Last September, fans of the Calgary Flames were dealt a gut-punch as the organization made a startling announcement on the eve of training camp. Having seemingly exhausted efforts to negotiate with the City of Calgary for a new home for the hockey club, the team announced they were no longer exploring a new arena. In attendance for the announcement, National Hockey League commissioner Gary Bettman declared “they’re going to hang on as long as they can” in the Scotiabank Saddledome.
If you’re a curious type, like our staff are, you’re probably wondering precisely what that statement means. Are the Flames in serious economic trouble? Is there a specific timetable for when the finances of the club just don’t make sense in the Saddledome anymore? We asked around, dug into the numbers, and have roughly modelled how things look for the club going forward.
What are their revenue streams?
The Flames get their revenue from a few sources.
- They sell tickets to Flames games (and other events in the Saddledome)
- They sell food and beverages during Saddledome events
- They get a cut of the NHL’s television deals
- They get parking revenue from a few lots immediately around the Saddledome
- They get advertising revenue from ads sold within the Saddledome
- If they qualify for it (by falling outside the top 10 in hockey-related revenues as stipulated by the Collective Bargaining Agreement), they get a share of the NHL’s revenue sharing funds
Ticket prices are generally trending upwards league-wide, and while we don’t have hard data regarding the Flames’ ticket prices, they haven’t been going up by leaps and bounds: they’re about league-average comparatively. Generally speaking, ticket and concession prices (for games and other events) are a product of the swankiness of the buildings they’re in – the newer and fancier the building, the easier it is to lure in big-name acts with big ticket prices. Compared to other markets with newer buildings, the Flames’ prices for food, concessions and beer are about middle of the road.
The Financial Posts explained a big component of the NHL’s financial structure, the TV deals, in this rather simple way:
A big reason for the difference is broadcasting rights. In 2013, the NHL signed a record 12-year, $5.2-billion agreement with Rogers Communications Inc. for its Canadian teams, the largest deal in league history. It also signed a significant, but less prosperous 10-year deal with NBC for US$2 billion in 2011 to cover its American teams. The revenue from both deals is pooled and shared among all franchises.
If all 31 teams split all of the money annually (and the league office didn’t hold onto anything), the Flames would get around $20 million per season from the TV deals.
The NHL’s revenue sharing scheme is detailed in Section 49 of the CBA, but their explanation is a bit complex and frustratingly circular. The Hockey News’ Ken Campbell has a reasonably straightforward breakdown:
Teams receive revenue sharing if they qualify for it under the terms of the collective bargaining agreement. One NHL executive said that, generally speaking, the way NHL revenue sharing works is that the teams that finish in the top 10 in revenues share some of those revenues with the teams that finish from 11 through 31. This isn’t always the case, but it appears to be a general rule. He said the Flames will not have finished in the top 10 in 2016-17 and are not in the bottom 10 either. That means they will receive somewhere in the neighbourhood of $1 million-$2 million at the upper end and $10 million-$12 million if they are down around 20.
The revenue sharing scheme may be important to the long-term health of the franchise for reasons we’ll get into shortly.
What are their expenses?
The Flames have a few different continual expenses:
- They cover player salaries (paid in American dollars)
- They cover team salaries and building salaries for games and other events
- They cover any ongoing operating costs for the Saddledome
- They cover any necessary maintenance and repair costs for the Saddledome
- Per their agreement with the city, they’re responsible for a lease payment for the Saddledome in the form of a contribution to each of WinSport, Hockey Canada and Parks Foundation Calgary
Non-player salaries are probably a wash and cancel out concessions and advertising revenue – in effect, the concession workers and ad sales people pay for themselves.
Even though there have been repeated lockouts in the name of cost certainty, player salaries continue to escalate. Looking at NHL Numbers’ archive, here’s how that’s impacted the Flames and the rest of the league over the past decade:
(For the seasons where the Flames’ cap hit is above the ceiling, the team utilized the long-term injured reserve, or LTIR, to stay below the cap.)
That’s a cap ceiling increase of $24.7 million over 10 years (49.1%, or 4.9% per year) and a Flames spending increase of $29.7 million over the same period (68.4%, or 6.8% per year). The cap increase generally coincides with a league-wide revenue increase of around the same amount – though it’s not evenly distributed, obviously (looking at you, Arizona and Carolina) – but the NHLPA has the ability to trigger up to a 5% salary cap rise every season (though doing it if revenues aren’t there to support it triggers an increase in escrow on player salaries). The fact that the player contracts are negotiated and paid out in American dollars is a big challenge for the Flames, given the volatility of the currency markets and that almost all of their revenue comes in Canadian funds.
The big scary piece here is repair costs. Looking at other facilities, there’s a general causal relationship between a facility’s age and maintenance costs; as a building ages, it costs more to keep it looking spiffy as repairs gradually become more extensive and, thus, more expensive. The City of Glendale conducted a comparative study back in 2012 assessing the operating costs for facilities similar to the then-Jobing.com Arena and concluded that the building (built in 2003) would have annual operating costs of between $15 and $18 million. Given that the Saddledome is older, it’s reasonable to assume that its costs are (a) higher that those amounts and (b) rising. And that’s discounting the fact that the entire building was underwater to the 11th row five years ago and was hurriedly repaired to get everything ready for hockey season – even if everything was repaired perfectly, floods have a habit of making everything worse.
The Saddledome Foundation leases the building from the City of Calgary for $1 per year, on the condition that the operators of the facility – nominally the Flames themselves – donate a sum each year to each of WinSport, Hockey Canada and Parks Foundation Calgary. There’s a formula indexed to inflation and the building’s revenues in the lease agreement that determines the contribution, but it’s currently around $600,000 to each organization (or roughly $1.8 million of the building’s revenues). Presuming that the bottom doesn’t fall out of the building’s finances, these lease-related expenses will stay around this level (or slightly increase).
Ongoing operational challenges
There are two fundamental issues for the Flames right now, and they’re somewhat interconnected: player salaries and maintenance expenses for the Saddledome are both going up. Combined, they’re both likely escalating more rapidly than the team’s ability to generate revenue – and that’s completely discounting any additional challenges posed by the ongoing oil-related roller-coaster ride that the Canadian dollar is experiencing. It’s worth reiterating this: the age of the Saddledome, and its wear and tear and upkeep, are fundamental challenges to the economic viability of the Flames.
That said, the league’s revenue-sharing plan has likely been a huge help to the Flames in this regard. As the Flames slide down the league-wide revenue rankings, they get more and more help from the revenue-sharing pot. While the revenue pot is tied to hockey-related revenues – the intention is basically to have it as a “top-up” measure so the league’s lesser lights aren’t rendered non-competitive and can still spend to to the cap mid-point – as the league-wide revenues go up, having a share of the pot will increasingly help the teams on the NHL’s lower end. While it’s not a silver bullet by any means, if the NHL’s revenues increase at roughly the same rate that the Saddledome’s upkeep costs go up (and nothing else changes for the Flames revenues relative to the rest of the league) then the revenue-sharing funds should be an effective measure to keep the Flames afloat for awhile.
To make a long story short: the Flames can “hang on” in the Saddledome in perpetuity as long as they’re fine with using revenue-sharing funds to make ends meet. If you’re a billionaire used to having an air-tight business model that produces profit for your shareholders, utilizing an external pot of funds to make your hockey club economically viable probably isn’t what you had in mind when you bought your hockey club. And if you say it out loud, the phrase “the team’s finances work long-term as long as they keep getting revenue-sharing” really doesn’t sound like the makings of a great plan.
And so, a new arena…
In this context, team ownership’s desire for a new barn makes a ton of sense. The Flames have been responsible for the upkeep for the Saddledome since 1994, when they took over the lease from the city and both parties sunk some money into the last major renovations to the facility (which added the suites above the lower bowl back in 1995). The logic at the time was that as the most prominent tenant, the Flames were the best-suited to operate and maintain the facility – or at least better-suited than the city bureaucrats that were doing it at the time. As the building has aged, it’s become more expensive to maintain and as newer buildings opened in adjacent markets it’s become tougher to get big-ticket acts to fill in dates between hockey games. (That’s arguably something that all parties involved should have anticipated when they negotiated the new deal back in ’94, but it’s everybody’s problem now.)
Would a new building fix the Flames’ ongoing finances and create long-term stability for the franchise? If it would increase revenue-per-head as the city claims it would – the phrase “multiply” was used – then it definitely would. Even a modest increase in revenue-per-head would get them away from their dependence on revenue-sharing for their viability. But the devil, as they say, is in the details, and it would be important for all parties involved to structure whatever type of lease agreement they put in place so we’re not dealing with this mess again in 20 years. In other words: if we’re going to all the trouble of building a new city-owned barn, it’s important to get in writing that the Flames need to have a plan for maintaining it for the long haul.