Walt Disney (NYSE:DIS) is now the only theme park operator that has yet to open its gated attractions, and it will be another four weeks before that happens. Half of Disney World's theme parks will begin entertaining guests again on July 11, followed by the other half four days later. Disneyland is proposing to reopen its two theme parks on July 17.
Some have wondered why Disney is waiting so long since the mid-March closure of its iconic attractions to get rolling again, especially after its rivals -- in Central Florida, at least -- opened as quickly as possible after receiving clearance at the state and local level to get back to business earlier this month. Disney knows what it's doing. Let's go over some of the reasons showing up seemingly unfashionably late to the industry's relaunch party could be a smart call.
Time is on Disney's side
It may seem shocking to see Disney waiting so long to unlock its turnstiles, especially since one analyst, Todd Juenger at Bernstein, argued a couple of months ago that Disney is losing $1 billion in earnings before interest and tax for every month it remains closed. However, Disney is in a unique position in that it has many other profitable businesses to keep money coming in with its parks shuttered.
Disney isn't a regional amusement park operator with all of its eggs in the Ferris wheel basket. It has Disney+ streaming to a growing audience of homebound entertainment consumers. There's ABC, ESPN, and Disney Channel among the many other media networks and cable properties cashing in on the captive audiences. Folks are still buying consumer products based on Disney's wide catalog of intellectual properties.
Disney will obviously be in better shape once Disney World and Disneyland get going again, but its chances for profitable success are stronger the longer it waits. Let's talk about Central Florida right now. The first couple of days of park operations for Disney's smaller rivals have been lightly attended, but those numbers will grow with every passing week. Social media was full of snapshots of long lines to park at Universal Orlando on Saturday, a sharp contrast from the small crowds over its debut weekend earlier this month. By the time Disney World opens, you can be sure that area hotels will be busier than they are right now, and locals will be more accepting of the expectations of a park visit.
Disney's eagle-eye view here gives it a chance to learn from the mistakes of others. It can also mirror what it sees working for its peers. All of the operators have different approaches to how they're handling guest check-ins and even in-park sanitation measures. Disney can take these next few weeks to see best practices bubble to the surface.
It also probably bears pointing out that COVID-19 confirmations are spiking in Florida. The Sunshine State has had back-to-back record days of new cases. Florida is highly unlikely to usher folks back into quarantine, but if it does happen you can be sure that it will be easier for Disney to delay its opening than for folks who just started greeting patrons to shut down their gated attractions. Things can also go the other way in the next four weeks with the outlook improving. Social distancing measures that are restricting operations or the safeguards like face covering requirements weighing on some guest experiences can soften up if the spike in new cases proves to be temporary and associated death rates continue to decline.
Profitability could be easier than you think
Bernstein's Jeunger -- the analyst with the $1 billion-a-month deficit meter running on the closed parks -- recently boosted his price target on Disney. He thinks Disney can cover the incremental fixed and variable costs of running its parks at just 25% of its normal run-rate attendance. In short, running at 25% of its average attendance is enough to hold up as well as where it is right now with its $1 billion-a-month hole. Actual profitability, according to Jeunger, would be when it's operating at better than 60% of its pre-pandemic levels.
There is a lot of confusion within the theme park community when it comes to capacity, especially when folks wrongly take that to mean the same thing as average attendance counts. Florida's Orange County Economic Recovery Task Force is recommending that theme parks initially open at 50% capacity, and Disney will probably offer less than that until it works the kinks out. Profitability in this scenario, or even improving on the $1 billion-a-month deficit, may seem challenging until the eventual 75% capacity phase, but reality is kinder than that.
Disney's capacity is naturally a lot higher than its daily attendance. Capacity is dictated by the amount of people who can physically be in the park according to fire code, and that's the higher figure being used to cap crowds. The Magic Kingdom is the world's most visited theme park, welcoming an average of 57,000 visitors a day in 2018, according to industry watcher Themed Entertainment Association. Trip planning specialist Touring Plans estimates that Magic Kingdom has a capacity of 90,000, a figure that's probably lower with some shows and experiences not reopening this summer but obviously well above the typical guest counts.
However, going with the 90,000 figure because it's out already out there, we find that the Magic Kingdom at 50% capacity -- or 45,000 guests -- would be more than 60% of its pre-pandemic levels. The news gets even better for Disney World's biggest potential crowd eater. Epcot's capacity is 110,000 daily visitors, but it only welcomes an average of just 34,000 visitors -- or 31% of its capacity -- a day. If you're worried about availability on Disney World's new online reservation system, it's a fair bet that Epcot will rarely if ever fill up even if Disney goes with the same 30% capacity limit it initially used for Shanghai Disneyland last month.
Between math that could be kinder to Disney's new normal than investors probably think and the advantage of following instead of leading in the state's reawakening efforts, Disney has a good chance of getting this right. The media giant has time and the experience of others on its side, and that's why its strategy with its theme parks is brilliant.