COVID-19 decimated Disney’s Parks, Experiences and Products (PEP) division causing a 35% drop in revenue from $26.2 billion in FY19 to just over $17.0 billion in FY20. We anticipate revenue could fall up to 20% further in FY21 due to second and third outbreaks in some of its biggest markets including Europe and Japan, and with ongoing physical restrictions being mandated in other large markets including China and Hong Kong. However, we believe several factors see PEP well-positioned to benefit from a recovery in FY22 and beyond.
Reaching herd immunity
Vaccination rates in the US are advancing more rapidly than originally projected. US President Joe Biden exceeded his original vaccination target of 100 million doses in his first 100 days in office, recently announcing that more than 220 million doses were administered over that period. The daily rate has also accelerated to over 3 million jabs per day as more vaccines become available and distribution sites increase.
Over 80% of seniors have received at least one dose, lowering the death rate of the most vulnerable by 80% compared with January levels. In fact, 55% of the adult population have received at least one dose and 30% of adults have been fully vaccinated. At the current rate, the elusive herd immunity figure of 70-90% may be achieved by the end of the American summer, as some models predict (see below). These rates are important to monitor as many states have tied their reopening efforts to the effectiveness of the vaccine rollout, including California, where some of Disney’s largest attractions are located.
The CDC has recently relaxed face mask, travel and other mandates for fully vaccinated adults and other public entities are following their guidelines closely with states, counties and cities amending their own policies in lock-step. A more assured sense of their health and welfare as well as unrestricted mobility and improved comfort could be a catalyst for a surge in travel by US citizens this summer.
Post pandemic travel in the US
Disney’s theme parks and attractions remained closed for much of 2020, though most have since reopened at reduced capacity. In the initial reopening phase, capacity was capped at 25% due to social distancing but improvements in operations, health and hygiene measures, and creative enhancements in industrial design have increased this limit to 35%. While travel bubbles are being discussed between the US, Europe, Canada, Mexico and other countries, it is likely US tourists will prefer to travel domestically where it is still safer to do so. Further, unrestricted mobility at home and no requirement for face masks will also provide for a more ‘normalised’ tourist experience; comfort and convenience are important when travelling.
Three-quarters of Disney’s PEP revenue is earned domestically, so a successful reopening to domestic travellers may offset much of the international tourism lost while borders remain closed. Before COVID Americans took approximately 2.3 billion domestic trips each year and around 93 million trips abroad, while inbound international tourism was reached around 80 million. In any case, tourists from Europe and the Americas account for the majority of annual tourist inflows into the US, meaning discussion around potential travel bubbles with these regions could provide further upside.
Pent up demand
Looking forward, if the US reaches herd immunity by the end of the summer and the CDC removes all physical distancing and face mask restrictions later this year, it could become a significant catalyst for theme park attendance and Disney’s valuation. In 2019, almost 156 million people visited one of Disney’s parks or resorts with around 56 million of these at a single venue: Walt Disney World in Orlando. Pent-up demand for travel and leisure activities is expected to lead an economic recovery, and Disney’s CEO, Bob Chapek, has repeatedly emphasised that demand for theme park attendance has far outpaced supply at the venues since they’ve reopened, albeit at reduced capacity.
The company also has a four-ship vacation cruise line business, with three new ships expected to be added in 2022, 2024 and 2025 respectively. Consumer surveys for cruise line cancellations in 2020 also pointed to excess demand. Given the option of cash refunds or discounted credits for future bookings, the overwhelming majority of travellers chose the latter – a very optimistic sign for the industry. Furthermore, with widespread vaccine rollouts across the globe, cruise lines are selling out cruises for the second half of 2021 out to 2023, in many instances setting booking records and outstripping pre-pandemic levels according to Travel Weekly.
Disney operating improvements
Disney has optimised its operations meaningfully since the pandemic began, to run much more efficiently. Enhancements in industrial design have reduced waiting times at rides while ensuring physical distancing measures are enforced. Improvements to Disney’s Genie app, which has been widely adopted, allows visitors to organise, manage and change every aspect of their trip both in advance and on the go, with real-time support.
Other changed behaviours such as increases in online bookings, mobile food ordering and cashless payments have not only provided a safer environment for visitors during the pandemic but also offer margin expansion opportunities for PEP over the longer-term. Optimisation across many functions including human resource management, inventory management, marketing functions and more offer operating leverage opportunities once capacity constraints are removed.
With the US vaccine rollout, significant pent-up demand for travel, and improved operations, Disney’s parks are positioned to contribute significantly to the company’s overall valuation in the coming years.