Oil Prices Threaten Las Vegas Recovery

According to Moody’s Investors Service, the Las Vegas Strip is continuing to gain traction on its road to economic recovery, although rising fuel prices threaten to hinder its progress.
In 2011 Las Vegas attracted 38.9 million visitors, which was up 4.3% on 2010 and just short of its 2007 record of 39.2 million. Last year’s figure also saw a 3.4% increase in hotel occupancy, while gaming revenues rose 5.1% in 2011 to $6.068 billion including a 3.5% rise in slot revenue.
As gaming analyst Peggy Holloway explains in Monday’s report:
“After suffering through a deep trough during the recession when visitor volume declined as new capacity came online, the Las Vegas recovery is under way. Hotels are benefiting from increased visitor numbers that permit higher room rates, while gaming revenues are recovering, albeit more slowly.”
However, the recovery could be hampered by higher crude oil prices which are already at their highest level since 2008, with analysts predicting a further 30% spike if Iranian oil supplies are interrupted. This would inevitably affect the fragile global economy, while forcing up the travel cost to Las Vegas, frequency of visitors and discretionary spending.
Referring to companies such as MGM Resorts International and Caesars Entertainment Corp. which are heavily dependent on the Strip for their gaming revenues, Peggy Holloway commented:
“The pace of recovery will largely dictate the fortunes of companies that rely on this market for a material portion of their profits. These companies have a high mountain to climb to reach previous levels of absolute profits.”
Consequently, Moody’s report is not expecting the credit profiles of these companies to improve significantly for at least a few more years. However, when that does occur streaming measures already taken by the main hotels and casinos should see them well placed to take advantage of a recovering economy.

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