Forum explores consequences of airline woes

Local boosters could face an unhappy return to the days when Las Vegas was a regional destination if airlines can't figure out how to make money on long-haul leisure routes.

That's bad news for anyone who has a stake in roughly $30 billion in resort building projects under way on the Strip and is counting on airlines to bring in customers.

Airlines are expected to cut 12 percent or more of the available domestic seats coming into McCarran International Airport this year, with many of the losses coming from long-haul East Coast and Midwest markets that helped Las Vegas grow from a Western state gambling outpost to a national resort destination.

A rapid rise in the cost of fuel means airlines have a better shot at making money if they focus on profitable, short-haul routes and cut back on longer flights where fares no longer cover costs.

"We are so far away from where most of the people live," said Maurice Gallagher, president and CEO of Allegiant Air, a Las Vegas-based airline that specializes in routes from small towns to resort communities in Nevada, Arizona and Florida. "It is jackrabbits and snakes from here to Kansas City."

Gallagher was one of four air travel and tourism leaders to speak Monday at the Las Vegas Convention Center during an event sponsored by the Nevada Tourism Alliance.

Allegiant, which along with Southwest is one of the few domestic airlines making more money than it spends, has cut long-haul destinations such as Lansing, Mich., and Champaign, Ill., and added closer hops such as Santa Barbara, Calif., to its schedule.

Gallagher says the fuel costs of a given flight increase with distance but revenue from fares, added charges and in-flight sales flatten out after about three hours in the air. That gives airlines economic incentive to fly shorter routes with fuller planes in order to cover the cost of fuel, which is up nearly 91 percent from a year ago.

It's bad news for Las Vegas, where about 32,000 new hotel rooms are in development on the Strip. To maintain occupancy rates around the historical average of 90 percent, each new room would need to attract about 200 new Las Vegas visitors, a total of about 6.4 million people by 2012.

The construction is on top of the room boom of the late 1990s and was fueled in large part by cheap airfare to Las Vegas from nearly every corner of the country.

"Our growth in the last decade has really been in the long-haul traffic," said Randall Walker, director of the Clark County Department of Aviation.

There were nearly 48 million arrivals and departures at McCarran in 2007, a figure that represents about 24 million individual passengers, or approximately half of the people who visit Las Vegas annually.

In 2008, Walker expects the total to be 5 percent to 8 percent lower. He said the decline in the number of passengers could be less than the decline in the number of available seats because airlines tend to cut empty seats and connecting routes first.

For example, by the end of 2008, US Airways will have 48 percent fewer flights at McCarran than it did at its peak in September 2007. But many of the cuts are from its overnight, red-eye flights. About 60 percent of the seats on those flights were for connecting traffic, he said.

"Those people weren't getting out of the airport and staying in a hotel anyway," Walker said.

But Scott Kirby, president of US Airways, said the airline situation could worsen.

Many service projections are based on information airlines submit to a publication called the Official Airline Guide. But the guide, called OAG for short, isn't always an accurate gauge.

"At least half of the capacity reductions aren't in the system yet," Kirby said.

He said the financial state of the airline industry is worse than during the fallout from the Sept. 11, 2001, terrorist attacks that halted air service and resulted in layoffs throughout the Las Vegas resort industry.

"The impact of oil prices today is worse on the industry than 9/11 was," Kirby said.

The cost of fuel alone to haul a US Airways passenger on a typical flight is $299, he said. And that doesn't include other costs such as employee wages, aircraft payments and maintenance.

Still, there are tickets available for less than $299, which means airlines will need to raise fares further and cut more capacity.

"It is going to be painful and it is going to result in a lot fewer seats flying around," Kirby said.

Although much of the forum dwelled on the airline industry's problems, there were some thoughts on how Las Vegas could weather the financial storm.

Walker said cutbacks in scheduled service could revive charter flights to Las Vegas. In the 1990s charter flights carried as many as 10 percent of the passengers coming into McCarran, he said. As airlines boosted scheduled service and cut fares, the number of charter passengers fell to less than 1 percent of the total traffic to Las Vegas.

"You might see some shift on that," Walker said.

Also, the battered state of the U.S. economy has the dollar trading at all-time lows against foreign currencies, such as the euro. The imbalance means Europeans and other foreign visitors have unprecedented spending power in the United States.

Terry Jicinsky, senior vice president of marketing for the Las Vegas Convention and Visitors Authority, said talks are already under way to increase foreign service to Las Vegas.

Kirby also said delays at crowded airports that had prompted passenger revolts and congressional rumblings are no longer a problem.

"Oil prices going up to $140 a barrel has fixed the congestion issue," he said.

Contact reporter Benjamin Spillman at bspillman@reviewjournal.com or 702-477-3861.