Analysis: How hard a financial hit are F1’s teams about to take?


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As teams emerge from their shutdowns and yesterday’s publication of a partial calendar signals the return of racing, Formula 1 teams face the next challenge: gearing down their operations as a result of the expected decrease in sponsorships and F1 earnings, plus the imposition of a now-reduced budget cap next year.

Given that the 10 teams operate to greatly different business models, each of these factors can be expected to affect each operation in a different fashion. The independent teams will not necessarily be the hardest hit. As a group they are likely to feel the pinch of reduced revenues – as result of not having parent companies with deep pockets to turn to – but in the longer term they are least likely to be affected by the cap.

Then there are five teams – Ferrari, Mercedes, Red Bull, McLaren and Williams – on contractual bonus schemes with F1, albeit under vastly different terms and levels. These outfits enjoy elements of income despite there having been no revenue-generating events so far this year. Liberty offered advances to the rest, but these will need to be repaid out of future earnings.

As Liberty CEO and chairman Chase Carey once said, there are “no free lunches”. Although race contracts include penalty clauses for cancellations, the indications from Liberty are that they have waived fees for affected events. Certainly, Liberty’s first quarter 2020 financial results did not reflect any income from race promoters.

The crucial aspect for Formula 1 and the teams for this year is that Liberty salvages whatever 2020 income is possible by ensuring that no fewer than 15 grands prix are staged and broadcast. Less than that means various penalty clauses contained within broadcast contracts kick in, and television executives are sure to remind Carey about the cost of lunches…

Start, Red Bull Ring, 2019
F1 has finally confirmed how its 2020 calendar will begin
Under normal conditions F1 derives its annual revenues from three main ‘buckets’: race hosting fees (estimated $700m), broadcast fees (another $700m) and ‘other’ – being licencing, ‘bridge and board’ signage and hospitality – which constitutes approximately $400m, with signage making up 75% of that, so $300m. For a ‘normal’ 2020 F1 budgeted a turnover of $1.8bn, of which $1bn would go to the teams.

However, under the ‘Covid Calendar’ announced on Tuesday, race hosting fees and hospitality largely falls away, certainly during early events. The blueprint devised and proposed by RaceFans and subsequently adopted by F1 has the commercial rights holder paying promoters to stage spectator-free races. Thus, the usual income ‘bucket’ has not only sprung a major leak, but is being scooped from simultaneously.

Clearly’s F1’s turnover will take a big hit this year. How far it will fall, and how much of the burden teams will have to shoulder, is the essential question.

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Assuming the championship stages at least 15 rounds (a reasonable number given the eight European events confirmed already) the ‘broadcast’ portion ($700m) should be safe. So, too, should advertising revenues ($300m), making for $1bn – a good start, but still appreciably short of budget.

Start, Bahrain International Circuit, 2019
Reinstating ‘propaganda races’ will be lucrative
Once the championship leaves Europe the game changes substantially, for travel costs kick in, but so should hosting fees – if not in full, then partially. The races targeted by Liberty range from ‘propaganda’ races in the Middle East ($40m each, potentially including postponed Bahrain), Sochi and the delayed Baku race ($50m each) and China ($40m); the rounds in USA and Mexico ($25m each).

The overall schedule covers Europe, the high earners and two races in Liberty’s North American heartland, making for (at least) seven outside of Europe and 15 in total.

Reinstating the street races in Vietnam or Singapore ($30m) will be tricky, but doing so could bring race fee income to $300m or $270m without a street race in whichever city, making for a turnover of around $1.3bn. Against this should be offset any fees payable to promoters to stage the closed events, estimated at an average of $2m per European round, so $16m for the eight-race set. A bargain given the TV and signage income.

All this points to an income reduction of around $500m for 2020, approximately 25% down on a budget, indicating the eventual prize pot will be worth approximately $750m.

With five teams guaranteed various bonuses the reduction is not a linear 25% but points to reduced F1 income from Liberty of between 20% (top three teams) through 25% (McLaren, Williams) to 30% for the balance. These are estimates, but align with projections from team and other sources and exclude sponsorship income or parent company underwrites, and hence the overall reductions are lower.

We can get a feel for the effect this will have on teams by applying these factors to our analysis of their 2019 budgets. This suggests 2020 team income from F1 will reduce as follows:

Team (% reduced F1 income)Actual 2019 F1 incomeProjected 2020 F1 incomeProjected 2020 budget
Mercedes (-20%)180 (inc. bonus)145385 (-35)
Ferrari (-20%)205 (inc. bonus)165400 (-40)
Red Bull (-20%)150 (inc. bonus)120300 (-30)
McLaren (-25%)105 (inc. bonus)80205 (-35)
Renault (-30%)7050190 (-20)
Alpha Tauri (-30%)6546137 (-19)
Racing Point (-30%)6042137 (-18)
Sauber (-30%)5538138 (-17)
Haas (-30%)5035135 (-15)
Williams (-25%)60 (inc. bonus)45110 (-15)

Top-ups from team owners may well be required. It is evident reduced income will affect the smaller teams more than the majors. These numbers are estimates for there is no way of establishing the exact terms and conditions of individual team sponsorship contracts, particularly for force majeure. There may yet be court cases.

There will, though, be much belt-tightening, and one hears of suppliers being advised that spend will be cut by up to 30%, which also corresponds with our estimates.

All this affects manpower levels and will continue to do so after the budget cap comes into play. McLaren last week announced redundancy measures for around 70 of its Racing staff (and far more elsewhere in the group), but that number will surely increase over time as the cap is lowered. All teams above the benchmark figure of 600 in race operations will need to reduce their payrolls to some degree.

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When and how many jobs teams may need to cut is a complex question, for there are three distinctly different issues. First, the financial implications of the pandemic: here the number of staff across spectrum who were placed on furlough suggests there will be job losses in the short term. The next trigger point is at season’s end ahead of the new, lower $145 million budget cap (with exceptions) for 2021. After that a glide path kicks in, reducing spending to $140m (2022) and $135m (2023).

Sebastian Vettel, Ferrari, Circuit de Catalunya, 2020
Ferrari may expand its non-F1 programme
The calculation is not, though, simply a matter of applying a pro rata cut to budgets in excess of $145m, for there are a number of activities which are not be affected, namely marketing costs, hospitality, heritage programmes, driver wages and certain executive costs. Engine manufacturing and supply activities are also excluded, which has a bearing on Mercedes, Ferrari and Renault’s teams.

Where teams have modest hospitality and marketing programmes – such as Haas, F1’s youngest team, which exists to sell machine tools – such exclusions are negligible. But for the majors these expenses can be appreciable, and are currently included in their F1 spends. Thus, where one team may exclude costs to the value of less than, say, $10m, for another the figure could easily be well over $50m.

Equally, teams with sister motorsport operations may transfer heads. AlphaTauri may, for example, absorb some of Red Bull’s excess. The drinks company’s F1 operation is totally unique in that a central operation (Red Bull Technologies) supplies both teams with hardware, and they in turn operate the race team. Thus, internal transfers could come into play, reducing the pain.

Meanwhile Ferrari is known to be considering WEC (hypercar) and IndyCar programmes. Last-named makes sense as the USA is Ferrari’s largest market, and in the words of a senior USA motorsport figure, “IndyCar would snap Ferrari’s hand off were such a programme in the offing.”

Red battery-powered cars with electrified ponies on the nose? Unlikely, but forget not that before his untimely death in July 2018 then-Ferrari boss Sergio Marchionne threatened to go racing with batteries, saying, “We need to be involved in Formula E because electrification via hybridisation is going to be part of our future.”

It may have been bluff during negotiations with Liberty about F1’s future, but the fact is Scuderia Ferrari will need to reduce staff levels once the cap bites. With the cash register ticking from 1 January 2021, the team needs to take decisions sooner rather than later. Even allowing for its high-profile marketing activities and an enviable 90-year heritage, it will likely need to redeploy around 250 F1 heads.

Mercedes, too, faces substantial cuts – but the team has been strangely quiet of late, with some folk suggesting all major decisions are now taken in Stuttgart, then cascade down to the F1 base in Brackley. Only Mercedes will know, but either way the scale of its headcount reduction will be equal to Ferrari’s given their similar budgets and activities.

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Unlike the Italian team, Mercedes does not, however, have many options outside of F1: It dumped DTM in favour of its Formula E campaign, which is now staffed and up and running, so there is little headroom. Yes, the F1 operation recently diverted resources to projects such as ventilators and embraced advanced engineering projects such as cycling and yachting, but is that really where the F1 team wishes to venture?

Either way, it appears at least 200 heads will need to be absorbed elsewhere. Racing Point, which already uses Mercedes power unit and other hardware and is situated close to Brackley, could be a target as it ramps up.

For the rest, McLaren is in the process of taking a knock and Renault will need to halt the recruitment and expansion programmes it embarked upon before the cap was reduced. One hears Sauber is in a holding pattern given that its livery and naming deal with Alfa Romeo expires at the end of 2021. Haas is well under the cap, and likely to remain so (and in the sport) given its ‘listed parts’ model which sees it draw parts from Ferrari and Dallara.

Which brings us to Williams and last week’s bad news, namely that F1’s third-oldest team and second on the all-time constructors championship log – with nine titles, one ahead of McLaren, but still shy of Ferrari’s 16 – finds itself being offered ‘for sale’. Still, in reply to a question from RaceFans, Claire Williams stated no retrenchments are envisaged. Let us hope so, for the team is right-sized for the $145m cap.

However, the foregoing covers only the first two scenarios, namely the effects of race cancellations due to Covid-19 on the teams’ F1 revenues (excluding effects on sponsorship income, still unknown at this stage), and imminent (2021) budget cap. Thereafter two additional cuts loom, namely $5m in 2022/23 respectively, which, while relatively minor, could see headcounts reduced or redeployed by a further 20 each year.

These estimates indicate the ‘benchmark number’ for core F1 team staff numbers will be around 560 by 2023, albeit varying by business model. Bear in mind, though, that lower overall headcounts generally equate to higher buy-ins or outsourcing. On that basis, for a given budget any payroll savings are balanced by increased purchase ledger spend, thus providing a measure of efficiency or ‘bang-for-buck’.

At most F1’s reduced budget caps will affect headcounts at five teams: Mercedes, Ferrari, Red Bull, McLaren (to a lesser extent) and Renault (ditto). The rest are currently within limits, while ‘excess’ heads could be absorbed – either by associate teams or via external recruitment drives – and redeployed via associated in-house motorsport programmes or within the wider group, plus natural attrition is another reducing factor.

Incoming teams – three are said to be sniffing about, although a maximum of two is a realistic target – are also potential recruiters of ‘excess’ personnel, and thus it is imperative that the FIA and Liberty commence its ‘new team’ process soonest. In order to make it attractive the proposed anti-dilution clause insisted upon by existing teams needs in order to maintain prize monies at existing levels must be waived. If the major teams are seriously concerned about the welfare of their staff as they maintain, then they will agree to this important concession.

It is inevitable there will be short-term heartache, but, as per the saying, “No pain, no gain…”, but that pain can and should be minimised. In the long-term F1 stands to gain plenty through evolving into a more efficient sporting business.

While this will be of little consolation to those who will be forced to exit the sport to which they passionately dedicated their careers, the bottom line is that F1 has no option other than lowering its caps on spending. A $100m cap could soon become reality.


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9 comments on “Analysis: How hard a financial hit are F1’s teams about to take?”

  1. Many thanks for an interesting analysis of the future financial impact on F1.

    However, I question whether Ferrari would seriously contemplate an Indycar programme if they can’t use their own chassis and engine. As their racing programme doubles as their marketing and advertising platform using a Dallara chassis might just be acceptable, but it would be unthinkable to have a Honda or, heaven forbid, a Chevrolet engine powering a Ferrari badged car.

    You surmise that the Indycar organisers, or Roger Penkse, would love to have Ferrari racing, but assuming they were allowed to enter their own car, apart from any contractual issues with their Indycar’s current suppliers I could see howls of protest from Honda, Chevrolet and Dallara.

    Using contracted Indycar suppliers presumably controls costs and evens up the racing. If Ferrari came along with their bespoke chassis and engine, even if they had to agree a budget cap, they would likely drive a train through any performance limitations.

    1. The way I see it, if Ferrari do decide to run an IndyCar, no doubt it would be with a long list of caveats/demands, which IndyCar management would be more than happy to oblige. Like it or not, Ferrari’s presence will draw more eyeballs, bums on seats etc, and this will benefit everyone involved in the series.

      Due to this, I feel the likes of Honda and GM may not be too upset, as the profile of the series will increase, perhaps further justifying their involvement?

      If Ferrari do enter, as you say, the will be no question as to what chassis and engine they will be running. Perhaps this will lead to a customer operation? Introducing a third manufacturer to the grid will only improve competition.

      All in all, this is a win-win for all involved.

  2. Biskit Boy (@sean-p-newmanlive-co-uk)
    3rd June 2020, 14:27

    The budget cap was brought in partly to make the smaller teams more competitive. If it works it might mean those teams currently spending under the cap will be able to increase their spend and hopefully employee some of those leaving the larger teams.

  3. So many things to potentially look forward to if this were a utopian world: Ferrari entering additional teams in Indycar and Le Mans, top engineers trickling down to smaller teams, a grid of 26 cars and F1 teams having additional inputs in making advances in medical technologies.
    If only we come out of 2020 stronger and without the nooses of accountants breathing down everyone’s necks.

  4. While this will be of little consolation to those who will be forced to exit the sport to which they passionately dedicated their careers, the bottom line is that F1 has no option other than lowering its caps on spending. A $100m cap could soon become reality.

    Very good and detailed analyis as always, @DieterRencken.
    I’m more optimistic that the right overall business model and growth initiatives do not require a further budget cap.
    There is no reason F1 cannot grow too $3B revenue in a couple of years. Liberty should be rewarded a cool $1-1.5B for its effort (pay expenses and bank loans), which leaves another $1.5-2B for the 12/13(!) teams. Thus if each team gets some $150M each and chases another $50M+ in advertising, then there is no need to go that low.

    Of course, this all depends on:
    1) total revenue to grow to $3B. This seems a lot but compare it to the NBA ($8B), AFL/NFL ($18B), MLB ($9B), Premier League ($6B), NHL ($5B), La Liga ($4B), Olympics ($6B) etc. There is no reason why F1 cannot get to similar numbers if done well.
    2) share a big chunk of revenue/profit with the teams. Hopefully, F1 will one day move to a franchise system, or similar, where teams are guaranteed a long term and a fair part of the overall success.

    1. NBA makes more than Premier League? I did not know that (then again I’m all football but besides the point)
      Also with the recent China/Hong Kong issue I hear it’ll go down which way they side
      I would omit the Olympics since it happens every four years
      Unpopular opinion also I would consider lowering the hosting fees if the tracks aren’t making any profit (I don’t know if they are)
      Getting to that 3B is the next step and it all rests on Broadcasting revenues, this is what allows the Premier League to give 100M to teams just for showing up
      (From playing FM I can tell you that is delicious money)

  5. I’d be very surprised if f1 visits l the USA, Russia or Mexico this year. Brazil is certainly a write off too, simply because the virus is out of control. I’m pretty surprised Silverstone is being held – caution seems to have been well and truly abandoned as the lure of ‘getting the economy moving’ twinkled its shiny star. Has no one considered a second wave of infections would devastate the economy? Or indeed cause needless additional deaths? I can’t help but think the sport is putting the cart before the horse.

    1. Your observations could very well turn out to be correct.However, not a wheel has turned in anger yet so we are all still speculating.

      The first step is to see what transpires in Austria, although with the somewhat unique location of the Red Bull Ring, even if the grand prix is run with little or no problems, we won’t have a green light to carry on. However from a practical point of view vital lessons will be learnt. I expect some issues in Austria but not enough to jeopardise the balance of the season.

      As with the incredibly fast design and development of aspirators, F1 teams are very quick to adapt and improve so I would expect the lessons from Austria to be implemented quickly and subsequent grand prix to be held safely, with spectators involved before the season ends.

    2. Rodrigo Cesar Dechen
      14th June 2020, 4:49

      I could agree with you, but then we both would be wrong. First, the Pandemic is not out of control here in Brazil and second, everyone will be tested for Covid on those races, without the presence of a public. The risk is incredible low.

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