Understanding the NHL’s real problem – Operating Income

In business, the sole purpose of the corporation is to maximize shareholder value.  In other words, the goal and only goal is to make money.  Period. 

There are many financial figures that help us understand if a business is doing well, but the all-important one is operating income.  Operating income is not how much cash you make from sales.  Operating income is the difference of everything that goes into running the business minus everything from operating the business (costs, expenses).  If the business is operating at a loss, chances are they won’t be around for a long time.   A business can sell a hell of a product but they also have to manage their costs.

Okay, so why am I telling you this?  NHL franchises are not operating well.

According to Forbes, 18 out of the 30 teams had a negative operating income (loss) in 2010-2011, meaning their day-to-day operations of running a team were not making money. With that being stated, therein lies the underlying problem for the majority of NHL franchises.   Most teams were operating at a loss in 2010, and this includes big market franchises. 

The Pittsburgh Penguins and Washington Capitals had negative operating incomes in 2010, (-. $2 million, -$7.5 million).  Pittsburgh and Washington have arguably the two greatest players in the world in Sidney Crosby and Alexander Ovechkin, and have been part of the main blood rivalry that the NHL has marketed in the last few seasons.   There is no question that they have been filling up the arenas, with Pittsburgh reaching 100.9 % capacity (12th in the league) and Washington reaching 100% (10th in the league) in 2010, according to ESPN.  Although 12th and 10th may not appear to be that good, the difference in rankings between teams is extremely miniscule, and rankings are based on overall fan attendance, not stadium capacity.  Fans are showing up, the teams are generating high revenue, yet these two franchises had a negative operating income.

Additional big hockey markets had small operating incomes in 2010.  The Philadelphia Flyers had an operating income of $3.2 million.  The Boston Bruins had an operating income of  $2.7 million. Both teams’ had high stadium capacity percentages of 101.1% (PHI) and 100% (BOS), respectively.  They ranked 3rd and 16th in league attendance.   Even though their operating income weren’t in the red, those are pretty low incomes for an NHL franchise, especially when you consider the huge hockey markets that make up Philadelphia and Boston. 

So why is the operating income shrinking across the board from small markets to big markets?  Clearly most franchises are doing a good job of selling their product to the fans, so what’s the issue?  Labor costs.  The salary cap, and required revenue to operate at a profit are not in sync, and during the next CBA negotiations, the NHL and NHLPA will have to decide how to split revenue.  Most businesses handle high labor costs by cutting jobs within the corporation, or outsourcing these jobs.

I though it would be interesting see what the salary spending were for Pittsburgh, Washington, Philadelphia, and Boston.  As I mentioned before, these teams are either operating at a loss, or a very small income.  Perhaps their salaries (or labor costs) are too high.

According to capgeek, here is the salary spending in 2010: 

Pittsburgh - $61.6 million (4th)

Washington -  $60.2 million (6th)

Philadelphia  -  $59.6 million (11th)

Boston - $60.1 million (7th)

Washington was 6th in spending, and 17th in revenue for 2010.  At this point, the salary cap is too high for most franchises to operate at a profit. These teams will either have to start reducing their salary cap, or increase their revenue so they’re operating at a profit.  

Unfortunately, this doesn’t bode well for fans.  The result could be higher ticket prices, food prices, or some of their favorite players leaving for free agency. 

 

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7 Comments

George Prax's picture

Great article. But I'm going to have to disagree a little. I have a bit of a background in business, and I've found out that even a figure like operating income can be misleading, especially when it comes to big business like the NHL. We'd have to know what their expenses actually include before making an assessment about whether they're operating at a loss, and look at any consolidated financial reporting, not only for the league as a whole, but for each of the others and their related businesses.

For example, the Canadiens are owned by Molson, the only beer you'll find at the Bell Centre. How much are they paying for that beer (to a related party), and how much are they making from it? The Leafs are going to be owned by Bell and Rogers. Are those companies going to pay for advertisements, or are they going to charge their new subsidiary for telecommunications? I obviously don't have access to any figures, but I've noticed this to be a trend. For example, in the movie industry, a film is produced by a certain studio, then its rights are sold to a distributor. A lot of the time, the studio and distributor are owned by the same company, but they'll still report the sale of the rights, which in turn might reduce a movie's profits, even though the money's going to the same place.

Moreover, what kind of payments is the NHL making to these teams, and what kind of expenses are they charging them? What kind of money is the league itself making on behalf of the team? I have a feeling a lot of these teams' financial statements are a logistical nightmare, so I wouldn't take it as scripture. That said, you have a point. Labor costs are ridiculously high, considering the effect of the cap has been that teams have actually been spending more, overall. I have a feeling this is going to be a major talking point in CBA negotiations over the summer.

John OHara's picture

Nice interesting point! - without having the financial statements, it's tough to get a true grasp of their reporting, especially when you consider the partnerships and other subsidiaries that might be included. I assume they are reporting using GAAP, and perhaps would do their best to make the numbers look respectable without being unethical. I think the next CBA negotations will be intense, but I would be surprised to see a lockout, or a shortened season comes into play. Hopefully not. The NHL is making good revenue, and with the new TV deal in place, it would be a shame to see it shortened or locked out.

George Prax's picture

Considering both the NBA and NFL managed to get some sort of work stoppage this past summer, and the NHL has done it twice in the last 20 years, I wouldn't be surprised to see a short lockout. I don't think we'll lose the season but I can definitely see them losing October and possibly November to a lockout. Fehr vs. Bettman? That's going to be crazy. The dude rejected realignment just to be a douchebag.

Alexander Cameron's picture

The NHLPA rejected realignment because Bettman gave them an ultimatum timeline for the decision of the accepting/declining realignment. Then failed to provide convincing statistics to why realignment would be a beneficial proposition
This includes whether travel schedules could be improved, why some teams should have to compete in divisions of 8 teams versus 7 teams, and many other problems.
A lot of players thought it was the start of a good idea but ultimately failed to meet their required needs for accepting it and because the ultimatum yes/no of didn't want to enter into something they were given full details on.

Unless you meant Bettman was a douchebag, because he is. But he didn't reject it.

George Prax's picture

They're both douchebags. I don't really know what the NHL had to tell them to facilitate the decision, the stats were all over the blogosphere hours after the proposed realignment was made public. I didn't really like it all that much as it was still uneven, but the teams that were getting screwed were in the minority. Fehr categorically rejected it, and I'm fairly certain it was only meant as a chess play to get leverage heading into the CBA negotiations. Considering his track record and Bettman's I have little reason to believe that the 2012-13 season won't be unaffected by these negotiations.

Adam Pardes's picture

Really cool look at this, John. Nice work!

evilbobsaget's picture

I for one I'm glad they put the kibosh on realignment. Uneven conferences were impractical in my opinion and with the uncertainty of where Phoenix will eventually end up, it is better to wait that to shuffle franchises around every 2-3 years.

Due to my short time involved in pro hockey I can tell you Prax is semi-right. The money goes back to the same sources. But its a little more complicated than he puts it. There is a long work around. Molson, The Habs and the operating company for the Bell center (which I will now refer to as "Bell" ) are three separate corporate entities.

On paper the Habs get revenue from tickets, apparel, Tv rights ect... They in turn pay "Bell" to play in the Bell Center. In turn "Bell" buys beer by the keg from Molson. ( There may be a third party vendor operating the concessions such as Versabec or J.A. Hubert, but I'm not going to get into that) So money is exchanged hands but at the end of the day, Molson is putting money from the right pocket into the left pocket. On paper, the Habs may lose money but at the end, the parent company shows a profit.

Also, operating expenses and profits in most professional sports are counted for the season only. Playoffs are bonus money.

Owners will try everything to hide money from the players but I do believe the "revenue share" is slanted way too favorably for the players. The cap floor is now higher than the original salary cap!! It is essential for the sports survival that the salaries goes down.