Why the pandemic’s economic impact on F1 goes far beyond a disrupted calendar

Two statistics lay bare the astonishing impact Covid-19 has had on Formula 1.

First, since the pathogen intensified its spread across world in March almost half this season’s scheduled 22 races have been cancelled or (optimistically, in the view of some) postponed. Second, the obligatory annual team shutdown – usually a three-week break in summer – has now been in place for three times as long.

Although speculative calendars are increasingly doing the rounds, these count for nought as long as authorities restrict the movement of people across the world. What use is a calendar which schedules races in countries which refuse to admit foreigners or make concessions for sport activities?

The pandemic’s effect on the 10 teams has been disastrous. Most have furloughed staff, some are expected to be ‘retrenched’, ‘de-hired’ or similar, while a number of independent teams have availed themselves of advances on future F1 revenues from commercial rights holder Liberty Media. Major cost and expense cuts are coming across the board. Whether the all teams make it through the season is questionable.

It seems likely that the 60% majority required to reduce the annual budget cap from $175m (with exemptions) to $145m in 2021 (and less over subsequent seasons) will be delivered over the coming week via a team vote. This is significant: Due to the impact of Covid-19, the FIA pushed through amendments to the International Sporting Code eliminating the need for unanimity for major rule changes at short notice.

Meanwhile the introduction of F1’s radical ‘new era’ regulations has been delayed from 2021 to 2022 as a cost-saving measure. This complicates driver and sponsor contracts: numerous such deals were timed to coincide with the original end of the current era (2020) in order to provide for fresh starts under incoming regulations. Thus, it will be intriguing to see whether one-year extensions are entered into.

Also significant is that Ferrari is investigating an IndyCar entry as an alternative to mass layoffs. Red Bull must surely be considering the transfer of human resources to sister team AlphaTauri where feasible. Intriguingly, the word on the F1 video-conference beat is that Renault is hiring engineers, pointing to a continuation of its F1 programme despite the impending loss of star driver Daniel Ricciardo, with no word yet on his replacement.

There is also increasing talk that Fernando Alonso will replace the Australian, returning to the team with which he won his 2005 and 2006 titles, making it his third stint with the French-owned outfit.

Certainly, the recent appointment of Pat Fry as technical director – a heavy-weight appointment that has largely stayed under the radar – shows serious intent, while the driver and engineer worked together at Ferrari and McLaren.

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Still, nothing can be taken for granted: Where F1’s current commercial agreements demand full-on commitment from teams for the duration of the covenants, drafts of the incoming Concorde Agreement permit teams to leave on an annual basis.

Given that most contracts run for a maximum of three years and that retrenchment packages are usually linked to length of service, recent recruits would be entitled to minimal severance packages by end-2021, assuming Renault leaves after the current formula. The company’s replacement for Carlos Ghosn, Luca de Meo, slides his feet under the CEO desk in July, so let’s see which way the wind blows then.

During F1’s last crisis, the 2008/9 global meltdown, a number of brands – including motor manufacturers – used the crisis as excuse to exit F1 after the sport had failed to fulfil their objectives for whatever reason, albeit usually self-inflicted. Only executives with career death wishes publicly admit to errors of judgement in splashing out millions on programmes that bombed, and thus to them the crisis was blessing in disguise.

During the aftermath of the then-withdrawals of a number of motor brands, I had lunch with an (ex) executive of one of those affected, who privately admitted his team had left due to poor results and governance concerns, yet publicly the company blamed the economy.

“How could we say ‘We’re leaving because F1 didn’t work for us or we had issues with [name withheld]’?” he asked rhetorically. “It was more convenient to blame the economy than our own shortfalls or political battles, plus many shareholders loved us for pulling the plug on an activity that divides opinion.”

Could similar reasoning be advanced by company boards this time around? Sextuple champions Mercedes could, of course, crow that the sport has ticked all boxes and that it is time to move on, but what about Renault and Honda? The former recently applied for state aid, while the latter has increasingly embraced electrification and is committed to F1 only to the end of 2021, a convenient date given the delayed regulation change.

Forget not that both walked away from F1 in 2008-09, only to later return in different guises. Could it be that history repeats itself?

It is not only the teams that have been and will continue to be hit during the aftermath of the pandemic, for virtually all walks of life have been affected, and that obviously includes F1. No element of the sport has been left untouched, and that situation will continue for many years. Some changes are likely to be irreversible through circumstance, while others will be adopted voluntarily.

An example of the latter relates to travel: Where before March this year all teams bosses plus numerous F1 personnel and FIA officials regularly traipsed to London, Geneva or Paris for meetings of the Strategy Group, F1 Commission or World Motor Sport Council, since March they have met via videoconferences more regularly and taken more decisions of greater gravity than during any similar period in recent history.

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This trend can be expected to accelerate, and it will be a matter of time before it is applied to races, too: why fly hundreds of race engineers and support staff to grands prix if videoconferencing does the trick? Are 60 heads really necessary to operate two race cars for seven hours per weekend in places as far flung as Melbourne and Montreal? Surely a number could operate from base via increased use of virtual garages?

The next question is whether crews of 18-20 are required to change four wheels when six heads would be more cost-efficient. Teams will argue they won’t be able to turn around a car within two seconds; so what if it is the same for all? Nose changes or wing adjustments? Sure if required, but why not after wheels have been changed? Gradually the number of heads can be whittled down without affecting safety or the ‘show’.

When a 20-strong headcount marks the starting point for pit stops, it is easy to find functions to fill their weekends. When it is half that, teams will be forced to combine a number of activities, applying time and motion studies to improve efficiency team efficiency. Of course, no industry enjoys lay-offs, but when the alternative is an ailing sport there is no other option, for a defunct activity has a zero payroll.

Consider F1 hospitality units: Are such palatial structures really required? At 12 of the season’s 22 races the promoters provide team quarters and there are no complaints. Yet hundreds of thousands of kilometres are logged up by an average of 20 trucks per team – 200 total – lugging such fortresses across Europe. A team member recently put the average annual cost of operating such units at $8-10m, or $80-100 collectively.

The units have their root in tobacco sponsorship of old, when fag brands had the resources to out-glitz each other, a trait that continued under the car brands after legislation outlawed cigarette liveries. Would Mercedes exit F1 were hospitality units banned? The Three-Pointed Star could, of course, leave – and finger the ban – but it is unlikely to be the sole reason given that such hospitality exists only at European races.

Would Philip Morris withdraw tens of millions from Ferrari on the basis of losing its red tower? The Mission Winnow folk always seem fairly content in temporary structures in Suzuka and Singapore, so why not in Silverstone or Spa? The same applies to any sponsor or partner one cares to list – and F1 could find itself attracting additional sponsors once its juvenile games of ‘mine-is-larger-than-yours’ cease. (See below)

Covid-19 has impacted heavily on a variety of sponsors operating across a broad spectrum of industries, with oil brands amongst the hardest hit. A check on the share prices of Petronas (Mercedes), Shell (Ferrari), ExxonMobil (Red Bull) and BP (Renault) shows that an average of 30% has been wiped off their respective market capitalisation in three months – directly attributable to the continuing effects of Covid-19.

Pre-Covid the word was that Petronas was poised to withdraw after ten years as the team’s title partner, and after many more seasons with Sauber and BMW. Amid much fanfare Mercedes announced in February this year that the British (privately held) petrochemical giant Ineos had upped its involvement with the team to principal partner level, some say at an annual fee of $30m.

Many expected the company and its billionaire Jim Ratcliffe to ramp up its involvement further in due course – possibly by way of a buy-in given that ownership of the late Niki Lauda’s 10% shareholding is currently under discussion.

However, the pandemic has massively affected Ratcliffe’s wealth, with the latest Sunday Times Rich List dropping him from richest Briton to fifth after estimating that his personal worth dropped almost £3bn to £15bn over the past 12 months, an almost 20% drop.

Yes, £15bn is still enough to buy all ten teams and Liberty Media outright. But Ratcliffe faced considerable criticism after requesting £500m in state loans and aid for Petroineos, a jointly-owned company with PetroChina. The placing of staff employed in Ratcliffe’s hospitality operations on (state-subsidised) furlough has further ratcheted up that pressure.

The flaunting of wealth on the airbox and rear wing of a silver Mercedes does not sit well against that background. Mercedes F1 CEO Toto Wolff’s admission to Austrian broadcaster ORF that he is in discussion with Mercedes about whether to extend his contract beyond the end of this year and, intriguingly, on what terms given that he also a shareholder in the team poses questions regarding the futures of both brands in F1.

By their nature contracts are bilateral (at least), and surely Mercedes CEO Ola Källenius and the main board hold most of the cards, for it is they and not Wolff who will decide the company’s F1 future. Let us see whether they reach for the ready-made excuses detailed above, or extend a continuous involvement in F1 which began in the mid-nineties.

Sole F1 tyre supplier and Liberty corporate sponsor Pirelli has seen its market value plummet, having shed 40% this year. Aston Martin’s has tanked by 60% during the same period. Brake supplier Brembo has also taken a sizeable knock, so all three companies will be watching their F1 spend diligently. One wonders whether Pirelli’s decision to restrict tyre compounds is driven as much by economics as practicality.

Finally, Liberty’s global sponsors: Rolex, Heineken, Emirates, DHL, Pirelli (see above) and Aramco, the Saudi sovereign wealth fund-owned oil giant. Of these, the two most at risk of exit are Heineken and Emirates, while least at risk is Aramco, not only because it is the latest addition to F1’s ranks, but because Liberty needs to keep the Saudis sweet after the fund invested $500m in F1’s sister company Live Nation.

Heineken’s contract expires this year – its two sponsor leads recently left the company, one joining F1 as head of marketing – and with restrictions on mass events and increasing drink-drive pressures, the brand may well choose to exit. Emirates has haemorrhaged cash during the crisis and may needs to regroup, thus triggering whatever exit clauses exist in a contract that is scheduled to expire at the end of 2022.

However, F1’s downsizing is likely to make it more attractive to sponsors who would normally jib at $30m title sponsor packages, whether on grounds of value, affordability or principle. Some sponsors may value F1’s high-profile contribution to the fight against Covid; others its determination to introduce bio- and synthetic fuels sooner rather than later – increasingly crucial elements in the global fight against air pollution.

Ultimately it seems inevitable that sponsors and brands will walk away from F1 over the next two years, but by the same token the sport and its masters have put in place the sort of cost-saving measures that will attract a broader base, albeit one that is likely to have less economic depth. One thing is, though, certain: F1’s commercial ‘face’ will change markedly in the short to medium term.

RacingLines

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• Todt defied expectations as president – now he plans to “disappear” from FIA
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