How F1 Teams Could Keep Their Wheels Turning During The Downturn

Formula One teams may be able to break even over the next two months despite not being able to race due to the coronavirus outbreak as they should still receive prize money according to company filings.

F1’s season-opener was due to take place in Australia today but was cancelled on Friday after a member of McLaren tested positive for COVID-19 leading to the team pulling out of the race. Reigning champions Mercedes followed suit and the race finally got the red light when the majority of the teams voted not to proceed.

Later in the day F1 put the brakes on its races in Bahrain and Vietnam which already had a number of roadblocks in their way as we reported. F1’s announcement added that the season is expected to start in Europe at the end of May which is seven races later than originally planned. It raised questions over the immediate future of the smallest teams but F1 has a trick under its hood which should help them steer through the uncertainty.

Unlike most businesses, profit is not the yardstick of success for an F1 team. Instead, they tend to spend all their revenue in an effort to win on track. Success boosts both their prize money and exposure on television broadcasts which allows them to charge more for sponsorship. It keeps the wheels turning and has driven up the team budgets to as much as $500 million annually.

One of the teams’ biggest costs is research and development which is spent during the year on creating the car for the following season. None of the teams have signed a contract to race in F1 beyond the end of this year so development of the 2021 car hasn’t revved up yet.

There will also be no need to travel to or prepare the cars for races until the end of May. As a result, the teams’ costs will reverse dramatically when they aren’t racing whilst a contractual maneuver should keep their revenue ticking over.

F1 is owned by Liberty Media and listed on the Nasdaq with the ticker FWONK. Its biggest single cost is paying prize money to the teams which came to $1 billion last year. Each team’s allocation is largely based on its ranking in the championship the previous year and the total represents a 68% share of F1’s underlying profits in the current year.

Crucially, F1’s filings confirm that “there are no Team payments paid with respect to individual Events.” Instead, the documents state that “payments of the Prize Fund are made on the last business day in every month of the World Championship season (March to November), with the final payment in respect of each year being made on the last business day of the following February.”

So even though the teams aren’t racing, they should still be paid. However, they may not receive as much as expected if F1 doesn’t reschedule any of the seven races that are due to take place before the end of May. This is because the races pay hosting fees to F1 which came to an average of $28.7 million each last year. The fewer the races, the lower the total hosting fees received by F1 and the less profit there is for the teams to share in.

Likewise, the company filings add that “if an Event is not held, cancelled or does not receive international television coverage (for example, as a result of a technical problem), Formula 1’s fees under the relevant advertising and sponsorship contract are likely to be reduced unless the advertising and sponsorship contract allows Formula 1 to substitute another Event for the cancelled Event and Formula 1 does so.”

The same goes for revenue from F1’s hospitality outfit, the Paddock Club, as the documents state that “if an Event is cancelled, Formula 1 will also be required to refund…amounts paid for tickets.”

However, it may be harder to make a dent in F1’s single largest revenue source, the $762.8 million it receives in fees from broadcasters. The company filings confirm that typically, the “broadcast contracts include a provision to reduce the fee payable to Formula 1 if there are fewer than 15 Events” and this is precisely how many will remain after the end of May.

So although the teams are due to receive prize money between now and the end of May, in light of the factors above, it isn’t clear how much they will get. “If we don’t go to races what happens to the prize-fund money? Does this decrease? At the moment we’re just hoping that’s not the case, and obviously we’re having discussions about insurance,” said Claire Williams, deputy boss of the Williams team earlier this week.

Williams is one of F1’s few teams which isn’t owned by a billionaire or an auto maker. Instead, it is floated on Frankfurt’s junior exchange with 52.3% of the company in the hands of its founder Sir Frank Williams. Even though it doesn’t have limitless resources, it should still be able to stay the course.

As none of the teams have signed a contract to race in F1 next year they don’t need to invest in development of their 2021 cars over the next few months when it would usually be done. If they shut their headquarters down during that time the biggest cost would be paying staff to ensure they don’t get jobs elsewhere.

Williams’ latest financial statements show that its 635 staff were paid $65.5 million (£53.3 million) in the year-ending 31 December 2018 giving a bill of $16.4 million from March through May. However, its prize money for the year came to an estimated $89 million giving it an average of $26.7 million over the three months. Even if this is reduced the team could still have more left in the tank.

In addition to prize money, sponsorship is the other major source of revenue for F1 teams and although it is likely that this will be reduced by the number of races that are cut from the calendar, some payments may be made upfront. It could still be an uphill struggle and Williams says that “if we have to shut down the factory it will be incredibly difficult.” However, if it keeps it going until the end of May it could prove to be the winning formula.

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