Weak U.S. Economy affects Casino Bottom Lines

Gaming Industry feels the Pinch

Gambling Industry Feels Pinch of Weak US Economy

April wasn't kind to the US gambling industry this year. As the American economy continues to worsen, it is having an impact on all aspects of the entertainment sector. Decreasing revenues and rising costs have resulted in layoffs, dropping stock values and even has one developer trying to renege on a promise...and another encouraging a lawsuit!

Layoffs and Job Eliminations

MGM Mirage began planning cost cutting measurements back in August of 2007 due to a lagging economy. The company laid off 440 mid-level management employees at the beginning of April for an estimated annual savings of $75 million dollars. MGM's two casinos in Biloxi, Mississippi lost 100 employees leaving more than 75% of the job cuts for their Las Vegas strip properties.

The MGM Mirage job losses aren't totally unexpected in light of a company statement issued back in February. “Economic conditions in the US, including the downturn in the housing market and credit concerns, during the latter half of 2007 and into 2008 have had, and could continue to have, a negative impact on our operating results,” said a company spokesperson.

The company has said that no further job cuts are planned unless economic conditions get significantly worse. MGM employs close to 55,000 people between corporate employees and the employees at their properties worldwide.

Harrah's Entertainment eliminated 500 corporate positions about six months ago as advised by an outside consultant. The company has also laid off approximately 100 more employees at Bally's Las Vegas when they discontinued the hotel's buffet service. Additionally, Harrah's eliminated some jobs at their casinos in Atlantic City earlier this year.

Station Casinos had some layoffs and made some to cuts to work hours back in February but none since according to spokesperson Lori Nelson. The company continues to go forward with its plans to open the new Aliante Station by the end of the year. The opening of the $675 million dollar resort will create 1500 new jobs.

Dropping Stock Values

The day after MGM Mirage announced its job reduction plans, share prices across the gaming sector went down. MGM's stock lost 4.3% ($2.24) to close at $49.58 for the day. Las Vegas Sands dropped even more to close at $69.03, a drop of 6.7% ($4.99). Wynn Resorts dropped the least out of the major market players. Wynn shares lost 2.6% ($2.63) for the day.

Analysts are revising their projected earnings per share for 2008 due to the economic downturn. Thomson Financial analysts project $1.98 per share earnings for this year while Morgan Stanley analyst Celeste Mellet Brown lowered her estimated for MGM Mirage from $2.21 to only $1.83 per share due to the weakened demand in Las Vegas. Wachovia analyst Brian McGill cut his first-quarter earnings estimates for most casinos including MGM Mirage, which he slashed from 46 cents down to only 39 cents per share.

McGill is advising caution on Las Vegas Sands and MGM Mirage, saying “While many markets have seen a slowdown, we believe the regional operators are likely to see a more stable year than the destination market of Las Vegas.” Another analyst, Bill Lerner of Deutsche Bank, said in a statement to investors after the MGM layoffs, “Trends in Las Vegas and across the US have been softer this year, as both gaming and nongaming revenues have been impacted by a difficult economic environment.”

Budget-tight guests are showing a tendency to spend less in all major segments of the business. “Instead of four days, people stay for three. Instead of a five-star experience, they are going for four stars. Instead of two shows, they are going to one,” said MGM spokesman Alan Feldman. “There certainly is the possibility that there are people who are also making a decision to gamble less.”

Casino Developer Tries To Renege On a Promise

Pittsburgh casino developer, Don Barden, committed $3 million dollars to helping fix up the city's Hill District when he was competing for a slots license. During the bidding process back in 2006, Barden promised $1 million dollars per year for three years to help develop the Hill District but now his company, PITG Gaming, has petitioned the Pennsylvania Gaming Control Board to release him from his promise.

State lawmakers are pushing Barden to keep his promise and several have drafted letters asking the gambling board to deny Barden's petition. Sen. Jay Costa sums it up with his comments, “Where I come from, you make a commitment, you stick to your commitment. That's what's disappointing here.”

Pittsburgh Mayor Luke Ravenstahl said he will be discussing the issue with Barden. His remarks indicated that he felt Barden wants to keep the $3 million to offset rising construction costs. Sen. Wayne Fontana showed no sympathy to the unexpected costs when he commented, “Just because there is some incurrence of additional costs, it doesn't mean it should be at the expense of a promise made to the residents of the Hill District. We all know that a casino is going to make a lot of money.”

Apparently Barden is having some difficulty obtaining the financing needed for his casino project in Pittsburgh. Ground was broken for the project in December after closing on a $200 million dollar bridge loan that will mature on May 19. Officials at Barden's existing casino, Majestic Star, have been in New York City seeking investors for the project before the bridge loan comes due. Hopefully he finds permanent financing in time because Pennsylvania officials don't sound very forgiving. As Sen. Fontana says, “We expect him to live up to his promise.”

Trump Encourages Suit Over Smoking Ban

The billionaire developer, Donald Trump, is encouraging other casino owners to file a suit to prevent Atlantic City's new smoking ban from taking effect this coming fall. Rather than filing a suit on his own, Trump wants Casino Association of New Jersey to fight the ban instead. Trump has said that he feels the ban creates a competitive disadvantage for the gambling concerns since people can go across the border to Pennsylvania where their slots parlors allow smoking.

His fears are not groundless. Each state that has passed legislation to ban smoking on the casino floors has seen a precipitous drop in gambling revenues. After the worst year in Atlantic City's history, casinos could be greatly affected if profits drop further from the anti-smoking legislation. The 11 casinos represented by the Casino Association of New Jersey could have enough clout to get the state to back down but so far there has been no word from the association's president on what it may or may not do.

As you can see, it has been a turbulent month for the gambling industry in the United States. Layoffs, falling stock prices, developers backing out of deals, smoking bans and lawsuits are not good omens for any business. There is good news for travelers, however. In an effort to drive revenues, this spring is the ideal time to schedule a Las Vegas trip if you can afford to. Room rates have dropped more than 20% to last year and there are excellent travel deals to be found. This is the best time in years to enjoy springtime in Vegas!