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Best of Chris Sieroty

Gaming Guru

Chris Sieroty
 

Rising fuel prices could slow down gaming recovery

10 January 2011

LAS VEGAS, Nevada -- For Strip resorts, the good news is gaming industry analysts expect "smooth sailing and moderate gaming growth" for at least the first half of the year.

The bad news is nonluxury resorts will continue to have a hard time competing with their luxury counterparts as the price difference to trade up continues to narrow. Strip hotels are also expected to be hurt by higher airfares, the result of higher fuel prices, according to analysts with the Global Gaming Group at CB Richard Ellis.

"Every (extra) dollar it costs to get here means they have less to spend in Las Vegas," Brent Pirosch, director of gaming consulting services with CB Richard Ellis, said Friday.

In a report, authored by Pirosch and Director of Gaming Research and Analysis Jacob Oberman, they cautioned that rising airfares "could serve to crowd out" spending and visitation from middle- and lower-tier customers.

Airfare increases are already a fact of life, with virtually every major carrier adding one-way or round-trip surcharges to their flights. US Airways and American Airlines are just two airlines that have added a $20 round-trip surcharge for most domestic fights, according to the website Farecompare.com.

Oberman said at $50 for a round-trip surcharge the 18 million visitors to Las Vegas would be paying an extra $900 million annually.

"They are giving to the airlines some of what they would be spending on the Strip," Oberman said. "The surcharges are going to affect the lower end of the market who are on a strict budget."

Even without surcharges, rising oil prices could push airfares even higher. The extent of the rise in oil prices, however, depends on the world's economy.

Those who are predicting a strong economic recovery say this will translate into greater demand and increased prices for oil. Those who expect a slowdown in the U.S. or Chinese economies say oil prices could stay at or below their current levels. At the end of trading on Friday, the price of oil stood at $88.03 a barrel on the New York Mercantile Exchange.

While it may cost more to get to Las Vegas, once tourists arrive they are expected to choose to stay at a luxury property -- such as Wynn Las Vegas, Bellagio, Aria and The Cosmopolitan of Las Vegas.

That trend took off in the third quarter of 2010 when luxury property EBITDA (earnings before interest, taxes, depreciation and amortization) grew by 27.5 percent, while nonluxury properties experienced an 18.5 percent EBITDA decline, according to the report.

Oberman and Pirosch attributed the continued growth at luxury properties to them being in a better position to attract meetings, their greater exposure to high-end Asian gaming, their customers being less affected by rising airfares, and their customers having more money because of the stock market's recovery.

Resorts such as Wynn and Bellagio should also continue to benefit from the trade-up phenomenon caused by the compressed room rate environment. In other words, a visitor is having to pay relatively small amount extra to stay at a luxury property rather than a nonluxury hotel.

Pirosch, who expects room rates to remain depressed this year, said customers are only having to pay $20 to $30 more to stay at a luxury resort.

"Although demand during heavy convention periods should be plentiful for all Strip hotels, it is the demand periods that rely more heavily on leisure visitors where we believe we will see the trade up phenomenon hurting the nonluxury properties the most," the report said.

Pirosch said demand this week for the International Consumer Electronics Show has pushed luxury room rates up to $600 a night, while nonluxury hotels are benefiting by being able to charge $200 to $300 a night.

"With this environment, we ultimately believe U.S. home prices will need to increase for nonluxury properties to experience revenue growth in line with their luxury counterparts," Oberman wrote. "The reason why we believe home price growth is needed is that homes make up a greater portion of their customers' balance sheets."

Both Oberman and Pirosch expect that, absent a major economic shock in the United States or China, Las Vegas will be set for moderate gaming revenue growth for at least the first part of the year.