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Should Casinos Support National Airlines? (Part Two)

When a lack of flights into Las Vegas was a pressing issue in 1998, casino companies considered a number of alternatives, including subsidizing long-haul flights by large carriers in order to make such routes more profitable. The plans annoyed Southwest, and led to a meeting between a number of top gaming officials and Southwest Chief Executive Herb Kelleher.

Kelleher was assured at the meeting that Southwest wouldn't be neglected by the casinos in their plans to encourage more flights into Las Vegas - and in response, Kelleher committed to expand Southwest's service to McCarran.

A Southwest spokeswoman wouldn't comment on whether the Dallas-based airline felt it was appropriate for the gaming industry to help prop up a competitor. But Kristin Nelson noted that Southwest had added 17 Las Vegas flights in 2000, including new flights to such cities as Albany, N.Y., Birmingham, Ala., Buffalo, N.Y., Baltimore-Washington, Columbus, Ohio, New Orleans, Omaha, Neb., Louisville, Ky., and Tulsa, Okla.

"We're very proud of what we've done in Las Vegas, and ... there's a lot of potential for growth," Nelson said. "Southwest Airlines is a growing airline, a growing company. We increased our flights (to Las Vegas) by 17 in the course of one year, and that's pretty significant growth."

Still, gaming analyst William Schmitt of CIBC World Markets believes Las Vegas could suffer "a blip in visitation downward" if National closes.

Decrease in Seats

"My gut feeling is if it closes, you'll have a period of time with a decrease in seats, and that's not a good thing," Schmitt said. "It'll probably be three to six months before the other airlines make up the difference.

"Longer term, you won't have the quality of flights coming in that National provides. My sense is that in the long-term, those flights will be replaced, but by flights of lower quality."

Ironically, Harrah's wouldn't suffer as badly as other operators if flights were cut into Las Vegas, since its hotel room inventory isn't nearly as large as the other large operators. But analysts say investors may be growing frustrated with a string of disappointing business deals for the gaming giant.

The write-off for Harrah's from National could exceed $50 million in a worst-case scenario. That follows on the heels of several quarters of disappointing results at the Rio, acquired by Harrah's last year, and continued struggles at Harrah's New Orleans, where the company is attempting to reduce a mandatory state tax of $100 million a year.

Economic Impact

"The economic impact of National (in write-offs) doesn't equate to a dollar a share, but there is a growing level of frustration surrounding these kind of recurring non-recurring charges," David Anders, gaming analyst with Merrill Lynch, said.

But Schmitt believes it would have been worse for Harrah's to continue to try to support National on its own.

"At the end of the day, it will cost them $40 to $50 million. It's not a good investment," Schmitt said. "It would have made more sense for the other guys to do it, because they have a much larger room base in the city. Knowing what we know now, it wouldn't have been a good investment for anybody.

"What would make investors more nervous would be if they invested more money in it, because that money is going down the tubes. It benefits other operators much more than it benefits (Harrah's). Harrah's has already lost the money; Harrah's should let it go."

Another top gaming executive said his company doesn't want to offend National's competitors.

Southwest is by far the largest airline at McCarran International Airport here, with a capacity of 21,708 outbound passengers daily. That's more than four times the size of National, with 5,000 outbound daily seats.

"We would love to see this airline succeed, but an equity investment is not the proper role for us to play," said Alan Feldman, MGM Mirage spokesman.

Feldman cited concerns that such an investment could damage relations between the company and National's competitors at McCarran. Both MGM Grand and Mirage Resorts -- which have since merged -- reached this conclusion separately when declining to invest in National's start-up, Feldman said.

"It's not in the best interest of the companies to make an equity investment where we would be competing with our business partners (other airlines)," Feldman said. "That was the principal reason (that MGM Grand and Mirage) didn't invest then, and it remains the principal reason today."

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