Economy
Saving Las Vegas One Airplane Ticket At A Time (WYNN)(LCC)(MGM)
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One of the largest casino projects in history almost fell apart last week. CitiCenter, an $8.7 billion casino being built in Las Vegas, came close to losing a critical piece of funding from one of the two partners that owns it, MGM Grand (MGM). The publicly traded company came up with $200 million at the last minute, but CitiCenter will need more money to be completed, and MGM is close to being tapped out.
MGM shares trade at $2.85, down from a 52-week high of $62.90. Rival casino operator Wynn (WYNN) has a stock price of $21.37, down from its period high of $119.74. Wynn is in the process of selling seven million of new shares to repay debt and cover other corporate costs. Wynn could probably have avoided raising any money in a more favorable economy when the gambling business was booming. But, the firm has $4.4 billion in long-term obligations and had $210 million in operating income last year. With the gambling industry in a shambles, that profit is going to be down this year.
There are cheap travel packages all over the Internet that allow people to fly to Las Vegas and stay in a high-end hotel at remarkably low prices. One American Express offer allows people to take a plane from Los Angeles to Las Vegas and stay at Wynn for $344 including three nights and the airfare. It would be hard to come up with math to show how that is profitable for either the casino or the airline. A close look at the financial dynamics of gambling and airlines reveals that it is actually a very good way to get cash flow from travelers who would normally not travel at all.
US Air (LCC) flies from Los Angeles to Las Vegas at least six times a day. Round-trip airfare is as low as $98. Odds are extremely low that those flights are all full. On most days, the least expensive rooms at Wynn are $165. In this economic environment, there is no chance that Wynn is full.
The US Air flights are going to go from LA to Vegas and back whether they are 20% full or 90% full. The variable costs might be a little fuel due to the weight added with more people and the extra cans of Coke and packets of peanuts. Otherwise, the difference between a full flight and an empty flight is zilch. A similar principle holds true at Wynn. The cost of the debt for the real estate and maintaining and staffing a hotel with hundreds of rooms is not going to change if the hotel is full or nearly empty. The variable cost is probably not much more than a few dozen people and washing and changing linen.
A package deal for $344 helps the airline and the casino, although the casino almost certainly gets the better end of the bargain.
All that the airline receives is $344 for each traveler, although there may be a silent partnership with the casino that gives USAir a piece of the casino’s action. The casino, on the other hand, may emerge from the travel package arrangement well ahead of the game. The guest who spends three nights at Wynn may well gamble, dine in the restaurants in the building, play golf, or go to a show. With many of the retailers who took space at Wynn dying for customers, these additional guests may be the difference between a default on retail leases, which would leave Wynn holding the bag, or hanging on until the recession is over.
Most airlines and probably every major casino company will lose money this year. Letting travelers stay at casino hotels at extremely low rates probably shrinks what could be catastrophic losses to ones which are manageable.
Douglas A. McIntyre
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