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July 28, 2014

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Airlines sound alarm for Vegas tourism

County rejects request to halt terminal project

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Airlines serving McCarran International Airport have issued the bleakest economic forecast yet for Las Vegas, recommending that officials reconsider the need for a terminal that is under construction because there may not be sufficient tourism traffic to justify it.

The airlines also have asked the airport to cancel its $114 million Heliport project and to reevaluate all other capital projects in McCarran’s five-year plan.

The airlines’ message to Las Vegas: The industry will not quickly recover from the tourism decline wrought by a combination of higher fuel prices and a sputtering economy.

County officials scoffed at the airlines’ pessimism, saying the region’s economy depends on an airport built to support more tourism traffic. The Clark County Commission on Tuesday voted to stay the course with construction of the terminal.

The airlines’ concerns about Las Vegas reflect how the industry nationwide is looking to cut costs and asking airports to reconsider expensive capital improvements. Oakland International Airport, for instance, has shelved plans for a $500 million terminal after losing three airlines, with two more to be lost in September. Passenger traffic for Oakland, the Los Angeles Times reported, is expected to fall more than 23 percent.

Airport projects such as McCarran’s $1.8 billion Terminal 3 are financed with fees paid by airlines, which pass those costs on to customers through fare increases and various charges. The airlines serving Las Vegas would begin paying for the cost of Terminal 3 after its opening, scheduled for 2012.

In Las Vegas, an advisory committee for airlines serving McCarran asked the airport Friday to take a second look at the projects in its $3.5 billion capital improvement plan.

“The current state of the industry is at an all-time low and there is much uncertainty as to what the future holds,” wrote Linda Macey, Southwest Airlines’ manager of properties and chairwoman of the McCarran committee, in a letter to Aviation Director Randall Walker. “Specifically, we request that any nonessential expenditures be deferred and that all remaining projects be reevaluated for any and all cost savings potentials.”

She added: “Only those projects with a current, justifiable need should be funded at this time.”

In particular, the committee asked the airport to delay awarding a contract for further construction of Terminal 3 so it can “further discuss and evaluate the risks and benefits associated with proceeding ... at this time.”

The letter carried little weight with the Clark County Commission, which, at Walker’s behest, voted Wednesday to approve a $1.2 billion contract for Perini Building Co. for construction of Terminal 3.

Walker said he would reconsider other capital improvements in August.

County officials were adamant that nothing be done to jeopardize Las Vegas’ ability to fill 30,000 more hotel rooms scheduled to open in the next three years.

“For the last number of decades the challenge we’ve had is to keep up with the growth,” Walker told commissioners. “If we do not build Terminal 3, it will be a self-fulfilling prophecy that those hotels cannot get filled.”

There are also the considerable costs associated with delaying construction, he said.

Commissioners agreed, voting 6-1 to approve the construction contract.

“Our choice is to decide to step back and ensure we don’t have the capacity to make our tourist-driven economy successful,” Chairman Rory Reid said. “The only reason to do that is to serve the short-term interest of the airline industry ... It’s not in the community’s interest.”

Las Vegas has been a reliable bet for the airlines for the past 25 years, but the industry now seeks “to make sure the capital plans are rational and that they will work in this new economy,” said Bob Montgomery, Southwest Airlines’ vice president of properties and a spokesman for the McCarran airline committee.

Airlines, chafing from the abrupt increase in the cost of fuel in recent months, have announced plans to cut capacity as tourism travel drops — driving up the price of remaining seats — as a way of coping with higher operational costs. Analysts say cuts by major airlines could result in 15 percent fewer seats available to travelers. The Air Transport Association, the industry’s lobbying group, predicts 2.7 million fewer people will fly this summer than in summer 2007.

In Las Vegas, the largest capacity cuts are expected to come from Phoenix-based US Airways, the second-busiest carrier at McCarran.

The airlines say that on average, it costs $299 in fuel to transport one passenger on a round trip, about twice as much as it did a year ago. In 2000, it cost about $70.

Effective Sept. 3, the number of daily US Airways departures to and from McCarran — as high as 141 less than a year ago — will drop to 81. By the end of the year, the airline will cut another seven flights.

Southwest is the largest operator at McCarran, with 42 percent of travelers. McCarran was handling more passengers than its rated capacity just a year ago, a fact Walker used to underscore the need for the new terminal. But air travel has fallen sharply since, and, after four consecutive years of record passenger traffic, the airport expects numbers to be down this year.

According to the latest figures, from May, McCarran saw a 5 percent drop in passengers compared with the previous May. Overall, passenger numbers are down 2 percent for the year.

“We just don’t know the impact to business or how long it will take to recover,” Montgomery said. “Right now we have lots of questions and very few answers.”

In the end, the city will need the new terminal, UNLV economist Keith Schwer said. Casinos “are going to try and put heads in the beds and that will take more flights coming in.” And although he noted that some carriers would likely not live to see new Strip construction, others will take their place.

Analysts at Fitch Ratings took a dimmer view: “The U.S. (airline) industry’s current structure is unsustainable in the current fuel environment.”

(This story has been corrected. In an earlier version, it said that the Clark County Commission voted Wednesday to approve a contract for McCarran International Airport's Terminal 3. The commission voted Tuesday.)

Sun reporter Richard N. Velotta contributed to this story.

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