Casinos face economic malaise after enduring war jitters

Tuesday, April 22, 2003 | 11:09 a.m.

Major Las Vegas casinos are breathing easier after the U.S. victory in Iraq, saying business has held up well during what turned out to be a relatively swift end to the conflict.

That victory hasn't spelled relief for American consumers, who are coping with difficult economic times by cutting back on discretionary spending, however, casino executives say.

"We're resilient but not immune to the economic downturn," MGM MIRAGE Chief Financial Officer Jim Murren said in an interview last week. "We're sort of in a holding pattern now economically in Las Vegas. Our business isn't getting better but it's not getting worse."

Companies say they didn't experience any significant downturn in business because of the war.

"We have had negligible cancellations attributable to the war in Iraq," Park Place Entertainment Corp. spokeswoman Debbie Munch said. "Year-to-date hotel occupancy is strong compared to last year, but we continue to see a shorter booking window for hotel reservations."

"We didn't see a significant change during the war," added John Marz, head of marketing at Mandalay Resort Group. "We still believe that it's a matter of the economy."

That coincides with data collected during the war by the Las Vegas Convention & Visitors Authority, which began tracking hotel occupancy rates and other key indicators weekly instead of monthly in the hopes of helping area casinos react to a potential drop in business.

While the latest official figures are from February, preliminary data gathered from local casinos throughout the war showed no noticeable visitation trends, the LVCVA's senior research analyst Kevin Bagger said.

Occupancy rates fell "maybe two to three points" after the war, Bagger said. But those results could be attributed to a variety of other factors, from the economic slump to a dropoff in convention activity, he said.

Culinary Workers Union Local 226 also hasn't seen any significant effect on workers' hours.

D. Taylor, the union's secretary-treasurer, reports "no big layoffs" -- though a small number of workers may have been affected by reduced hours.

"Business is a little softer -- but the big thing is not the war but the economy," he said. "This month is traditionally a very good month for the city." But, he noted, "the economy is in the toilet and it's tax time right now."

Major companies say they didn't resort to new marketing plans during the war to stimulate business.

Mandalay Resort Group never sent out direct-mail pitches that had been crafted in the event of a major war-related downturn.

And though Park Place followed the lead of the Las Vegas Convention & Visitors Authority by delaying some print ads planned before the war, those ads are now running again.

After war broke in Iraq, the tourism authority stopped airing television ads promoting Las Vegas but resumed them the following week.

The concurrent outbreak of a deadly Asian virus known as Severe Acute Respiratory Syndrome hasn't noticeably affected business, as now is an off-peak time for travelers from Asian countries, companies say.

"At this point for us in time it's not even an issue," Marz said. "We're not seeing any fallout from that."

The Chinese New Year in February and the Christmas holiday in December are typically the busiest times of year for Asian tourism, experts say. Casinos respond with displays and settings catering to Asian gamblers.

An announcement Monday that the Chinese government had called off a one-week May Day holiday in that country beginning May 1 due to the SARS virus also hasn't appeared to register as a threat to Las Vegas tourism.

Asian travel to Las Vegas was hammered after Sept. 11 and is still far short of previous visitation levels for Strip properties as a whole, Park Place spokesman Robert Stewart said.

The SARS threat doesn't help that trend, but "I wouldn't put too much weight on any single factor," he said.

During a conference call with investors Wednesday, MGM MIRAGE -- the first major casino company to report first-quarter earnings -- blamed economic problems for first-quarter earnings that fell a hair short of analysts' expectations.

Gamblers -- particularly domestic high-rollers -- aren't spending like they used to, executives said.

"Net worths are not what they were, stock portfolios are down ... people have to work harder at their businesses," Chief Executive Terry Lanni said.

Lanni told investors that the company doesn't expect a significant improvement in business trends until sometime next year, when a presidential election will lead lawmakers to focus on boosting the economy.

"I don't think anyone here expects it to improve until consumer confidence improves in the U.S.," Murren added.

The war changed people's spending patterns in the short-term but hasn't materially affected the company, he said.

"People were -- I don't want to say 'frozen,' but they were indecisive with regard to their travel plans," he said. While tourists held off on some trips, companies also curtailed their travel plans.

"We're starting to see some improvements in that behavior," he said. "We've had no major groups cancel and didn't see any unusual attrition activity." Still, he said, the company did experience a slowdown in non-group tourist business.

MGM MIRAGE stock fell more than 10 percent, bringing down other Las Vegas operators as well, on the news that the company's second-quarter forecast would come in lower than analysts had expected.

Executives said the figures reflect a great deal of uncertainty about the economy and other geo-political events but don't necessarily foretell a downturn in business.

"The clarity of future business has rarely been as cloudy as what it is right now," Murren told the Sun.

Other Las Vegas casino companies are expected to release their first-quarter earnings over the next few weeks.

The good news for Las Vegas is that the dramatic decline that some had feared after the war didn't happen, said Mary Lynn Palenik, director of gaming research and analysis at PricewaterhouseCoopers in Las Vegas.

"I think people were expecting people would be reticent to travel and get on an airplane," she said.

Compared to the 90-day Gulf War, the main coverage of the short-lived war in Iraq was largely concentrated on all-news cable channels rather than mainstream television, she said.

"People weren't watching it 24-7 like they used to."

While the nation's gambling capital held up better than other major cities by driving tourism after the Sept. 11 terrorist attacks, analysts agree that Las Vegas is still in recovery mode -- with gambling revenue and hotel occupancy falling short of pre-Sept. 11 levels.

LVCVA figures released this month show that some recovery is under way. Visitor volume is up 4.6 percent from January to February compared to the same period last year. Convention attendance was up 30 percent and the number of conventions held was up 5.3 percent.

Total hotel occupancy was up 3.9 points, to 84.6 percent, and the average room rate was up 19.8 percent, to $87.22.

Some analysts attribute the year's strong start to a busy convention calendar -- a trend that has positive implications for casinos in the long-term but doesn't necessarily help the companies' equally important tourist or non-group business.

The numbers are still a positive indicator for the local economy, especially considering that room inventory increased 0.3 percent during the period, Palenik said.

That means the city was able to fill about another 400 available rooms at higher average rates than last year in the difficult economy, she said.

Some analysts remain skeptical that Las Vegas casinos will be able to break through the economic malaise anytime soon.

J.P. Morgan analyst Harry Curtis last week lowered 2003 earnings estimates for casino giants including MGM MIRAGE, saying hotel room rates will essentially remain flat through June.

"We believe that many operators are having to market to lower rated customers in their databases to mine for incremental demand," Curtis wrote in a research note to investors last week. "The war with Iraq has exacerbated already weakening business trends, but underlying economic weakness is the primary driver of slower demand, which will likely linger despite a successful resolution in Iraq."

Gambling revenue is lagging 2000 levels as consumers wager more conservatively, he said. Casino expenses are also up from 3 to 5 percent for most properties because of new Culinary Union contracts and non-union wage increases as well as higher insurance and benefit costs, he said.