High gas prices, fierce competition and an ailing economy have taken a heavy toll on Atlantic City’s casinos, and industry analysts predict even more pain ahead, including layoffs, bankruptcy filings and lower tax revenue for senior citizen programs.
„Atlantic City is truly at a crossroads,“ said Harvey Perkins, senior vice president of the casino consulting firm Spectrum Gaming Group. „Layoffs are a given.
„With new capacity coming on line in the next few years, the weakest property in Atlantic City most likely won’t be able to survive,“ he said, referring to the planned opening of additional slot parlors in surrounding markets.
Other analysts take a similarly dim view of the state of the A.C. market.
„We may be passing through the darkest point in the tunnel right now, but it would be foolish to believe the tough times are behind us,“ Deutsche Bank analyst Andrew Zarnett wrote in a recent report.
Perkins is not so pessimistic about the long run. He said once Atlantic City clears the near-term hurdles — when the economy bounces back and after the region absorbs new slot parlors in Pennsylvania and New York — the seaside gambling resort should thrive again.
„The best thing that happened to Atlantic City is competition,“ Perkins said. „This market has had lazy exclusivity for 28 years, because very few of the operators chose to reinvest vibrantly. Those that did invest are faring better than those that didn’t.“
An industry report released last week by the N.J. Casino Control Commission highlights the discrepancy.
For the first half of 2008, net revenue at Atlantic City’s 11 casinos fell an average of 4 percent, while gross operating profit — which excludes interest, taxes, depreciation and other charges — plunged 17.1 percent. In the gambling industry, gross operating profit is a widely watched figure that is considered the best way to compare the performance of casinos.
Only two casinos reported increases in gross operating profit for the first half of 2008: Harrah’s, which climbed 9.9 percent, and Trump Plaza, which rose 2.2 percent. The biggest losers were Resorts, down 59.3 percent, Tropicana, down 54.4 percent, and the Hilton, down 49.7 percent.
Resorts and Hilton, owned by Colony Capital, a Los Angeles investment fund, have not had any major refurbishment since Resorts added a USD 125 million hotel tower in 2004. Tropicana has yet to recover from mass layoffs and the loss of its owner’s casino license last year.
Spokespeople for the three casinos declined comment.
Atlantic City has been struggling since late 2006, after the first slot parlors started opening in Pennsylvania and New York. Last year was the first time in the city’s history that it ended on a down note, with revenue declining 5.7 percent. This year, some analysts predict the decrease could hit 10 percent.
The main reason: higher gas prices and a decline in consumer spending have dashed hopes for a strong summer. In addition, the global credit crunch has put the brakes on new development. And with a full smoking ban going into effect Oct. 15 and more competition from Pennsylvania on the horizon, little relief is in sight.
„Why the city of Atlantic City thinks it needs a smoking ban at this time is incomprehensible to us,“ Deutsche Bank’s Zarnett said.
Any decline in gambling revenue also affects the state’s casino revenue fund, which pays for programs for senior citizens and the disabled through an 8 percent tax on gross revenue. Casinos also pay 1.25 percent of gross revenue to the Casino Reinvestment Development Authority, which invests in economic development projects throughout the state.
State Treasury Department spokesman Tom Vincz said that „in the context of a USD 33 billion budget, the decline in the casino revenue fund is a concern, but we would be more concerned by a comparable percentage drop in one of our major taxes.“ He said the department is planning for a decline in money from casino revenue next year.
Tom Carver, who oversees the development authority, said his agency also is monitoring casino revenue. But it is still moving ahead with projects that should help A.C., such as transportation improvements.
Most immediate, however, is the prospect of job losses. The Casino Control Commission’s report showed the decline in gross operating profit was four times that of net revenue. Spectrum Gaming’s Perkins said that shows something has to give. Because operators are already spending less on promotions, he said, labor is an obvious place to cut.
Atlantic City’s 11 casinos employ about 42,000 people.
ÂTrump Entertainment Resorts chief executive Mark Juliano said he does not foresee major job losses at the three Trump casinos, because „we have done a quite a bit of tweaking of our labor over the past two years — we can’t go much further.
„The only way we could go further is if we close a tower or close parts of our gaming floor or our restaurants, and we have no thoughts of doing that,“ he said. „Then you’d be cutting off your nose to spite your face.“
Likewise, Carlos Tolosa, eastern division president for Harrah’s Entertainment, said his company’s four A.C. casinos — Harrah’s, Bally’s, Caesars and Showboat — already have made labor adjustments. He said it would not be prudent to slash jobs, because service could suffer.
Like Perkins, Tolosa said last week’s report on gross operating profit proves reinvestment is crucial to survival.
In the second quarter, Harrah’s, which is benefiting from a USD 600 million hotel, pool and spa expansion, was the only casino to report an increase in gross operating profit, up 18.7 percent over the second quarter of 2007.
Without Harrah’s, the A.C. market would have plummeted 23 percent, instead of 16.5 percent, Tolosa said.
In the end, Tolosa said he expects the overall market will rebound.
„I do believe that in ’09, we’ll have modest growth in Atlantic City,“ he said. „I think we’ll come through.“