There's a paradox burning in the hearts of the loudest critics of Walt Disney's (DIS 0.81%) sprawling theme-park complex in Florida. The two most common complaints about Disney World these days are that the resort's gated attractions are too crowded and too expensive.
It defies the basic framework of mutual exclusivity. If Disney's Florida parks are crowded to the point where they're turning people away with its controversial park-reservation system, is it charging too much?
It's a layered situation with some hard truths that Disney World's biggest fans -- its annual passholders -- have yet to realize. It doesn't have to end badly, and Disney's about to pull some levers that will increase supply at a time when it can't keep up with the current demand. Shareholders stand to cash in either way, but we're getting ahead of ourselves.
Image source: Disney.
Now is the time -- now is the best time
Disney turned heads last month when it announced that it delivered record revenue and operating income at its domestic parks and resorts. It's a refreshing surprise.
Turnstile clicks are on a short leash between the limited number of daily available reservations, travel restrictions, and an omicron variant that was raging during the fiscal first quarter that ended in December. It's not just the top line facing a cap to the operational upside. The bottom line is also being weighed down by higher wages, pandemic-tackling compliance costs, and last-minute trip cancellations. Despite getting squeezed at both ends of the segment's income statement, Disney World is at peak on a financial basis.
Many of the revenue-enhancing measures that the media giant has rolled out are working, even as it cannonballs the pocketbooks, convenience standards, and ultimately, the patience of diehard fans. How did we get here? How did we arrive at the point where the blowout financial recovery of Disney's theme-parks segment is getting booed instead of applauded by its most active visitors?
NYSE: DIS
Key Data Points
The lay of the Fantasyland is easier to understand than you probably think. When Disney World reopened two summers ago, it joined fellow attraction operators in attempting to navigate the new normal by minimizing the negative cash flow. As demand began to pick up, Disney World realized that it wouldn't be able to keep up with its supply end of the bargain. There were too many Disney World attractions, restaurants, and even hotels that couldn't be staffed quickly or reopened safely to meet the booming desire for getaways at the place where escapism rules.
Disney's response was a largely panned park-reservation platform that's infuriating to many of its annual passholders because it's built around optimizing what the average guest will spend for a day at the park. These advance reservations are divvied up into three categories: overnight resort guests, day visitors on single-day admissions, and annual passholders.
It's not a surprise that the passholder group is the one where availability dries up the quickest. Disney World passholders pay between $1 and $4 a day for a year of access to the resort's gated attractions. They get free parking and merchandise discounts, and don't have to pay extra to visit different parks in the afternoon.
Compare that to a less frequent visitor who would have to pay $139 to visit any of Disney World's four theme parks on a single-day ticket tomorrow, or $204 if the plan is to hit more than one park after 2 p.m., the way that passholders do. They also pay $25 if they're bringing a car.
Disney resort guests are also kicking in a fair sum of money to stay onsite. How can passholders compete with that kind of per-capita spending?
Disney World could raise prices, and they obviously have done that already in nearly every passing year. It also stopped selling new annual passes, except for the cheapest offering that only costs $399 a year. The Pixie Dust Pass is limited to weekdays during non-peak travel periods, but it's good for a year at a price that's less than twice the price of a single-day park-hopper ticket.
Then we get to the Genie+ and Lightning Lane products, where folks pay $15 for access to an app-based platform access to expedited queues. One or two rides at each of the four parks offer one-time access for even more money.
Disney purists are upset that this new premium platform replaced the included FastPass system, but there's no turning back. Disney mentioned in its latest earnings call that a third of its park guests are buying Genie+, and that bumps up to half of all visitors during peak travel periods.
It's a great big beautiful tomorrow
Nobody likes the park-reservations system, but Disney has said that it's not going away anytime soon. Earlier this month, several theme-park blogs wrote about how Universal Orlando parent Comcast (CMCSA +0.96%) was surveying guests about requiring park reservations to help combat its own problem with overcrowding. It's not going to go over well if it does happen, but just the fact that Disney World's biggest rival is reportedly asking its passholders about the shift is problematic and newsworthy.
Reality is going to be a heartbreaker for annual passholders. Disney World could probably do away with park reservations if it stopped selling annual passes, including renewals, the way it did at Disneyland in 2020. Filling the park during lulls would be a matter of offering Florida residents discounted tickets, as needed.
Disney could take a smaller step, instead, like keeping its annual passes but doing away with free parking or institute some other kind of usage fee per visit. However, Disney needs the passholders -- even the ones who aren't paying for Genie+ -- because they fill up the standby lines that encourage others to pay for the faster-moving lines.
The silver lining here is that supply is getting better. More Disney hotels, eateries, and experiences are starting to come back. New rides, parades, shows, and character greeting areas can let thousands of more guests in without overcrowding its current offerings. In the next few months, we'll see a pair of new roller coasters go online, along with the return of the Walt Disney World Railroad and traditional character meet and greets.
If the economy plays along and the pandemic fades, it will be easier for Disney to ramp up the experiences that will get the iconic resort back to the point where supply exceeds demand. Disney will continue to be the top dog among leisure stocks, and investors will be more than happy to ride this carousel -- the carousel of progress.
