If you ever have occasion to drive north on the 101 near Scottsdale, you can't help noticing the Talking Stick resort that has been built to replace the slot machine filled tents that used to comprise Casino Arizona. The resort was scheduled to open last December...then the date was pushed back to April of this year. Now, ten weeks after the April deadline, the resort is complete but unoccupied. The Talking Stick spokesman claims that the delay has been caused by the "smoke evacuation system" being a "fraction off."
Golly, we just can't open because that danged smoke ventilator just doesn't seem to be fast enough... Give me a break.
In January of 2009 I questioned the economics of the Talking Stick Resort.
Indian Gaming has a competitive advantage because it has low transaction costs--locals don't have to travel far to play the games, so the fact that the gaming is not as good as Vegas (no craps, six deck shoes, continuous shuffle) isn't a huge problem. No one travels to Phoenix to gamble on the reservation. If they have to fly in, they go to Vegas.
So what does the resort add? Headaches.
The economic pattern is always the same--whether it's power plants, cruise ships, 747s or resorts--some power point presentation says that the project can make money and by golly, someone is willing to finance it and after it's about 40% done, things change. The economics no longer work, but since the project is nearly half done, it doesn't make sense to abandon it.
So then the project is completed and operates at a loss. Why would it "operate" if it's at a loss? That's a classic accounting question. The project can cover its variable costs (labor, lights, AC) but it can't generate enough revenue to cover its fixed costs (debt service, taxes, insurance). So the project loses less money when it's operating than when it's shuttered. That's the current story of Vegas, General Motors, most airlines and about half the cruise lines.
For a while, I thought that it would be the story of Casino Arizona. It would bring in enough room revenue to cover the cost of the staff that are required to rent and clean the rooms. Sure, it would be an economic disaster for the tribe, but things would eventually turn around.
But since I wrote that post, the economy has continued to limp along and very few people thought that 18 months later, the Greater Phoenix Resort market would still be in a recession...but things have come off even worse than I predicted.
So what does the delay mean? It looks to me like the resort can't even meet its variable costs. It would cost more to rent the few rooms for which there is demand than the revenue that those rooms would generate.
My guess is that the onset of cooler weather--especially if combined with a stronger economy*--will allow the resort to open and cover its variable costs and at least make some contribution to its debt payments. But it will still be operating at a loss.
It's looking like Talking Stick is a financial disaster. The tribe was much better off with slot machines in tents. Now they have a pretty building and a huge mortgage. And the valley has 497 additional vacant hotel rooms.
Footnote: Don't bet on that "stronger economy" thing. Well, you can bet on it, but you might want to read this first.