February 28, 2021

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KNUTSON: Formula One’s Budget Crunch

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Dan Knutson BLOOMINGTON, Minn. — For the first time there is a budget cap in...

Dan Knutson

BLOOMINGTON, Minn. — For the first time there is a budget cap in place for the Formula One teams. But of course, Formula One being Formula One, there are all sorts of loopholes and exemptions.

After plenty of bickering among the teams and negotiations among the teams, Formula One’s commercial owners Liberty Media and the FIA, the teams eventually agreed to an annual budget limit of $175 million.

Then along came the hardships of COVID-19. The teams were now more amenable to reducing the cap even further and in May they voted for a new figure of $145 million.

But not included in that are a number of big-ticket items, including driver salaries (that’s a “savings” of more than $40 million on Lewis Hamilton’s salary alone!), the cost of the power units, the salaries of the three highest-paid employees, marketing, PR, leasing costs, hospitality, factory maintenance and more.

Yet five teams already have budgets below the cap: Haas, Aston Martin, Williams, Alfa Romeo and AlphaTauri.

Alpine (formerly Renault) and McLaren are somewhere in the middle, so they will have to make some adjustments up or down with their budgets.

The big three — Mercedes, Red Bull and Ferrari — are spending more than $250 million annually, so they will need to make some cuts and adjustments. And they have found a legal loophole by working with their sister/junior teams.

Haas, for example, is setting up a facility on the Ferrari grounds at Maranello. Former Ferrari employees, including technical director Simone Resta, will work there, but they will be paid by Haas. Red Bull personnel can move to AlphaTauri and there will also be an exodus of Mercedes staff who will head to Aston Martin.

Meanwhile, on the financial front, many of the teams will receive reduced payouts in 2021 from the revenue that Liberty Media generates from the sport and business.

According to a report in the Financial Times, Formula One reported operating losses of $363 million in the first nine months of 2020.

That income — or lack of it in 2020 — is derived from a number of sources, including: what the TV networks pay for the rights to televise the races; on track advertising; luxury hospitality paddock club suites at the track; and what the circuits pay to host the races.

Most tracks rely at least partially on spectator ticket sales to help them pay anywhere from $20 million to more than $50 million to host a grand prix. But with most circuits having no — or just a few — fans at their races last year, Liberty had to waive those fees and let the tracks have the races for free. The tracks even asked Liberty to pay some of their operating costs.

More income was lost because there were no VIP hospitality suites at the tracks.

However, Liberty is not going to be as generous and as charitable this year. Outgoing Formula One CEO Chase Carey has warned that F-1 expects its partners to do their share this year. In other words, the tracks won’t get the races for free.

Carey has also sought to increase revenue by signing a deal with Amazon’s digital streaming services.

The money earned in 2020 will be paid out to the teams in 10 equal installments in 2021. The payouts are based on the teams’ results from last year, so first-place Mercedes will rake in a lot more than Williams, which finished last in the constructors’ championship.

According to Auto Motor und Sport, Mercedes will be paid $126 million in prize money this year compared to the $177 million it earned in 2019 and was then paid in 2020.

However, the teams will have to spend plenty of money this year — first to develop their 2021 cars, which are based on the 2020 models, and second, to design their 2022 cars with the radical new technical rules.

Plus, there is no doubt =the pandemic will continue to affect Formula One’s income flow in 2021. For example, as of mid-January not a single one of the 23 tracks on the 2021 schedule of races was offering any tickets for sale to the fans.

But the financial stress on the teams will be eased some by the new budget cap introduced this year.

The post KNUTSON: Formula One’s Budget Crunch appeared first on SPEED SPORT.

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