July 9, 2008
Las Vegas Left Wondering Where the Tourists Are
By Benjamin Spillman, Las Vegas Review-Journal
Jul. 6--Nicolas and Juanita Cignetti are bringing down Las Vegas just as they built it, a little bit at a time.
Now gasoline costs more than $4 a gallon and the Cignettis aren't planning a return to Las Vegas, choosing to stretch their money further at an Indiana riverboat casino or a West Virginia hotel-casino. With airfares rising, the national economy declining and Americans cutting back on everything from road trips to restaurant meals, Wall Street is fearful that middle-class vacationers like the Cignettis who helped fuel the rise of modern-day Las Vegas are ready to turn their backs on Sin City.
"We are just going to hang tight until we see some relief," said Nicolas Cignetti, 72. "I can wait until prices come down and, if they don't, so be it."
He said the couple last visited Las Vegas in March and paid a combined $412 for round-trip fares from Cleveland. When he checked prices for a return trip in May the fare was more than $400 each, twice what the couple was used to paying. So he balked.
Instead, they will catch a bus from Canton to Indiana for an overnight trip to the riverboat casino that costs $84 per person, including two dinners. Or, they'll drive 67 miles to Mountaineer Casino Racetrack, where a room costs $59 a night and comes with food coupons worth $20.
"There is nothing that is going to compare with Vegas," Cignetti said. "But the point here is, with what it costs now to go out there, I'm happy with going to Mountaineer."
Forecasting the demise of Las Vegas is a game that's as tired as puns on the city's ubiquitous "what happens here, stays here" advertising slogan.
But for the first time in recent memory, two benchmark indicators of the health of Las Vegas, the number of hotel rooms in development and airline seat capacity at McCarran International Airport, are moving in opposite directions.
According to the Official Airline Guide, seat capacity at McCarran is expected to decline 12 percent in the fourth quarter. Meanwhile, the number of available hotel rooms on the Strip is expected to increase 18 percent by the end of 2009.
That has investors wondering how resort operators intend to maintain the 90 percent occupancy rates to which they've grown accustomed with fewer available airline seats for customers and drive-in traffic slacking off as gasoline prices approach $5 per gallon in parts of Southern California, the No. 1 source of Las Vegas visitors.
"In our opinion, this could not come at a worse time for Las Vegas," Wachovia analysts Brian McGill and Denis Kelleher wrote in a note to investors. "With the cuts in airline capacity, we do not think there will be enough seats to fill the new room supply."
The circumstances are weighing heavily on resort stocks.
The average daily share prices for MGM Mirage, Las Vegas Sands Corp. and Wynn Resorts Ltd. all sank in May. MGM shares were down 7 percent, Las Vegas Sands dipped 4 percent and Wynn Resorts fell 2 percent. Shares in all three companies are trading near 52-week lows.
News of impending airline cuts won't help.
The projected cuts slice deep into the core markets for Las Vegas. According to the Official Airline Guide, service between Las Vegas and Los Angeles will drop 8 percent. Service from the Bay Area will drop 9 percent. Phoenix service will drop 15 percent and the declines for Honolulu and Dallas will be near 30 percent.
"They are worried," said Tom Parsons, CEO of BestFares.com, of the airlines. "You have to be worried, too, in Las Vegas. You are truly a discretionary city."
At least customers in major markets will still be able to book direct flights to Las Vegas.
Customers in smaller cities are seeing flight options drastically reduced and fares rising dramatically. In some cases they are losing air service altogether.
Late last month Air Midwest, an affiliate of Mesa Airlines and US Airways Express, ceased operations in Ely, leaving the mining town in White Pine County without commercial air service.
Great Lakes Airlines of Cheyenne, Wyo., had been scheduled to take over routes from Ely but backed out because, an airline spokeswoman told the Ely Times newspaper, it would require more federal subsidies to make service financially sustainable.
"Basically, it is taken off the board," said Ron Williams, manager of the Ely airport.
Ely isn't alone. Across the nation, airlines are cutting small-town routes to focus resources on major routes. That means fewer choices for rural residents who might want to visit Las Vegas.
"They are going to have to get in their cars and travel to an alternate airport," Parsons said.
Whether the service is from small towns or major markets, the projected 12 percent decline at McCarran doesn't mean Las Vegas will lose 1.7 million customers next year, the number of lost seats in the fourth quarter times four.
A major portion of the cuts will come from connecting flights operated by US Airways and others. Phoenix-based US Airways plans to trim Las Vegas service by 20 percent beginning in August.
However, 51 percent of the seats it will cut are on connecting flights, which means they are on flights with customers who aren't getting off here anyway. That means they won't be missed by resorts.
There's also a chance airlines will simply squeeze more people onto the remaining flights.
Southwest Airlines, the carrier with the biggest presence at McCarran, has plans to keep growing service in Las Vegas and operates flights at about 75 percent capacity, meaning its planes have room for passengers bumped by competitors.
"The (Official Airline Guide) has never been a tool we use for a guide," Rosemary Vassiliadis, deputy director of aviation for Clark County, said of the guide's projections. "What we look at is load factor."
Deutsche Bank analyst Bill Lerner concurred.
Lerner, who is based in Las Vegas, said the Official Airline Guide's projections make it easy to overstate the impact.
"The point is there is excess capacity, so there is room to cut without meaningfully impacting visitation to Las Vegas," Lerner wrote in a note to investors.
Cuts by the so-called legacy carriers also provide opportunities for other airlines.
Las Vegas-based Allegiant Air has posted double-digit growth even as the industry is reeling by targeting small towns with little competition and by bundling airfare with hotel rooms.
There is also potential to offset the domestic cutbacks with service from foreign countries.
The Las Vegas Convention and Visitors Authority recently overhauled its foreign outreach program in an effort to boost the international segment of Las Vegas visitors from 12 percent to 15 percent by the end of 2010.
The authority will spend about $18 million next year on marketing and outreach in other countries, including marketing subsidies for foreign airlines that agree to serve Las Vegas.
Changes to federal government policies already in the works are expected to increase the number of Chinese and Korean visitors.
The weak dollar also encourages foreign visitation.
"With the devaluation of the dollar, it is like America is on sale for them," said Kathy Anderson, travel and tourism manager for General Growth Properties, which owns Fashion Show mall on the Strip and malls in The Venetian and Palazzo hotel-casinos. "It actually ends up paying for their vacation."
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