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.