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Soft gains fuel talk of recession

Feb 19, 2008 5:41 AM

The latest statistics for Nevada’s gaming industry indicate that 2007, while not a banner year, saw modest gains in gaming revenue and casino visitors (see accompanying story).

Which leads to the question as to whether the gaming and tourism market is feeling the effects of a slowing economy.

Key industry executives are split in their answers.

The chief operating officer of Las Vegas Sands said the gambling industry, while not immune to recession, is "recession resistant," while the chief financial officer of MGM Mirage believes signs of a recession are beginning to "rear their heads right now."

"One of the last things people want to do is stop enjoying themselves," Las Vegas Sands’ William Weidner last week said at the Reuters Travel and Leisure Summit in Los Angeles.

He said the Las Vegas Strip, where Sands recently opened the Palazzo resort adjacent to its high-end Venetian hotel-casino, still offers "a real bargain" compared with some other travel options.

Domestic vacation destinations in general are more appealing to Americans, given unfavorable foreign exchange rates, and gambling has always been "attractive," Weidner said.

He also emphasized that the convention business in Las Vegas allows Sands to "ratchet up or ratchet down" its bookings to match the market.

Weidner conceded, however, that the company has felt a twinge of weakness recently, despite suffering almost no impact from the slower U.S. economy through last year. In the first quarter of this year "we feel a bit of it," he said.

That "twinge" was also being felt in Las Vegas Strip casinos operated by MGM Mirage.

"It’s hard to ignore a lot of the bad news that’s out there. Clearly the consumer is a little bit stressed," said Dan D’Arrigo, chief financial officer at MGM Mirage, who also spoke at the Reuters Travel and Leisure Summit.

D’Arrigo said the operator of Strip resorts like the Mirage and Circus Circus was seeing weakness in low-end "value" properties and in its meetings business.

He added, however, that MGM’s high-end business, driven in large part by international gamblers, continues to perform very well, and that is balancing some of the weakness at lower-end properties.

Echoing his comments was Deutsche Bank analyst Bill Lerner, who said weakness is already being felt at "high-frequency" gambling venues like regional riverboats and Vegas casinos that cater to local residents.

"There are some risks on the casino side that are starting to rear their heads right now," Lerner said.

The U.S. gambling market actually grew during past recessions, most of which coincided with major increases in gambling capacity. In the early 1980s, New Jersey’s Atlantic City was starting to build out, and in the early 1990s the riverboat casinos of the Midwest and U.S. Gulf Coast were opening.

The recession early in the current decade was unique because of the attacks of September 11, 2001, after which consumers made a relatively quick comeback to Vegas, Lerner said.

"This time maybe its different," he said, citing the consumer confidence crisis, strains of the war in Iraq and the fact that no new casino markets are slated to open in the near-term.

Las Vegas is often said to be resistant to a slower economy because "so much of our business is booked far in advance," Steve Wynn, chief executive at Wynn Resorts, said during a conference call with investors.

However, "it would be unsophisticated to think that Las Vegas is somehow a magical island unto itself, immune or isolated ...," Wynn said.

Nonetheless, the Sands executive said he expects Las Vegas will find new ways to lure visitors to the new hotel rooms expected to open over the next few years.

After the Palazzo, the Strip is slated to see the debut of several new mega-resorts, including the Cosmopolitan, MGM’s CityCenter, Steve Wynn’s Encore and Boyd Gaming’s Echelon Place.

"Everyone has been consistently wrong about Las Vegas since the beginning," Weidner said, referring to prognosticators from as far back as the 1950s who said that the gambling corridor was verging on being overbuilt.

Solutions to bringing more people to the gambling haven could include making bigger airplanes or extending runway aprons at the city’s current airport, the Sands executive said.

"We’ll figure it out ... My view is that the infrastructure will follow the development," he said.