Sunday, December 29, 2002
Copyright © Las Vegas Review-Journal

2002 IN REVIEW: A year of recovery

Resilient tourism industry shakes off Sept. 11 attacks to regain near-normalcy

Crowds of shoppers on Nov. 1 enthusiastically welcomed the opening of the new Nordstrom store, part of the Fashion Show mall's 900,000-square-foot expansion. Photo by Clint Karlsen. Members of the Culinary and Bartender's unions marched July 1 in front of the Golden Gate. After an eight-day strike, unionized workers reached a new pact with the downtown property. Photo by K.M. Cannon. Travelers wait for their baggage at McCarran International Airport on Dec. 20. Traffic at the airport through November was down only 1.1 percent from the same period a year ago, evidence of Las Vegas' resilience in the wake of the Sept. 11, 2001, attacks. Photo by John Gurzinski.

In the days and weeks immediately following Sept. 11, 2001, those who claimed the terrorist attacks would ravage Las Vegas' tourism-based economy were out in abundance.

"Las Vegas (is) hurting," USA Today wrote Sept. 21, only 10 days after the attacks. "Hotel occupancy was at least 30 percent off normal levels last weekend; 240 meetings, conventions and trade shows due there in the next 60 days have backed out."

That same day, Australia's Sydney Morning Herald wrote, "The American tourism industry is just about out for the count ... (and) the entertainment strip at Las Vegas is also feeling the pinch."

Such statements weren't without merit. Las Vegas' monthly visitor volume was down an average of about 7.5 percent from October through December last year, while McCarran International Airport handled 1.5 million fewer passengers in its fourth quarter compared with the same period in 2000.

Several Strip resorts laid off approximately 15,000 workers in response to slowdowns in tourism, both real and perceived, as many locals braced for further job cutbacks if the travel industry's problems were to continue into 2002.

A funny thing happened on Las Vegas' journey toward financial ruin, though. As this year concludes, Southern Nevada's tourism industry has demonstrated its resilience and is poised for future growth in 2003 and beyond, said Manny Cortez, president and chief executive officer of the Las Vegas Convention and Visitors Authority.

"I think we've come back completely from September 11," Cortez said Dec. 10.

The turnaround didn't come without effort. Shortly after the Sept. 11 attacks, the authority began an eight-week, $13 million advertising campaign designed to revive short-term interest in visiting the area. It has since spent nearly $36.1 million on additional campaigns promoting the destination throughout the United States and key international markets.

"We were back in the marketplace with our advertising campaign about 30 to 45 days after (Sept. 11, 2001), and I think it was very effective and it really reinforced our regional and core markets," Cortez said. "What's continued to plague us has been the economy and the uncertainties of world situations right now."

Through October, Las Vegas' year-to-date visitor volume of 29.6 million was off by nearly 175,000 visitors, or 0.6 percent, compared with the 29.8 million people who visited the city during the first 10 months of 2001; compared with the same 10-month period in preattack 2000, that total was off by about 590,000 visitors, or 2 percent.

Traffic at the airport through November was down only 1.1 percent from the same period a year ago, and gambling operators such as MGM Mirage, Mandalay Resort Group, Park Place Entertainment and The Venetian have recently resumed work on major construction projects at their Las Vegas properties.

"We're adding anther 3,000 hotel rooms next year and additional exhibit space at Mandalay Bay, so I think the industry itself has really got a lot of confidence in the future of Las Vegas as a destination," Cortez said. "Barring some unforeseen catastrophe ... you're going to see a significant recovery for the destination over the next several months."

Cortez also believes the city's hedonistic reputation has served it well in today's era of self-gratification.

"I think the attitude is `I've got to live for today because I don't know what's going to happen tomorrow,' and Las Vegas offers that escape," Cortez said. "Las Vegas really doesn't ... sympathize or empathize with (people); we're saying `Las Vegas is here if you want to escape and get away from it all.' I think people are entitled to do that, and people are willing to do that."

NATIONAL AIRLINES

Las Vegas-based National Airlines, which launched service in 1999 to fill a void in long-haul air service from the East Coast, shut down Nov. 6 after nearly two years in Chapter 11 bankruptcy, leaving 1,500 people unemployed and stranding thousands of passengers.

The airline's financial troubles began with skyrocketing jet fuel prices in 2000 and worsened after the terrorist attacks of Sept. 11, 2001, when passengers shied from flying and air fares plummeted.

Mike Conway, founder and chief executive officer of National, tried to save the airline by finding additional investors, but that plan never materialized.

A reorganization plan was confirmed by Judge Linda Riegle in March, contingent upon an infusion of new capital.

National received a commitment for a $70 million loan from Foothill Capital, a subsidiary of Wells Fargo & Co., if it could be federally guaranteed by the Air Transportation Stabilization Board.

The final nail was pounded into National's coffin in August when the airline was denied the loan from the ATSB, created after the terrorist attacks to aid the ailing airline industry.

Employees at the airline agreed to take pay cuts ranging from 10 percent for front-line workers to 30 percent for management in an effort to keep National flying.

After the loan guarantee denial, National devised a $112 million debtor-in-possession financing plan and cut the Foothill loan amount to $25 million. When an outside investor pulled out of a $2 million letter of credit needed to secure the loan in October, the shutdown plan was initiated.

At its peak, National had become the No. 3 carrier at McCarran International Airport; flying an average of 32 daily flights from McCarran to destinations such as New York; Chicago; Philadelphia; Washington, D.C.; Seattle; Los Angeles; and San Francisco. It ended 2002 with nearly 2.13 million passengers for the year.

LE REVE

Steve Wynn broke ground on his Le Reve megaresort in October, and a lot of Las Vegans are banking on the $2 billion megaresort to supercharge Strip tourism when it's scheduled to open in the spring of 2005.

Wynn's creation would be the first Strip megaresort to open in almost five years, since the bankrupt Aladdin in August 2000.

The developer's company, Wynn Resorts, went public in October to raise part of the capital to finance Le Reve. The financing process was a tough one, the initial public offering market was terrible, and Wynn was forced to lower his Wynn Resorts share price three times before it opened at $13.

But Wall Street sources and Wynn said the financing difficulties were merely temporary roadblocks.

Instead of Strip-facing attractions that attract passers-by with the promise of what's inside, Le Reve's signature attraction will be different, Wynn says.

An eight-story, man-made mountain will face the main casino building and the inside curve of the hotel tower. The mountain would enclose a three-acre lake and provide unique views from a number of vantage points within the hotel-casino.

Instead of using a theme as The Venetian, Bellagio, and Luxor do, Wynn says Le Reve will be casually elegant, with a sophisticated ambience.

Le Reve is slated to have 2,700 hotel rooms and a 110,000 square-foot casino, 18 restaurants, a new golf course and an on-site, full-service Ferrari and Maserati dealership. The property is expected to employ 8,000 workers.

NEVADA POWER

If the Western energy crisis of 2000 and 2001 was "the perfect storm," this year was a year of punishment for the energy industry.

Several executives at energy companies, including Enron Corp., have been accused of criminal violations related to market manipulation.

Walt Higgins, chairman and chief executive officer of Sierra Pacific Resources, the holding company of Nevada Power Co., remembered his career as a Navy officer in a submarine and called the power crisis "the perfect storm."

While Nevada Power, the electric company serving Las Vegas, faced no accusations of wrongdoing, state regulators accused Nevada Power of buying power unwisely.

In March, the Public Utilities Commission rejected $437 million of the $922 million that Nevada Power wanted to recover through higher rates. The PUC concluded that the utility made unwise power purchase decisions that shouldn't figure in rates.

Stock in Nevada Power's parent, Sierra Pacific Resources, fell to $9.11 from $15.86 in the first day of trading after the decision. New York rating agencies slashed credit ratings for the company's subsidiaries to junk-bond level, and some power suppliers terminated contracts with Nevada Power.

Even as Nevada Power struggled to avoid bankruptcy and keep local air conditioners running during the summer, the Clark County Commission voted in July to put a nonbinding issue on the ballot. It asked if voters wanted to establish a not-for-profit power utility, implying that the new agency could replace investor-owned Nevada Power.

Less than three weeks later, the Southern Nevada Water Authority decided to make an unsolicited buyout offer for Nevada Power. It ultimately bid $3.2 billion for the electric utility and promised customers it could cut power rates by 20 percent if the deal was completed.

At the Nov. 5 election, voters favored a not-for-profit electric utility by 57 percent to 43 percent.

A few days later, Nevada Power filed a new energy rate case, calling for a 5.3 percent, or $81 million rate, decrease. The reduction, however, doesn't allow for potential liabilities including Enron's $300 million lawsuit against Nevada Power and Sierra Pacific Power Co., another Sierra Pacific Resources subsidiary. In addition, Nevada Power appealed the PUC rate-case decision and Nevada Power customers will face higher bills if a state judge overturns the PUC rate case.

LAS VEGAS HOUSING

The lowest mortgage interest rates in 40 years and a steadily increasing Las Vegas population again propped up the local housing market even in the face of economic uncertainty throughout the nation.

New home sales remained strong this year, though they were not projected to surpass the record of 22,940 set in 2001.

Through November, the most recent month of statistics available at press time, there were 20,097 recorded new home sales in Las Vegas, down 2.5 percent from a year ago, according to Home Builders Research.

Existing home sales have increased 11 percent to 35,202 through November.

With the median price of a new home at $188,897, up 8.4 percent from November 2001, home builders are fretting that it's going to be more difficult to provide affordable housing for entry-level buyers.

They're blaming the price increase on skyrocketing land costs and construction defect litigation, which has made it harder and more expensive for builders to find liability insurance.

They testified before Nevada's insurance commissioner in July that some builders and subcontractors are going out of business because of the liability insurance crisis, and that legislative reform is necessary to give builders the "right to repair" construction problems before being slapped with a lawsuit.

Builders are scrambling for residential lots, too, as the tightening land supply has driven up the price at an incredible pace.

A Bureau of Land Management auction in November netted $180 million, more than all of the previous 11 BLM auctions combined.

The average price per acre was close to $160,000, compared with $30,881 at the May 2001 BLM auction in which 1,900 acres in North Las Vegas were sold.

Although most of the land in the recent BLM auction was in the southwest valley's development hotbed, the trend is jeopardizing affordable housing projects.

Las Vegas home values are appreciating annually at about 6 percent, leading some experts in the industry to predict a "housing bubble" with overinflated prices, much like California experienced in the 1980s.

FASHION SHOW EXPANSION

Las Vegas' evolution into a top worldwide shopping destination received a nearly $1 billion boost Nov. 1 when the Fashion Show mall opened its new west wing, an approximately 900,000-square-foot addition that includes sites for up to 90 specialty stores as well as new or expanded space for seven department stores.

Fueled largely by local shoppers interested in Nevada newcomers Nordstrom and Bloomingdale's Home, the expanded mall attracted more than 100,000 shoppers during its first day of operation. Mall management hopes continued increases in consumer traffic will help Fashion Show to raise its sales-per-square-foot standard from a pre-expansion level of $600 to as much as $1,000 within the next four years.

"We're expecting annual sales to exceed $1 billion by 2006," said Rita Brandin, vice president and group director for the Rouse Co., a Columbia, Md.-based developer that has owned the mall since it acquired a 75 percent share from The Howard Hughes Corp. in 1996.

Rouse bought the remaining 25 percent of the mall's ownership from TrizecHahn Corp. (now Trizec Properties) in April 1998.

The mall's expansion also generated about 6,500 new jobs, Brandin said.

Fashion Show, at the intersection of Spring Mountain Road and Las Vegas Boulevard South, opened in February 1981 as an 822,700-square-foot retail center that many locals said introduced luxury retail to Southern Nevada.

Over time, newer Strip retail centers such as the Forum Shops at Caesars and The Venetian's Grand Canal Shoppes usurped some of Fashion Show's prestige, and Brandin said an expansion was necessary to make the nearly 22-year-old mall more competitive.

Fashion Show's expansion is scheduled to conclude next fall with the addition of an eighth department store, Lord & Taylor, as well as a new eastern facade, 117,000 square feet of small store space, a food court, and "The Cloud," a 400-foot-long multimedia canopy suspended over a plaza along Las Vegas Boulevard South.

BUSINESS TAX PROPOSALS

The Las Vegas business community rallied to oppose a proposed gross receipts tax recommended by the Governor's Task Force on Tax Policy, formed to explore solutions for the strapped state budget.

Projections for the budget deficit over the next two years range from $700 million to $800 million.

The task force considered several new taxes such as gross receipts and net profits, and also considered raising the business license tax.

In the end, the committee settled on gross receipts, which would tax businesses one-quarter of 1 percent on total annual revenue with some exemptions up to $350,000.

It was heralded as a broad-based tax for businesses to pay their fair share to sustain quality-of-life services necessary for Southern Nevada's socioeconomic vitality.

The Las Vegas Chamber of Commerce opposed the proposed gross receipts tax after surveying its 7,000 members in November. The tax would unfairly penalize businesses with high volume and low profit margins, the Chamber determined.

In its survey, the chamber solicited members' opinions on the quarter-percent gross receipts tax; a 4.5 percent tax on net profits; a 2 percent sales tax on services; an increase in the business license tax from $100 to $300 for each employee; and replacing the current business license tax with a payroll tax of 0.85 percent.

Nevada has built its reputation on a favorable tax structure and business-friendly environment; many business leaders feel the gross receipts tax will send the wrong message and stymie efforts to diversify the local economy.

Gambling executives have long contended that their industry bears the brunt of taxes in Nevada, and that developers should pay for the growth that has burdened state services such as education, health and transportation.

The Southern Nevada chapter of National Association of Office and Industrial Properties commissioned a study by the University of Nevada, Las Vegas, to gauge how much developers pay in fees and other exactions to provide the infrastructure for that growth.

State law would require at least two thirds of each house of the legislature to approve new taxes. In the case of the adjusted gross receipts tax, the Department of Taxation would have to build an infrastructure to apply, collect and enforce the tax.

The earliest that the gross receipts tax could be in place is fiscal year 2004-05.

CULINARY STRIKE

Two of Nevada's most powerful forces collided last spring when Strip and downtown hotel owners met to negotiate new contracts with the Culinary union.

When the dust settled, the union representing more than 40,000 maids, food-service workers and cocktail waitresses negotiated new five-year contracts with 34 Strip and downtown casinos, deals that will cost Strip casinos about $3.23 1/2 for each hour worked by the final year of the pacts. Downtown casinos will pay about $2.20 per hour more by the fifth year of the deals.

Almost all of the new money is being used to replenish the union's depleted health and welfare fund, which provides workers' health-care benefits, leaving little or nothing for wage increases.

Maids also won some working condition concessions, including the creation of cleanup crews that would clean hotel rooms with particularly hazardous messes.

D. Taylor succeeded Jim Arnold as the union's secretary treasurer, its top job, before the negotiations. Taylor and John Wilhelm, president of the Culinary's national parent union, negotiated for the workers.

The settlements came in three bursts. First, Harrah's Entertainment and Park Place Entertainment reached deals, followed closely by Mandalay Resort Group and MGM Mirage properties.

Second, independent Strip operators and all union downtown operators save one settled.

And finally, after an eight-day strike against downtown's Golden Gate, that contract was also settled.

CORPORATE CHANGES

Two top corporate players in the gaming industry this year announced changes in their executive suites.

Las Vegas-based Harrah's Entertainment announced Sept. 4 that Chairman and Chief Executive Officer Phil Satre would be leaving his day-to-day executive control of the company effective Jan. 1.

Current Chief Operating Officer Gary Loveman will take the helm as the new chief executive. Satre will remain chairman of the Harrah's board of directors.

Satre has served as Harrah's CEO since 1994, and as chairman since 1997. During his tenure, the company bought the Rio as well as the Showboat and Harvey's casino operations. He also directed the company's New Orleans land-based casino through severe financial problems, and last year won a significant tax cut for the property from Louisiana lawmakers.

Musical chairs was also the name of the game when Park Place Entertainment boss Tom Gallagher announced his resignation Nov. 19 in Atlantic City.

The move surprised few on Wall Street because of Park Place's difficulties recovering from Sept. 11, but some industry analysts expressed surprise at the company's decision to replace him with Chief Operating Office Wallace Barr as president and chief executive officer.

"Gallagher had been under a fair amount of criticism and the company's stock prices really lagged the (gaming) group," Bear, Stearns & Co. analyst Jason Ader said. "In the end, somebody had to be accountable."

Park Place shares fell 45 percent in value in the past two years, compared with an increase of 10 percent in the Dow Jones Casino Index, and overall its financial performance has been slow to recover from the economic effects of the Sept. 11 terrorist attacks.

In addition, the Caesars brand has been in decline for the last few years and Caesars Palace has suffered from construction disruptions and competitive disadvantages compared with new properties on the Strip, Wall Street analysts said.

Gallagher's resignation was effective immediately. He also resigned as a member of the board of directors.

Two other senior gaming executives passed from the scene. Casino pioneer Bill Bennett, owner of the Sahara hotel-casino and a former chairman of Circus Circus Enterprises, the forerunner of Mandalay Resort Group, died at Desert Springs Hospital Dec. 22 following a lengthy illness. And Ralph Engelstad, developer and owner of the Imperial Palace hotel-casino properties in Las Vegas and Biloxi, Miss., died Nov. 26 at his Las Vegas home.

GROCERY SHUFFLE

Grocery store ownership shuffled in November when Cincinnati-based food giant Kroger Corp., closed its acquisition of 18 Southern Nevada stores operated by Raley's, a Sacramento, Calif., company.

The sale made Kroger, the owner of Smith's and Food 4 Less, the Las Vegas Valley's No. 2 grocer behind Boise, Idaho-based Albertson's. Under the deal, eight Raley's stores became Food 4 Less; seven became Smith's, and three closed.

The transaction was neither quick nor easy.

First, the United Food and Commercial Workers Union Local 711, which represents the 1,400 Southern Nevada Raley's workers, tried to get Kroger's assurances that all Raley's workers would get jobs at Smith's or Food 4 Less. Kroger made no such promises, and said all Raley's workers would have to reapply for work.

Then, state attorney general Frankie Sue Del Papa asked the Federal Trade Commission to investigate the deal on antitrust grounds, fearing it would hurt local grocery competition.

In a letter to the commission, Del Papa said she worried workers who did get absorbed into new jobs would lose pay or seniority. Also, she also objected to the closures, saying they would eliminate jobs in an already stressed economy.

The commission's investigation delayed closure of the Kroger-Raley's deal. Instead of the 30 days Kroger expected when it announced the deal Sept. 13, closure took 60 days, ending Nov. 13. In a statement issued that day, the commission concluded the deal didn't hurt competitive balance, given the entry of Wal-Mart, Kmart and King Ranch into the local grocery market.

Although most workers at the Raley's converting to Smith's kept their jobs, 700 of 750 by the union's count, the fate of the workers in stores converting to Food 4 Less was uncertain. A Food 4 Less spokesman said he didn't know what would happen to those workers as the stores did their transitional renovation.

The union said Food 4 Less made clear it would look beyond former Raley's workers for staff. Union officials disliked the decision but said they couldn't force a different one.