Controversy raging over casino support of National

David Strow

Friday, Dec. 8, 2000 | 10:26 a.m.

Following the bankruptcy filing of National Airlines, a debate has developed on both Wall Street and the Strip -- who, if anyone, should help the airline survive its most difficult days?

There's little debate that National, McCarran International Airport's fifth largest carrier, plays a key role in getting visitors to the Las Vegas Strip. Up until now, just one of the Strip's operators has funded National -- Harrah's Entertainment Inc., which has invested nearly $58 million, and now faces the prospect of big write-offs.

Now National needs more cash -- but Harrah's, without reciprocation from other gaming companies, is refusing to put up any more money.

"Hopefully, we'll be able to find sources of capital so it can continue operating," said Gary Thompson, spokesman for Harrah's. "(But) we are not willing to invest substantial amounts of our shareholders' money to benefit the shareholders of our competitors, when 90 percent of the benefits National brings to Las Vegas go to other hotel-casino operators.

"There is no way Harrah's will continue subsidizing those other operators indefinitely."

But four of Las Vegas' biggest gaming operators -- MGM MIRAGE, Park Place Entertainment, Mandalay Resort Group and Boyd Gaming -- are privately telling Harrah's what they've been saying since the founding days of National: That a start-up airline isn't an appropriate investment for a casino company.

Is it in the casino companies' best financial interest to invest in National? Analysts are deeply divided on the answer.

David Anders, gaming analyst with Merrill Lynch, believes the companies are acting correctly by refusing to invest. Shareholders at the companies would be angered if the companies invested cash in a struggling business, Anders said.

"Investors generally believe casino companies should run casinos," Anders said. "Harrah's stake in National has always been somewhat controversial with investors. If the routes are profitable, airlines will figure out ways to get planes there.

"Generally investors don't like money-losing ventures. This isn't technology."

Jason Ader, gaming analyst with Bear Stearns, acknowledged that casino investors typically don't like to see casino companies invest in airlines, noting that MGM Grand's effort to launch now-defunct MGM Grand Air in the early 1990s met with heavy criticism.

But Ader also believes the big operators need to balance this view with their dependence on more airline seats -- and says the loss of National could strike a blow to the Las Vegas Strip.

"I'm surprised the industry couldn't come together to keep this airline, which has been so valuable, capitalized through this difficult period," Ader said. "It would have made sense for all casinos to come in. The whole city benefits from National, and so do the casinos, not just Harrah's and the (Harrah's-owned) Rio.

"If National ends up closing, it's a big negative, one that threatens the positive disposition that the investment community has toward the Las Vegas market, because you have this pipeline constraint again."

A furious Dave Ehlers, chairman of Las Vegas Investment Advisors and a National shareholder, was far more blunt.

'Mini-depression'

"Before National came along, we had a mini-depression in Southern Nevada," Ehlers said. "That mini-depression began to be cured as National began operations a year and a half ago. National almost single-handedly took Nevada out of that mini-depression.

"The lack of National will put these (casino) operators back in the place they so richly deserve."

There's little argument that National now plays an important role in bringing visitors to the Las Vegas Strip. National is responsible for adding more than half of the new flights at McCarran since 1999, and has 56 daily flights from Las Vegas to nine cities. Its most important routes, from the gaming industry's perspective, are its direct "long haul" flights between Las Vegas and major Eastern markets such as Miami, Philadelphia, New York, Washington and Newark, N.J.

But not everyone is convinced that, even if National disappears, that other carriers would leave a vacuum for long.

"I don't know if you can take just one airline and say it's an important component," said John Marz, vice president of marketing at Mandalay Resort Group. "They've opened areas that are important. The direct flight from Miami, for example, is a nice plus for the city. From that standpoint, they've been a good addition to the existing airline (traffic) into this market.

"But look how many flights Southwest (Airlines) has added ... for Southwest, Las Vegas is now their No. 2 city. And it seems like every airline's (traffic) into Las Vegas is up except for one or two."

When a lack of flights into Las Vegas was a pressing issue in 1998, casino companies considered a number of alternatives, including subsidizing long-haul flights by large carriers in order to make such routes more profitable. The plans annoyed Southwest, and led to a meeting between a number of top gaming officials and Southwest Chief Executive Herb Kelleher.

Kelleher was assured at the meeting that Southwest wouldn't be neglected by the casinos in their plans to encourage more flights into Las Vegas -- and in response, Kelleher committed to expand Southwest's service to McCarran.

A Southwest spokeswoman wouldn't comment on whether the Dallas-based airline felt it was appropriate for the gaming industry to help prop up a competitor. But Kristin Nelson noted that Southwest had added 17 Las Vegas flights in 2000, including new flights to such cities as Albany, N.Y., Birmingham, Ala., Buffalo, N.Y., Baltimore-Washington, Columbus, Ohio, New Orleans, Omaha, Neb., Louisville, Ky., and Tulsa, Okla.

"We're very proud of what we've done in Las Vegas, and ... there's a lot of potential for growth," Nelson said. "Southwest Airlines is a growing airline, a growing company. We increased our flights (to Las Vegas) by 17 in the course of one year, and that's pretty significant growth."

Still, gaming analyst William Schmitt of CIBC World Markets believes Las Vegas could suffer "a blip in visitation downward" if National closes.

Decrease in seats

"My gut feeling is if it closes, you'll have a period of time with a decrease in seats, and that's not a good thing," Schmitt said. "It'll probably be three to six months before the other airlines make up the difference.

"Longer term, you won't have the quality of flights coming in that National provides. My sense is that in the long-term, those flights will be replaced, but by flights of lower quality."

Ironically, Harrah's wouldn't suffer as badly as other operators if flights were cut into Las Vegas, since its hotel room inventory isn't nearly as large as the other large operators. But analysts say investors may be growing frustrated with a string of disappointing business deals for the gaming giant.

The write-off for Harrah's from National could exceed $50 million in a worst-case scenario. That follows on the heels of several quarters of disappointing results at the Rio, acquired by Harrah's last year, and continued struggles at Harrah's New Orleans, where the company is attempting to reduce a mandatory state tax of $100 million a year.

On Thursday, Harrah's stock fell $1.38 to $27.06, a decline of 4.8 percent.

Economic impact

"The economic impact of National (in write-offs) doesn't equate to a dollar a share, but there is a growing level of frustration surrounding these kind of recurring non-recurring charges," Anders said.

But Schmitt believes it would have been worse for Harrah's to continue to try to support National on its own.

"At the end of the day, it will cost them $40 to $50 million. It's not a good investment," Schmitt said. "It would have made more sense for the other guys to do it, because they have a much larger room base in the city. Knowing what we know now, it wouldn't have been a good investment for anybody.

"What would make investors more nervous would be if they invested more money in it, because that money is going down the tubes. It benefits other operators much more than it benefits (Harrah's). Harrah's has already lost the money; Harrah's should let it go."

Another top gaming executive said his company doesn't want to offend National's competitors.

Southwest is by far the largest airline at McCarran International Airport here, with a capacity of 21,708 outbound passengers daily. That's more than four times the size of National, with 5,000 outbound daily seats.

"We would love to see this airline succeed, but an equity investment is not the proper role for us to play," said Alan Feldman, MGM MIRAGE spokesman.

Feldman cited concerns that such an investment could damage relations between the company and National's competitors at McCarran. Both MGM Grand and Mirage Resorts -- which have since merged -- reached this conclusion separately when declining to invest in National's start-up, Feldman said.

"It's not in the best interest of the companies to make an equity investment where we would be competing with our business partners (other airlines)," Feldman said. "That was the principal reason (that MGM Grand and Mirage) didn't invest then, and it remains the principal reason today."

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