June 13, 2008 / 8:11 PM / in 9 years

Airline cuts to squeeze Las Vegas resorts

5 Min Read

<p>Fireworks explode over Las Vegas Strip casinos just after midnight in Las Vegas, Nevada January 1, 2007.Steve Marcus</p>

LOS ANGELES (Reuters) - Airline capacity cutbacks combined with U.S. economic softness look set to take more money off the tables at Las Vegas Strip resorts after the summer, likely forcing room rate discounts on top of already declining visitor rates.

Work is under way to add more than 40,000 luxury hotel rooms to the gambling corridor -- about one-third more than today -- but it looks as though operators will have trouble filling them up.

From now through the end of next year, the room inventory will jump by more than 11,000 with the opening of casino-hotels like Wynn Resorts Ltd's_(WYNN.O) Encore, MGM Mirage's (MGM.N) City Center and Fontainebleau Las Vegas.

"For Vegas to grow, more (airline) seats have to come onto the market," said Matthew Jacob, an analyst at Majestic Research.

But airlines, pounded by soaring oil prices, are planning to scale back flight schedules after the peak summer travel season ends. Carriers like Continental Airlines (CAL.N), AMR Corp's AMR.N American Airlines, UAL Corp's UAUA.O United Airlines and Delta Air Lines Inc (DAL.N) have all announced capacity cuts.

Most have not provided details of which flights would be cut, but US Airways Group Inc LCC.N has said it will drastically reduce Las Vegas services. On Thursday, the U.S. No. 7 carrier said it would close its Las Vegas night operations from September 3, because revenue "no longer exceeds the incremental cost of flying."

The carrier said its overall daily departures from Las Vegas would drop to 81, compared with as many as 141 in September 2007.

The cutbacks will likely mean higher fares for remaining seats as well as more time-consuming travel routes, Jacob said, which could deter potential Las Vegas visitors.

Wachovia Capital Markets analyst Brian McGill estimated earlier this week that the airline industry will take at least 12 percent, probably more, of its capacity out of Las Vegas beginning in October.

"In our opinion, this could not come at a worse time for Las Vegas, as there is a meaningful amount of new supply that is to come online beginning in December of this year with the opening of Wynn Encore," he said in a research note.

According to the Las Vegas Convention and Visitors Authority, about half of visitors to Las Vegas arrive by air, with the rest driving in -- mainly from Southern California -- but air arrivals account for about 80 percent of hotel stays.

Overall visitation so far this year has been down marginally from last year. Nevada casinos won just over $1 billion from gamblers in April, the latest figures available, a 5.1 percent decrease from the same month a year earlier, according to Nevada's Gaming Control Board.

The major casino operators all reported lower profits or outright losses for the first quarter, and there are few indications that conditions are improving, despite local optimism.

"Las Vegas will still continue to have strong air access ... in addition to direct flights, there will be access via connecting flights and feeder routes," said Kevin Bagger, research director at the city's visitors' authority.

He also said airlines are "constantly readjusting routes" and would respond quickly to any upturn in demand.

Deutsche Bank analyst Bill Lerner said airlines were being forced to become more efficient with their Las Vegas operations, noting that discount airlines may also continue to pick up some of the dropped capacity.

"In our view, the real risk from jet fuel inflation appears to be a redistribution of visitors' budgets," with visitors spending less during their stay or shortening their visit, he said in a research note.

McGill at Wachovia said Las Vegas will need to bring in an additional 2.8 million visitors to fill the additional rooms opening through next year.

"With the cuts in airline capacity, we do not think there will be enough seats to fill the new room supply. We think it is more likely that the increased fares will lead to lower hotel prices, as the operators must keep prices low to subsidize the cost of a trip for a visitor," he said.

Editing by Leslie Gevirtz

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