Could Oil Prices Turn the Flames Into A Budget Team?

Hockey and the business world have been intertwined for basically as long as both have existed. And ever since Canada’s biggest movers and shakers of various industries have become involved in the ownership groups of the Canadian National Hockey League teams, its meant that the business of business is almost as important as the business of hockey.

In a lot of ways, the introduction of the salary cap has diminished the amount that exchange rates and commodity prices can impact any individual club’s operations, but for a few reasons, you might want to keep an eye on the recovery of oil prices (and the Canada/U.S. exchange rate) over the next six-to-nine months.

Since the team arrived in Calgary, the Flames have been tied to the oil industry in two primary ways. First and foremost, the team’s ownership group (while varied) has featured some of the biggest players in the Canadian energy sector – nowadays it’s Murray Edwards, but the Seaman brothers and others have been huge movers and shakers both in the oil-patch and the NHL.

Second, Calgary is an oil town and the Flames get a gigantic chunk of their revenue either directly from energy companies purchasing suites or advertising, or indirectly via season-ticket and other purchases for individuals that work for the energy companies.

The 1990s collapse of the Calgary Flames was precipitated by a downturn in the price of oil worldwide, the downturn of the Canadian dollar, and the lack of a salary cap meant that the American teams could easily out-spend Calgary. All the Canadian teams felt the pressure of paying players in American dollars while taking in revenues in Canadian dollars – Quebec and Winnipeg had to move because of economic pressures – but arguably no team felt the challenges on both sides of the ledger as the Flames did, leading to the eventual “save the Flames” season ticket drive that ended up keeping the team in town. (The Oilers were probably a close second.)

The world oil price has dropped from about $60 in June to just shy of $33 now (in terms of West Texas Intermediate). Similarly, the exchange rate has moved from $1.25 Canadian per American dollar in June to around $1.41 now, which placed the “real” cost of the $71.4 million US salary cap at $89.25 million (in June) and $100.7 million now. (An aside: holy crap.)

The Flames get their revenues through the disposable income of Calgarians, and through the promotional and marketing budgets of various Calgary-area companies. The Calgarians most likely to come to Flames games – to be able to afford ticket prices, parking costs, and buy beer, nachos and jerseys – are probably higher-income Calgarians, which typically means you work in the energy sector or in a connected industry. Similarly, energy companies have traditionally bought a ton of advertising, corporate seats and rented suites from the Flames, in part because they have the financial ability to do so (both as a marketing tool for themselves and as a means of treating their employees).

Now, here’s the rub: season tickets are generally on year-to-year contracts, and corporate commitments typically vary in length. But for argument’s sake, let’s just suppose that a decent chunk of them are either also year-to-year, or have “buy-out” provisions that allow a company to get out of a multi-year deal early by paying a penalty. Last spring, when season ticket renewals were up, the Flames were doing well but more importantly the economy was doing fairly fine – oil prices were sliding a bit, but the bottom didn’t fall out of the market until the summer. But if you’re an oil company facing the prospect of low prices and future production and/or workforce rollbacks, or if you’re a worker who has been laid off (or is worried about the prospect of it), you probably won’t want to commit a lot of money to season tickets no matter how good the team is on the ice. And a lot of ticket holders bailing out at the same time could possibly make a noticeable dent in their bottom line.

Most economists are now saying that the price of oil probably won’t start recovering until the second half of 2016, which means the spring ticket renewal will probably come at a time when nobody’s really sure when the Alberta (or Canadian) economy is going to really rebound. And the NHL will have to set its 2016-17 salary cap in the first chunk of 2016, likely with the Canadian owners trying to keep it as low as possible to avoid exposing themselves to exchange rate risks and a competitive disadvantage with the American teams.

I figure the salary cap won’t move very much for next season because of the weakness of the Canadian dollar – and importance of the health of the Canadian markets to the NHL’s bottom line – but I also wouldn’t be surprised if a few of the smaller market Canadian teams (Calgary, Edmonton and Winnipeg specifically) don’t become budget teams to some extent as their markets weather the economic storm. If the energy sector keeps taking a kicking and a recovery in oil prices looks a long way off, and if Flames ownership are worried about the long-term viability of the franchise if they keep spending to the cap, you might end up seeing the local hockey club quietly become begin to run on a budget.

And don’t even get me started on the likelihood of Flames ownership fronting a bunch of money for a new arena while oil prices are this low, because I really can’t see that happening.