The end of Euro Disney’s white-knuckle ride?

After years of financial struggle, say Christian Sylt and Caroline Reid, the Paris theme park has finally found a path to profit — just as the European economy hits a downturn Disney and happy endings go hand in hand. But after 16 years, shareholders in Disney’s theme park near Paris are still waiting for their frog to complete its transformation into Prince Charming. In November, Euro Disney is set to announce its first net profit for more than five years — a success achieved not by pixie dust but by hard, old-fashioned graft.

Despite an economic slowdown in Europe, things have never looked better for Mickey Mouse’s maison secondaire. Attendance is at record levels and its parks are brimming with new attractions. But perhaps its biggest strength is that after years of ups and downs, Euro Disney’s management has figured out how to make its business model work. The days of needing a fairy godmother are over.

Few corporate rollercoaster rides have been as wild as Euro Disney’s. For an enterprise built on magic, it has been blighted by bad luck. The original resort — theme park, 27-hole golf course and seven themed hotels with 5,800 rooms — opened to great fanfare in 1992. It was Europe’s second biggest building project, and from the start it was saddled with the equivalent of €3 billion of debt. The skies soon clouded over.

The opening day crowds, expected to number half a million, failed to materialise. Reportedly just 50,000 people had passed through the turnstiles by the time they closed. Then came the onset of recession: in 1993, Euro Disney made a net loss of €814 million and faced bankruptcy. But it was saved by a real prince, charming or otherwise, when Saudi investor Prince Alwaleed invested €263 million. In 1994, the park’s name was officially changed from Euro Disney to Disneyland Paris, to expunge its old reputation — and, so it was said, to avoid the then negative connotations of the prefix ‘euro’. For better or worse, the operating company retains the original name.

But the biggest impact on the bottom line came from reduced ticket prices and a refinancing which gave the park enough new capital to open a blockbuster ride called Space Mountain. Disneyland Paris became Europe’s most visited theme park and in 1995 it began a run of seven profitable years. Such was its success that a second park was built next to the fairytale original. The €610 million movie-themed Walt Disney Studios was meant to cement Euro Disney’s comeback — but bad luck struck again. The huge overheads of running two parks swelled operating costs just as a tourism recession followed 9/11 in 2001.

Only at Disneyland could lightning strike twice. In 2005 the company was saved yet again by a restructuring and a rights issue, providing another €250 million to invest in more attractions after three years of no new rides. Alwaleed personally put in €25 million, diluting his stake to 10 per cent, with 50.2 per cent of the shares floated on the Euronext market in Paris, and the rest held by Walt Disney Company. At last the scene was set for the long-awaited happy ending.

‘Following the restructuring in 2005, the management started looking at a segmentation of the business to understand in every market what our target is... and how we approach marketing in every country,’ says Ignace Lahoud, Euro Disney’s chief financial officer. The study revealed three perceived barriers: the stress of making travel arrangements, the price of entry, and the age of children. The latter was particularly significant since families are Disney’s target market, but the study showed that ‘European families with kids under five thought it was too early for them to bring their children,’ explains Lahoud. To turn this around the marketing team created a package offering hotel accommodation and park passes free to children under seven. Park passes are now included with every hotel package, and a two-day park ticket can even be upgraded to annual access for just €32, so the barrier to entry really is as low as it could be. But this was just the first step.

‘One of the findings... was that we need to create a sense of urgency,’ says Lahoud. The resort’s 15th anniversary was an obvious excuse for a year-long celebration. But by then the Studios park was desperately in need of some TLC. When it was commissioned in the late 1990s, Euro Disney’s fortunes had not improved sufficiently to fund a large-scale development. Disney’s design wizards, known as imagineers, took the approach of mimicking a working film studio — which boiled down to a lot of plain, identical buildings housing just nine attractions, compared to 43 in its sister park.

But for last year’s celebrations, the park got a new area themed on Disney’s newest digital characters. The centrepiece is an innovative rollercoaster based on the hit animated film Finding Nemo. To appease kids and thrill-seekers alike, the coaster cars spin in the dark past detailed sets from the film complete with high-tech projections which make the cartoon characters appear to float alongside the track. Meanwhile, marketing expenses increased sharply as Euro Disney rolled out a global ad campaign to trumpet the anniversary.

It worked. Last year both parks pulled in a record 14.5 million guests — a 13 per cent increase year-on-year and well over double the 6.8 million who visited the park in its first year. The resort now attracts more visitors than the Eiffel Tower and the Louvre combined, and 44 per cent of all its visitors are French.

Naturally, increased attendance brought a new sparkle to the finances. Revenues for 2007 rose 12 per cent to €1.2 billion and the business made an operating profit (that is, before interest and tax) of €51 million, its first in four years. Behind this was an increase in hotel occupancy to more than 89 per cent — compared to average occupancy for all hotels in Paris last year of 79 per cent, according to consultancy firm TRI Hospitality.

However, Euro Disney still clocked up a net loss of €42 million, due to interest charges on its remaining €1.9 billion of debt. The debt has put pressure on its share price as well as its balance sheet. So, despite sitting on assets worth €2.9 billion, Euro Disney’s market capitalisation is just €337 million. Climbing this debt mountain requires a more sophisticated strategy than just bringing in more guests, and Disney’s business model has matured accordingly.

With 12,850 staff and massive fixed costs, Euro Disney cannot turn a profit from ticket sales alone. Merchandise and catering are also important profit centres. Until recently, Disney’s strategy had been to bring in as many guests as possible for as long as possible, since those staying several days are more likely than day-trippers to dine on-site and take souvenirs home. But with occupancy now so high, and demand even outstripping hotel-room supply in the busiest periods, this strategy has evolved. Having previously offered ‘a third night free’, Disney is now trying to maximise returns on longer hotel stays. As Lahoud explains: ‘There is lots of demand and people are willing to pay the premium. Therefore I would rather favour people who are willing to pay more and renew the rooms. So an average length of stay between two and three days is the sweet spot for us.’ The strategy is bearing fruit. At the end of June, Euro Disney announced that revenues for nine months of the current financial year had increased 12 per cent to €937 million. A 7 per cent increase in average spending per hotel room was attributed to higher room rates and fewer promotional offers. With the strong summer period remaining — and if the weather is kind — the company should post a net profit for the year and perhaps another record attendance, somewhere between 14.5 and 15 million.

Lahoud has had a helping hand from the imagineers too. Earlier this year the €250 million investment programme was completed with the launch in the Studios park of the Tower of Terror, a flagship ride like no other in Europe. Almost 200 feet tall, the Tower of Terror is themed as a faded Hollywood hotel. Inside, guests are strapped into seats in a mock-up of a service elevator that climbs up the building through mystical scenes using high-tech projections to tell a story of disappearing tourists. At the peak of the ascent, a giant window opens to reveal the surrounding Paris countryside and the parks below — before the guests are forced down 13 storeys faster than the speed of gravity. Colourful façades of classic Hollywood buildings were added to the buildings in the park surrounding the Tower — plus a bafflingly high-tech show where guests interact with computer-generated Disney characters.

Now comes the challenge of keeping up momentum. ‘Whilst celebrations create a sense of urgency, this same celebration also has a limited life span so we need to come up with new things,’ admits Lahoud. New attractions will require funding, but ‘our plan is to fund all attractions in the future with our selfgenerating cash’. Given that the largest profit ever made by Euro Disney was €44 million, it could take some time to generate enough capital. ‘The challenge is coping with the debt and growing the business,’ explains Lahoud.

As for the credit crunch, ‘we need to be cautious, depending on how the economies of the bigger markets start acting. Fortunately we have not seen any impact from rising fuel prices.’ So although the economic situation is worsening, the theme park’s luck seems to be changing for the better: the Parisian Mickey Mouse has finally grown up.