By: Christian Sylt on October 6, 2013
Formula One’s teams received a record amount of prize money last year as the return of races in the United States and Bahrain gave the series its biggest-ever calendar and boosted its fortunes.
The Bahrain Grand Prix was cancelled in 2011 due to a civil uprising in the country but it was back on the calendar in 2012 along with the U.S. Grand Prix at Circuit of the Americas in Texas. The annual race-hosting fees from these two races alone came to $66 million in revenue to F1, according to F1 business publication Formula Money. Those two races took the total number of Grands Prix to 20 and contributed to an 11.8-percent gain in revenue last year at Delta 2, the highest-level F1 parent company which files publicly available financial statements.
Those documents confirm that “despite the continued effects of the [global economic] downturn, …
growth was noted in a number of the [F1] Group’s income streams. Underpinning the performance were the calendar change effect which saw strong incremental revenues generated from the events in the USA and Bahrain.”
Delta 2’s revenue comes from fees paid to host and televise F1 races — and it hit $1.4 billion in 2012. The company had an operating profit of $1.18 billion, and 63 percent of this is shared between the top 10 F1 teams as prize money. Company filings which are due to be released next week show that the payment to the teams rose 8 percent to $751.8 million last year. That is 202-percent higher than in 2007 when the prize money only comprised a percentage of the fees from broadcasters rather than a cut of F1’s profits.
Yet despite this bumper haul of money, more teams are at risk of going out of business than at any other time in recent years. At the end of 2012, Spanish team HRT became the first F1 team in three years to close its doors. Earlier this year McLaren’s team principal Martin Whitmarsh said he believes that seven of the eleven F1 teams are in such financial difficulty that they are in “survival” mode.
The situation seems to have improved since then as Lotus and Sauber both made deals that provide significant financial input. However, the problem has far from evaporated. F1’s chief executive Bernie Ecclestone said at the end of September that “we are talking about two vulnerable teams at the moment.”
There are three reasons why teams are threatened despite being fuelled with so much money. The first is that F1 is in the midst of implementing costly new regulations which will see in-season testing return in 2014 along with a switch from today’s V8 engines to V6 turbos.
“We have made some mistakes with introducing the new powertrains, we didn’t control the costs enough, and the sport may well pay the price of that over the next 18 months,” Whitmarsh on Friday told the U.K.’s Sky Sports. He added “we are not at crisis yet, but we have to be careful we don’t wait for that crisis.”
Unlike the teams lower down the grid, McLaren is one of the best-rewarded outfits and this is the second reason why several are at risk.
The 63-percent prize money payment is comprised of three elements. The first is a 47.5 percent share of F1’s operating profits which is divided into two with half going to the top 10 equally and the other split between them depending on their position in the standings.
However, in addition, Ferrari, McLaren and Red Bull Racing share a dedicated annual prize fund of at least $100 million. This is because they are what are known as Constructors’ Championship Bonus (CCB) teams — the top three teams based on races won in the four seasons prior to 2012. As the only team which has been in F1 since the series was born in 1950, Ferrari also gets its own further annual prize payment of at least $62.2 million.
This puts the lower-ranking teams in the top 10 at a financial disadvantage even though they last year received $28 million which is far from insignificant. The reason it isn’t enough is that the teams employ a business model which is unusual to say the least.
Most companies want to make a profit first and foremost, but not F1 teams. They are generally run to simply break-even with neither a profit nor loss. This involves the team bosses spending whatever is available and they do it in pursuit of victory. The theory is that it is better to win on track and make no profit rather than make money and finish low down the standings. Spending all the money available to them means that it is hard for teams to build up cash reserves, and it also makes it tough for them to scale-back during an economic downturn.
In contrast, F1 is more insulated from risk as although the payment to the teams is its biggest single cost, that payment decreases if the sport’s profits decrease. The main exception to this is that the CCB teams — Ferrari, McLaren and Red Bull Racing — also have the right to quit the sport if operating profits fall below $715 million. As those profits were $400 million beyond that threshold last year, there seems to be little chance of F1’s biggest stars leaving the sport. But that doesn’t help all of the other teams.