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Best of Benjamin Spillman

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Benjamin Spillman
 

Tourism: If not by air, then how?

27 May 2008

LAS VEGAS, Nevada -- Cuts to the number of flights to Las Vegas could outlast the nation's current economic dip, making it more costly and inconvenient to get to one of the world's top tourist destinations long after the next recovery.

With record-high fuel prices forecast by some to go even higher, airlines potentially face an industry-changing dynamic that threatens an important commodity for the Las Vegas economy -- cheap and easy flights to and from Southern Nevada.

If that happens, it would be up to the hospitality industry to find ways to keep casinos on Las Vegas Boulevard and Fremont Street bustling despite transportation costs eating a larger portion of tourists' budgets.

"It wouldn't surprise me to see a lot more capacity drawbacks in Vegas over the next year," said Darryl Jenkins, former director of the George Washington University Aviation Institute. "This isn't an economic cycle. This is a cost increase. It is the worst one any of us have ever seen."

Already, five airlines with service to Las Vegas have filed for bankruptcy or ceased to operate since December.

Another, US Airways, recently announced it would reduce the number of flights to and from Las Vegas nearly 20 percent come August.

American Airlines also announced it would cut some flights after the peak summer season is over although it did not announce which routes would be affected.

Even Southwest Airlines, an industry leader that remains profitable and the carrier that hauls the most Las Vegas passengers, has reined in growth plans in large part due to escalating fuel costs.

"It is not surprising because most airlines are in a lot of distress right now," said Andrew Levy, chief financial officer for Las Vegas-based Allegiant Air. "They really struggle to make money flying into pure leisure destinations like Las Vegas."

Unlike most domestic airlines, Allegiant is growing revenue and continues to post double-digit profit margins. The airline saves money by flying low-cost MD-80 aircraft from small-town markets with little or no competition and by packaging seats with hotel rooms, rental cars and even Las Vegas show tickets.

Levy said cuts by other airlines could benefit Allegiant because in tough times troubled carriers tend to withdraw from the kind of small markets that are Allegiant's specialty.

But unless carriers adopt new business practices to account for higher fuel costs the fallout could be tough on Las Vegas, said Levy, whose background includes a stint as vice president of an investment company that specialized in aviation.

He called recent service cuts, "a fraction of what it will end up being if fuel prices stay where they are, or go higher.

"It is going to dramatically change the way we travel in the U.S.," Levy said.

Others warn against reading too much into the airline cutbacks.

Traffic at McCarran International Airport has dipped in recent months, but remains strong. And with an estimated 30,000 new hotel rooms under development on the Strip there is an expectation more tourists will come to gape at multi billion dollar resort projects such as Encore and City Center.

"We never get too overly excited about one carrier's reduction," said Randall Walker, director of aviation for Clark County, of the looming US Airways cutbacks.

In 2002, when the tourism business was still suffering fallout from the Sept. 11, 2001 terrorist attacks, Las Vegas absorbed the complete and sudden shutdown of National Airlines.

In 2001, National was the fifth-most prolific airline at McCarran and represented about 7 percent of total airline passenger traffic at the airport.

"One day they just stopped flying," Walker said. "It took about three months before we didn't notice the difference."

Walker said US Airways cutbacks may turn out to be a positive for Las Vegas if they free up space at crowded McCarran for new flights.

That's because many of the routes US Airways will trim are connecting flights, meaning aircraft stopped in Las Vegas en route to another location containing passengers who didn't stick around long enough to leave their money.

According to Walker, 51 percent of passengers on the soon-to-be defunct routes were connectors even though just about 15 percent of McCarran's overall passenger traffic is people making connections.

"We are really not too fond of those kind of flights," Walker said. "We try to manage this airport for the benefit of the community."

A reduction in the number of flights could reduce revenue for the airport, which makes money from landing fees and other charges through the airlines as well as from retail and food and beverage sales in the terminals.

Although Walker said the revenue comes in on a per-passenger basis, so the airport would still make money if people who would have used the US Airways routes arrive via a different carrier.

The airport also bases fees on operating costs, which means if there are fewer flights it could increase what it charges airlines to maintain a steady revenue stream.

The economic slowdown isn't changing plans for a new airport to complement McCarran, either.

Walker said plans are on track to open the proposed airport about 25 miles southwest of McCarran in 2017.

He said down cycles in the economy in the 1980s, '90s and early 2000s didn't do much to disrupt the long-term traffic increases at McCarran.

Jeremy Aguero, a principal for the financial consultancy Applied Analysis, said he thinks Las Vegas will endure the airline slump.

Aguero acknowledged Las Vegas will lose customers "at the margins" due to the economic slump and airline industry woes. However, he said the greater long-term problem will be finding ways to accommodate more visitors. New hotel rooms will bring new guests and Interstate 15 from California to Las Vegas is already congested.

McCarran could also reach capacity before a new airport is built.

"The math is very difficult to get through in terms of how you get enough people into Southern Nevada," Aguero said. "I don't think we have fully exhausted the well of d