Columnist David Ehlers: Wall Street’s bear hurts visitor volume

David Ehlers

Friday, June 27, 1997 | 11:17 a.m.

WALL STREET, based on the amount of short selling of gaming stocks, is becoming increasingly bearish on Las Vegas.

As measured by short sales as a percent of the total shares outstanding, the questionable honors go to Circus Circus and Station Casinos with 10.9 percent and 8.7 percent of total share capitalization represented by the sale of borrowed stock.

Short selling, in general, is an investment professional's pastime. This means that, most likely, either a hedge fund or other financial institution has sold shares with the expectation of buying them back at a lower price. Thus, the supposed smart money in Wall Street is short some $270 million worth of Circus stock and short some $27 million of Station Casinos stock.

There are common similarities between the two companies: Both are increasingly taking on more debt and both have exposure to so-called emerging markets where conditions have become intensely competitive.

On June 19, Standard and Poor's downgraded the credit ratings of Circus Circus. S&P stated:

"The outlook is now negative. The downgrade reflects expectations that credit measures will not improve significantly over the next few years, primarily due to continued share repurchases and heavy capital expenditures as the company pursues its growth strategy. Operating performance also has been weaker than expected, but Standard & Poor's anticipates that certain properties experiencing softness will improve over time."

My interpretation of this very candid assessment of Circus' outlook is that S&P, more or less, endorses Wall Street's less-than-robust view of Circus' outlook. S&P indirectly implies, in my opinion, that the share repurchase was overly aggressive since "credit measures" won't improve for at least several years.

* A SUN article by Gary Thompson on Wednesday quoted industry sources to the effect that occupancy and visitor trends do not exhibit the robust trends of prior expansions. I agree.

Las Vegas' best and most well-heeled visitors may be finding increasing difficulty in obtaining suitable air transportation. Despite very high load factors, just three carriers -- Southwest, United and America West -- command 56 percent of the market share, offering bargain fares to essentially vacation or free time visitors. Las Vegas Investment Advisors is reluctantly coming to the conclusion that the present structure of airline mix as well as airline future equipment allocation may combine to effect a continuation of disappointing visitor and gaming revenue numbers.

Consider these factors:

The affect of this trend may be an effective limitation on Las Vegas travel by many who wish to visit. It also may ensure Las Vegas having an ongoing visitor mix which is least desirable from the standpoint of visitor per capita disposable income.

If indeed this is the case, the long-range implications are disquieting and may be summarized as follows:

Thus, if Las Vegas continues to be only partially served with nonstop and/or direct access to the distant eastern U.S. markets, it may be forced, by lack of suitable air transportation, to revert to its historical role of a regional market. The current and recent past levels of investment in Las Vegas may to too ambitious for a regional market -- even one of the maturity and admitted excellence of the Las Vegas casino-based destination resort facilities.

The Las Vegas Investment Advisors' weekly survey of air fares to and from top ten markets indicates that fares are currently at the highest level during the past year and up more than 50 percent since December. The magnitude of these increases, given the marginal propensity to consume a Las Vegas stay, may be playing a material role in inhibiting room demand.

It should also be noted that airline seat availability has increased by double digit compound rates for the last four years. In 1997, however, the seat capacity is lagging the former years in the face of stable passenger throughput for the largest three carriers (Southwest, United and America West). I estimate that seats arriving/departing Las Vegas have increased only 3 percent in 1997.

In an effort to shed further light on the subject matter, I've initiated conversations with several Wall Street airline analysts. One of these is a highly respected buy-side analyst with 25 years experience and said to be "one of the best."

"Traditional airlines can't make money on the fares charged by Southwest Air. Las Vegas' transportation dilemma is that the combination of high load factors and very low average prices results in low yield per seat mile versus other business travel routes. Traditional airlines have better alternate uses for equipment," the analyst told me. The analyst noted that these factors have the effect of choking off Las Vegas' visitor flow.

Next week, a continued look at Southern Nevada's disappointing visitor numbers.