LV airline lines up casino backing

National Airlines Inc., a new Las Vegas-based air carrier backed by two major casino companies, will begin direct flights from San Francisco, Los Angeles, Miami and New York within six months, its founder said today.

The launch of the new low-fare carrier will help offset cutbacks in service to Las Vegas by established airlines such as America West and Delta, National Airlines President Michael Conway said.

Initially, National's fleet of four 175-seat Boeing 757s is expected to add 46,600 passengers per month to the traffic flow at McCarran International Airport, he said.

National expects to triple its fleet after 12 months of operations and be flying as many as 40 aircraft to Las Vegas from 22 major U.S. cities within five years.

Gaming analysts and tourist officials said National could help boost the visitor counts needed to fill the new hotel rooms coming on line.

"It won't immediately provide enough capacity to fill every room under construction, but it's a step in the right direction," said Jason Ader, senior managing director of Bear Stearns & Co. "It will focus on the type of customer Las Vegas needs to bring in."

"It's definitely a positive development for Las Vegas because adding aircraft capacity to the market is very important," said Andrew Zarnett of Ladenburg Thalmann & Co. "It will help resolve the visitor shortfall."

More than $8 billion of new resorts are expected to add about 22,000 rooms by 2001. They include Bellagio, Paris, Mandalay Bay, The Venetian, Marriott at the MGM Grand, the Resort at Summerlin, the Aladdin-Planet Hollywood project, two Lake Las Vegas hotel-casinos and expansions at the Rio and Hard Rock.

But growth in traffic on the two main arteries feeding tourists into Southern Nevada -- McCarran and highways leading from Southern California and Arizona -- isn't keeping pace with the surge in room inventory.

As a result, hotel occupancy rates are dropping almost as fast as the stock prices of some of gaming's biggest operators.

"We estimate that about 100 new daily long-haul flights will be required to accommodate the estimated 3.2 million additional air passengers expected to visit Las Vegas," said Las Vegas Convention & Visitors Authority President Manuel Cortez.

"This represents a 12 percent increase over the current average daily flights, making National's presence here critical to the continued growth and business expansion of Las Vegas."

"We're going to need 200,000 more visitors a week within the next three years to maintain current occupancy rates," said David Ehlers, chairman of Las Vegas Investment Advisors Inc.

"National Airlines will put a dent in the problem, but it's going to have to grow as quickly as possible."

To fuel that growth, Conway -- a co-founder and former chief executive of America West -- has gained the support of two casino operators with major holdings in Las Vegas.

Harrah's Entertainment Inc. and Rio Hotel & Casino have each invested $15 million in National, giving the new carrier a stronger financial base than any other start-up airline in U.S. history, Conway said.

"Our investment in National is a strategic move that will allow us to offer additional valued services and conveniences to our customers," said Harrah's Chairman Philip Satre.

"A strategic alliance and investment with a well-founded and focused airline based in Las Vegas and serving many of our local and feeder casino markets creates a unique opportunity to build upon the total experience that our customers desire on a Las Vegas trip," he said.

"Our partnership with National is a natural," said Rio President James Barrett. "For major Las Vegas players to sustain their growth and visibility, it is essential that airline capacity into Las Vegas keep pace with the dramatic growth in room inventory. National provides the right solution at the right time."

Ader said their investments will give Harrah's and Rio "unique marketing advantages, especially in facing the competition from the new properties coming on stream." Zarnett said the hotel-casinos will generate increased mid-week business from their alliance with the airline.

There's another incentive, as well. Some airline executives believe video inflight gaming may become an option for domestic carriers over the next few years. With Harrah's and Rio as strategic partners, National may have a competitive advantage in that arena.

National has raised more than $47.3 million through private placements of stock to the two casino companies and a handful of other investors.

National's capitalization -- more than $20 million higher than that of any other new U.S. airline -- will enable it to outlast any price war that might erupt if other airlines slash fares on competitive routes, Conway said.

His confidence isn't shared by some competitors who mutter about price wars.

"The big guys will beat up on them," said a pilot for a big, established carrier. "They're going to be taking on Goliath and Goliath's brother.

"The only thing they have to offer is price, and you'll see competitors offering $29 fares until they bleed them dry."

But if that occurs, it won't last long, Conway said.

"The fares in this market are already the lowest in the country, which is why established carriers aren't eager to come here. And the federal government has just issued guidelines against predatory pricing.

"It would be very difficult for an incumbent airline, particularly one that's been taking capacity out of the market because fares are too low, to cut fares further," he said.

In fact, air fare increases are a more likely outcome, said another airline executive who requested anonymity.

"You'll probably see an increase in visitor volume after Bellagio opens in October," the executive said.

"Then, because there aren't enough planes flying into Las Vegas now to support that increased demand, carriers will have an incentive to raise ticket prices.

"You'll still have fewer people than necessary, and the ones who do come will have less money to spend once they get here," the executive said.

One incentive for boosting fares is low profit margins. At 10.5 cents per passenger mile, airline yields in Las Vegas were the lowest of all major U.S. destinations and 5.6 cents below the national average as of the end of last year's third quarter, according to Ader.

The Las Vegas yields, depressed because this is a leisure market competing with more profitable business destinations, are so low some airlines lose money even when filled with passengers.

United Airlines, for example can break even with 63.3 percent of its seats filled on an average domestic flight. But its breakeven load factor on flights to Las Vegas was 102.7 percent at the end of 1997.

Even if predatory pricing is a remote threat to National, other start-up airlines have failed after a few years of operations. TriStar and Western Pacific, formerly known as Commercial Airlines, were two low-fare carriers serving the Las Vegas market that are no longer in business.

Western Pacific, though, based its operations in Colorado Springs -- a key strategic error, Conway said.

"While they were a no-frills carrier and started with modern equipment, their success was based on the likelihood they could pull enough traffic out of Denver, which was dominated by United Air Lines," he said.

"But they were always vulnerable to United matching their fares on a selective basis out of Denver, which would keep passengers from driving to Colorado Springs.

"And to be a hub, Colorado Springs needed to be a strong destination point itself, which it isn't," Conway said. "By the time they saw it wasn't working and decided to move their operation to Denver, it was too late."

Tristar flew 100-passenger BAE-146 aircraft, which were powered by four engines requiring more fuel and maintenance than twin-engine planes carrying a higher number of passengers.

"They were a point-to-point carrier out of Las Vegas, a very small, under-capitalized airline that tried to take on short-haul carriers in their strength," Conway said. "One of their routes was from Los Angeles to Las Vegas, and they were competing directly with Southwest Airlines."

Conway speaks from experience. A former Continental Airlines vice president, he co-founded America West Airlines in 1981 and spent 13 years with the Phoenix-based carrier before being ousted in a power struggle at the end of 1993.

He and his team, which includes several executives with extensive airline experience at America West and elsewhere, designed their strategy to avoid the problems that affected Tristar and Western Pacific.

National's business plan projects its lowest unencumbered cash balance at about $28 million at the end of its seventh month of operation, with positive cash flow thereafter. That provides a financial cushion in the event of fare wars or a downturn in the economy that impacts leisure travel.

It has deferred $4 million of a planned $5 million in progress payments on new aircraft from the seventh month of operations to the 13th month.

National will fly only Boeing 757 aircraft, cutting the high training and maintenance costs associated with operating a fleet that includes several different models.

Each plane will include 22 first-class seats, with initial first-class package fares from the East Coast running as low as $500 roundtrip.

It will offer frequent non-stop service from East Coast cities where a demand-supply imbalance creates overbooked flights, many of them operating only late at night.

It won't fly overseas, but will pursue marketing alliances with foreign carriers landing at gateway cities that serve as the first stop for overseas passengers heading for Las Vegas.

And it will combine productivity increases and cost-containment measures to enable it to make money despite offering full-service meals, reservations, baggage handling and other benefits at low fares, Conway said.

"We'll be using one aircraft type with a longer average stage length, which cuts down on engine and airframe wear, landing fees, fuel costs and other expenses," he said.

Reservation services, airframe and engine overhauls, catering, ground crews, materials management and training will be among the functions National will subcontract to other suppliers to trim overhead.

As a result, annual operating costs per aircraft will range from 45 to 70 percent below those of existing carriers, Conway said.

He also said National should benefit from a more favorable relationship between air carrier revenues and capacity on routes the company plans to serve.

Revenues on those routes into Las Vegas have soared 34 percent since the company prepared its original financial forecasts, while seat capacity is up only 4 percent, he said.

With the sharp increase in Las Vegas room inventories stimulating new demand, that should bode well for National, he said.

Over the next six months, National will begin hiring and training a staff that will eventually include more than 2,200 employees based in Las Vegas.

It will also undergo government certification programs, Conway said. The Federal Aviation Administration will review crew flight training and other procedures and the Department of Transportation is expected to issue a certificate of public convenience after studying the financial fitness of the carrier.

National has secured up to five gates at the new "D" Terminal at McCarran and is negotiating leases for as many as nine Boeing 757s, although it plans to use only four planes initially.

Within a year or so, National plans an initial public offering that could provide a big capital infusion to the new carrier.

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