Bright LV economy dims a little bit in latest year

Gary Thompson

Tuesday, Aug. 12, 1997 | 9:59 a.m.

The latest casino win figures and signs of a spreading price war don't bode well for Las Vegas, analysts and educators say.

But any widening impact of a business slowdown would be felt less by new, full-service resorts offering a variety of attractions than by older casino properties and a few highly leveraged gaming companies facing cash-flow woes.

It would be felt by casino workers and their creditors, as well. Though most casino companies publicly deny rumors of widespread layoffs, some privately acknowledge they've cut back the hours of large numbers of workers at a few off-Strip resorts.

If the reduced paychecks continue for long, a ripple effect could spread through the business community, affecting car dealers, banks, home builders and others -- including the gaming companies themselves -- whose customers include casino workers.

"Las Vegas has a long history of phenomenal resistance," noted William Eadington, director of the University of Nevada, Reno's Institute for the Study of Gaming.

But he says the latest gaming-win figures aren't good news. They show that, while the state's casinos won a record $7.57 billion in the fiscal year ended June 30, that was up just 0.7 percent from fiscal 1996. On the Strip, the year's win slipped 0.2 percent, including a 1.2 percent drop the final month of fiscal 1997.

The disappointing results came despite a double-digit jump in room inventory and a 4.1 percent rise in visitor volume for Las Vegas during the year.

"Non-baccarat gaming on the Strip declined $3 million, or 1.1 percent, in June," said analyst Dave Ehlers of Las Vegas Investment Advisors Inc. "The fact is that in recent months there's been no growth in Strip gaming revenue except for baccarat.

"This is particularly discouraging in light of the fact we have 10,000 more hotel rooms than last year and there's no growth in airport visitor volume."

One reason for the latter indicator, Ehlers and Oppenheimer & Co. analyst David Wolf says, is that airline economics are working against Las Vegas.

For months, Ehlers has been warning that airlines are earning less per seat mile on flights to Las Vegas and are therefore allocating planes to more profitable routes.

"McCarran has fewer seats coming into the market this year than last because air carriers are substituting smaller planes for the big wide bodies," Wolf said. "It's difficult for gaming operators to produce good results when they can't bring their optimal customers in.

"Visitor volume may be up, but it's mostly highway traffic. And the best customers are the distance travelers who fly in the from East, the South, the Midwest for an extended stay.

"If you try to bring Southern Californians from the beaches to the desert in the middle of summer, you better be offering them a heck of a deal."

Some resorts have been doing just that -- to their detriment. Room prices have been slashed, particularly during mid-week, at several Strip resorts. But some still have seen occupancy rates fall far below historical norms. And that can be troublesome for resorts that earn as much from nongaming revenue sources as from tables and slot machines -- especially if they're saddled with debt.

Others, especially some casino operators that cater to locals, have extended the marketing war kicked off by Stratosphere Corp.'s aggressive casino product pricing last fall. And that could be as harmful to Southern Nevada as it was in Atlantic City and Reno when casino operators in those locales tried similar strategies.

"For the most part, Las Vegas has been very successful in avoiding price competition as opposed to competing through product differentiation," said Eadington. "But in the last year, you've seen some cracks in the dike.

"Buying business that way is what economists refer to as cutthroat competition. And if everyone does it, you might not expand the volume of business enough to overcome the negative costs."

Wolf says some of the locals-oriented operators have become "very aggressive in their moves to get customer counts up." A few are offering customers $50 in extra coin for a $100 buy-in, while others are offering bonus bets, buffet bargains and other costly lures.

Dealers say many savvy customers cash in on the giveaways without gambling, making the marketing gambits losing propositions.

"That's traditionally a bad way to do business," Wolf said of the attempts to buy customers. "It benefits nobody."

Eadington cites two other reasons to be concerned about the flat results -- "the fact the economies in California and the country as a whole are so strong, and the fact there's so much new casino-hotel supply in the pipeline that will be coming on stream in the next few years.

"If, in fact, market saturation is starting to show and all this supply is coming on line, it will create tremendous pressures on the properties on the lower end of the spectrum. They'll have trouble competing on quality, rather than price, because the new properties will have so much more to offer."

And if they have to cut prices much lower, margins may fall below the point where highly leveraged companies can service debt. That's what happened with Stratosphere, and some analysts say a few other operators may face a similar fate.

"When a slowdown begins, it won't go away overnight," said Salomon Brothers analyst Bruce Turner, who predicted Stratosphere's bankruptcy filing months before it happened.

"It's going to be a tough summer. Hey, it is a tough summer."