Short-term problems confronting casinos

Tuesday, Oct. 2, 2001 | 9:28 a.m.

The long-range forecast for the gaming industry remains bright, but casino companies are going to have to weather several sub-par quarters before they return to the income levels they were experiencing before the Sept. 11 terrorist attacks, a panel of Wall Street analysts concurred Monday.

"People love Las Vegas and they love to gamble," said Bear Stearns & Co. Inc. gaming analyst Jason Ader in a panel discussion at the Global Gaming Expo Monday at the Las Vegas Convention Center. "The attacks won't change how people spend their money."

But though the industry's future prospects are good, the short- and intermediate-term picture isn't, especially for resort destinations dependent on airlines to deliver customers, panelists said.

"The riverboat properties and the Indian reservations are already coming back," said Larry Klatzkin, senior vice president of Jefferies and Co. Inc.

But markets like Las Vegas and the Caribbean are going to take longer -- possibly into 2003 or 2004 -- to return to pre-Sept. 11 levels, since the industry was in a slump even before the attacks, and afterward, airlines slashed their schedules by around 20 percent.

"A lot of people are saying, 'Who knows what (President) Bush is going to do and what else is going to happen,"' Klatzkin said of customer uncertainty.

It may be too early to tell just how bad the short-term damage will be to casinos, said Bill Schmitt of CIBC World Markets, noting that a confrontation with the perpetrators of the attack hasn't occurred and "we haven't played our hand yet."

"It took two years for things to return to normal in 1991 (after the Persian Gulf War)," said Robin Farley, an analyst for UBS Warburg. "It's not a question of growth, but of recovery."

While some Las Vegas properties have shown some outward signs of recovery recently -- several of the casino giants sold out their hotels last weekend, just three weekends after the attacks -- executives say the industry is still far from recovery.

Terry Lanni, chairman and chief executive officer of MGM MIRAGE said the company's five Las Vegas-area hotel-casinos ran close to full occupancy this past weekend. However, the customers filling the rooms of the Bellagio, Mirage, Treasure Island, MGM Grand and New York-New York weren't the high-end customers the company has built its business on.

"There were more bargain seekers," Lanni said. "That doesn't translate into the same level of revenues" in other areas of MGM MIRAGE's business, such as restaurant sales and gambling revenues, Lanni said.

Occupancy has been improving at the company's properties. The weekend after the Sept. 11 attacks, MGM MIRAGE hotels were recording an average occupancy rate in the high 50s. The next weekend, occupancy was around 75 percent; this weekend, they were nearly sold out.

But midweek occupancy remains in the 50 percent to 60 percent range, Lanni said.

Business from the Far East has been brought down drastically, Lanni said. Some flights from Japan, he said, have more crewmembers than passengers on board. That hurts MGM MIRAGE in particular, since it relies heavily on high-rollers -- and the Pacific Rim is one of the richest sources of high-end players.

But business from Europe remains strong, Lanni said. "People in Europe are used to this (the threat of terrorism)," Lanni said.

Predicting a return in business by looking at certain indicators is difficult, Lanni said.

"You can't predict what's going to happen as well as what has already happened," Lanni said.

But he still expects business will start to pick up starting around New Year's.

"I think it'll be back by spring," Lanni said. "I believe it will come back sooner than people think. I believe Americans are pretty resilient, and I think the world's pretty resilient."

Debbie Munch, a spokeswoman for Park Place Entertainment Corp., which owns Caesars Palace, Bally's, Paris Las Vegas and the Las Vegas Hilton, said although Caesars was sold out over the weekend, midweek visitation at the properties is still down, mainly because so many conventions, meetings and trade shows have canceled.

"It's going to take a lot longer to get that back up to where it was," Munch said.

Don Snyder, president of Boyd Gaming Corp., said business was also strong at Boyd's properties this weekend. Boyd owns the Stardust on the Strip, three casinos in downtown Las Vegas, Sam's Town on the Boulder Strip and two locals casinos in Henderson.

"It's not back to normal, but the rooms are full," Snyder said. "We feel good about that. The weekend business is coming back. The next test is the midweek business. That will take a little longer."

High occupancy is a good indication business is coming back, but pushing room rates back up is also important, Snyder said. "It's important to get back to where they (room rates) were before," he said.

Because of the logistics of setting up meetings and shows, the resorts aren't expecting to recover most of the sales of rooms tied to shows, many of which have been planned for more than a year but were abruptly canceled after the attacks.

Panelists also predicted that in the aftermath of the attacks, the casino industry could be in for another round of corporate consolidations - but most companies have been weakened financially and may not have the resources to make a move right away.

David Anders, managing director of Merrill Lynch, said some companies could adopt the diversification strategy successfully employed by Harrah's Entertainment Inc. But instead of corporate mergers, he expects there to be more single-property transactions. MGM-MIRAGE, he said, could be interested in diversifying into a Midwest riverboat property with Argosy Gaming Co. a potential target.

Argosy, based in Alton, Ill., owns six riverboat casinos in the Midwest and the South.

But Steve Kent, vice president of Goldman Sachs & Co., said most riverboats aren't up to the quality standards desired by some of the big Las Vegas casino companies.

And then, there's the problem of financing a deal.

William Newby, a managing director of Bank of America, said most companies' stock value collapsed in the week following the attacks and that banks and term lenders have pulled back from any deals.

"The issue here is how long is this going to last," Kent said. "Banks aren't going to walk away from this market altogether and there are some good projects coming down the line."

Other issues aired by the gaming analysts:

--Harry Curtis, managing director of Robertson Stephens, said the climate may not be right for the geographic expansion of the gaming industry. However, he said he wouldn't be surprised to see proposals that already have surfaced in Pennsylvania, Maryland and Florida make a comeback.

--Although the state of New York could use the revenue that taxation on casinos could provide, panelists don't expect the state's lawmakers to embrace any new gaming proposals. Some said there may be a movement for some growth in Indian casinos in the state that could meet with the favor of lawmakers.

--Kent said he expects the gaming supply industry to further consolidate as smaller companies strategize to compete with International Game Technology Inc., Reno.

THE SUN's David Strow contributed to this report.