:30and mixed by Jeremy Johnston. We had help from Daniel Moritz Rapson. And thanks to listener Nebojsa Kulic, who suggested this topic. People love those chairs. You'll see them hanging as porch swings. The Freakonomics Radio Network. The hidden side of everything.