Walt Disney World, Prize Asset, Juggles Highly Anticipated Opening With Capacity Constraints, Caution

Jill Goldsmith
·6 min read

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Walt Disney World, the biggest theme park on the globe and arguably the Walt Disney Company’s most important asset, opened for business Saturday after being shuttered for nearly four months with a swell of hope and twinge of apprehension.

The anticipation has been massive given the symbolic heft of the park, a bellwether for Disney’s recovery, the crippled tourism industry and the nation’s quest to return to a semblance of normality. But it comes amid a COVID-19 spike in Florida, which today reported over 10,000 new cases, following more than 11,000 on Friday.

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“To all who come to this magical place, welcome! On behalf of the entire team here at Magic Kingdom Park, we’re glad you are visiting today,” Jason Kirk, Vice President of Magic Kingdom Park said in a Tweet Saturday morning, urging guests to wear face coverings and practice physical distancing.

CNN and other national and local media are monitoring the open closely, showing a barren parking lot just before 9 am — people needed advance reservations to come today — with increasing activity as the morning advanced but crowds naturally a far cry from pre-COVID throngs due to capacity constraints.

“The reopening of the parks globally is a critical sign of recovery as this removes the largest overhang at the company due to COVID-19,” said Alexia Quadrani, analyst at J.P. Morgan in a note Friday.

The park’s shopping and retail zone, Disney Springs, opened May 20. Magic Kingdom and Animal Kingdom put out the welcome mat today. That will be followed by EPCOT and Hollywood Studios on July 15, the same day Disneyland Paris is set to open. Tokyo Disneyland reopened on July 1, Hong Kong Disneyland on June 18. Shanghai Disney has been open since May 11.

Disneyland’s return has been delayed until California publishes updated guidelines. But the famed Anaheim park’s adjacent shopping district, Downtown Disney, did open last week with fans lining the sidewalk to get in.

Disney’s parks and resorts business is more than a third of revenue, with domestic theme parks about 80% of the total and Walt Disney World an estimated 70% of that, according to Wall Street analysts. Parks are stamped in the company’s DNA. The early chapters of executive chairman Bob Iger’s 2019 autobiography, The Ride of a Lifetime, are all about theme parks – in Shanghai for the proud opening of one, confronted with a crisis at another.

Analysts expect Disney to be strong on safety and don’t truly seem to anticipate the worst – another shutdown. But they don’t neccessarily expect Walt Disney World’s opening to mov the company’s financials yet given lower capacity.

“Knowing Disney, they will be careful. Financially, it will not make a difference,” said one Wall Streeter. Disney shares popped more than 2% Friday on “sentiment,” he said, adding, “It’s a pathway to them getting back to normal. But near term, I wouldn’t be changing my estimates for the September quarter if they open tomorrow or open on October 1. I think it’s rounding errors.”

CEO Bob Chapek said in April that Disney was not aiming to turn a profit in reopening but on making up the incremental cost of doing business, plus a bit. Parks have large fixed costs, even when they stand still, and they will be inflated by the expense of temperature checks and other measures.

“It’s not about breakeven point for profitability necessarily but just making a positive contribution at the net contribution level. So what we’re thinking is that while every site is completely different, that’s the approach we are going to take. And frankly we would not reopen any park unless we can make a positive contribution to that overhead and operating profit level,” Chapek said on a conference call to discuss fiscal second quarter quarter earnings. Parks and resorts took a $1 billion hit to revenue on COVID-19 for the three months ended in March.

Analyst Todd Juenger of Bernstein calculated Disney would generate enough profit contribution to cover the incremental costs of operating the park at about 25% of normal capacity and would need to reach 60% of capacity to break even.

Florida’s Economic Recovery Task Force set theme park capacity limits at 50% initially but J.P.Morgan’s Quadrani expects Disney will reopen to more limited capacity of about 25% and increase attendance gradually.

“While not impossible, we don’t believe a second shutdown is likely given the steps taken to reopen. We also expect the theme park to see pent up demand; Disney World began taking advance reservations on June 24, with initial slots sold out in minutes. We expect initial attendance to be driven by Florida residents and annual pass holders, along with domestic visitors in driving distance,” she said.

Pass holders generate lower revenue, analysts noted. And international visitors generally spend more. John Hodulik of UBS noted that the bulk of Walt Disney World’s normal yearly traffic comes from out-of-state domestic (55%-60%) and international travelers (20%). About 20%-25% of attendees are from in-state.

At smaller Disneyland in Anaheim, a rebound could be faster because the bulk of traffic there (over 50%) typically comes from in-state residents.

Walt Disney Word has been closed since Mach 16. Its opening will gauge pent up demand for amusement versus fear of the virus, face masks in a Florida summer and the fact that many people are poorer now than they were pre-COVID. Thousands of furloughed park workers, however, will be once again employed. (Seven unions, except the Actors’ Equity, which rejected safety protocols, are sending people back to work.)

Bernstein, in his note from June 11, addressed the issue of re-closing. “At the time we are writing this report, the market seems to be indicating it believes a very low probability of that happening… But the probability has to be greater than zero, and many investors tell us they believe that risk is much higher than the market is currently recognizing.”

Disney itself seems to recognize the possibility, he noted, “given the massive amount of liquidity it has raised and suspending its dividend.”

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