Politics, Business & Culture in the Americas

Sports: Professional Hockey Expansion in Canada

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In Canadian hockey, currency fluctuations can be almost as important as player skills. When the Canadian dollar, or loonie, began approaching parity with the U.S. dollar in late 2007, fans in Winnipeg and Québec City were thrilled. Financial constraints (along with a lack of owner interest) had driven the Winnipeg Jets to Phoenix in 1996 and the Québec Nordiques to Denver in 1995. But many now believe that the loonie’s rise has opened the way for a return of National Hockey League (NHL) franchises to both cities.

This optimism may not be warranted. Potential owners forecast an uncertain long-term value of the loonie, which is critical for the success of Canadian professional ice hockey. In the last half of the 1990s and early into the new millennium, the U.S. economy was growing faster than the Canadian economy. Although ticket sales remained high for Canadian NHL franchises, the weakening Canadian dollar meant that U.S. teams were typically stronger on non-ticket revenues such as payments for media rights, regional sports networks and sponsorship. This put further stress on small-market Canadian teams, and importantly, decreased their attractiveness as investments.

In Winnipeg and Québec, no local owner was willing to invest—regardless of the fact that Canadian teams traditionally have championship-quality talent. The Edmonton Oilers won five Stanley Cups (1984, 1985, 1987, 1988, and 1990), the Montreal Canadiens captured Stanley Cups in 1986 and 1993 and the Calgary Flames celebrated a championship in 1989.

Now, a stronger loonie and a robust, growing Canadian economy, boosted by the interest of a few hockey-loving Canadian billionaires in potential ownership, is sparking hope that the NHL will have a renaissance in Canada. Unfortunately for Canadians, uncertainty about the long-term strength of the loonie makes that unlikely.

A myriad of factors contribute to a hockey team’s success. On-ice prowess is important, but so is the infrastructure that makes a franchise sustainable over the long term. Also needed is a viable, modern downtown arena and the commitment of an owner or ownership syndicate to spend what’s necessary to build talent. The strength of the Canadian dollar against its U.S. counterpart affects these factors.

In the decades since World War II, the Canadian dollar hovered around 80 U.S. cents. It began to decline sharply in the 1990s and 2000s, reaching a low of 63 U.S. cents in 2006 as the U.S. economy grew faster than that of Canada. But only a few months later, a deteriorating U.S. economy and Canada’s improving economic picture led to a climb toward parity. While this has not been good news for Canadian exports to the U.S., it has been good news for hockey.

A Canadian NHL team collects its gate receipts and other local revenues (TV deals, sponsorship, radio, etc.) in Canadian dollars, while it pays its largest expense (players’ salaries) in U.S. denominations. So, the 40 percent upward shift in the loonie has meant a much stronger financial position for the Canadian clubs relative to the mid-2000s. This has made available more resources to pursue marketing opportunities, upgrade facilities, and pay players the kind of six and seven-figure salaries they are accustomed to earning from U.S.-based teams.

For the current Canadian NHL teams, this is evident in their off-season player moves. Teams like Ottawa, Montreal and Calgary are now able to spend in the free-agency market. The Ottawa Senators signings of Sergei Gonchar (a three-year, $16.5 million deal) and now-traded Alexie Kovalev (a two-year, $10 million contract) highlight their prolific spending. For Winnipeg and Québec City, club ownership has been transformed from a money-losing enterprise to an investment that can break even or better.

Take, for example, the Toronto Maple Leafs. In 2009–2010, Forbes reported that Toronto had gate receipts of $91 million. If the currency had been at its 2006 rate of 63 U.S. cents, the U.S. equivalent revenue would have amounted to $57 million—which happens to be what the Leafs paid in player salaries in that period. In a sport where teams compete across borders, owners must calculate their worth in U.S. dollars. So, with an appreciated loonie, Toronto raked in $34 million more than it would have in 2006—money that goes toward profits and infrastructure investments.

A stronger Canadian dollar has recently made the ownership of a Canadian team a more attractive investment. The Montreal Canadiens were sold in 2009 for a reported $575 million to the Molson family. The team itself had been valued by Forbes at $339 million in 2009, but the Molsons clearly were paying attention to the Canadiens’ potential as a revenue-earner. Operating income has since climbed to $53 million in 2010, more than doubling the $25 million in revenues in 2007. Similar upward trends in operating profit since 2007 are reported by Forbes for all Canadian teams.

That has not gone unnoticed. From 2006 to 2010, RIM cofounder Jim Balsille tried unsuccessfully to bring a second team to Ontario. There has also been discussion about a second team in Toronto.

But this optimism must be tempered by realism. Although the loonie remains strong for now, an improving U.S. economy could plunge it back to the 80-cent range; and the structural benefits of operating in the larger U.S. sports market could once again swing the advantage to U.S. teams.

Prospective owners must be concerned about long-term risk. Franchises for Québec City and Winnipeg are not guaranteed, as potential owners consider future profitability. For example, both cities are small markets and more susceptible to an economic turndown than Montreal and Toronto.

Bottom line: any potential owner of a team in Québec City or Winnipeg will have to watch currency rates as closely as player rankings. The loonie may help a team fly high in the short term, but it could become an albatross in the long term.

Tags: Canada, Norm O'Reilly, Policy update, Sports
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