Airlines, Hotels Clash Over Vegas Airport - TheStreet

Las Vegas, a city built for visitors, is ground zero in the airline industry's effort to cut back on marginally profitable flights.

But the city's powerful hoteliers are none too happy about the cutbacks. They still want the carriers to finance a new airport terminal, which is needed to support 32,000 additional hotel rooms slated to open by 2012.

The timing is unfortunate. Traffic at McCarran International Airport fell 8.6% in July, compared with the same month a year earlier. In fact, traffic has fallen every month this year, except for February, which had the benefit of leap day in 2008. And the airlines aren't finished cutting.

In July, each of the top four carriers at McCarran showed passenger count declines. At

Southwest

(LUV) - Get Report

, the leading carrier with a 42% share, passenger counts fell 5.6%.

US Airways

(LCC)

passenger totals dropped 17.3%. The decline at

UAL's

(UAUA)

United was 8.9%, while traffic on

Delta

(DAL) - Get Report

slid 12.7%.

"We have a great potential to be impacted

by airline cutbacks because we have more visitors per capita than any other major city, and 50% of our visitors come by air," says Jeremy Aguero, principal analyst at Las Vegas economics research firm Applied Analysis.

"Las Vegas was uniquely positioned to take advantage of exuberant consumer spending between 2004 and 2007," Aguero says. "And now, we are uniquely positioned to be impacted by the slowing of that consumer spending, particularly in tourist activity."

In June, the number of visitors to Las Vegas fell by 3.1%, and the average daily room rate sank 16%, according to the Las Vegas Convention and Visitors Authority. Meanwhile, the number of rooms increased 2.5%.

US Airways, which now calls its Las Vegas operation a "secondary hub," leads the downsizing. Last week, it virtually ended a late-night connecting bank that predecessor America West opened in 1986 and halted service to a dozen cities. Daily Las Vegas departures, as high as 141 in September 2007, dropped to 81. By January, the total will be 74.

Nighttime Las Vegas flying accounted for the lowest revenue per available seat mile in US Airways' system, President Scott Kirby said on a July earnings call. Because of its 24-hour culture, Las Vegas had provided a rare opportunity to use airplanes at night, rather than parking them. "It's all utilization flying," Kirby said. With fuel costs high, "it just didn't make sense anymore."

Southwest also continues to cut, with another 14 departures coming out of the January schedule. Las Vegas is the No. 1 Southwest city, with 240 daily departures.

"Airlines are fed up with Las Vegas," says aviation consultant Bob Mann, because many of the vacation travel packages to the city funnel most of the proceeds to the hotels.

"It amazes me how people fight for the last $10 on an airfare and then spend $400 on a hotel," Mann says. "This is an attempt to get out of those situations. The airlines are saying 'we don't want to play anymore -- we will supply fewer seats and leave it to the hoteliers to fix.'"

Those hoteliers are headed in the opposite direction, growing rather than shrinking.

By the end of 2011, Las Vegas will open 32,095 hotel rooms, bringing the total to 165,042, says the Convention and Visitors Authority. Topping the list is a $9.2 billion project by

MGM Mirage

(MGM) - Get Report

, with four hotels and retail space, which is scheduled to open in late 2009.

In the second quarter, MGM Mirage's operating income declined 29% and revenue slipped 2%. "While MGM has the largest share of the Strip and may have the most leverage to a consumer recovery, we believe the downturn in Las Vegas fundamentals may be extended through at least 2009," wrote MacQuarie Securities analyst Joel Simkins in a recent report.

"We think investors should stay on the sidelines, particularly as airline capacity reductions, slower business travel, and Strip supply growth will likely weigh on shares," Simkins said.

Airlines and hotels clashed at a July meeting of the Clark County commissioners, who considered plans by McCarran International Airport to build a $1.8 billion, 14-gate terminal, financed by airline revenue and passenger fees.

In a letter to airport director Randall Walker, Linda Macey, head of the airport airlines committee and properties manager for Southwest, asked for a delay in the project, even though preliminary work has begun.

"The current state of the industry is at an all-time low, and there is much uncertainty as to what the future holds," Macey wrote. "Projects that cannot be justified based on substantiated current needs should be canceled and/or deferred."

But it is clear that in Las Vegas, hotel operators have the upper hand, because the terminal project is moving ahead. "County officials scoffed at the airlines' pessimism," according to a story in the

Las Vegas Sun

. "

They were adamant that nothing be done to jeopardize Las Vegas' ability to fill 30,000 more hotel rooms scheduled to open in the next three years."