Las Vegas: Failing Casinos, Rising Unemployment and Increasing Budget Woes
There seems to be parallel realities in Vegas right now. On the one hand, for tourists, things seem almost eerily normal. In fact, better than normal. Room rates have dropped so low that you can find stays at Strip resorts cheaper than budget motels on lonely highways -- with show tickets, gambling coupons, and/or a food credit tossed in for good measure.
In short, Vegas remains much the same place: full of conspicuous consumption, parties every night and carefree fun for all (or those with enough cash). This weekend, the ticket to have is the Madonna concerts at MGM. The top ticket price is a not very budget-conscious -- $375. In short: There have been a few issues that noticeably affect the tourists in Vegas.
Meanwhile, in the parallel world, the last few months, weeks and even days have been among the most difficult that Las Vegas locals have seen for our economy. Strip revenues and visitor counts have been dropping for more than eight months. The result is now coming into full view almost by the day.
Vegas lacks a Plan B that posits an area without ever-increasing growth. We need more people always coming to exist. Things don't have to drop for Vegas to feel pain. Here is why: New tourists are needed to fill all the new resorts opening -- M, Aliante Station, Encore, City Center (with six towers), Fontainebleau and even the new tower at Caesars. Meanwhile, near the Strip are the recently opened Palms Place and Trump. I am leaving out MGM's Signature and others. But the point is clear: Even if the number of tourists simply doesn't rise, everyone in Vegas knows bad times are ahead.
From the big gambling companies to the individual employees who live off shifts and tips, these are dark days. All of the major Strip resorts have already done some layoffs (except Wynn, which has to staff its new Encore) on account of the economy. In addition, many workers remaining have seen their hours cut substantially. Almost every local business depends on the casinos in some way. Both of our local newspapers have reported staff cutting at their competitor's parent company. You know that story.
This is on top of Vegas already being ground zero of the foreclosure crisis. As Buffet readers know, I bought my own condominium in February 2007. The other night I walked through my complex and counted eight moving vehicles. Of the owners of the two other units in my building, one has already moved out of state. A renter has moved into the unit. The owners told me before they left that the rent is less than their mortgage but it will allow them to wait out the economy.
A short tour of the agony of the big companies include MGM-Mirage having issues funding the final phase of their gigantic City Center and the Las Vegas Sands (owner of Venetian and Palazzo) admitting they may default on debt. Meanwhile, the malls attached to both the Venetian and the Palazzo are for sale as the parent company teeters with financial issues. Fontainebleau has not opened yet but Moody's just downgraded its debt. Harrah's has just announced quarterly losses. The Tropicana is in bankruptcy, and I have not even gotten to the Cosmopolitan, where the developer lost the project to bankers months ago. So, behind most smiles in Vegas these days there is a lot of anxiety. Yet, those with jobs are extra grateful to still be standing, and with fewer customers to serve, I've actually noticed an improvement in customer service in my travels on the Strip. Of course, eventually tourists are going to notice. The Riviera, for example, announced it is taking a year off from the badly needed renovation of the property to save money.
So, the one sure thing is that the future guarantees some amazing deals for tourists (and, with gas prices down, why are you reading this in California?). But for locals this is a harrowing economic time, no matter if you are a big player such as Steve Wynn about to open a new casino (Encore) or just a front-line worker hoping to keep working 40 hours.
Vegas only knows how to grow and we are still growing, but no one knows if all those rooms will attract people as has always been true in years past. As elsewhere, these are interesting times and even in a fantasy city such as Vegas it turns out reality exists.
Global turmoil hits gambling industry
The ongoing economic downturn has hit the gambling industry, a media report says. For Las Vegas Sands casino operator, a full-blown financial hurricane may be brewing, Time magazine reported, pointing out that in a November 5 filing to the Securities and Exchange Commission, the company had revealed its cash was drying up.
For the first six months of 2008, according to the filing, the casino's earnings were "insufficient to cover fixed charges" by USD 80.1 million.
This gaping shortfall, astonishing for a company that was throwing off more than USD 600 million in free cash flow annually just three years ago, could trigger defaults on its USD 8.8 billion in long-term loans.
Las Vegas Sands in default warning
Las Vegas Sands shares fell more than 40 per cent yesterday after the casino operator warned that it risked defaulting on its debt, raising doubts about its ability to continue operating as a going concern.
The stark warning signals the severity of the downturn affecting the global gaming industry, which is suffering from falling spending at its two main centres, Las Vegas and Macao.
The group, owner of The Venetian and The Palazzo in Las Vegas as well as The Sands in Macao, is struggling to meet its debt obligations. It recently raised $475m in convertible senior stock notes from Sheldon Adelson, its largest shareholder after earnings declined below the amount necessary to maintain debt covenants.
The company said in a regulatory filing that it was continuing to look for new capital, partly because the poor earnings outlook meant it was likely to breach covenants again. "If our Las Vegas earnings . . . do not increase sufficiently . . . we will need to obtain significant additional capital," it said.
Failure to raise new capital would trigger a series of defaults, raising a "substantial doubt about our ability to continue as a going concern", the group said.
Harrah's slashes costs amid slowdown
Harrah's Entertainment is continuing to cut jobs and capital expenditures as well as costs in corporate, marketing and purchasing to combat a decline in customer spending, company executives said Friday.
The world's largest casino company by revenue on Friday posted a third-quarter loss due to the gaming slowdown on the Strip, decreased visitor numbers across the company's 50 casinos and the closure of properties in the Gulf Coast because of hurricanes.
"To the degree revenues continue to decline, costs will have to continue to come down," company Chairman and Chief Executive Officer Gary Loveman said during a conference call to review the company's earnings. "To the degree we see further erosion of revenue, we'll continue to aggressively respond with cost reduction."
Harrah's, which is privately held but has publicly traded debt, reported a net loss of $129.7 million for the quarter ended Sept. 30, compared with net income of $244.4 million in 2007.
The company's net loss for the first nine months of 2008 increased to $415.1 million, a swing from net income of $667.2 million the first nine months of 2007.
Harrah's will continue to "scrutinize every dollar of capital spending" well into next year to position the company so it can "benefit from the eventual economic rebound."
The casino company has cut approximately 1,800 jobs in Las Vegas this year, and another 200 around the state. In October, 21,849 full-time employees worked at the company's eight local properties, according to company officials.
Trump reports loss
Casino operators Trump Entertainment Resorts Inc reported quarterly losses on Friday as the economic slowdown continued to savage the gambling industry.
"Our average spend per patron has fallen significantly during the fluctuations of the financial market and gas prices," Trump Chief Executive Mark Juliano said in a statement.
Economy worries Nevadans
Nevadans are markedly pessimistic about the worsening economy, a new statewide poll shows, as they hold dim prospects of a quick recovery, with more than one in four fearing for their jobs.
And for good reason, economists say: The breadth of the emerging recession is wider than any seen in recent times, with the bottom yet to be found as unemployment rises and consumer confidence wanes.
"This is pretty serious. The mood is very pessimistic," Tom Cargill, economist at the University of Nevada, Reno, said last week after the presidential elections.
Unemployment Numbers Keep Climbing
The nation's economy lost another 240,000 last month. So far this year, more than 1 million jobs have been lost. Unemployment has now surpassed the high seen after the last recession in 2001.
Nevada's new unemployment numbers will be released later in November and the outlook is grim. Nevada is already at a 23-year high for unemployment. More than 100,000 people are looking for work.
The current unemployment rate is 7.3-percent and state economists predict it could go as high as 8.6-percent in 2009.It is expected that the unemployment rate will decrease in 2010 when some of the new properties open. (My Thoughts: NOT!)
Zappos cuts work force by 8 percent
Henderson-based online shoe company Zappos.com will be laying off 8 percent of its work force, stretching across almost every department, the company's chief executive officer wrote in his blog.
Zappos is also considering closing brick-and-mortar outlet stores in Nevada and Kentucky.
The company held a "surprise" meeting Thursday morning to notify its workers of layoffs, a source told the Review-Journal on Friday.
Rumors had circulated throughout Zappos offices in Henderson for the past week or two that sales are flat or declining and layoffs were coming, the source said.
"Today has been a tough, emotional day for everyone at Zappos," Chief Executive Officer Tony Hsieh wrote to Zappos employees on Thursday. "This is one of the hardest decisions we've had to make over the past nine-and-a-half years, but we believe that it is the right decision for the long-term health of the company."
The company is a major employer in the Las Vegas Valley with about 700 workers.
Southern Nevada has experienced layoffs in several sectors, including construction and hospitality and gaming. The unemployment rate has risen to 7.4 percent from 5.1 percent a year ago.
In this economy, even sex can't sell
The women at Donna's Ranch are crowded around the kitchen table griping about depleted bank accounts. At this northeastern Nevada bordello, they woo grizzled truckers and weary travelers for a single reason: money.
Lately, the women don't go home with much.
Amy, 58, once bought a $32,000 Toyota Tacoma in cash; now her $1,200 mortgage saps her dwindling pay.
Marisol's daughters think she works at a resort; she struggles to keep up the ruse. It now takes months, not weeks, to bring $5,000 back to Southern California.
"Marisol," one of her regulars tells her, "it costs me in gas what it takes for me to spend a half-hour with you."
Signs of the economic free fall have cropped up in many of Nevada's 25 or so legal brothels.
The Mustang Ranch, for example, has a steady stream of customers, but the number of women vying for work has soared. Even a 74-year-old applied.
This summer, the Shady Lady gave $50 gas cards to those who spent $300.
The Moonlite Bunny Ranch offered extras to customers paying with their economic stimulus checks.
Donna's Ranch, 180 miles west of Salt Lake City near Interstate 80 and Highway 93, has seen its business plummet nearly 20 percent. More than three-quarters of its customers are long-haul truckers, and high fuel and food prices have drained them of "play money," says Donna's owner Geoff Arnold.
That cuts into pay for his 10-member staff and the "working girls."
The brothel's woes start with the barflies, who are hoarding what little money they've saved. Tonight, two of them slouch in their stools and bemoan the economic slump. The bartender, Gayle Salinas, is pinching pennies too. She used to take home $50 in tips. Now she might pocket $12. Her pay is linked to how much the prostitutes make—and customers aren't choosing their most expensive offerings.
The women negotiate the price of "parties" and their duration, which the bartender tracks using kitchen timers. Ten to 15 minutes costs at least $100. Customers once regularly paid thousands of dollars for extras listed on a hot-pink "menu"—but these days, few men desire the hot tub or mirrored fantasy room.
Earlier that night, Marisol had guided a trucker from Utah into the fantasy room. This was his first brothel trip in a year; he used to stop by every few months.
"See how comfortable you can get?" Marisol coos.
He passes on buying an expensive party. Marisol isn't surprised. She had played a fortune-telling card game that afternoon; it showed the future would bring little cash.
Talking to a trucker, Amy curled up at a folding table just big enough for a radio and mike, and a dry erase board listing the Ranch's selling points: Free beer. Free chili. Free shower. Souvenirs"I'm going to bed," the trucker tells her at last.
"Maybe come here and have a happy ending?" she purrs.
"Tell me what a happy ending is."
"I can't talk about it over the radio."
Thanks, the trucker says. Not tonight.
State Budget cuts: 14 percent could become 30 percent
The state will have to chop nearly $250 million more out of agency spending this fiscal year, bringing the total cuts to more than $1.4 billion and, unless something changes, a 30 percent total cut in the budget for the coming two-year budget cycle.
And according to Director of Administration Andrew Clinger, that is 16 percent on top of the 14 percent cuts agencies have already made in their budget requests.
Spokesman Ben Kieckhefer said Gov. Jim Gibbons has been informed about the situation but that Clinger’s office has not yet talked with agencies or run detailed projections of what the impact to agencies and programs would be if 30 percent cuts were ordered.
“We’re trying to get our arms around what this means to the people of Nevada and what effect it would have on the people of Nevada,” he said.
Asked whether 30 percent cuts are even possible, Kieckhefer said, “I don’t know.”
Diffley said the worst is yet to come for the economy. He said the most pessimistic projections would make this economic downturn the worst since 1981.
Both said unemployment will continue to climb past this month’s 7.3 percent to more than 8 percent in 2009 and 2010.
The most pessimistic view of the coming budget cycle, however, came from Lon DeWeese of the Nevada Housing Division, who said home prices are down 35 percent from their peak but that, “at this point in time, we’re only about half way through the adjustment.”
He said fully a third of all housing financing was 100 percent by 2006 and that a large number of those loans will readjust their interest rates over the next two years. The impact, he said, will be more foreclosures by people who simply cannot afford the houses they were allowed to buy with creative and risky financing packages.
STATE BUDGET DEFICIT: Gibbons says tax hikes possible -'Nothing is off the table,' governor says
Gov. Jim Gibbons said Friday that "nothing is off the table" and that even tax increases might be required to deal with a growing state budget deficit.
After a closed-door, two-hour meeting with key legislators, Gibbons said declining tax revenues are forcing the state to cut spending by another $300 million for the fiscal year ending June 30 and by $1.5 billion in the 2009-11 two-year budget.
Assemblywoman Sheila Leslie said legislators and the governor need to better explain to the public what the effects of cutting the budget by $1.5 billion for the 2009-11 period would be.
"It would mean massive layoffs and shutting down rural hospitals," she said.
Senate Minority Leader Bill Raggio, R-Reno, said the state could not stand another $1.5 billion in cuts because it would mean reductions in essential services.
"We're talking about survival," said Raggio.