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December 18, 2014

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Trimming flights good for airlines, bad for Las Vegas

Carriers’ profits are money tourists can’t spend here

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Steve Marcus

New rooms on the Strip, background, have added to tourism industry woes related to cuts in flights and increased airfares.

Flights cut, fares up

Airlines have been cutting capacity to Las Vegas, which allows them to raise fares. The combination of lower costs and more revenue means higher profits for airlines, but fewer people flying to Las Vegas. The good news for Southern Nevada: The trend of cutting flights has slowed considerably.

An airline industry strategy to raise profits — by offering fewer flights — may make sense for them, but may be coming at the expense of the Las Vegas tourism industry.

For the airlines, offering fewer flights ensures that they can cut expenses and increase fares.

And indeed, airline capacity cuts — in Las Vegas and nationwide — have resulted in higher fares and profitable airlines.

The downside for Las Vegas is obvious: The higher fares may scare off travel to Southern Nevada, or cause tourists to spend less money once they get here.

Dan Hippler, the vice president of marketing for VEGAS.com, a sister company of the Las Vegas Sun, said for June, July and August, fares on flights to Las Vegas have been 7 percent higher than they were in the same months in 2009. USA Today, quoting Orbitz.com executives, recently reported that airfares were up 10 percent for domestic travel and 17 percent for international travel in July compared with the previous year.

Most major airlines are reporting increased profits with the higher ticket prices, coupled with add-on charges. Southwest Airlines, the busiest air carrier at McCarran International Airport, reported a revenue increase of more than 20 percent in the second quarter, compared with the same quarter a year earlier; Delta Air Lines, the No. 2 carrier at McCarran, saw revenue climb 17 percent for the quarter.

US Airways, whose CEO, Doug Parker, is one of the leading industry proponents of capacity reduction, reported earnings more than quadrupled for the quarter.

The decreasing airline capacity coupled with the increasing number of hotel rooms in Southern Nevada has prompted a New York-based gaming analyst to warn that recovery from the recession “is going to be slow and prolonged.”

Andrew Zarnett, a research analyst with Deutsche Bank, said excess rooms, higher unemployment and expected increases in taxes, as well as rising airfares don’t bode well for Las Vegas.

“Given that approximately 50 percent of Las Vegas revenues come from visitors who arrive by air, we believe that the higher cost of flying will be yet another impediment to the Las Vegas recovery,” Zarnett wrote in a note to investors. “We believe that higher airfares will have a twofold impact: Higher airfares will make it more expensive for consumers to travel to Las Vegas, resulting in lower passenger volumes, and consumers choosing to travel to Las Vegas will spend less at the casino floor, given the higher cost of flying will reduce their discretionary budgets.”

It’s no secret that capacity is down at McCarran.

In July, the number of arriving airline seats was down 3.5 percent from 12 months earlier.

A more dramatic measure comes from a three-year view: There are 17.5 percent fewer flights and 15.5 percent fewer seats arriving now compared with July 2007, when the economy was booming.

Clark County Aviation Director Randall Walker says the slowing of the capacity reduction is reason for some optimism. He’s also encouraged by the record load factors — the percentage of paying customers on flights — airlines have been reporting.

“Airfares are up across the country and flights to Las Vegas are no exception,” Walker said. “For the short term, that’s not good for stimulating demand, but on the other hand, it’s important to have airlines that are financially healthy.”

Walker said he doesn’t expect capacity at McCarran to grow dramatically for at least two years, and that it will take a long time, if ever, for capacity to reach 2007 levels, especially because some airlines have merged, further shrinking capacity.

(Northwest Airlines’ merger with Delta, announced in 2008 and completed this year, had little effect on the Las Vegas market, and Walker expects the proposed merger between Continental and United will produce a similar minor blip on the airport’s radar.)

Cathy Tull, Las Vegas Convention and Visitors Authority senior vice president of marketing, isn’t sold on Zarnett’s assessment of Las Vegas’ future. She reasons that just because airfares have climbed nationally doesn’t mean they’ll be up by the same levels on flights to Las Vegas. The reason: This market is dominated by low-cost carriers.

Southwest Airlines, whose “Bags fly free” ad campaign bolsters its message that it doesn’t charge as many ancillary fees as its rivals, has a 44.5 percent share of the seats coming into Southern Nevada. Las Vegas-based Allegiant Air, another big discounter — but one that capitalizes on ancillary revenue — owns another 5.5 percent share.

McCarran is populated by other low-fare carriers such as WestJet, JetBlue, Spirit and AirTran. Legacy carriers, conscious of their low-cost rivals, often cut fares in Las Vegas to compete.

McCarran ranks 11th of 50 airports in an airfare comparison, Tull said.

Because airline capacity has fallen so dramatically, Tull said, the convention authority has spent more time and money marketing “drive” markets, mainly Southern California and Arizona.

Since 2005, the percentage of Las Vegas tourists who arrive by car has inched up while the number arriving by plane has gone down. In 2005, 47 percent of tourists arrived in Las Vegas by plane and 53 percent by car or bus. By 2009, 42 percent came by plane and 58 percent by car or bus.

“As the recession continued, people realized that they could cut their costs by putting four people in a car and driving instead of flying,” Tull said. “We put a lot more resources into Southern California and Arizona. And, that’s one of the reasons we spend so much time talking about transportation developments in California.”

In October, the authority is expected to shift some of its advertising resources to Phoenix to capitalize on the opening of the Mike O’Callaghan-Pat Tillman Memorial Bridge over the Colorado River at Hoover Dam.

“We’re going to tell them that the trip just got shorter with the opening of the bridge,” Tull said. “We’re planning a print and radio campaign to explain that Las Vegas is a little closer to Arizona with the bridge.”

CORRECTION: The percentage change in the number of flights and seats coming into the Las Vegas were incorrectly reported in the initial version of this story. There were 17.5 percent fewer flights and 15.5 percent fewer seats coming into the market in July 2010 than in July 2007. A change in how the number of flights and seats were posted by McCarran International Airport from 2007 to 2010 resulted in the error. | (August 20, 2010)

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