Gaming industry facing challenges

Gary Thompson

Tuesday, Dec. 9, 1997 | 9:59 a.m.

A somber, cautious mood prevailed as the heavyweights of gaming convened to discuss the industry's future.

Questions about market saturation, choked transportation arteries and punitive legislation permeated the opening sessions of the three-day American Gaming Summit that got under way at the Las Vegas Hilton Monday.

Hilton Hotels Corp. Gaming Division President Arthur Goldberg, perhaps mindful of the surprise earnings announcement his company would make later in the day, predicted that "The No. 1 question you'll hear at every presentation will be: is Las Vegas overbuilt?"

After the stock market closed Monday, Hilton announced that a sluggish gaming market and problems in Las Vegas and Louisiana would keep fourth-quarter net income for the gaming-and-lodging giant far below the 37 cents a share widely expected by financial analysts.

Responding to Hilton's announcement that earnings would be in the mid to high 20-cents-a-share range, Salomon Smith Barney analyst Bruce Turner said, "It does appear that gaming's absolute growth has been softer than anticipated."

In Beverly Hills, Hilton President Steve Bollenbach said the company's hotel business will post record results, but "The Las Vegas and Atlantic city markets have not performed to expectations."

Hilton also said it would take a one-time charge of 27 cents to 29 cents a share related to losses at its Kansas City and New Orleans casinos and its unsuccessful pursuit of ITT Corp.

A cautiously optimistic Goldberg noted that Las Vegas hotel-casinos still enjoy 90 percent occupancy rates despite slowing tourist growth.

"With everything I've seen on the drawing board, this market is very safe and very secure," he said.

But, said Goldberg, "I'm very, very concerned about the macro issues," including narrow margins nationwide and the possibility of punitive measures arising from the National Gambling Impact Study Commission.

"We could get taxed out of business just like the cigarette industry," he said. "If we don't have someone we can talk to, we don't have a shot."

One Congressional friend of gaming, Goldberg said, is Sen. Robert Torricelli, D-N.J., who sounded a few warnings about traffic problems afflicting Atlantic City and Las Vegas.

"I'm convinced transportation is a key question of our future," he said. "We have to be offensive in making sure the infrastructure is there to serve our customers."

Torricelli slammed industry opponents, saying 92 percent of Americans believe gaming is "a worthwhile and acceptable form of recreation."

He said a small but vocal group of opponents have proposed anti-gaming legislation that failed "because we've built a very broad and powerful coalition" that includes casino employees and local politicians who understand the industry's economic benefits.

MGM Grand Inc. Chairman Terry Lanni said recent negative economic indicators "should not block growth" of new casino construction.

"If someone wants to build it, let them build it. Let the market determine whether it will be successful or not."

Saying cycles affect almost every industry, Lanni warned, "This isn't the time for companies in our business to be highly leveraged."

He also criticized industry leaders for failing to work together to solve some of the problems facing gaming.

"I'm upset with the internecine warfare among competent people who spend time trashing each other," he said. "We've got to cooperate more to deal with these challenges."

Lanni cited several factors that don't bode well for the short term. He said domestic airlines are making more money carrying business travelers than lower-margin leisure travelers, "and that's not good for Las Vegas."

In fact, McCarran International Airport officials released the planned flight activity summary for December on Monday. It showed planned flights will average 54,406 seats daily this month -- just three seats a day more than last December's 54,403 seats. The valley has almost 7,000 more hotel rooms to fill than a year ago.

Lanni also said highways that connect Las Vegas with the lucrative Southern California feeder market aren't adequate and that currency problems in Asia might impact casinos catering to high-end players.

He said Atlantic City has "a very narrow window of opportunity to develop as a destination resort" because it faces growing competition from Connecticut and Native American casinos and slot machines in Delaware.

Lanni noted that New York Mayor Rudolph Guliani has suggested turning Governor's Island into a destination resort featuring gaming.

Native American gaming needs more regulation and oversight to avoid a scandal, and Illinois' recent plan to raise gaming taxes to as much as 35 percent will deter most companies from competing there.

As for Louisiana and its scandal-ridden past, "we should have serious discussions with the French about taking it back," Lanni said.

"There will indeed be failures in this industry, but there will be substantive success stories as well," he said. "Those companies with good brand names, superior facilities and strong balance sheets will thrive.

"Remember, 'it's always darkest just before the day dawneth.'"

Also at the summit -- sponsored by Bear Sterns & Co., Lionel, Sawyer & Collins, and Casino Journal Publishing Group -- the first of several gaming and lodging concerns offered investors profiles of their companies.

Mirage Resorts Inc. Chief Financial Officer Dan Lee should benefit from building new, "must-see" resorts such as Bellagio, Beau Rivage in Biloxi, Miss., and on the H-Tract in Atlantic City.

"Our growth will come from taking cash flow from our existing properties and using it to build new ones," he said. "You can't improve much at efficiently operated existing properties that are already running at 99 percent occupancy."

Lee said less than half the supply of new rooms in Las Vegas will come from new resorts; the bulk comes from addition to existing properties, which traditionally show lower returns on investment.

Brand-new resorts such as Bellagio, Venetian and Paris will benefit Las Vegas, he said, by "growing the market enough to benefit everyone."

Lee predicted 1998 would be a "good year" for Mirage, even with the economic uncertainties in Asia.

"The Las Vegas baccarat market has roughly tripled in the past seven years," he said. "And we haven't seen any impact so far from those problems." Even a sharp drop in that business overall wouldn't impact Mirage results by more than 2 percent, he said.

Lee also noted that Monte Carlo, Mirage's joint venture with Circus Circus Enterprises Inc., has generated enough cash flow in just one year to pay half the project's $210 million debt, which should be fully retired in another 18 months.

Circus President Glenn Schaeffer said the room rate wars affecting Las Vegas should end next year, when the first of the new upscale resorts stimulates tourist growth.