Paradise lost for Disney's new resort

Disney has fired executives at its $850m Hawaiian mini-theme park and suspended sales of timeshares

There is trouble in paradise for Disney. The company's latest mini-theme park is scheduled to open in less than two weeks, but while Goofy, Donald and the rest of the gang are packing their hula skirts and leis, the bosses back at corporate headquarters just fired the executives in charge of the new venture in Hawaii. Investors are bracing for bad news.

Disney is spending an estimated $850m (£513m) building the Aulani resort and spa on the island of Oahu but to date, it seems, this has been something of a Mickey Mouse operation.

The company has suspended sales of timeshares at the resort after a review of the costs of Aulani, which concluded that the business could be on course for operating losses unless it raised fees. The costs of running and maintaining the 21-acre resort had been underestimated and will outstrip fees from Disney Vacation Club members, according to reports in the Orlando Sentinel newspaper in Florida, often called Disney's local paper because its catchment area includes the Disney World theme park.

Jim Lewis, the president of Disney Vacation Club, the company's timeshare division, was fired last Friday, shocking Disney insiders who had pegged him as a rising star at the company's parks and resorts division. Two other executives are also out. One of them, Jim Heaney, a vice-president of Disney's travel operations, said he was "bewildered" by the decision.

The debacle in Hawaii has enraged the bosses at Disney headquarters because Aulani represents a departure from their traditional mega-theme parks business and a test case for what they hope will be a lucrative new chain of mid-size resorts and spas across the US and beyond. Instead of imposing the company's brand of Americana in carbon-copies of Disney World, the new ventures are meant to tack to the local culture and geography of their surroundings.

At Aulani, guests get all the usual Disney trappings, including the chance to breakfast with Pluto and hang out by the pool with Minnie Mouse, and to watch Disney movies and learn about its animation processes, but other family activities sound distinctly Hawaiian. There are hula dancing classes and, for kids, storytelling around the fire pit, featuring traditional Hawaiian tales. (One, Naupaka, the tale of two youngsters who are torn between their love for each other and the different worlds from which they come, sounds like it could be a future Disney movie.)

Inside the resort, the company boasts, "lava rock rises up through the floor of the grand lobby as dual pools of water cross the expanse: one gently flows with flora while the other rushes wildly through. This Hawaiian philosophy of balance – bright and shadowy, brisk and slow, delicate and coarse – resonates deeply throughout the resort, which reflects not only the nature of the islands but the spirit of its people".

Disney acquired the 21 acres in 2007 and built more than 800 residential and hotel units. It had been marketing timeshares at Aulani for more than a year before putting the temporary halt in place last month. Now, it is in talks with the Hawaiian government to revise paperwork that estimated income from dues at the resort, and has told Disney Vacation Club members they will have to pay more than they were expecting if they sign up from now.

Disney said on Monday that Mr Lewis's replacement would be Claire Bilby, a 23-year company veteran who had most recently been senior vice president of distribution marketing and Asia Pacific sales.

Such turmoil is not unknown for Disney, which suffered a much more financial painful crisis over the opening of Disneyland Paris. After protests from politicians and unions, the park opened to mediocre attendance and went through several senior management changes before becoming profitable for the company.

The parks and resorts division is the second most important to Disney, after its television channels, outstripping even the famous movie studios business. In the first nine months of its financial year, ended 2 July, the division brought in revenues of $8.7bn, up 9 per cent on the same period a year ago. Its operating profit of $1.1bn, up 13 per cent on 2010, accounted for 17 per cent of the total profit for the group.

Michael Corty, an analyst at Morningstar, said Disney's resorts business remains a powerful part of the media giant's appeal to investors. "Its theme parks and resorts are almost impossible to replicate, especially considering the tie-ins with its other business lines. While this business took a hit during the recent recession, we think the company took the necessary steps (mainly by offering volume hotel discounts) to keep attendance and occupancy rates high. Taking a longer-term view, we think the Disney properties will remain popular for years to come."

'Mouse House' rattled by fall in consumer spending downturn

Mickey Mouse may be the face (or at least the ears) of the Walt Disney Company, and investors still use the corporate nickname "the Mouse House", but the adventures of that particular rodent are not what move Disney shares these days.

In fact, it is more likely to be news from the company's network of US and international sports channels, ESPN, that sends the stock up or down, as it did when Disney reported financial results last week.

ESPN did not have the outlay of covering the World Cup football this year, yet its results disappointed because marketing costs and wages all rose, and there was a minor kerfuffle among the analyst community about the company recognising revenue from ESPN earlier than expected, artificially bolstering the latest results but raising questions about the final three months of its financial year.

The media networks division – which includes ESPN, the US network ABC and the Disney Channel – accounted for 70 per cent of Disney's operating profit in the first nine months of this year. Its movie studio was a distant second, accounting for less than 8 per cent.

Disney's shares are down about 12 per cent since the start of the year as investors fear rising costs and the prospect that advertising could be hit by a second downturn. But Bob Iger, the chief executive, put on a Disney smile last week and sounded as optimistic as ever about his main brand.

"Our research shows that each week, almost 107 million people watch, listen, read or log on to ESPN-branded media," he said. "And the average person now spends six hours and 35 minutes with ESPN each week."

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