2009 is history

…at least as far as the LVCVA is concerned. The December and year-end visitor numbers, minus the gaming figures for now, was just released. Here are some highlights from the executive summary:

December: Visitor volume up 1.5%, room inventory up 6% compared to December 2008.
2009 (total): Visitor volume down 3%, room inventory up 6% compared to calendar 2009
Average Daily Rate (ADR) was down a whopping 22% for the year, but only 5.8% in December
Both the number of conventions held (19,394) and the number of attendees (4,492,275) were down substantially for the year (13.6% and 23.9% respectively)
Air passengers deplaned declined by 8.2%, traffic on all highway was up by 2.5%, and on I-15 by 4%
2009 LAS VEGAS YEAR-TO-DATE EXECUTIVE SUMMARY

First, the good news. The drop in ADR was less than double-digits for the first time all year. Considering that March and April saw drops of more than 30%, losing less than 6% in room rates with a jump in occupancy in December was actually good news. Convention travel showed a year-over-year increase in December, the first increase all year. I don’t know if this classifies as “green shoots,” but it’s definitely better than a straight year of annual declines.

Now, the so-so news. Visitor volume was down 3 percent, which is actually better than the 2008 decline of 4%. There seems to be some correlation between the falling ADR and the rising visitor volume, meaning that cutting prices on rooms helped to lure more people to town–no surprises there. With the number of air passengers falling, casinos clearly need to ramp up their outreach to Southern California and encourage people to make the drive up I-15.

But wait–there is also some bad news. Visitor volume fell by 3 percent for the year. Room inventory increased by 6 percent. It doesn’t take an economist to realize that there’s still an imbalance between supply and demand that does not bode well for the future. The increase in visitor volume for December–despite a highly-hyped casino opening–was less than the increases in the previous three months. Since September, the monthly gain has decreased steadily. In December, at least, it doesn’t seem like the new supply brought enough visitors to Las Vegas to compensate for the increase in capacity.

There is still hope, though. When the gaming numbers come out, we’ll get a better idea of whether the people who came to town in December gambled more than they did in 2008. That was the case in November, but the 6.9% bump in revenue for that month was largely driven by high-end baccarat play, as the slot play actually fell by a billion dollars, an indicator that people for the most part are gambling less. If high-end play increases, then a jump in gaming revenue can compensate for the lower occupancy rates, at least for the short term.

But the larger trend–less air traffic, more auto traffic–seems to run counter to the high-end strategy. We’ve got a confusing year ahead of us, that’s for sure.

Room rates, 2009, and the future

Because we can’t wait for the future, everyone wants to know what’s going to happen. Spectrum Gaming has a 21-point list of what to expect, but I’ll give you my own views, focusing mostly on Las Vegas.

This is all with the caveat that, as I often say, “my work is not predictive.” That’s just a fancy way of saying I can’t tell the future, and a more polite one, too.

With energy prices and room rates down, I can see a rebound in business, but depressed room rates (relatively speaking) might reverse the steady trend of gaming revenue’s decline as a portion of total revenues.

That’s wordy–let me put it plainer: in 1984, Strip casinos made more than 58% of their total revenues from gaming. That number held fairly steady until 1994, when it began an unprecedented slide. In 1999, the figure dipped to 48.1% percent, and from 2005-7 it hovered between 40 and 41%.

With room rates down and consumers spending less freely on shows, expensive meals, that number may start to move in the other direction. If gaming revenues decline proportionally to room rates, we are in trouble. Year to year, they were down more than 14% in October, and occupancy was down more than 6%. That means a 20% total drop in room revenues. If gaming revenues fell by one-fifth for the year, the state’s budget would probably implode.

So, to borrow a phrase from Mr. Mom, somebody better figure out a way to get people gambling in Las Vegas pretty fast.

Slashing room rates and offering generous comps may do the trick, but what will the consequences be?

When analysts pencil out expected return on investment for future properties, they’ll note the trend of falling room rates. So builders won’t be able to borrow as much money to build higher-end rooms, since you can’t justify spending the same on a room that’s going to earn $110 a night as one that will pull down $160. The next wave of casinos might be a step down in terms of detailed finishes from what we’ve been seeing.

With casinos making more money, proportionally, there will be a greater drive to maximize revenues, which in the end will mean more labor-saving devices, fewer employees with their pesky wages and benefits, and, in the end, greater control over comps. It might be easier to give away a $90 room than a $250 one, but I think casino departments will have their feet held to the fire to maximize their revenues. In the long run, this might not be the same as optimizing them.

Since gas prices have fallen quicker than airlines have added capacity, I see a quicker rebound in drive-in traffic than fly-ins, which means generally stronger results for companies sensitive to value shoppers. The question is, once people have $250 a night to spend on a room, will they be willing to do so if they’ve just spent $90 a night? Or will they feel gouged?

While 2009 will see some great deals for people coming to Vegas, I think that everyone should be aware of the unexpected consequences of cheaper rooms. It may change the face of Vegas in ways that will please some, but not others.