This essay originally appeared in Charlton fanzine Voice of the Valley.
The Championship has become in effect a Premier League Division 2. In many ways it is the least level playing field of all the divisions, except that it is not dominated by the same six clubs each year. Three factors contribute to its distinctive financial structure. First, the availability of generous parachute payments paid to around a third of its clubs (eight at present). Secondly, the option available to relegated clubs of selling one or two players at a substantial profit. This can be done without compromising the club’s competitiveness. Thirdly, the willingness of benefactor owners to pour substantial funds into the club they own in the hope of gaining promotion to the Premier League. Given that some clubs in any one year are in a relegation battle, they have a 6-1 chance of success, although no doubt each club thinks it can beat those odds.
As a consequence, the clubs in the Championship have been losing on average a total of £1.5m a day. Not a single club made a profit in 2017/18 and total losses are around £400m.Kieran Maguire of the PriceofFootball, one of the most respected football finance analysts has reported, ‘In the last five years Championship clubs' income was up 53 per cent, wages were up 55 per cent and losses up 106 per cent.’ Wages are now the highest ever in the Championship compared to income, 107.5 per cent in 2018 (the average wage is £15,000 per week). The Championship competes with some of the big five European leagues for transfer spending.
Parachute payments are unique to the English (and Scottish) game and, currently, see relegated clubs receive a percentage of their final earnings in the Premier League in which they were relegated. Parachute payments are calculated relative to Premier League equal share: year 1 – 55%, year 2 – 45%, year 3 – 20%. If a club is relegated after only one season in the top flight, it is only entitled to two years of payments. The introduction of parachute payments for relegated clubs in 2004 was intended to provide a safety net. Eleven clubs have gone into administration after relegation from the Premier League.
It is worth noting that the parachute payments for clubs relegated in earlier seasons can change in line with any updated TV deal. QPR actually got more in their second year after relegation (£31.2m) than their first year (£25.9m), while they get £16.6m in each of years 3 and 4, compared to the original £10.5m.
It is evident that parachutes have a major impact on the competitive balance in the Championship, as the six clubs with the highest revenue in 2016/17 all benefited from these payments, most notably the three relegated the previous season (Aston Villa, Norwich City and Newcastle United). Championship clubs with parachute payments are twice as likely to be promoted to the Premier League compared to clubs without and considerably less likely to suffer further relegation to League One compared with other clubs in the League.
‘Parachute Payments in English Football: Softening the Landing or Distorting the Balance,’ co-authored by Rob Wilson, Grish Ramchandani and Daniel Plumley in the Journal of Global Sport Management, graphically illustrates the impact that these handouts are having on English football. They argue, ‘Championship clubs with parachute payments are twice as likely to be promoted to the EPL compared to clubs without and considerably less likely to suffer further relegation to League One compared with other clubs in the League.’ The team’s research has led to Wilson to believe that parachute payments are worth five points on every other team in the league.
Less than half of the promoted teams in 2013-18 had been receiving parachute payments during their promotion seasons. Teams with no parachute payments spend an average of £5.18m (net) the season they get promoted. These sides spend an average of £2.02m (net) in the three seasons leading to promotion. Teams that achieve promotion while being paid parachute payments only have a net spend of £1.1m on transfers. However, in part that reflects the quality of recently relegated clubs and their ability to sell one or two players at a substantial profit.
A further consideration is whether relegation clauses are included in players’ contracts. This is becoming an increasingly common practice. However, when Sunderland was relegated to the Championship, they did not put any relegation clauses in their player’s contracts. The likes of Jermaine Defoe were sold for free.
Of the 85 teams relegated from the top tier over the 28 seasons to 2016, only 20 were promoted back the following season. If a less-than-one-in-four chance of bouncing back immediately seems slim, then in subsequent seasons the chances get even worse. Former Premier League clubs spending a second year in the Championship have just a 14 per cent chance of promotion; by the time they begin a third campaign, they are actually slightly worse than the average team in the division, typically finishing in the bottom half. In fact, of the 37 teams demoted from the Premier League in its 24-year history to 2016, nine were in the third division or lower.
The financial benefits of promotion to the Premier League are considerable, even if the stay is a relatively short one. This can be illustrated by the case of Huddersfield Town’s accounts for 2017/18. The Terriers swung from a £20m loss before tax in the Championship to a £30m profit in the Premier League, a £50m improvement, as revenue increased by £109m from £16m to a club record £125m and profit on player sales was up £5m to £6m. After tax, a £17m loss was turned into £26m profit.
To illustrate the huge difference in the Premier League, not only is Huddersfield's 2017/18 £125m revenue a massive £109m more than the previous season’s £16m, but is also more than twice as much as the previous five seasons in the Championship combined (£60m). The £109m revenue growth was very largely driven by broadcasting’s £102m increase to £110m, reflecting the financial chasm between the Premier League and the Championship. The 2017/18 profit of £30m is the first time that the club have made money since 2006 – and that was less than £100k. In the nine years before promotion to the Premier League the club sustained losses amounting to £57m, averaging over £6m a season.
Just how far a benefactor owner will go in backing a club is illustrated by the case of Middlesbrough where Steve Gibson has pumped in £90 million in shares and £93 million in loans. However, there are limits to what even such a generous owner can achieve. Kieran Maguire comments, ‘ Boro paid an average wage of £23,400 a week in 2017/18. I would expect this to fall this season as otherwise they would only be able to afford 19 players (and no managers, coaches or support staff) before the money runs out. Boro had 237 staff in 2017/18. As a result Middlesbrough had the highest costing squad in the Championship by summer 2018, but that has come back to bite them as parachute payments stop in 2019/20. Boro spent more on players in 2017/18 than any other club [in the Championship], twice as much as the next club, as it bought players for £66 million.' Staff at the stadium and the training complex has been invited to apply for voluntary redundancy.
At Sheffield Wednesday, canned tuna magnate Dejpon Chansiri lent the club a further £40 million in 2018 on top of the £20 million in 2017. He has also put in £2 million in shares in 2017 and £21 million in 2018/19, so his total investment since acquiring the club is pumping in over £100m and he owes the club £60m for the stadium.
Financial fair play was, of course, meant to put an end to unsustainable financial practices, but the Football League has been half hearted in pursuing defaulting clubs, knowing that its legal basis for the rules is open to challenge. Club are adept at discovering new loopholes. Aston Villa, Derby County and Sheffield Wednesday have sold and leased back their stadiums to avoid breaking the rules.
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