Covid-19 drives F1 to a crossroads

Formula 1 is famous for speed. Its cars can hit more than 220 miles per hour and races are sometimes won by just a hundredth of a second. But even F1 couldn’t outmanoeuvre the microscopic particles of the Covid-19 virus.

As the deadly disease spread around the world two weeks ago and confirmed cases grew, most pro and college sports leagues raced to cancel or postpone their events. But not F1. At the same time as the National Basketball Association announced that it had suspended its season, F1 teams were revving up the engines of their cars in preparation for the following day’s practice runs at their season-opener in Melbourne, Australia.

Hundreds of race staff were the process of flying from Europe to Melbourne as sports events elsewhere began to close their doors. Even F1’s chief executive Chase Carey was in the air as he flew from Vietnam to Australia, which had begun to close its borders to foreigners even though it was due to host the third F1 race of the season.

Carey flew into a metaphorical storm in Australia, one that presented a glimpse not only into F1’s turbulent immediate future, but even larger changes likely to arrive over a longer period as the racing series now stands at a virus-imposed economic and operational crossroads.

McLaren, F1’s second-most successful team, had pulled out of the running in Australia after one of its employees had tested positive for the virus, and 14 others had been put in quarantine.

Despite this, the Australian Grand Prix promoter insisted that the show would go on, a stance that sent shock waves through the paddock, F1’s nerve center at the track.

The drivers, however, ultimately voted with their feet. Four-time title winner Sebastian Vettel and his former teammate Kimi Räikkönen secretly flew back to their homes in Switzerland in the middle of the night, while reigning champion Lewis Hamilton posted a message on Instagram saying: “Honestly don’t want to leave my hotel room.”

The moves drove the teams to take a vote on whether to continue, and this is what put the brakes on the race as Hamilton’s Mercedes squad also decided that it was pulling out.

The decision came a day after McLaren announced that its team member had fallen ill and the delay left staff, media and fans fuming. It is also believed to have made a hefty dent in F1’s fortunes. The Australian Grand Prix promoter was due to pay F1 an estimated $42.5m (€38.6m) hosting fee, but last month Carey revealed that if a race “is not held, we would not receive the promotion revenue”.

F1’s filings state that if a race is not held, the “fees under the relevant advertising and sponsorship contract are likely to be reduced” and corporate hospitality tickets are required to be refunded. Together, those components comprise about 19.4 per cent of F1’s $2bn revenue last year and join the $602.1m it received from race promoters.

The sport’s largest source of revenue is the $762.8m paid by broadcasters such as ESPN in the United States. And according to the filings, these contracts “include a provision to reduce the fee payable to Formula 1 if there are fewer than 15 Events”. Perhaps not coincidentally, F1 announced March 23 that this is the minimum number of races that are planned to take place this year.

“We recognise there is significant potential for additional postponements in currently scheduled events, nonetheless we and our partners fully expect the season to start at some point this summer, with a revised calendar of between 15-18 races,” Carey says.

“As previously announced we will utilise the summer break being brought forward to March-April to race during the normal summer break period, and anticipate the season end date will extend beyond our original end date of November 27-29, with the actual sequence and schedule dates for races differing significantly from our original 2020 calendar,” he says.

F1 has cancelled or postponed the eight races which were due to take place before mid-June, including the historic Monaco Grand Prix which will not be held this year for the first time in more than six decades.

But that may the least of F1’s worries.

Chase Carey, chief executive and executive chairman of the Formula One Group, talks as a press conference is held before the 2020 Australian Grand Prix was cancelled (by Clive Mason/Getty Images)

Heavy Cost Burdens

Uncertainty over when races will be able to resume is one of the factors which has driven down the value of F1 this year. The sport is owned by Liberty Media which also controls the Atlanta Braves and is listed on the Nasdaq stock exchange.

Over the past two months F1’s stock price has reversed by 42.7 per cent which is almost three times the amount the overall market has dropped during that time. F1 lost a quarter of its value in only one day, just 24 hours after its season opener was due to take place.

At the time of writing, the Formula One Group, which also includes a 33-per-cent stake in event promoter Live Nation and 15 per cent of the Braves, had a market capitalization of $6.2bn. Deducting those two stakes gives F1 itself a value of $2.8bn which is just $800m more than the price that its previous owner, the private equity firm CVC, paid for the sport in 2005.

The other driving force behind this decline is marked uncertainty over the future of F1’s ten teams due to their turbocharged running costs.

Seven of the teams are based in the UK and file publicly-available financial statements along with one of the others. The filings show that the average running cost of an F1 team is $219.5m (£189.4m), and each one employs a robust average of 573 staff, helping to swell costs.

The teams’ revenue comes from three primary sources: sponsorship, payments from team owners, and prize money, which is paid by F1 and represents 68 per cent of its underlying profit.

That prize money is on track to reverse sharply this year due to the lack of races. And the same goes for sponsorship payments to the teams from corporate partners, as they are fueled heavily by television coverage and the exposure that brings.

All of the teams use engines provided by four auto makers: Ferrari, Mercedes, Renault, and Honda. The first three also own their own F1 squads, and all of them have been battered by Covid-19 as people are reluctant to travel, and car sales have already crashed in China where the pandemic began with similar sales retreats likely to happen elsewhere around the world.

Over the past two months, those four transportation titans have lost a combined $19.1bn of market value. Those losses makes it less likely that they still will be able to bankroll an F1 engine program, which typically costs around $1.4bn. The window to turn away is fast approaching as the contracts which commit the teams to race in F1 all expire at the end of this year.

Despite having little revenue coming in from prize money and sponsorship while the races are on hiatus, the teams still have those extensive staff bills to pay. The financial statements show that they come to an average of $61.4m annually, which comes to $15.4m between now and mid-June.

The UK government has committed to covering 80 per cent of the wage bills of all corporations until the end of May. But that government support will cover only up to $2,900 (£2,500) per person, per month, which is less than half of the average salary at even the lowest-paying F1 team.

The longer the teams lay idle, the more money they burn on staff. Last week UK Prime Minister Boris Johnson forecast that it would take 12 weeks to “turn the tide of this disease” which brings us to the middle of June.

But that doesn’t mean F1 will be able to spring into life then.

Health And Safety Considerations

Last year, F1’s 21 races took place in 21 countries over an eight month period and attracted 4.2 million spectators. This global audience has historically been one of F1’s biggest strengths. But it has now led to the championship getting the red light to prevent it from inadvertently accelerating the spread of Covid-19.

In order to host an F1 race going forward, the host country needs to be free of Covid-19 along with the UK, Italy, and Switzerland, as the teams are based there. After the debacle in Australia, where there were concerns that F1 could spread Covid-19 in the country, it is likely that future race hosts won’t take any chances.

All these elements and public health and safety considerations need to be in place with enough advance notice for F1 to make arrangements to race and for spectators to buy tickets, assuming that they can still afford it and are comfortable with attending mass gatherings.

As seven of the teams are based in the UK, a race there might be the most likely option. However, F1’s regulations state that at least seven other rounds are required in order for it to be classed as a championship. Considerable doubts remain about whether this is possible.

The longer it takes the teams to hit the track, the less chance there is of them weathering the storm. In turn, that could call into question the overall future of F1, as its regulations state that at least 12 cars (six teams) are required for a race to take place.

Faced with the prospect of the most severe economic recession in decades, F1 may need to take a completely new direction in order to guarantee the survival of its teams. In light of the economic climate, it is hard to see how they could continue to exist with anything close to their current costs and staff numbers.

F1 announced last year that it will introduce a cap on team budgets in 2021, and it still plans to do this. But the limit of $175m per team could still be far too high given the Covid-19-imposed austerity now facing the property.

One extreme solution to the current crisis would be for F1 to insist that its teams each buy one of the outfits in its F2 junior series, which is also owned by Liberty and could then become part of the top tier. This is what happened in 1952 and 1953 when F1 couldn’t field enough competitive cars so it allowed in ones from the tier below and ran races to their regulations.

Unlike their bigger brothers, which are custom-built by each team, F2 cars are largely identical. It puts a full emphasis on driving ability, which is often seen to be lacking in F1. Drivers would relish it as it would level the overall playing field, which is something that Liberty has promised to do from day one.

From the outside, F2 cars look almost identical to those in F1 so most fans wouldn’t spot the difference. Under the hood, it also is no different as F2 cars have a top speed of 199 miles per hour whilst F1 racers are only around 11-per-cent faster.

Crucially, F2 teams run on annual budgets of between $5m and $10m, with at most only 50 staff, so they operate far more sustainably than F1 outfits. It shows that switching F1 for F2 would be an opportunity to address all of the sport’s problems in one fell swoop and emerge with perhaps a more appealing product. It would be a radical solution, but these are desperate times.

Like many other racing outfits, F2 teams are under heightened threat right now due to the lack of events.

Just last week Trevor Carlin, owner of one of F2’s most storied squads, said to London’s CityAM that if the shutdown “goes on for six months there’s a chance the team won’t exist.” Accordingly, F1 outfits would benefit the broader motorsport economy by buying the junior outfits and the acquisition could be funded by cash they have in the bank or selling their lavish premises which would no longer be needed.

Staff would be the collateral damage as F1 teams would have to lay off around 90 per cent of their workforce. However, the existing staff numbers seem to be unsustainable in the current climate anyway so these job cuts appear to be inevitable.

It would surely be more logical for jobs to be lost as part of a restructuring plan which guarantees the teams’ future than for the teams to reach the end of the road when they realize they can’t afford to continue with their current level of workforce.

For many US sports, the Covid-19 crisis thus far is still an annoying hiatus. But for F1 it could be the silver lining that secures the very future of the sport. Time will tell.

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