Is Formula One in economic crisis?


Over the last decade, several mainstream media outlets have made the claim that from an economic standpoint, Formula One is in crisis. Force India and Sauber have survived against the odds amidst rising costs, Manor have been forced into administration, several Grand Prix are in danger of pulling out, and there has recently been a change in ownership. Is the sport falling apart at its core? Or is the situation not as bad as it is portrayed by the press?

In the last couple of years, Force India, Sauber and Manor have battled bravely to stay on the grid, despite huge financial obstacles. Caterham F1 Team made 230 staff redundant in 2014 as they collapsed, whilst Haas was only able to make it this season thanks to exploiting several loopholes which have since been closed. Manor now also seem to be losing their battle, entering administration at the start of 2017.

There are two main reasons why nearly half of the grid is in financial difficulty. Firstly, the budget cuts that were promised in the V6 turbo hybrid era were simply unrealistic. Engine tokens were introduced to lower the cost of the development race, but big manufacturers such as Renault and Ferrari soon wanted these removed to have more flexibility on upgrades, and to close the gap to Mercedes. Because of this, the price of engines for independent teams has remained high, and both Force India and Sauber wrote a letter to the FIA in May asking for stricter measures to be introduced.

However, the cost of development is not the only reason why independent teams are particularly struggling. Formula One’s controversial prize money system massively favours the manufacturers, and gives underdogs very little chance to spring a surprise. Whilst around a third of total prize money is split evenly amongst the top 10 teams across 2 of the last 3 seasons, the rest of the money is heavily favoured towards keeping the big teams at the front.

Along with getting $50m more than Manor in 2015 thanks to their placings in the constructors’ championship, Mercedes also received a $39m constructors bonus, plus $35m in additional funding. In fact, the big 4 teams, Mercedes, Ferrari, Red Bull and McLaren all receive a constructor’s bonus, whilst Ferrari have negotiated a $70m bonus for being a long-standing team. All this means that despite McLaren finishing 9th in the constructors table in 2015, they received the 5th highest amount of prize money, $15m more than Force India earned for finishing in that place in the championship.

It should be of no surprise then that, following complaints from Force India and Sauber (two teams sensing a financial crisis), the EU’s competition commission have investigated the sport over the past year, and whilst no conclusions have been drawn yet, the system is clearly anti-competitive in its nature.

Over the past few weeks, news has broken that the Malaysian GP is to drop off the calendar after 2018 due to the cost of maintaining the race. In addition, the German GP will not run in 2017, and the long-term futures of the Brazilian, British and Singapore GPs remain in doubt.

Part of the reason for this is due to some of the race fees that Bernie Ecclestone and Formula One Management have demanded in recent years. Whilst initial hosting fees are at a reasonable $30m, new F1 race contracts are usually 10 years long, and come with a 10% increase in fees each year. This means that by year 10, fees are a sizable $70.7m, well over double those in year 1.

In addition to this, the cost of maintaining the track and its facilities to Grand Prix standard is huge.  The pit buildings and paddock club area can cost around $50m to build, and then must be updated and maintained regularly, adding further millions to long-term expenditure. Track infrastructure costs around $50m, grandstands around $30m and media centres another $15-20m as well. Over 10 years, this maintenance cost is estimated at around £360m.

For a street circuit, these costs become particularly problematic. Grandstands are temporary, and must be rebuilt every year, roads have to be upgraded to grand prix standard, and there are the added costs of building barriers and fences each season as well.  It is no surprise then to see tracks such as Marina Bay in Singapore doubting their long term futures, with costs rising, and interest in the sport within Asia dwindling.

The other major concern for some tracks hosting grand prix is the continued fall in attendances. Whilst races such as the British Grand Prix remain hugely popular, partly due to the continued success of Lewis Hamilton, other races such as those in Austria and Bahrain have suffered from significantly lower gates.

However, overall, this is not actually a big problem. The sport has seen a huge increase in ticket prices over the last decade, and whilst this has reduced demand for tickets from certain demographics, ticket revenue over the same period has increased by 35%. Aggregate attendances have also increased as well by 3.6%, which considering this period includes the 2008 global recession, shows the effect of hosting new races in popular locations such as Mexico and the US.

Therefore, whilst the sport is struggling in certain markets, there is enough optimism to suggest that the sport is gaining popularity in North America, and maintaining it in key areas such as the UK and Italy. However, it must be an issue for the future that the gamble to explore Asian and Middle Eastern markets doesn’t appear to be paying off. The news that the French Grand Prix will be returning in 2018 after a 10-year absence suggests that the classic European markets could be making a comeback.