Saturday, April 25, 1998 | 4:32 a.m.
Long viewed with disdain by casino operators, the convention business may play a key role in revitalizing Southern Nevada's shaky economy.
Gaming executives and tourism officials are gambling that a revamped marketing effort and a huge jump in convention space will lure enough business travelers over the next three years to offset the rising room inventory and flat tourist growth rate threatening the fiscal well-being of many resort operators.
By year-end 2000, Las Vegas will boast nearly 6 million square feet of convention space, a 44.1 percent increase over the 4.16 million square feet available as of last Dec. 31, the Las Vegas Convention & Visitors Authority says.
In the same period, Las Vegas hotel and motel room inventory will rise 20 percent, boosting the total to 126,396 from the 105,347 currently open, the LVCVA says.
A big jump in room inventory due to the addition of six new resorts since 1996 hasn't been accompanied by the rise in visitor volume that previous new hotel-casino openings had produced.
As a result, tourism and gaming executives are worried that unless visitor volume rises substantially, the 21,000 rooms being built will add to the over-capacity problems cutting into gaming companies' profit margins.
Similar concerns about supply outpacing demand are posed by the jump in convention space. Tourism and resort officials say they are working overtime to attract enough convention-goers to fill the new space and rooms.
Yet the effort could be derailed if competing convention cities wield the current transportation bottleneck affecting Southern Nevada as a weapon to frighten off potential business customers.
The new marketing and convention strategy reflects a sudden sea change in the attitudes of many casino operators, who have traditionally looked to table games and slot machines as the primary contributors to the resort-based economy and scorned conventioneers as nongambling "stiffs."
But the growing contribution of noncasino revenues to the financial performance of Las Vegas resorts has sparked a new appreciation for visitors willing to pay a premium for rooms and other amenities, especially during normally slow mid-week periods when occupancy rates often run 7.5 percentage points or more below weekend rates.
"There has been a significant shift in the dynamics of the Las Vegas (gaming) market," notes Jason Ader, senior managing director of Bear Stearns & Co.
"While overall (hotel-casino) revenues have risen significantly, gaming as a percentage of revenues has declined to 56.4 percent in 1996 from 61 percent in 1990."
In 1997, total hotel and motel room occupancy rates fell to 86.4 percent from 90.4 percent in 1996, as increases in supply outpaced demand, he says.
"There was a great disparity between midweek and weekends, as weekend occupancy rates were 91.6 percent and midweek rates were 84.1 percent," Ader says.
Even if Las Vegas is able to achieve a 90 percent occupancy rate in the year 2000, a whopping 12,640 rooms -- or the equivalent of four 3,000-plus-room resorts -- would be empty on the average day. At the 1997 rate, 17,190 rooms would stand empty.
The potential convention market is huge. More than 150 million people will attend nearly 1.1 million trade shows, conventions, corporate meetings and the like in the United States this year, generating about a half billion total room nights, according to convention industry figures.
Those attending conventions in Las Vegas -- the top convention city in the country -- "tend to have a longer length of stay than the average visitor and are significantly less price-sensitive to room rates," says Ader.
According to Prudential Securities gaming analyst Joseph Coccimiglio, Las Vegas visitors fall into four main categories:
+. Casino players, who, depending on their betting patterns, can get discounted or free rooms and other amenities, which resort operators expect to offset with gambling wins.
+. Free and independent travelers (FITs), who call resorts directly to book rooms and pay the "rack rate" -- typically the highest and most profitable for the hotels.
+. Convention attendees, who normally stay in blocks of rooms bought at a discount to FIT rates since most meetings occur during midweek periods.
+. Tour and travel customers, who buy room and flight packages from travel agents dealing with wholesalers who, in turn, buy room blocks at the lowest possible rates.
"When resorts were running at 90 percent occupancy rates with rated players and the FIT business, they were blowing off the convention and tour and travel business, and not even returning phone calls," says one convention expert who requested anonymity.
"They burned a lot of bridges with that attitude."
Two factors -- the legalization of gaming in other jurisdictions and the combined impact of declining air service and rising room inventories -- have brought about an attitude adjustment.
A comparison of year-end room inventory and visitor volume totals can provide an indication of the growth needed to fill hotel rooms existing and under construction. But that paints a rosier picture than reality because not all rooms were available for the full years.
The comparison shows the total number of visitors per room per year fell from 318.5 in 1994 to 289.2 in 1997. To maintain the same ratio as in 1997 would require 36.6 million visitors. During the same period, average annual gaming revenue per room fell about $5,000.
Some analysts predict Las Vegas will need as many as 85 to 100 additional flights each day to bring in enough customers to maintain hotel occupancy rates in the high 80-percent range.
Most estimates, though, assume visitor growth will maintain the same proportion between those who currently arrive via highways and those flying here. But because the main highways leading into Las Vegas are already saturated during holidays and weekends and in dire need of repairs, most of the growth will need to come from air service.
"If visitation growth falls short of 35 million, then tier 1 casinos will still generate reasonable returns on invested capital, but tier 2 and tier 3 casinos will suffer meaningful cash-flow declines," says BankAmerica Robertson Stephens analyst Harry Curtis.
Despite lobbying by Sens. Harry Reid and Richard Bryan and recent efforts by resort and tourist officials, airline executives have indicated they won't add flights to Las Vegas unless demand warrants. And by "demand," they mean more passengers willing to pay higher fares than Las Vegas currently commands.
Meanwhile, LVCVA officials and resort executives are expanding efforts to increase convention business.
"Las Vegas is already the No. 1 trade show destination in the country," says Jeff Beckelman, vice president of sales and marketing for The Venetian, whose Sands Expo & Convention Center is in the midst of an expansion that will boost the property's total meeting space to about 1.7 million square feet.
He said growth in that business can come from attracting more major shows, providing space to meet the growth needs of existing shows and to lure smaller meetings during the move-in, move-out periods of the larger conventions.
"Our sales plan calls for us to host 20 of the top 200 trade shows as anchor tenants by the year 2000, and fill in around it with the leapfrog business," Beckelman says.
But competition from other destinations and the lack of adequate air service from Eastern markets pose threats to success in attracting more convention business.
"If the number of airline seats doesn't increase, you face a problem in selling conventions, which normally book space a year or two in advance," notes one travel expert who requested anonymity.
"My experience with the convention business is that it's fiercely competitive. Las Vegas competes with Chicago, Orlando, New York, Los Angeles and San Francisco, all of which currently have far better accessibility for air travelers.
"Las Vegas has a widely recognized seat-capacity problem," he says, "and that is being used as a weapon by competing convention destinations to scare people from coming here."
Even if carriers add flights in response to increased demand from higher-yielding business travelers, that won't automatically result in an incremental increase in visitor volume. There's a danger many budget-conscious FIT and tour-and-travel visitors will cancel plans to visit Las Vegas.
The past few years have seen a 150-percent jump in the number of tourists who believe Las Vegas has become too expensive to visit. With casino gambling now available closer to their homes, many frequent Las Vegas visitors have cut their repeat visits drastically.
"What you gain on the top end, you could lose on the bottom end," the travel analyst warns.
Airline officials say "revenue-guarantee programs" -- subsidies from Las Vegas hotels -- might be needed to augment tourist fares enough to provide the carriers with an incentive to increase service to McCarran.
Even with subsidies, says analyst Dave Ehlers of Las Vegas Investment Advisors, "The proposal by (former America West President) Mike Conway to form a Las Vegas-based low-fare carrier offers the only real solution to the transportation bottleneck strangling Southern Nevada's tourist growth."
Conway's plan calls for adding up to 100 flights a day to McCarran within five years.
If the Las Vegas visitor count doesn't pick up substantially for whatever reason, destructive price wars are likely to erupt as resort operators offer discounted rooms in a bid to attract desperately needed bodies. This would severely impact the older, less spectacular properties with less to offer -- the second- and third-tier hotel-casinos Curtis described above -- and further erode casino companies' profit margins and stock values.
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