Airline Cuts Could Affect Las Vegas Gaming -Wachovia (MGM, WYNN, LVS)

Wachovia is out with a research note this morning bringing to attention a concern that not many other Wall Street firms have considered yet: how will capacity reductions at the major airlines affect returns for Las Vegas strip operators? Adding to the issue, Wachovia points out that these reductions "could not come at a worse time for Las Vegas, as there is a meaningful amount of new supply that is to come online beginning in December of this year with the opening of Wynn's (Nasdaq: WYNN) Encore."

The firm sees the airline industry taking at least 12% of capacity out of Las Vegas starting in October, and believes this number will likely get bigger as Wachovia expects more airlines to reduce Las Vegas flights over the next few months. Such a capacity reduction will reduce the number of visitors into Las Vegas by 2.4 million a year, Wachovia estimates. Given that "84% of airline customers stayed at a hotel on the LV Strip" in 2007, the firm believes this will certainly impact hotel operators on the Strip.

Beginning late 2008 through 2009, Wachovia expects 11,445 rooms to come online given the new projects at the Wynn Encore, MGM MIRAGE's (NYSE: MGM) City Center and expansion projects at the Hard Rock and Caesars Palace. With an estimated 62,928 total rooms on the Las Vegas Strip, the firm points out that the additional ~11,000 rooms represents an increase in capacity by 18% a year. Moreover, Wachovia estimates the additional amount of rooms will lead to 2.8 million additional visitors a year that must come to Las Vegas in order to fill these rooms.

Now once again considering the airline capacity reductions, Wachovia believes these rooms will be very difficult to fill. Adding together the reduction in airline capacity and the room supply increase, Wachovia estimates that Las Vegas will need over 5 million additional visitors this year in order to see strong occupancy numbers. Also boding negatively for hotel operators such as Las Vegas Sands (NYSE: LVS), the firm notes that increased airline fares will likely "lead to lower hotel prices, as the operators must keep prices low to subsidize the cost of a trip for a visitor." The firm says Las Vegas could see "a prolonged period of lower occupancy and ADR's."

Although the Wachovia report doesn't mention the direct impact on specific companies, it does provide a list of total rooms for resorts from several of the major hotel operators, putting into perspective the possible financial impact:

• MGM's Bellagio - 3,993 rooms
  
• MGM's Luxor - 4,408 rooms
  
• Wynn Las Vegas - 2,716 rooms
  
• MGM's Mandalay Bay - 3,832 rooms
  
• Las Vegas Sands' The Venetian - 4,027 rooms
  
• MGM's The Mirage - 3,044 rooms
  
• MGM's Monte Carlo - 3,213 rooms
  
• Las Vegas Sands' The Palazzo - 3,000 rooms and
  
• MGM Grand - 5,044 rooms

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