Formula One forced to cut spending as costs pinch

Wednesday, 25 December 2013 00:00 - - {{hitsCtrl.values.hits}}

Reuters: 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 a 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 don’t ‘think’ there is one. There ‘is’ one,” AirAsia airline entrepreneur and Caterham team owner Tony Fernandes told Reuters 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.

Unique business model 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. The division between the rich and the also-rans is evident on the track, where Red Bull’s Sebastian Vettel ended the season winning the last nine races and his fourth title in a row, such predictability testing the patience of many fans. “At the end of the day there may be only five Formula One teams if it carries on the way it is,” said Fernandes. Cost cap 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. 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. 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. “I have been an awful long time in Formula One and owned and ran a team for 18 years,” said Ecclestone, who has been in the sport since the 1950s as both poacher and gamekeeper. “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 told Reuters. “What we are going to try to do is set a cap on the amount a team can spend. We’re going to try to save them from themselves.”