Is economic relief in sight for Las Vegas gaming?

By Liz Benston

Sunday, Nov. 7, 2010 | 2 a.m.

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.”

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.

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.”