May 7, 2008
Down on Its Luck
Las Vegas used to be a recession-proof oasis.
Not anymore.
By Steve Friess
Newsweek Web Exclusive
On the third weekend of every April, Emily Ann
Frankston and her family—spread out over five states—meet up
in Las Vegas for their annual family vacation. This year was
different. The only ones to show up were Frankston, her husband
and her brother-in-law, and they stayed just two nights instead
of the traditional three. "My two sisters back east said airfares
were too high, my mother-in-law lost her job in January, and
some of the others said they were busy, but we think they didn't
want to spend the money," says Frankston, 37, who drove in from
the Phoenix area. "We've done this for the past nine years.
Even after 9/11 we all came. But this year's it's just us. This
recession is really hurting everyone."
It's even hurting the city of Las Vegas, the economy of which
was once thought to be impervious to the economic swings suffered
by the rest of the country. Not anymore. According to the Las
Vegas Convention and Visitors Authority (LVCVA), Las Vegas has
seen gambling revenues fall only once since 1970: in the aftermath
of the Sept. 11 terror attacks they dropped 1 percent in 2002
from 2001. So far this year they've fallen 4 percent, the number
of conventions held has dropped 10.4 percent, and average daily
room rates were off 3.8 percent in the first two months of 2008,
according to the most recent data available. Visitor volume
was up 1.2 percent through February, but market analysts say
that's because of the extra day provided by this being a leap
year; March's figures will likely put the year-to-date numbers
in negative territory. The stock price of MGM Mirage, owner
of Bellagio, Mirage and eight other Strip resorts, has halved,
from $100.50 in October to about $49 on Friday. In recent weeks
the company eliminated 440 middle management jobs to save $75
million annually. "We made a structural change in our company
to become more efficient and provide the same level of service,
but we did have to advance that effort because we were also
seeing a softening in the marketplace," says MGM Mirage spokesman
Alan Feldman.
What's leaving Las Vegas more susceptible to this economic
crisis than to previous ones? Diversification. Roughly 60 percent
of the Las Vegas Strip's revenues now come from nongaming activities.
By contrast, in 1991 and 1992, when the last comparable slowdown
occurred, nongaming activities provided just 42 percent of overall
revenue. "This is different from prior downturns," says Bill
Lerner, a Deutsche Bank gaming-sector analyst. "Now that there
are a lot more nongaming amenities, the visitation mix is leaning
toward nongamblers, and the consumer coming to Vegas is different
now than it was."
It doesn't help that the city's convention business is slipping.
Several annual conventions have seen fewer attendees show up
and have seen those who do come stay for shorter periods. For
example, last week's National Association of Broadcasters confab
attracted 105,000 registrants, down from 111,000 in 2007, according
to NAB executive vice president Chris Brown. Those figures could
have been worse, Brown says, but advance registrations were
so far down that several hotel-casinos voluntarily offered to
cut room rates by $10 or more to encourage attendance. Says
Brown, "That's never happened before."
The Frankstons aren't the only vacationers staying away. Nearly
7 percent fewer cars crossed the Nevada-California border along
Interstate 15 through February, reflecting in part that record-high
gasoline prices are curtailing drive-in visitors from the largest
neighboring state. Making matters worse, three airlines with
substantial service to Las Vegas—Aloha, ATA and Champion—are
going out of business.
Even the mortgage mess and the subsequent credit crunch have
taken a toll on Vegas. Several major construction projects on
the Strip are delayed due to financing problems, including a
second tower for Donald Trump's new condo-hotel. Also delayed
is a plan to build a $6 billion version of New York City's famed
Plaza Hotel. And while construction continues on the half-built
$3 billion Cosmopolitan Resort and Casino next to the Bellagio,
the project may be in jeopardy after developer Bruce Eichner's
company defaulted on a $760 million loan from Deutsche Bank.
(Eichner did not respond to NEWSWEEK's request for comment.)
Despite such problems, other developers still seem more than
willing to bet on the future of Vegas. There is more than $30
billion in new construction scheduled for the Strip. And assuming
those projects don't get squeezed by the credit crunch, some
40,000 new hotel rooms will be added to the current 136,000
by 2011, resulting in 100,000 new service sector jobs.
Like other major U.S. cities, Las Vegas is banking on the
Euro-rich to help out during these tough times. According to
Robert LaFleur, a gaming-stock analyst for Susquehanna Financial
Services, "Bachelor parties in Vegas are now all the rage for
soon-to-be-wed fellows from Australia and the U.K., for instance,
because it's so cheap to get there … Right now it's an easy
sell to get people from overseas."
The city isn't skimping on its advertising budget, either.
Last week the Las Vegas Convention and Visitors Authority launched
a $12 million three-month national TV ad blitz called "Vegas
Right Now" that insists "that there are new reasons why you
ought to come," says Rob O'Keefe of R&R Partners, the ad agency
that handles the annual $90 million tourist board account.
But given the host of problems facing the city, an ad campaign
might not be enough of a fix. In one, called "The Dangers of
Thinking," an announcer urges the audience to "do without thinking.
Do Vegas right now." While it was witty, the ad irked Vegas
regular Tania Franco of Atlanta, whose husband was recently
forced to take a pay cut at his job. "The message is 'Don't
think about how crappy your economic situation is, just come
to Vegas, damn it. If you don't, you're a wallowing loser.'
That's insensitive."
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