Research reveals how ski tourism operators can protect profits despite climate change

February 17, 2020

Research by Cass Business School academics has presented a methodology for identifying how winter tourism operators can protect themselves against the risk of decreasing visitor numbers to ski destinations and lost revenues.

Due to the effects of climate change, ski tourism in the Alps is becoming endangered by decreasing levels of snow caused by rising winter temperatures.

Focusing on the use of weather derivatives as a means of revenue protection, the study uses a series of models to design useful weather derivatives payoff - where operators 'sell' risk to financial markets for a premium - by predicting visitor numbers and revenues in a given month. The methodology is based on more than 50 years' worth of snowfall and temperature data recorded at a resort in Austria.

Highlight findings from the report include:Figures from the study included 20,774 historic daily weather observations of Sonnblick, Austria, from the European Climate Assessment (ECA), with the assumption that a ski season runs annually from 1st December through to 15th April.

A '100-day' rule is used as a critical threshold for visitor numbers, with the study considering 30cm of snow for at least 100 days during the winter season as a minimum requirement for testing reliability of ski operations.

Co-author Dr Laura Ballotta, Reader in Financial Mathematics at Cass Business School, said the report's findings should encourage ski tourism companies to purchase weather derivatives and think more strategically about the risk involved:

"Treatment of premises through artificial 'snowmaking' and landscaping is costly and could release potentially harmful additives into the environment. Diversifying activities beyond traditional ski and snow sports activities can also have expensive investment costs, so we believe that accessing financial markets for weather derivatives and sharing risk is the most viable option.

"Winter tourism is vital to Alpine regions, not just in terms of snow sport facilities but also accommodation, catering, entertainment and retail opportunities that come with it. Higher temperatures are reducing snow levels each year, which could have major ramifications on tourism to an area that depends so heavily on the revenues it generates.

"By using our methodology based on more than 50 years' worth of snowfall and temperature data, companies can optimise weather derivative contracts to protect themselves from financial ruin if snow levels are insufficient."
'Risk Management of climate impact for tourism operators: An empirical analysis on ski resorts' by Laura Ballotta, Gianluca Fusai, Ioannis Kyriakou, Nikos C. Papapostolou and Panos K. Pouliasis is published in Tourism Management.

Read the full paper here.

City University London

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