The Walt Disney Company (DIS) has announced that it is eliminating annual passes to Disneyland and the adjacent Disney California Adventure Park in Anaheim, California. Walt Disney World in Orlando, Florida, is allowing existing pass holders to renew while halting sales of additional passes. These decisions are driven by analyses showing pass holders to be among the least profitable visitors to these theme parks, combined with state-mandated restrictions on attendance in response to COVID-19.

Disney's California parks remain closed at this time, while its Florida park reopened in the summer of 2020 with attendance capped at 35% of normal capacity, a restriction that is still in force. When the California parks eventually reopen, Disney apparently expects that they also will operate for a significant period of time under attendance limits.

  • Disney finds that annual pass holders are among the least profitable guests at its U.S. theme parks and contribute to overcrowding.
  • Controlling attendance is key to getting its California parks reopened and possibly to having attendance caps raised in Florida.
  • Thus, Disney is eliminating passes in California and halting new issuance in Florida.
  • Passes issued in the future may come with more restrictions on use.
  • Dynamic pricing may reduce crowding while boosting entrance fees.

Why Pass Holders Are Less Profitable

The holders of annual passes to the aforementioned Disney theme parks are mainly local residents who tend to spend significantly less on food and merchandise than visitors from afar. Additionally, these pass holders are, as a result of living nearby, highly unlikely to book rooms at the Disney-operated hotels associated with these parks. Moreover, despite rapid escalations in the prices of passes over the years, the effective entrance fee revenue per visit from pass holders often works out to be significantly less than the daily or multi-day fees paid by other visitors.

Meanwhile, especially at the California parks, which have an estimated 1 million pass holders, pass holders add to overcrowding, which diminishes the experience for the more profitable guests. As a result, a number of these preferred visitors become less enthusiastic about returning in the future.

The issue faced by Disney with respect to pass holders thus is the opposite of a key dynamic in health club and gym economics. These businesses rely heavily on signing up large numbers of members who, after an initial burst of enthusiasm, eventually use the facilities infrequently. This bolsters revenues while not creating overcrowding that spurs offsetting membership cancellations.

Significance for Investors

The COVID-19 pandemic has cut both ways for Disney. On the one hand, it has increased the number of people staying home and looking for entertainment options there. This, in turn, has created a positive environment for the Disney+ video streaming service, which is enjoying robust subscriber growth far in excess of the company's projections.

On the other hand, Disney's Parks, Experiences and Products segment, which also includes, among other things, Disney's cruise ships, has suffered massive drops in revenue, swinging it from robust profitability to losses. To stem the red ink, Disney already has announced significant layoffs in this segment.

As described above, the decision to eliminate or curtail the issuance of passes is an attempt to boost revenue, although any significant positive effects are unlikely to be seen until the California parks reopen and attendance increases at the Florida park. Also, it is apparent that Disney has invested in data collection and analysis regarding its theme park visitors, which indicates sophisticated management practices.

Eliminating or restricting the issuance of passes also allows Disney to control access to its parks better than before and thus may help to speed the reopening of its California parks. After reopening, attendance caps mandated by government in response to COVID-19 are likely to persist for some time.

Looking Ahead

Resort officials at Disney's California parks have indicated that replacement programs for annual passes are under development. In Florida, theme park experts believe that sales of new passes are unlikely to resume before 2022, and when they do, they probably will have restrictions on usage to avoid overcrowding on peak days. In this vein, some observers speculate that Disney may experiment with dynamic pricing, with entrance fees floating in response to anticipated or actual fluctuations in daily supply and demand.