One of the very financial cornerstones that served Formula 1 so well for over 40 years could ultimately prove one of the factors that impede the sport’s return to (relative) normality after the pandemic.
When F1 commercial rights holder Liberty bought into F1 they immediately latched onto the advantages of ‘destination cities’, with the first event by the company being Hanoi’s now-postponed street race. Equally, enormous effort has been expended (thus far unsuccessfully) on staging a grand prix in Miami’s suburbs.
But there is always a flipside: that tactic of chasing street venues does not look too clever now. Street circuits require long and costly lead times to construct, making it harder to reschedule postponed events.
Monaco and Baku gave notice despite the latter having ten weeks in hand. Canada seems to be stalling, with a no-go decision expected within a week. Melbourne cancelled its grand prix on the eve of the event and is unlikely to return this year due to the costs and disruption of (re)constructing the Albert Park circuit.
However, the biggest impediment to F1’s recovery is its overall business model, which revolves around races of all types, with all its other income streams riding on the back of race fee income.
Effectively, the commercial rights holder (Liberty Media) sells the rights to stage a race to a promoter, who recovers the costs through a combination of ticket income, food and drink concessions, second-tier hospitality and public subsidies designed to encourage F1 tourism. The CRH further monetises the race by selling electronic media rights (predominantly television, plus live streaming and radio income), ‘bridge and board’ advertising, top-level hospitality and merchandising rights, all of which is utterly race-dependent. The bottom line: No race; no income.
This creates and imperative is to cram as many races into a season as possible, with each additional event providing further television, trackside advertising and hospitality streams. However, F1’s business model means promoters only stage events provided tickets can be sold, and public subsidies are paid where tourism gains are tangible.
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Thus, as soon as governments started banning mass gatherings in response to the pandemic – as was the case with the Australian Grand Prix, which was granted permission to continue “behind locked gates” before the promoter decided otherwise – F1’s business model collapsed overnight, for no promoter would pay eye-watering hosting fees, yet have no income. That would trigger immediate bankruptcy.
Before Covid-19, Liberty targeted around $1.8 billion in gross income, respectively split roughly 37.5%/37.5%/25% in terms of hosting fees, media rights and other earnings. Therefore, hosting fees contribute $675 million per year to Liberty’s coffers, as do media rights, with advertising and hospitality making up the balance of approximately $450m. In short, $675m in race fees spins off an incremental $1.125bn in media and ‘other’ income.
The most basic arithmetic shows the $675m divided by 20 of the 22 events on the original 2020 F1 calendar (Monaco and Brazil are believed to be on freebies) provides an average of $37.5m per race in fees, with media rights and the rest contributing $675m and $450 respectively. By extension, each paying race generates an average of around $90m in income.
(This means the 10 teams currently share – inequitably – approximately 66% or $1bn under ‘normal’ conditions, with the rest covering Liberty’s outgoings of around $300m and profit. The crucial figure, though, is the team’s collective slice, for without that income half the grid could be endangered.)
With eight races cancelled or postponed, and races in June and beyond weighing their options, the question becomes how quickly F1 can resume racing once the official ‘green light’ is given by governments and the current ‘social distancing’ measures are relaxed, as is beginning in China. Race promoters require two months minimum, most likely 12 weeks, to prepare their venues. Significantly, most of this cost and effort is expended on spectator facilities.
According to various sources, the actual racing installations require a maximum of three weeks given most hard- and software is already in place, while F1’s “circuit ring” and broadcast kit can be installed in three days flat. However, understandably promoters are not prepared to incur expenditure on preparations until official clearance is granted – delaying a return to racing by up to 12 weeks after the green light.
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That period could cover anything up to eight events assuming a number of triple-headers, as can be expected once the crisis subsides. Time will be of the essence as Liberty needs to maximise revenues in order to meet its various covenants after a truly dire period not of its own making.
However, a potential solution is at hand, provided Liberty is prepared to mindset shift from race ‘seller’ to promoter: Effectively paying European circuit owners to stage locked-gates races, with paddock access to restricted to key team crews and personnel, bona fide media and TV personnel and race officials.
The economics are simple: circuit owners have facilities they are unable to use for as long as governments ban paying punters. The chances of profitable events are slim even after restrictions are lifted as governments and consumers tighten belts. It follows that Liberty has zero income for as long as no races are run. Thus, the imperative is to run as many races as possible to recover lost TV and other income.
Equally, F1 fans are desperate for action, while sponsors and teams are unable to strut their stuff, and therefore have zero return on their substantial investments. Any races which can be held would fill empty TV spaces with much-needed exposure, and probably attract new audiences as F1 would have much less competition for eyeballs than usual.
Such ‘ghost races’ would be aimed purely at television audiences, with only key personnel permitted on-site and VIPs, sponsors, spectators and fans banned. No public means no traffic control and no car parks, no catering or public conveniences, no merchandising areas, no additional grandstands, no big screens, no programme sellers and, crucially, no need for public security or crowd marshalling.
With none of the above required, a race-ready ‘white’ circuit – one with all track perimeter areas ready for advertising billboards – a circuit could be prepared to full, ready-to-race specification within a fortnight.
Trackside officials and authorised media only would be permitted outside of the paddock, with access to the inner sanctum restricted to personnel as below. Race promoter sources confirmed to RaceFans that around 300 marshals would be required to safely run events, complemented by 100 medical staff.
According to team sources 45 to 50 heads are required to operate two F1 cars safely. Restricting the paddock to essential staff only means no paddock guests and thus no hospitality facilities, with skeleton marketing and PR staff permitted, say four total. Teams need to be fed, either via central catering – as per Formula 2’s paddock – or in vacant circuit hospitality units.
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Add in three engineers per team on the engine side, two fitters and a tyre engineer from Pirelli plus 10 staff to cater for brake, fuel and other technical duties, and the figure is still around 800 team heads maximum including drivers. In itself this is still a ridiculous figure: a stripped-out crew of 80 required to operate two cars for a couple of hours each day.
Media, television crews and race officials take the total to 1,000. Tighter clustering of events, possible as no ticket sales means promoters are not affected by date and distance proximity of two races, means crews – all pre-tested for Covid-19 – can travel across Europe in minibuses (eight per team), largely negating the need for flights and rental cars, thus minimising contact with outsiders and reducing costs and exposure.
To recap, the total (cross-checked) total headcount complement required stage a ‘ghost grand prix’ on a maximum safety/minimum headcount basis is 400 trackside officials, 800 team personnel plus 200 ‘other’ heads. That adds up to 1,400 in total, a figure governments may be comfortable with when restrictions are relaxed, particularly given the social distancing that is possible at vast circuits with many unused areas.
A number of circuits offer different licensed layouts or may even be used in both directions with minimal adaption, enabling events to be run on consecutive weekends on differing layouts, reducing costs, increasing the number of events F1 can run and fostering the unpredictable racing the sport craves. In some ways, how F1 reacts to this challenge could set a trend for its post-coronavirus future.
As discussed above, this concept could only be applied to permanent circuits due to the lead times and costs and other implications of preparing and racing at street venues. International freight costs mean flyaway races are less viable – these are generally included in hosting fees, with Liberty providing 11 tonnes per team and 20 economy class air tickets, and teams paying the rest. Still, ‘propaganda races’ such as Bahrain and Abu Dhabi may play ball.
So which circuits could run to this model? For starters all permanent European venues – Zandvoort, Catalunya, Paul Ricard, Red Bull Ring, Silverstone, Hungary, Spa and Monza. Possibly Hockenheim could be persuaded to return given this no-cost model? So nine such events, with one or two ‘altered layouts’ as above providing back-up for a run of races between mid-June and mid-September: a 13-week window.
Thereafter, if the global situation improves rapidly enough, the calendar may be able to return to normal, perhaps with deviations to accommodate China, Bahrain and possibly Vietnam before ending in February 2021. Thus F1 could potentially stage an 19-race calendar, with activities spread over Saturday (shortened practice and qualifying) and Sunday (race) to reduce costs and workloads.
Of course, this will still be a hectic schedule and will result in a lot of disappointed ticket-holders seeking refunds. But given the reduced manning levels required by the concept, staff could be rotated throughout the season. However F1 responds to the challenge it faces, it and the teams have a choice: Survive by adapting to sweeping changes in the world order or fail to do so and accept the consequences. It is both that simple and complex.
Now for the bottom line: Circuit rentals run out at $1m-$1.5m depending upon venue, infrastructure, location and manning required to run the event, with direct costs panning out at approximately double that, meaning Liberty would be in for a bill of $2-3m per event, so $25m over eight events.
Yes, Liberty writes off its hosting fee income. But, on the flipside, F1 scores television and some other income such as trackside advertising over the run of ‘ghost races’. This could pan out at around $500m in income which would otherwise be lost, or a 2,000% return on investment. Crucially, the cash-strapped teams need every bit of support going, and if push came to shove this concept could prove to be their saving grace.
Equally, circuit owners need every bit of support going, and this concept would provide welcome as they count their already substantial losses, particularly if they lose out totally on their grand prix this year. Sponsors, too, could be tipped into staying, while the sport could attract new eyeballs by staging events during otherwise fallow weekends.
One hopes, of course, that life soon returns to normal and not only for the sake of the sport we love. This crisis has changed the world order, and those businesses who best adapt will survive by thinking laterally, and may even emerge all the stronger for it. However, if the effects of Covid-19 do linger, a solution for F1 is at hand at the switch of its corporate mindset.
Who knows, the concept may even be snapped up by Moto GP.
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