Rising NHL cap forcing small clubs to splurge

June 28, 2011

When the minimum team payroll for the 2011-12 NHL season was announced last week, the spectre of another lockout was raised.

Some owners have complained that the league's economic conditions are as bad as they were before a lockout wiped out the 2004-05 season. Those complaints gained credence last week when it was revealed each team has to spend at least $48.3-million (U.S.) on player salaries. The announcement shocked a lot of people who were thinking the players and owners will work out a new collective agreement by the time the old one expires at the end of next season.

Now, the cap floor is more than the cap ceiling in 2005-06 ($39-million), the first season after the lockout ended, which is a sobering thought for the NHL's small-market franchises. According to CapGeek.com, 17 teams have to increase their payrolls just to make the floor, the hardest hit team being the Florida Panthers, who must spend $26-million more on salaries this summer just to hit the $48.3-million minimum. This was after Panthers general manager Dale Tallon traded for Chicago Blackhawks defenceman Brian Campbell and the five years left on his contract with a cap hit of $7.1-million a year.

A look at teams' operating income – earnings before interest, taxes, depreciation and amortization – according to figures published last December by Forbes.com, shows the league is in the same predicament it was in 2004, just before the lockout. The gap between the richest teams and the poorest teams is as wide as it was then and growing.

After the NHL Players' Association was defeated in the lockout, the salary-cap system, accompanied by revenue sharing, was supposed to solve the big market-small market woes. Player salaries became based on a percentage of hockey-related revenues, which is now at 58 per cent, so the owners had the "cost certainty" they long had wanted.

However, the rise of the Canadian dollar combined with the traditional revenue gap between rich and poor teams hit the league with a double-whammy. The six (and since last week seven) Canadian NHL teams now account for the lion's share of NHL revenue and drive up player costs.

According to charts on Forbes.com, at least some of the NHL's small-market teams turned a small profit or broke even 10 years ago. This was before the salary cap, when teams spent what they wanted or could afford.

In 2001, the operating income for the Columbus Blue Jackets and the Nashville Predators was $10-million each. The Atlanta Thrashers, now the Winnipeg Jets, had $7-million in operating income. All three ranked in the bottom five of Forbes' most recent NHL franchise valuations.

Those numbers compared well to the league's richest teams because at the time, the poorer teams spent nowhere near what their rich cousins did on players. The Toronto Maple Leafs' operating income for 2001, for example, was $15-million, and the New York Rangers were at $4-million.

In the last few years before the lockout, though, the small-market teams ratcheted up their payrolls because they saw it as the only way to compete on the ice. By 2004, the Blue Jackets' operating income was down to $1-million as their payroll climbed to $32.1-million from $19.2-million in 2000-01. The Thrashers' operating income shrank to $1-million, recovering from a $1-million loss the year before.

But the salary cap did not bring benefits for all. It did for the rich teams – the Leafs' operating income climbed to $42-million in 2006 because their payroll went to $39-million from $61.8-million after the lockout ended. For the richest Canadian teams like the Leafs, Montreal Canadiens and Vancouver Canucks, the good times continued. Their operating incomes all rose thanks to big crowds and the Canadian dollar. The Leafs took in $83-million last year.

Life is good for the richest U.S.-based teams, too, although the wonky economics caused by the Canadian buck and the recession slowed their growth. The Detroit Red Wings, for example, had just $15-million in operating income last year, down from $27-million in 2009.

But it's a bloodbath for the little guys, despite revenue sharing and any number of subsidies from local governments. The Blue Jackets lost $10-million in 2009 and $7-million last year. The Predators lost $11-million in the past two years. We all know how the Coyotes are doing. The numbers for the other low-ranked franchises by Forbes are similar.

Those familiar with the league's finances say a lockout is possible since new NHLPA leader Donald Fehr is not likely to preside over a huge decrease in the players' share of the revenue. But a more important negotiation may lie ahead. That would be a discussion between the big-market teams and the small-market teams about a more equitable way to cut up the revenue pie. That is not likely to be a pleasant discussion.

A big-market governor scoffed at the idea. He said a lot of the poorer teams don't run their businesses well, and besides, it's the big boys who pull in the money. NBC laid out only $2-billion over 10 years for a U.S. television contract because it wants lots of the Chicago Blackhawks, New York Rangers and Los Angeles Kings on the schedule, not the Predators and Blue Jackets. But, the governor said, the little guys still get an equal share of the $200-million a year NBC is paying.

He had some other examples, too, but the point was clear – if labour peace depends on large-market largesse, forget it.

(Ads will not print)