Vegas Hotels, Seeing Air Capacity Cut, Offer Opportunities

As air service shrinks around the United States because of the devastating effect of the high price of jet fuel on airlines' operating costs, Las Vegas is expected to feel more of a squeeze than most, particularly in the fourth quarter of 2008.

That's when capacity at McCarran International Airport is predicted to decline by 14.1 percent, based on a total seat capacity of 2 million this fourth quarter, compared with about 2.4 million in the fourth quarter of 2007, according to OAG capacity data.

The only U.S. airport expected to lose more fourth-quarter seats is Orlando International Airport, where a 15.1 percent decline is anticipated. In all, McCarran will lose all service from 30 airports in North America and Europe (see chart).

While analysts, hoteliers and city executives said the impact on the city from a corporate travel perspective may not be tremendously significant, there still could be negotiating opportunities for travel and meeting buyers.

"It's important to understand that Las Vegas is relatively unique in that business travel is a relatively minor piece of its overall business," said Warren Marr, Philadelphia-based director of hospitality and leisure consulting for PricewaterhouseCoopers. "Even with cuts in air service coming in the fourth quarter, it remains to be seen what impact they will have on corporate travelers, but I think we're looking at minimal changes. However, if the cuts do make it harder for businesspeople to get to the city and the hotels begin to feel that, then there could be some ability to negotiate better corporate rates, especially if negotiating across the hotel brand."

Las Vegas Convention & Visitors Authority senior vice president of marketing Terry Jicinsky said the capacity reduction still leaves the city with significant lift from major destinations.

"At this point, there's a great deal of speculation about the cuts and how they might affect us. There's no way to measure this yet," Jicinsky said. "In actuality, the cuts are coming from cities that are down on the list of population size, cities that don't affect us that much, that don't affect our total visitor base of more than 39 million that much. Even with cuts, we still have service from every major carrier and from 130 cities in North America, so getting to Las Vegas can still be done," he said, adding that, if they have to, travelers will resort to the old model of going through hub cities.

"We're working with carriers to add service, such as Virgin America direct from JFK—a major business feeder—and with Southwest, for example, on value packages that business travelers also can use," Jicinsky said.

If certain hotels, be they Strip properties, off-Strip hotels or those in the suburb of Henderson, are able to take away marketshare from their competitors with room rates, pricing for services will become a factor, PricewaterhouseCoopers' Marr said.

"The reality is that many business travelers want to get off their plane, get to their hotel and get checked in quickly," he said. "That's not a quick, simple experience at a 3,000-room property, but the cost of travel with the air service cuts and the cost of accommodations could be determining factors down the line about where to stay in Las Vegas."

Occupancy in Las Vegas' casino hotels, limited-service hotels and off-Strip properties for all segments was down 2.4 percent, year over year, from January through July 2008, Marr said, and room rates were down 6.6 percent.

"In comparison with the rest of the United States, Las Vegas took a bigger dent, but with its occupancy more than 25 percent above the U.S. average, the effects of those declines didn't have much of a negative impact," Marr said. "It's important to acknowledge that Las Vegas' total airlift has begun to decline already, with some cuts even before September. It remains to be seen how fares will be by year-end, but the city's hotels don't think it's going to be appreciably harder to get there."

It may become harder for corporate travelers to get to Las Vegas, Marr said, but it still will be better than getting to many other destinations because of the still-frequent air service. Slightly less than 50 percent of all visitors to Las Vegas arrive by plane, he said.

"Airlines have cut service because of their high costs, not because of load factors, which were pretty much full. With fewer Las Vegas seats to buy, it becomes a pricing issue of airlift competition," Marr said. "Corporate travelers are more willing and able to pay an increase in higher airfares per seat than the typical leisure traveler because corporations have less price resistance, and because corporate travelers need to be in Las Vegas for meetings and to conduct business."

Should the capacity decline lead to higher fares, the low-fare leisure traveler would find it harder to get to Las Vegas, Marr theorized, and there could be a minor shift in the city's mix of meetings vs. leisure travel.

In the past, Las Vegas' tourism industry has stepped up to subsidize the airlines and that is happening again, Jicinsky said.

"One of the fortunate things about Las Vegas is funding by the hotel room tax, so we have the ability to put some co-op dollars on the table, to provide them with matching dollars," Jicinsky said, a move confirmed by Ed Coffey, vice president of convention sales at The Riviera Hotel & Casino.

"In the meetings and convention market for short-term business—fall 2008 and spring 2009—we're offering special packages that provide meeting attendees a subsidy to reduce airfare costs. Our demand remains strong, so rates will rise year after year," Coffey said.

Short-term meetings, Jicinsky said, already are booked in advance. "Meetings are taking place and room blocks are being picked up," he said, "and with no cancellations of meetings for the fourth quarter, we expect the fall to deliver."