Once a Cash Cow, Disney’s Theme Parks Now Weigh on Profit

(Bloomberg) -- As Walt Disney Co.'s cable channels lost subscribers in recent years and the company pumped billions of dollars into new streaming services, theme parks were a steady source of profit.

Last year, operating income at Disney's largest division rose 11% to $6.76 billion, making it the company's fastest-growing profit driver. The results were so strong that Disney promoted parks head Bob Chapek in February to succeed longtime Chief Executive Officer Bob Iger. It's an entirely different story today.

With the company's theme parks shuttered all over the world due to the coronavirus, Disney is expected to report a steep drop in profit when it announces financial results on May 5. Earnings from resorts and consumer products may slump by $500 million or more in the period.

The world's largest entertainment company has many Covid-19-related headaches, including no live sports for ESPN and no theaters to show its movies. Film and TV production has shut down, and its cruise ships are docked. But the parks face a big hit going forward.

With fewer people willing to travel by airplane or take their families to crowded places, Disney's domestic park attendance -- an estimated 83 million visitors last year -- could fall by half in 2020, according to John Hodulik, a UBS analyst who previously recommended the stock. Profit at the division may tumble to just $500 million this year and $200 million the next.

“The lingering effects of the Covid-19 outbreak will be felt for a number of years, and the parks segment is unlikely to regain previous thresholds for profitability until after a vaccine is widely available,” Hodulik said in an April 20 report.

To reduce costs, Disney executives have taken pay cuts, and the company has put some 100,000 workers, mostly park employees, on unpaid furlough.

Life Amid Covid

In an interview last month, Iger, now Disney chairman, told Barron's the company was considering taking guests' temperatures as they enter parks. Beyond that, Disney has said little about when the parks may reopen, what new policies may be put in place or what else the company is doing to control costs. Company executives are likely to face such questions when they discuss fiscal second-quarter results on a call with analysts next week.

There are hints at what the parks business may look like in the near future. Disney reopened the hotels and shopping area outside its Shanghai resort in March. Guests are being screened for fever and required to show a government certification indicating they aren't ill. Visitors must also wear masks and maintain distances from other patrons, according to the park rules.

Disney said Thursday it is selling character-themed face masks in packages of four for $20, with the profit going to a medical-relief charity.

In Florida, where the company has its largest park presence, Walt Disney World President Josh D'Amaro sits on a gubernatorial task force planning for reopening. On Tuesday, the group revealed possible protocols for theme parks going forward, such as using tape every 6 feet to enforce social distancing in lines and encouraging employees over age 65 to stay home.

Protecting Workers

In negotiating furloughs for workers last month, Disney's labor unions won the right to bring staff back based on seniority. That was important, said Eric Clinton, president of Unite Here! Local 362, which represents employees such as ride operators and custodians, because union leaders think staffing levels will be below normal for some time.

“We didn't want managers picking their favorites to come back to work,” he said in an interview.

In California, where Iger sits on a panel advising Governor Gavin Newsom on reopening the state, a date for guests to return could still be a long way off.

While Newsom hasn't specifically addressed theme parks, a reopening plan he revealed on April 28 said concert halls, convention centers and other large entertainment venues are likely “months, not weeks” away. That's particularly hard on an industry that relies heavily on summer crowds.

Rival Comcast Corp., owner of the Universal Studios theme parks, said this week it will lose $500 million in the current quarter if its resorts remain closed for the period. Profit from the division fell 85% in the first three months of the year.

“I think 2020 is going to be write-off season,” said Dennis Speigel, a theme-park consultant in Cincinnati. “We've never experienced anything like that. Not during the Great Depression, 9/11 or even the most recent recession.”