Deloitte's Spotlight - Football parachutes or bungees?
For twenty years parachute payments have been awarded by the Premier League to cushion the landing for those clubs relegated into the Championship. Over this period there has been an on-going concern that this additional income would distort competition and lead to a yo-yo culture of the same clubs moving between the top two divisions.
These articles are taken from the Deloitte Annual Review of Football Finance, published by the dedicated Sports Business Group. Should you wish to learn more about the group then please visit the website www.deloitte.co.uk/arff.
This concern was heightened when the level of parachute payments increased by c.£5m in 2007/08 to £11.4m per season. However, the number of clubs in receipt of a parachute payment returning to the Premier League in the three years after 2007/08 remained the same as the previous three years, four out of nine, or less than half. In fact, of the 16 different clubs relegated during this six year period, nine had never returned to the Premier League as at the start of the 2012/13 season.
For clubs relegated from the Premier League at the end of the 2009/10 season the parachute payments were increased further, both in terms of duration, from two years to four years, and in value, c.£48m spread across these four seasons should the club not return to the top flight during this time. Of the teams relegated from the Premier League in the 2009/10, 2010/11 and 2011/12 seasons only two of the nine, West Ham United and Hull City, have returned to the Premier League, whilst another two, Wolverhampton Wanderers and Portsmouth, have been relegated further down the Football League.
From the 2013/14 season, as well as a further increase in the value of parachute payments to c.£60m over four years, the sanctions of Championship Financial Fair Play add a new element to this debate by limiting clubs’ spending and reducing their ability to use owner funding to bridge the financial gap to the clubs with parachute payments.
In 2013/14 Championship clubs will only be allowed to make a ‘fair play loss’ of £3m, or up to £8m if the excess over £3m is covered by shareholder equity contributions. Should clubs breach these limits they will be subject to a transfer embargo if they remain in the Championship and an automatic financial penalty if they achieve promotion to the Premier League.
To add some context, two-thirds of Championship clubs had a loss before tax greater than £3m in 2011/12, with almost half the division losing more than £8m. This will therefore require a significant financial re-alignment for many clubs, especially those without the guaranteed income of parachute payments or owners willing to provide equity contributions.
It will be interesting to see if these new rules lead to more clubs making an instant return to the Premier League. It may be that the intangible factors which can plague relegated sides, such as a losing mentality and a lack of togetherness, combined with the struggle to re-adjust their cost base to a significant reduction in revenue, will mean clubs without a parachute payment continue to beat the apparent financial odds.