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February 1, 2015

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Is economic relief in sight for Las Vegas gaming?

The quick answer: Maybe. Las Vegas resorts report hopeful signs and economists are optimistic, but consumers still cautious about spending.



Las Vegas casino mogul Steve Wynn speaks during the opening ceremony at Wynn Macau in 2006. Wynn Resorts and Las Vegas Sands are seeing increases in revenue because of their Asian properties, which are far outstripping business at resorts in Las Vegas and other areas of the United States.

Click to enlarge photo

The Cosmopolitan of Las Vegas is expected to open in December. Many analysts say the 2,995-room resort will steal business by pricing five-star quality rooms below those at comparable resorts. Another analyst, however, says the Cosmo is no threat to other Vegas resorts because it will open with no database of gamblers.

By some measures, the recession-battered Strip has made the turn and is on the road to recovery. Room rates, convention bookings, gambling revenue and visitor traffic have all improved.

But don’t release the confetti quite yet.

Some economists and analysts say small, year-over-year improvements don’t define a recovery, especially one large enough to benefit its most-leveraged companies.

“Things don’t seem to be getting worse, but they haven’t really been getting better, either,” said Joe Fath, a T. Rowe Price portfolio manager who specializes in gaming, travel and tourism. “There’s a difference between (a few positive indicators) that are pushing stocks up and real recovery,” he said. “If I had to bet on it, I’d say things will slowly get better, but at a very moderate pace.”

Many Wall Street analysts are equally guarded despite some positive indicators and a rally in casino stocks and bonds partly triggered by growth in Asian casinos far from Las Vegas Boulevard.

Although the Strip has reached a trough, there’s uncertainty about whether it will rebound strongly enough next year to make a difference on corporate income statements, said Dennis Forst, a stock analyst for KeyBanc Capital Markets. “Most investors think there’s going to be a pretty good recovery next year. But I’ve seen a lot of cycles and false positives. I’m going to sit back and say ‘show me.’ ”

Wynn’s confidence grows

Yet investors found solace in a Wynn Resorts conference call last week.

“I believe we’ve seen the bottom in Las Vegas,” said CEO Steve Wynn, who has historically been less optimistic than his Las Vegas counterparts. “I don’t know how fast it’s going to get better, but it’s not going to get any worse.”

Wynn, a vocal critic of the Obama administration, said success among Republican candidates for Congress in the midterm elections will have a stabilizing effect on consumers, especially business owners concerned about rising taxes and health care costs.

“People who have money have been in a defensive crouch ... They are clutching their bankrolls and hiding out.”

Wynn has raised room rates in Las Vegas on evidence that customers are loosening their wallets.

“We’re getting that visitor who is more well-rounded and got a deeper pocket,” he said.

In a separate conference call last week, MGM Resorts International CEO Jim Murren said he is optimistic as downward trends “have started to stabilize.”

Jim Murren

Jim Murren

Consumer spending was down this year, but recently has increased when customers come to town for special events, Murren said. And they are starting to pay higher rates at deluxe hotels such as Bellagio.

Convention rebound helps

MGM Resorts also has the biggest share of the growing baccarat market and is benefiting significantly from the convention rebound, Chief Financial Officer Dan D’Arrigo added.

Attendance at some shows is increasing as delegates return after the recession, while MGM has grown market share by luring shows from other cities and companies in Las Vegas, he said.

The three major bond rating agencies — which track business trends to rate bankruptcy risk — are treading more cautiously, however.

The Strip “will continue to struggle in the foreseeable future,” Moody’s Investors Service said in October.

“(P)rospects for a meaningful rebound in 2011 are uncertain,” Standard & Poor’s said last month. Despite higher visitation to Las Vegas and recent increases in room rates, consumer spending remains weak and isn’t expected to grow enough next year to boost earnings much for MGM, the report said.

The nongambling hotel industry — based on its primary indicator, room revenue — has bounced back significantly from the recession as business travel rebounded.

Airline capacity fears

By contrast, Las Vegas casinos depend more heavily on tourism, a hard-hit sector subject to multiple risk factors beyond the control of even the smartest casino operators.

Of primary concern is a decline in airline capacity into Las Vegas, experts say.

After years spent discounting rates to boost business, airlines are pursuing a more profitable strategy of cutting back on flights and charging more for seats, which is hurting Las Vegas by making flights more expensive for the budget-conscious tourists.

“To have a significant recovery for Vegas in terms of the totality of the market, we need more lift in here,” Mike Leven, president and chief operating officer of Las Vegas Sands, said in a conference call last month.

Moreover, recent increases in drive-in traffic aren’t enough to offset the decline in flights, said Patrick Bosworth, partner of Duetto Consulting and a former business strategist at Wynn Las Vegas.

As the nation’s top destination for air and hotel packages, Las Vegas is especially hurt by rising airfares, which force hotels to disproportionately lower rates to remain competitive, Bosworth said.

Unlike airlines that can run fewer planes, hotels can’t simply close or sell off towers when demand goes down, he said, because they have to offset bigger fixed costs by filling them as best they can.

The Cosmopolitan opening

Strip resorts also are wary of the 2,995-room Cosmopolitan of Las Vegas opening next month, which many analysts expect will steal business by pricing five-star quality rooms below those at comparable resorts.

The Cosmopolitan is projected to flatten room revenue for Strip resorts, which probably would have grown business next year without the new competition, said Bosworth, echoing a similarly downbeat forecast last month by CB Richard Ellis.

Click to enlarge photo

The Cosmopolitan's rooms will be marketed as a resort hotel with added perks typical of condominiums.

Bill Lerner of Union Gaming Group, a research and investment banking firm in Las Vegas, says such fears are overblown.

The Cosmopolitan will increase room inventory by 2 percent in Las Vegas and isn’t expected to threaten other resorts because it lacks a database of gamblers, Lerner said. Evidence of some recovery is “indisputable,” he added, based on recent data.

“High-end room rates are leading us out of the downturn, which is typical and encouraging.”

Macroeconomics is working against Las Vegas, however. Employment, home prices and consumer confidence — all of which drive discretionary spending — are still in the doldrums.

Signs of recovery

Although the U.S. economy is picking up and the Strip is showing signs of improvement, it may be too early to say Las Vegas casinos are recovering because consumers still lack confidence about the economy, said Stephen Brown, director of UNLV’s Center for Business and Economic Research.

Consumer confidence and sentiment — two measures of spending propensity — remain depressed more than a year after the recession ended in June 2009.

“They aren’t as strong as you might expect a year into recovery,” Brown said. “Consumer sentiment about economic activity nationwide is guarded. It’s psychological, but with real consequences,” he said, as people are less likely to spend.

UNLV economics professor Bill Robinson has a bleaker view.

“Income and job growth in California are what drive Las Vegas — and it’s got bigger economic issues, in dollar terms, than any other state,” he said. “We’re not getting a strong rebound unless it straightens its act out.”

Some indicators may not tell the whole story.

Some conventions book years in advance at low rates — a tactic that allows casinos to lock in bookings they can use as leverage to raise rates for tourists. If these rates are lower than expected, Strip operators won’t recover as well as anticipated, analysts say.

During Sands’ conference call, executives said they had “mixed feelings” on a recovery in Las Vegas next year. Its Las Vegas resorts book a disproportionately large number of conventions — where demand is rebounding strongly. But those room rates are still lagging, executives said.

Wynn Resorts, however, said convention room rates are improving.

Baccarat’s influence

The recent rise in gambling revenue is primarily driven by baccarat, a game influenced by a small number of high rollers. Slot wagering, the best indicator of mass-market demand, is down from last year, although declines have narrowed.

Conventions still represent a small segment of the overall market, Bosworth said. Some hotels have increased the rates they charge customers who book directly — a move that helps properties maintain their public image and pricing leverage.

Hotels sell a greater number of rooms at bigger discounts through third-party websites, where some properties lower rates even as they begin to charge more for directly booked rooms, he said.

With the exception of Wynn and Sands, which make most of their money in Asian casinos with breakneck gambling profits, Las Vegas-based casino operators have every reason to sound bullish.

“We’ve been bouncing along the bottom. But they need a much sharper economic recovery (than economists are anticipating) to dig out of their debt woes,” Fath said of MGM Resorts and Harrah’s Entertainment.

“If you tell people things are getting better, people start to believe it and things do get better. It can be a self-fulfilling prophecy.”

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  1. All of this ASSUMES that the economy will remain the same -- growing slowly.

  2. I agree with the poster "dipstick".
    Tourists like myself flying in to Las Vegas certainly notice if airfares or hotel rooms get more expensive. However, we will usually bite the bullet and book our trip anyway.
    As "dipstick" points out, what really affects our rebooking regular return visits is the dying gaming experience that Las Vegas is giving us. Tight machines and poorer payouts make us feel cheated by the end of our trip. The generally bad economy, in my opinion, is not even as large a factor in keeping tourists away, as is the ruining of the gaming experience by most of the casinos desperate to relieve us of every cent we bring as quickly as possible. We fly home feeling that there must be a better place to take our next vacation.

  3. I will not play at a blackjack table that pays out 6/5 for blackjacks, where I can't resplit aces, where the dealer can hit soft seventeen, where CSM's are in operation, where I can't double down on any cards I want, that don't allow for surrender and where there is inadequate penetration. I yearn for the good old days, but will not be played for a sucker by these casino's and their restrictive rules. As far as the recovery it's going to be SLOW, too much private and public debt (see Mohammed El Erian's (co-ceo of PIMCO) piece in the Washington Post last week) , not enough good paying jobs (many have been shipped overseas to China, India, and other countries) Chinese currency overvalued by 40% and a general lack of confidence in the economy that makes people willing to spend more freely. To top it all off lousy payouts and hidden fees, not interested in being fleeced, no thanks.

  4. With all due respect to the commentators who posted above, the Las Vegas gaming market has moved to a different client, with different spending habits. The resort fees are not an issue with the current wave of visitors to the gaming mecca. Value in service, products and presentation is leading the way in opening the new spending levers to a cash rich age group not concerned about the items you all have mentioned. The numbers are clear at Wynn, Venetian, City Center (which posted huge gains last quarter) and soon to be Cosmopolitan casino, who in their marketing is targeting quality in the areas of service, product and presentation. It is all about value, people are spending for value. The 6/5 Blackjack players or the resort fee conscience patrons are not at the main revenue driving casino properties.

    Six to Five blackjack was first used as a marketing product, but the public responded with a demand, and now 6/5 blackjack is here to stay, for now. Some of you may not like that product, but there is a demand for it. I personally think 6/5 blackjack should not be offered, but these type of products are in demand and attractive to the first time players.

    If anyone has notice we are seeing more and more of the 25 to 35 age group. This group is not following the traditional gaming day schedule of eating at dinner at 5 pm then gambling and drinking afterwards. The new group plays any hour of the day or night, will eat on anytime. Plus, you will see them drinking anytime, no matter the hour of the day or night. They spend money freely, without the emotion of losing, mainly expecting a quality product, and interaction with staff and other patrons.

    Do not underestimate the awareness of casino executives like Steve Wynn and Jim Murren, and Sheldon Adelson in recognizing how to tap into new markets with new ways to attract visitors to Las Vegas. It is now up to the middle casino operators to get on aboard and focus on offering value instead of their focus on cost. Yes, some of this value would be to discontinue 6/5 blackjack.

  5. The vehicle is out of control, bouncing around, hitting things left, right, up & down.

    As iamwinkler clearly pointed out, the abuses are so's openly offensive & insulting.

    Without a NEW IDEA, a NEW IMAGE and a NEW set of business standards, Las Vegas is toast.

    Las Vegas's themes are so-o-o played out that a turnaround appears very unlikely...short a divine intervention.

    ...especially with its last home-town hero & innovator... in Macao.

  6. From my most recent visit I noticed that on the Strip you don't really notice a decline of business, but the North Las Vegas operations are really suffering. Have never seen a Santa Fe Station Casino being so empty, may this be during the day or even during the peak times in the evening. At nights, it was like a ghost casino. Which was really depressing.
    The problem, to repeat myself, is the huge debt load of the mega resorts. They are raking in huge revenues but cannot generate no or only minimal profits because they owe too much in general.

    But then again, there's still a big over-supply of casinos, and only the places that offer the best deals and have some extra surprice available in their arsenal may attract the customers, and others, such as Plaza or Vegas Club are probably the next ones to bite the dust.

    From Switzerland

  7. Let me add a correction to my last comment, that should have read Chinese currency undervalued by up to 40% (being kept artificially low), making Chinese goods cheaper to buy and giving multi-nationals additional incentive to relocate production facilities in China, not to mention the other incentives-----cheap labor, lack of environmental restrictions, etc.

  8. I agree about the 6:5 blackjack. I come to Vegas for a chance at winning, not to be fleeced.

  9. Comments predicting the demise of Las Vegas? Now that's "so-o-o played out" -- like a hundred years played out.

    Las Vegas will survive and it will thrive. It might look like a different city than it did during the go-go years of 1994-2004, but it will be a better city, if only because the people who live here will appreciate it rather than hate it.

  10. The best 6:5 black jack I found was at the Riviera, in that party pit adjacent directly to the real pit. The dancers and the music were great so even the players that did not have to pay the "fee" (thus, playing regular 3:2 black jack games) had a chance to enjoy the show. Will never understand what makes the players play 6:5 b-j if they have a chance to play 3:2 b-j with almost the same view of the silicon babes. It's like playing a 8-5 j-o-b right next to a full pay machine.

    From Switzerland

  11. Much more concerning is the water issue that still not many people seem to take serious. Lake Mead water level is on its new low and it's going further down. Anyone wondering what will happen when there indee will no longer be enough water available???

  12. Chunky says:

    He agrees with Mr. Dipstick's comment that "the bean counters ruined it for everyone". Not only have they choked out visitors by nickel and diming them every inch of the way, they've done the same to employees, vendors and anyone else they can steal a nickel from.

    The tourism in Vegas grew and flourished when the town was powered by entrepreneurs and management who understood hospitality. Now look at what the bean counters and Wall Street / corporate suits have done to us!

    That's what Chunky thinks!

    ps: For the one millionth time don't forget to turn your clock back! ;-}

  13. jt2ou
    That's exactly what I also tried to carry over to some fine and interested readers: On any given Friday or Saturday night, many casinos are packed with people, many of them are young, dressed-up nicely, good-looking, in good mood. This is the crowd of party animals that's going to the clubs, but not the kind of crowd the casino needs to make money at the tables and slots.
    It may look nice, and indeed, it does look nice to see so many goodlooking young ladies in their sexiest outfits, fresh from the hair salon or SPA, but business wise it is questionable whether these many people are actually a great asset to the casino operations. I don't even think that many of them are 21 already, so this would be considered as "underage gaming", right? Well, I don't know, I understand that the people with their "normal lives" try to go and hang out in these super casinos on the weekends, nothing bad about it. Perhaps I'd do the same. Nice environment, nice people, safe place, what else do you want? It's just a matter of how much value are these people to the casino and even if they don't gamble much, does this stimulate the gaming taste of the other, non-party-hungry tourists that actually came to Vegas for gaming? There must be a reason for these night club scenery, or is it an effort to make additonal money that otherwise wouldn't even be made?
    We see, however, that despite these ultra-nightclubs many casinos are still suffering. It therefore can't impossibly be that much of a super business model.

    From Switzerland

  14. Homer

    I remember the days when the Rampart Casino offered really nice t-shirts (Nike-style) or jackets, but these new gifts/or slotplay remind me a little bit too much of the Cannery-management. They're doing exactly the same thing.
    So, what's left at the Rampart Casino is a nice swimming pool and a really good buffet that has almost never a long waiting line.

    On the other side, the machines are not really tighter than at any other casino and compared with international casinos, Vegas' casinos are still the best to play at. Comps and points on top of that. There are many countries in this world where you get nothing for your action, and even have to pay for your drink.

    From Switzerland

  15. 6/5 blackjack is for suckers. All we want is a fighting chance especially when the deck turns positive, lol. Maybe things will turn around and maybe that huge debt the mega casinos are carrying will be a good thing in the sense that many savvy investors like John Paulson (the second largest stockholder after Kerkorian in MGM, I believe, who made billions betting against sub prime mortgages through Goldmine Sachs) think that we are in for major inflation due to all this money printing thats going on (QE, QE2 ad infinitum) which will devalue debt and inflate real estate. The thinking is that the large mega casino companies are basically real estate companies, that this should help them. MGM just finished re-structuring their long term debt out to 2014-2015, if the casino and convention business continues to improve, they've already taken a ton of writedowns on City Center, they might be a good speculative investment at $12.

  16. Was that economic or comic relief ?

    It's so hard to tell the two apart.

    Perhaps the story contained several spelling errors...

  17. Longtimevegan has me a bit confused.

    I'm not sure what casinos he is frequenting, but I have seen no particular shift in the gaming, dining, and entertainment habits of our guests.

    Furthermore, although I'm paraphrasing a bit, it's inane to suggest that the 25-35 crowd is vital to the profitability of Las Vegas. Yes, this set of people will blow money in the clubs and in the casinos, but it's the older patrons that are, and always will be, the lifeblood of casinos.

  18. From my experience, I see different betting patterns between very young gamblers, the middle age, and the over 60s, or can we say, the retired?

    The very young gamblers play carefully, don't bet much , and very seldom try out something fancy. Minimum Bets on B-J or roulette, no typical system maneouvering, just playing to find out more about the games, but not risking their live's bankroll.

    The middle age, that's people between 35 and 55 or so, they are more familiar with the games. Some may have experienced heavy winning or losing streaks in the past, but they are not new to the games. Some of them play quit risky and take chances. Most "problem gamblers" probably fall into this cathegory. Some of them are probably desperately trying to get their money back that's been lost in earlier sessions, or some perhaps try to make up some extra money that's not coming in from their jobs.

    And then, the retired, people over 60 or so, they calm down again. Play less risky, more for entertainment, know that they can't win and will lose more than they win at times, so they play more for the fun part of it.

    As the business model of the Hard Rock obviously caters to the young crowd with pockets full of money, elder people are not quite the target clients. However, it needs to be stressed out that a casino can't make the millions needed from just a bunch of cool kids playing with daddy's money or some rockstars flying by at times. It's a mass' business, after all. Even if the Hard Rock does have a high limit section, I hardly ever see big players sitting and wagering in that room. Most money, and I think that's true, comes from the slot playing guests, still. Although, the dice action at nights must be pretty good, too.

    As long as the housing bubble was getting bigger, there was enough fresh easy cash around and available to burn. The times have changed, and no more easy money to everybody simply going to talk to his banker and getting a home mortgage loan to finance his cool life. Now it's a business with people who have real money, not borrowed money. And now it's decision time what kind of clients you want: No clients or clients that are willing to challenge their luck against the house edge.

    From Switzerland