Formula 1 forced to cut spending as costs pinch

Written by Reuters | London | Updated: Dec 24 2013, 10:29am hrs
Glamorous, high-tech and hugely profitable: With the lure of races from Monaco to Singapore, Formula One just keeps on giving so far as the money men controlling the motor sport are concerned.

The business, in which private equity firm CVC is the largest shareholder, had turnover of $1.35 billion in 2012 and generated an operating profit of $426 million once payments to its 11 teams had been deducted. That might suggest unconstrained happiness up and down the paddock but appearances are deceptive. Behind the luxury brands, the celebrity guests and the lavish hospitality suites, many of the smaller teams are battling to survive.

I dont THINK there is one. There IS one, AirAsia airline entrepreneur and Caterham team owner Tony Fernandes said last week when asked whether the sport faced a cost crisis.

You hear about people not having been paid, suppliers taking a long time to be paid. These are certainly not happy days, added the Malaysian, whose team finished last in 2013 and has yet to score a point in four years of trying.

Four teams champions Red Bull, runners-up Mercedes, Fiat-owned Ferrari, and McLaren have budgets of $200 million or more and benefit most from the division of revenues overseen by Formula One chief executive Bernie Ecclestone, long the dominant figure in the sport.

Ecclestone, who is facing a series of legal battles linked to the deal that brought CVC on board eight years ago, has built a unique business model that controls broadcasting rights, race hosting fees, sponsorship and licensing.

The teams shared around $750 million of the income last year but are questioning a structure that takes so much money out of a sport with a high cost base for teams flying around the world to 19 annual races.

Teams come and go, more than 100 of them down the decades with Spanish-owned HRT the most recent to exit at the end of 2012, but this year has been more unsettling than usual.

When 2007 world champion Kimi Raikkonen told reporters that Lotus, winners of the season-opener in Australia and regular contenders, had not paid his wages all season he confirmed widespread concerns about the health of the sport.

The talk now is of the urgency of taking costs in hand, with the governing International Automobile Federation (FIA) announcing this month that teams will have a cost cap from 2015 with the precise rules to be drawn up by mid-2014. The FIA has also sought expressions of interest from would-be teams wanting to come in from 2015, a move variously interpreted as a sign they feared losing a current competitor or that they already had a potential entrant waiting in the wings.

Previous attempts to curb spending have fallen apart, with companies such as Austrian soft drinks firm Red Bull prepared to bankroll a winning team to build their brand.

There is a large disparity in the distribution of money and the controls on cost dont appear to be as effective as they could be. Its not good for the sport and its not good for the fans. Without them there is no commercial model, said Marussia CEO Graeme Lowdon, whose team has one of the smallest budgets on the grid at around 65 million and has also never scored a point.

The teams are facing an engine bill twice as big as the current rate next year, when a new and more complicated turbocharged V6 with energy recovery systems is introduced, and fear the gulf between rich and poor is becoming unbridgeable.

Even McLaren, one of the bigger teams, is yet to unveil a new title sponsor for next season after Vodafone ended a partnership dating back to 2007. Swiss-based Sauber, the fourth-longest serving team, and Lotus previously known as the title-winning Renault and Benetton outfits have both hit trouble this year.

Formula One might be self-financing in an ideal world but past threats of rival series have come to nothing, with teams lacking the resolve, and the resources, to make the break from the business built by the 83-year-old Ecclestone.

Ever since I have been in Formula One, there have been the haves and have nots. Whatever sport there is, people will spend what they think they have to spend in order to win, the British billionaire said. What we are going to try to do is set a cap on the amount a team can spend. Were going to try to save them from themselves.