Steamboat Springs The resort community will write checks to airlines for more than $2 million after a ski season that saw steep discounts in airfares and still left passenger numbers down by 9,000.
Payments “will be north of $2.4 million,” said Andy Wirth, Steamboat Ski and Resort Corp. senior vice president of sales and marketing. “It will be one of the most expensive airline seasons that we’ve had in the near past.”
Ironically, resort leaders deliberately took steps this winter that compounded the expense of underwriting the airline program.
“We saw this coming, and the reason we knew it was that we facilitated fare sales,” Wirth said. “We had some challenges from a load factor perspective, and for the good of the general business community we had to take this hit. These fare sales played a critical role in our season.”
The amount the resort community owes the airlines at the end of ski season is a function of how well each Yampa Valley Regional Airport route performed, a number influenced not just by how full the airplanes were, but also how much passengers paid for their seats.
So, the ski area worked with airlines to discount fares for vacationers destined for Steamboat Springs. But when resort officials encouraged round-trip fares from Atlanta to YVRA for less than $200, for example, it meant the bill would come due at the end of the contract.
“We’re being squeezed on one side by the airlines having to discount fares,” former Sheraton Steamboat Resort General Manager Chuck Porter agreed, “and on the other side, we’re impacted by lower occupancy rates and lower revenues. We’re fortunate that we have a good funding mechanism in place.”
Porter is a longtime member of the Local Marketing District, which helps shape the ski season airline program. The LMD advises the Steamboat Springs City Council about how best to spend the proceeds of the 2 percent lodging tax (between $1 million and $1.2 million last year) that is dedicated to underwriting air service.
Writing seven-figure checks to the airlines is not out of the ordinary for the business community.
“There have been years when the cost of the airline program is below $1 million, but a number between $1.5 million to $2 million is very typical,” Wirth said. None of the routes performed in the black last year, he added.
Ski season flights originated in Atlanta, Chicago, Dallas, Denver, Houston, Minneapolis, New York, Salt Lake City and Newark, N.J.
Steamboat attracts direct jet flights from major cities every winter by negotiating contracts that give the air carriers minimum revenue guarantees. The money needed to attract major airlines to fly large jets here from cities such as Chicago and Dallas comes from the 2 percent lodging tax and direct contributions from Ski Corp. and independent businesses. Historically, the Ski Corp. contribution has been 60 percent of the total, Wirth said.
Each airline contract is different, but they often protect the resort with ceilings that limit the maximum amount that must be paid to the airlines.
Doing the splits
Going forward, Porter said, Ski Corp. and the LMD will pay equivalent shares of the airline program costs, and Ski Corp. will no longer cap the dollar amount of its contribution. His research indicates that the public will see a slight benefit from the new cost-sharing arrangement as the program continues in an era when it bumps up against the caps on airline revenues.
“I also think it’s easier to understand and more transparent for the public,” Porter said.
The total inbound capacity of the airline program at YVRA in Hayden this past ski season was 138,182 seats, and although passenger numbers haven’t been finalized, Wirth said, he projects 87,500 arrivals compared with 96,000 during the winter of 2008-09.
Steamboat contracts flights with American, Continental, United and Delta/Northwest airlines.
Discounted airfares aren’t the only challenges facing the members of the Local Marketing District as they plan the airline program for ski season 2010-11. The most expensive part of a ski vacation is typically the lodging, and aggressive discounting last winter was commonplace across Colorado ski resorts to compete for hesitant vacationers. Not just in Steamboat, but in Vail and Aspen, too, rooms that rented for $450 to $500 a night four years ago could be had for about $150 last winter, Wirth said.
The downward pressure on room rates translates into lower lodging tax revenues for the LMD.
The most recent city sales tax report through February shows that collections of the city’s portion of lodging tax (different from the LMD tax) were off 16.25 percent. While indicative of the entire ski season, it corresponds to the amount that the tax supporting the air program had dipped in the first two months of 2010.
Ski season 2010-11
Wirth said he has heard from senior executives at American Airlines and Delta Air Lines that Steamboat/YVRA performed at or slightly above other mountain airports last ski season in terms of load factors and yields (net revenue). He said he takes heart from that information and is pursuing a modest increase in capacity next ski season. At the same time, negotiations with the airlines are not becoming easier.
“It’s as challenging as ever,” he said.
The airlines have reduced capacity, and at the same time, he said, the price of crude oil is creeping up. Airlines are anticipating modest rebounds in leisure and business travel. It sounds good, but it means an old nemesis known as “opportunity cost” has joined Wirth’s conversations with airline route planners.
The term is used to describe the potential revenues airlines may give up when they divert their finite fleet of airplanes away from more lucrative business destinations and toward more price-sensitive leisure destinations.
Opportunity cost can become a lever to increase revenue guarantees spelled out in the airlines’ contracts with Steamboat.
Porter said the LMD has taken a conservative approach to managing its revenues and has built a $1 million reserve to protect Steamboat’s airline program against upheavals in the airline industry. It is reluctant to use the reserves.
“We won’t approve expenses above revenues except maybe to seed a new market,” Porter said.
Wirth said negotiations are on pace to have next season’s flight schedule complete by June 1. Thus far, American’s flights to YVRA from Chicago and Dallas have been loaded onto reservations computers. And he expects United’s Chicago flight to continue next year.
One uncertainty is the daily Delta Air Lines flight from Salt Lake City. The route is an important gateway to the strong California ski market, Wirth said, and if contract talks on that flight don’t come together, he would be interested in starting a direct flight from a California airport with one of Steamboat’s current airline partners.
Porter said the continued support of small businesses for the ski season airline program is important and urged the city of Steamboat Springs to closely audit the growing number of nightly rentals of privately owned homes to ensure that lodging taxes are being collected.
When Yampa Valley residents fly out of the airport, the ski season airline program is subsidizing their fares, he said.