The next tourism profit machine

The Yukon is a land of big opportunities and even bigger dreams. The flipside is a long list of creeks that didn't pan out, mines that never produced a pound of concentrate and promising businesses that went bankrupt.

The Yukon is a land of big opportunities and even bigger dreams. The flipside is a long list of creeks that didn’t pan out, mines that never produced a pound of concentrate and promising businesses that went bankrupt.

And while mining is famously cyclical, our other big business – tourism – isn’t for timid investors either. Statistics Canada says 30 per cent of small businesses don’t survive five years, and the figure for Yukon tourism businesses is likely higher. Perhaps much, much higher.

Fortunately, the pay-off can be big if you get it right. So let’s summon some pioneer spirit and look at one of our region’s most successful businesses, and see what lessons it holds for Yukon entrepreneurs.

I’ll describe the business, and let’s see how long it takes you to guess who it is. It has revenue of $36 million a year, and a very impressive 50 per cent gross profit margin. Yes, that’s $18 million in operating profit, before taxes and other corporate entanglements.

Its number of customers grew four per cent last year, and it is pretty confident of a similar rise this year. Last year it invested around $7 million to grow the business.

It has 20 full-time and 200 seasonal workers.

I’m talking about White Pass and its rail, tourism and port business, of course. The company is owned by ClubLink Enterprises, which runs 44 golf resorts mostly in Ontario, Quebec and Florida.

It may seem strange to have a golf course company own a tourist railway, but it makes more sense when you think about how the cash pouring out of White Pass helps ClubLink invest in its golf business. Its 2011 annual report highlights, in big letters, how the company simultaneously cut its debt-to-equity ratio and acquired five 18-hole championship golf courses last year.

Despite the global economic turmoil, the business looks like it is on a positive trend. In 2012 it is expecting 355 cruise ship visits in Skagway this year, up 10 from last year. And apparently their “capture rate”- that is, the percentage of cruisers who choose a train outing – is going up too.

For such savvy businesspeople, one wonders why they haven’t put a premium steak house in the neglected but fantastically located Whitehorse train station yet.

Close Brothers, the London bankers who financed the railway during the gold rush, would probably be amazed that it was now catering to cruise ship excursions.

(Readers with a soft spot for London bankers may be wondering how things turned out for the Close Brothers. Don’t worry, even though Whitehorse baulked at its planned name “Closeleigh,” they made their money back by around 1913, according to a history of the bank. After that, in a parallel with today’s ClubLink golf courses, they were able to use the White Pass cash flow for other schemes such as floating diamond dredges in Africa and buying up English gas companies.)

So what enables White Pass to make so much money? It is entirely conceivable that we could be reading headlines like “Struggling northern railway cuts schedule” or “Government considering ‘investment’ in strategic tourism asset” and so on.

The first thing that stands out is the White Pass value proposition. I recently rode the train. The cheechakos were obviously having a really great time as the cars rattled along cliffs and around one scenic corner after another. Only the most surly of teenagers could describe a trip to the summit as “lame.”

White Pass is also unique. No one else is going to build another scenic tourist railway for 1,000 miles. Economists call this “barriers to entry.” This is very different from other tourism businesses. Somebody can easily open another bed-and-breakfast across the street from yours or horn in on your northern lights watching business with a similar looking website.

White Pass also invests in its business. The cars are clean and the trains generally on time. They have also built new passenger cars, improved the track and are putting new engines in their 1960s-era locomotives. You don’t get the impression that the owners think of the business as a seasonal sideline, or are skimping on service or safety.

Finally, we get to pricing. White Pass doesn’t leave much money on the table. The White Pass Summit Excursion, the three-hour tour that 60 per cent of customers choose, is $113. The pricing topic is tricky, since going too far leads to the notorious stories one hears about gouging tourists. On the other hand, some northern tourism operators don’t fully recognize how special their offerings are and under-estimate visitors’ willingness to pay a premium for something memorable.

The $18 million operating profit for White Pass last year is a combination of its strong value proposition, barriers to competitive entry, investment in quality and aggressive pricing. It also helps to be lucky, and to have benefited from the boom in Alaskan cruises over the last decade or two. And White Pass is highly dependent on the cruise lines. But overall, it looks like a great business for ClubLink.

The question is who will build the next northern tourism profit machine.

Keith Halliday is a Yukon economist and author of the Aurore of the Yukon series of historical children’s adventure novels.