23.8.09

OPPORTUNITY COSTS. On a summer road trip, I caught a snippet of a radio report on Six Flags filing for bankruptcy that I thought mentioned something about the park's real estate holdings losing value. It's possible that capital losses contributed to the bankruptcy, but the simpler explanation might be a strategic mistake by management.
[Chief executive Mark] Shapiro, who is 38 years old, says he wants to attract a family crowd with more modest roller coasters and kiddie rides. The new Dark Knight coaster at Six Flags Great Adventure in Jackson, N.J., tied to the latest Batman movie, cost about $7.5 million to build, compared with $20 million or so for giant coasters such as the Goliath, in Georgia. Its top speed is just 30 mph, less than half of Goliath’s top speed. It’s housed in a dark building, which makes it harder to notice how much smaller it is than its high-octane competitors.
This defeat has several fathers.

Washington Redskins owner Daniel Snyder, whose investment company was a large stockholder, began pushing in 2004 for Six Flags to bring in new management, sell off some parks, and begin going after families rather than thrill-seeking teenagers.

In 2006, after cleaning up its parks and adding some new rides, management raised admission prices by $5 to $10, driving the ticket price to as high as $40 in some markets. But attendance dropped below 25 million in 2006, from 28.7 million in 2005. “Our lack of pricing power was really a big surprise to me,” says Shapiro.

In 2006 and 2007, Six Flags sold 10 parks and a 100-acre lot in Houston for about $400 million, hundreds of millions less than anticipated, according to [Jeffrey] Speed, the company’s CFO. Snyder had set a goal of trimming debt to less than $2 billion. But with the real-estate proceeds going to finance operations, the debt remained at $2.4 billion. Rivals such as Cedar Fair and Universal City Development Partners, whose theme parks include Universal Studios Florida, carry much smaller debt loads relative to their cash flow.

Shapiro hasn’t wavered from his view that the old amusement-park formula — build bigger and better roller coasters as often as possible — isn’t a moneymaker. He says he’s not overly interested in the typical teenage fans of such rides, who were once Six Flags’ best customers. He is courting parents, young children and corporate groups, and is emphasizing rides tied to movies and cartoon characters, which can generate T-shirt and sweatshirt sales.

There's probably a case study in failing the market test here.

In 2007, Six Flags sold off seven additional parks.

The company still has not reopened its New Orleans theme park, which it claims suffered substantial damage caused by Hurricane Katrina in 2005.

Scott Rothbort, a New Jersey-based investment adviser and professor of finance at Seton Hall University's Stillman School of Business, says Six Flags may indeed need to sell off some parks.

"It's just a bad business model," Rothbort says, summing up Six Flags' ongoing struggles.

"None of this surprises me," says [International Theme Park Services president Dennis] Speigel about Six Flags' planned cuts.

Nor would he be especially surprised if Fiesta Texas or the real estate beneath it were eventually sold.

Perhaps real-estate speculation is inherent in accumulating amusement park holdings. Particularly in the north, an amusement park (like the nearly-vanished drive-in theaters) generates a great deal of activity for only a few months, but its land has the potential to generate activity all year around. Consider Great America in Gurnee, close to several outlet malls, a major metropolitan area, and just outside the Lake Michigan watershed. I'd be surprised if somebody isn't contemplating what an office park (perhaps catering to retailers?) might do on those grounds. Many trolley parks near large cities became subdivisions years ago, if subdivisions bereft of rapid transit service to the central business districts. An American Profile article on one of the last kiddielands explains the dynamics.

Bartlesville's Kiddie Park is one of 14 such parks that endure across the nation. About 200 were in operation during their post-World War II heyday, according to Jim Futrell, historian for the National Amusement Park Historical Association and author of several books about the history of amusement parks in America.

As soldiers returned home and started families and people moved to the suburbs, the demand for family entertainment led to the development of amusement parks with small-scale rides for children. The Allan Herschell Co. in North Tonawanda, N.Y., sold entrepreneurs a ready-made package of rides designed for children.

Most of the parks were short-lived, though, because they catered only to families with small children and were located on prime real estate. "They quickly fell out of favor and were largely gone by the 1970s," says Futrell, 44, of Bethel Park, Pa.

Rising land values contributed, but hidden in that fell out of favor might be a change in attitudes toward children, those years being the era of The Population Bomb and other environmental excesses, Rosemary's Baby and related cultural excess, the onset of no-fault divorce, and the workings of the Say Aggregation Principle on stay-at-home parents.

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