Formula 1’s commercial rights holder Liberty Media is determined to level the playing field by capping how much teams can spend from the 2021 season.

The wide and growing gulf between F1’s haves and have-nots is illustrated in new data compiled by @DieterRencken for RaceFans on how much each team spent in 2018. Part one of the analysis, published today, covers the bottom five teams in this year’s championship.

Since 2013 I have complied an annual review of Formula 1 teams’ finances. The basis of the analysis is a combination of interviews, off-record discussions (crucial to obtain inside numbers), Companies House records for UK-based teams, and good old-fashioned sleuthing. The latter includes cross-referencing information with folk who migrated to other teams or those keen to spill beans for reasons best known to themselves.

Companies House records provide valuable, accurate references but are released nine months in arrears: the 2017 financials were filed by 30 September 2018. So where applicable these have been used as a base and updated using published information and/or other known factors.

Financial records of non-UK teams are not publicly accessible and thus educated estimates are applied. These teams are Toro Rosso in Italy, Sauber in Switzerland and Ferrari. The latter, as a conglomerate, does not split finances – either within the group or within Gestione Sportiva (as does Mercedes F1, which operates separate engine and race team operations). Haas, with bases in the USA, Italy and UK provided full disclosure; the others did not.

The teams’ ability to obfuscate their spending will change when (or if) budget caps are applied. Then teams will still be able to ‘fudge’ expenses such as marketing and certain salaries, but the balance will be known either through inclusion in the cap, or simple deduction. The reasons teams withhold such information are manifold, but generally point to embarrassment over their lap time value for money – which we calculate as the ‘bang-for-buck’ ratio.

After the sport’s first full year under Liberty Media as commercial rights holder in 2017, F1 enthusiastically anticipated this season for much was promised. These included high-profile marketing activities, a long-awaited over-the-top (direct-to-consumer) TV streaming service and significant progress on F1’s bugbears – inequitable finances and an engine-dominated spectacle.

The reality proved somewhat different, and is reflected in the FWONK/FWONA share price, which peaked and valleyed between a $38.82 high in February and $29 low shortly before the final race in Abu Dhabi. True, stock market indices across the world took hammerings in 2018, with most shares registering slides of 15 per cent, but F1’s share price drop was double that before settling at $32.40 as this is written.

The crucial factor, though, is not so much the stock’s value, but its volatility, which illustrates just how susceptible F1 has become to investor sentiment, as outlined previously. Where once decisions were taken on sporting or technical grounds, it is not unforeseeable that in future they are taken primarily to ally markets.

Formula 1’s revenues are disbursed according to a complex formula as outlined in the bilateral agreements – euphemistically, but inaccurately, referred to as ‘Concorde Agreements’ – as entered into between the CRH and teams individually. The basic prize fund is made up of 47.5 per cent of F1’s earnings after deduction of all the sport’s operating expenses, before income tax, depreciation and amortisation (EBITDA).

To this amount are added constructors championship bonuses (CCB) as at signing in 2013 (Red Bull Racing / McLaren), Ferrari’s Long Standing Team (LST) payment, double champion (DC) bonuses as may have been earned by a team since 2013 (Mercedes), and a $10m heritage bonus (HB) paid to Williams.

The basic fund is divided into two ‘columns’, with teams that were classified in the top ten of the FIA Constructors Championship at least twice over the previous three years receiving an equal share of ‘Column one’, while ‘Column two’ is disbursed according to the decreasing table as previously described. 2018 Columns one and two are expected to total around $330m each, providing for a basic prize fund (before bonuses) of $660m.

The prize ‘pot’ amounts to approximately 66.6 per cent of EBITDA, so around $960m disbursed in 2018 – pointing to a $300m bonus pot paid to qualifying teams – with Liberty retaining the rest ($480m) to settle whatever loan and shareholder obligations the company has. The ‘pot’ is disbursed to teams in ten monthly tranches between March and December, save where a team has entered a cessation event (bankruptcy).

A crucial point: as Liberty expands in its quest to develop F1, so ballooning expenses incurred by plush offices, increased head counts, improved technologies, etc… hit EBITDA, resulting in the “pot” contracting by an estimated four per cent over 2017. This factor, coupled with projected decreases in hosting fees/broadcast income, understandably caused teams to increasingly voice their concerns as 2018 wound down.

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TV ratings, too, are down, with a move to pay-TV in Italy said to be the primary factor. Streaming service F1 TV arrived late, was beset by problems and failed to compensate for lost eyeballs.

The consequences for teams were plain to see on logo-less flanks and wings. Martini’s decision to exit F1 even before Williams’s dire performance manifested itself provided just one indicator.

Although Liberty reported a three per cent growth in spectator numbers over the first 16 races, these statistics are based upon promoter figures, which are known to fluctuate widely. F1’s acid test will be the release of Liberty’s 2018 ‘eyeball’ report – purified TV audience rating by territory – expected early next year.

That Force India plunged into administration despite F1’s billion-dollar prize fund and its global appeal via races in 21 countries is symptomatic of two ills: an inequitable revenue structure and the exorbitant costs of competing, to wit keeping pace with Mercedes and Ferrari – the biggest beneficiaries (by far) of the former. Both issues lie within the control of Liberty, yet little (visible) corrective progress was made during 2018.

After two seasons under Liberty, and barely two to go before current covenants expire and F1 finally casts off the shackles imposed by previous rights holder CVC Capital Partners, virtually all the sport’s commercial metrics are headed in the wrong direction, even if some only marginally so. This despite improved on-track action and a title chase that see-sawed until September. That was F1’s saving grace in 2018.

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2018 Formula 1 team budgets and income

Notes:

1) This report is split in two: places 10 to six in the championship, with the top five teams coming under scrutiny next week. In addition, next week will include our unique financial indices, which not only examine performance relative to budget (B4B), but also the costs of lap time improvements over 2017.

2) Team budgets exclude engine divisions where applicable, with the assumption made that the FIA’s guideline charge of approximately $25m for an annual two-car supply is applied internally. However, tyre charges of $1.5m for a season’s two-car tyre supply are included in overall budgets.

3) Currencies have been converted from Euro (Ferrari/Toro Rosso), Swiss Francs (Sauber) and Sterling (others) to US Dollars as Brexit has played havoc with rates, particularly given that most sponsors contracts are US$-based, with Liberty dispensing prize monies in the US currency. For ease of comparison the rates used are: $1 = €0.88/SFr1.00/£0.80

4) ‘Bang-for-buck’, i.e. how much they spent to score a point in 2018. Lap time index: How much they spent per second of lap time gained over their 2017 performance.

2018 proved a torrid year for Williams: Despite being powered by Mercedes, FW41 regularly proved a tail-ender due to aerodynamic imbalances, with long-time title sponsor Martini exiting at season-end. However, the main metrics remained constant year-on-year, although headcount climbed 10 per cent.

Williams 2018 Budget $150m

2018 Income $150m

2018 Profit/Loss Breakeven (Group)

Employees 630 F1 only

Points 7

Bang-for-buck $21.5m/point

Lap time index $450m/sec (-0.33s)

Martini, Rexona and sundry other sponsors contributed around a quarter of non-FOM income – itself half the budget – with income linked to drivers Lance Stroll / Sergey Sirotkin providing the balance. George Russell / Robert Kubica replace them, with the latter expected to provide funding via Polish sponsors: crucial, as FOM revenues are likely to drop by $15m off tenth place in 2018.

Williams restructured its technical department and made substantial capital and process investments during 2018, and is hopeful of landing a major sponsor to sustain the team through 2019/20. Thereafter Williams will be right-sized for post-2020 F1, when budget caps will be phased in over three years, eventually hitting $150m/annum.

The team says

Despite a challenging year on-track, we continued to manage the business well commercially, and look forward to 2019. Managing an independent team’s finances is a high wire act due to Formula 1’s financial environment, a situation that can only be properly addresses through fair revenue distribution and cost controls.

Note: As a listed company Williams stresses that for legal reasons information provided is indicative, and does not constitute forward projections.

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Toro Rosso is a finishing school for Red Bull’s cadre of development drivers, and returned to its roots by running rookies Pierre Gasly and Brendon Hartley after a period of retaining drivers for numerous seasons. For 2018 a further development role was added: preparing Honda for Red Bull Racing from 2019.

Toro Rosso 2018 Budget $150m

2018 Income $150m

2018 Profit/Loss Breakeven

Employees 460

Points 33

Bang-for-buck $4.54m/point

Lap time index $131.5m/sec (-1.14s)

The team further expanded its Faenza base, and recruited accordingly for the main operation and its Bicester (UK) wind tunnel. Headcount increased 15 per cent over 2017 – as per the previous year – with the budget rising 10 per cent: new partner Honda contributed cash and power units while enabling Red Bull to reduce its contributions, with sundry sponsors (primarily Acronis and Casio) and FOM income making up the rest.

2018 was a trying year as Honda ramped up its effort for the good of the greater group, and this is reflected in the team’s ninth in the championship: two places down on 2017. STR has recalled Daniil Kvyat for 2019, pairing the Russian with rookie Alex Albon, who put in a strong F2 season. With improved Honda power and the benefits of sharing technologies with Red Bull Racing, things can only get better in 2019.

The team says

We will fully exploit the synergies [with Red Bull Racing] within the framework of the regulations. The co-operation is already fully on target.

The 2018 season marked a turning point for Sauber, being the Swiss team’s first full season under experienced manager Frédéric Vasseur. His immediate move on appointment in 2017 was to scrap a pending deal with Honda and sign for current-spec Ferrari powertrains. This proved profound: not only did Sauber benefit from arguably the best engine, but gained the services of Ferrari’s ace junior Charles Leclerc and funding from Alfa Romeo.

Sauber 2018 Budget $135m

2018 Income $135m

2018 Profit/Loss Breakeven

Employees 400

Points 48

Bang-for-buck $2.8m/point

Lap time index $54m/sec (-2.5s)

During 2018 the team’s owners, investment group Longbow Finance, spun off Sauber. It now falls under Islero Investments AG, albeit with the same shareholders, who simultaneously increased third-party business in order to boost income. Headcount grew 11 percent year-on year – similar growth to 2017.

The net effect was that Sauber moved from 10th to eighth in the constructors’ championship, aided, though, by Williams’ slump and Toro Rosso-Honda’s teething pains. Their benchmark remains Haas, fitted with the same rear-end installation, against which Sauber fell short despite Leclerc’s sterling efforts. The Monegasque has been promoted to Ferrari for 2019, while Kimi Raikkonen moves the other way.

Therein lies Sauber’s immediate challenge: Improving on, rather than simply consolidating, eighth place.

The team says

We do not comment on our financial situation.

After Force India plunged into administration in July, fashion billionaire Lawrence Stroll’s consortium was chosen as the successful bidder for the assets of the best-performing independent team of recent times. However the consortium did not purchase a ‘going concern’: this had ramifications worth up to $60m which have yet to be resolved.

Force India/Racing Point 2018 Budget $120m

2018 Income $125m

2018 Profit/Loss Went into administration

Employees 405

Points 111*

Bang-for-buck $1.08m/point

Lap time index $96m/sec (-1.24s)

During early races it was clear performance was hamstrung by lack of budget due to team boss Vijay Mallya’s legal travails, with updates being delayed, or not filtering through. At season’s end team principal Otmar Szafnauer reckoned the team was “always one update behind.”

Their early performance was rendered moot when the team’s points were reset at mid-season when they returned to F1 under new identity Racing Point. Nonetheless they missed a clear opportunity to beat McLaren to seventh (or fourth on a combined basis). Without its legal issues the team may have repeated its fourth place of the last two years despite (now) having the tightest budget in the paddock.

the 2019 F1 season could well be tougher unless the consortium ups its contributions. Stroll’s son Lance has joined the team as partner to the funded Sergio Perez, but FOM income is likely to drop by $20m – even before that contentious $60m.

The team says

Delivering a virtual fifth place is an bigger achievement than our past fourth places given the circumstances.

*Note: Force India scored 52 points after the 59 points they scored prior to the Belgian Grand Prix were deducted. Had they counted all the points they scored in 2018, they would have been fifth in the championship.

Although 2017 was embarrassing, McLaren balanced its books through Honda’s marketing contribution and free engines. Having canned that deal and signed for customer Renault power units, money now flows the other way – until the end of 2020 – while performance barely improved.

McLaren 2018 Budget $220m

2018 Income $220m

2018 Profit/Loss Breakeven

Employees 760

Points 62

Bang-for-buck $3.23m/point

Lap time index $240m/sec (-0.92s)

True, McLaren moved from ninth to sixth in the championship, but bare numbers overlook that Williams slid massively backwards and Force India’s tally was split in two. Discount those factors, and McLaren would have been eighth.

The numbers point to a $50m underwrite (and counting) unless CEO Zak Brown pulls hefty sponsor deals out of a large top hat. Although headcount increased slightly year-on-year, savings were the order of the year, with Fernando Alonso’s stipend partially covered by a barter deal with his Kimoa brand, and freedom to race for Toyota in WEC to earn hard cash. That saved an estimated $20m.

Raising cash will prove challenging without star drivers: Alonso and Stoffel Vandoorne have been replaced by Carlos Sainz Jnr and rookie Lando Norris. Although its FOM income will improve marginally, McLaren seems poised to tread water for a couple of seasons.

The saving grace is profitable automotive and advanced technology divisions, Middle Eastern shareholders with very deep pockets and a combination of bond and Michael Latifi’s cash injection. Without these factors McLaren Racing would potentially be facing extinction.

The team says

We have a plan to recover over the next [three-four] years as we improve performance that will come with improved cashflow from Formula 1 and also knock-on improvements within sponsorship. For that period we have to fund it and that’s what the equity came in to do.

Read the final part of our analysis on how much Formula 1 teams spent in nest weeks RacingLines column.

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