How F1 can level the financial playing field

Companies have legal responsibilities to post profits. Indeed, it is incumbent upon their directors to do so consistently, or, in the absence of black-inked bottom lines, to persuade authorities that their entities at least have reasonable chances of consistently doing so in future, with the accent being on "reasonable".

In fact, to trade whilst knowing a company is unable to meet future liabilities is, in most jurisdictions, illegal.

Fundamentally, this dictum applies across the world, save for where holding companies provide guarantees of liquidity and operate subsidiaries as service companies to a mothership.

The Mercedes Formula 1 team is one such operation, with shortfalls covered by parent Daimler AG. It views the F1 operation and its HPP high performance powertrain sister as marketing and technical exercises.

So unlike independent teams, which would sink into deep water were they to post losses amounting to £22m for the most recent financial year (which applies only to the racing team subsidiary, not HPP, which posted a profit of £6m, although how much of the £151m turnover represented R&D subsidies is unspecified), Mercedes F1 views the improvement over a 2014 loss of £76m as exceedingly good news.

Bear in mind these financials apply to the 2015 season and include the team's share of Formula One Management's 2014 "pot", which is paid a year in arrears. At that point, the team did not qualify for a double constructors' bonus amounting to an estimated £30m, but did pocket extraordinary bonuses worth an equal amount. Without these, the loss could have been as high as £50m, and over £100m for the previous year.

Such annual losses sank teams like Caterham and Marussia - although the latter was able to survive as Manor after a restructure - and pushed Lotus to the brink such that Renault purchased it for a relative pittance. But teams at the sharp end crow about their red ink.

Contrast that with a level playing field scenario, where all teams earn their shares of the sport's $1.8bn annual revenues on a sliding scale of performance, as was the case before CVC Capital Partners got its hands on F1's commercial rights and restructured its revenue schedule to disproportionately incentivise Red Bull Racing, McLaren, Ferrari and Mercedes (and to lesser degree, Williams), to commit to F1 to 2020.

Removal of various constructors' championship bonuses and extraordinary payments while keeping the overall "pot" the same size ($965m) would substantially alter the structure of 2015 Formula One Management disbursements (paid in 2016) as exclusively published by Autosport here.

But if you eliminate the bonus payments and redistribute the payments, it changes things significantly.

TEAM PAYMENTS WITH BONUSES REDISTRIBUTED

Team		   Current US$m    Revised US$m    Variance +(-) 	 
Ferrari*	   192		   114		   (78)		
Mercedes*	   171		   128		   (43)**
Red Bull Racing*   144		   92		   (52)			
Williams	   87		   101		   14			
McLaren*	   82		   64		   (18)			
Force India	   67		   88		   21			
Renault (Lotus)	   64		   85		   21
Toro Rosso	   57		   75		   18			
Sauber		   54		   71		   17		
Manor		   47		   62		   15	

*Denotes CCB teams. Note also that those teams posting negative variances are only those receiving bonuses, illustrating how skewed the structure actually is.
**Includes double bonus, paid for first time at end-2015.

On that above basis, Mercedes loses its (double) constructors championship and "other" bonuses, which total around $75m, but Column One and Two income rises from $97m to $128m for a net loss of $43m.

A Sterling equivalent is impossible to calculate accurately since Brexit, given the volatility of the currency and FOM's 12-month payment schedule, but a 12-month average provides a value of around £32m.

Any wonder Mercedes is looking at breaking even in the future. It does not take rocket science to calculate that a £22m loss is easily negated by £40m in bonuses that are paid selectively.

That is not clever management, simply a function of CVC's desperation to keep certain teams on side.

The team could, or might argue it would, cut its white overcoats according to the carbonfibre cloth available. But the fact is that in previous years it did not do so, hence its whopping £100m cumulative loss over two years. And any mooted budgetary reductions would surely impact on performance, or why else spend the money?

The team's turnover has risen by 86% since 2011, or an average growth rate of 16%. which points to the enormous commitment made by the Daimler board to F1. But the obvious question that arises is whether or not the board would have made quite the same long-term commitment without bonus sweeteners, which come at considerable cost to independent teams.

Therein lies the fundamental difference between manufacturer and independent business models, hence the precise reason why all attempts at capping costs have failed dismally, regardless of concept - whether a straight budget cap, resource restriction agreement, or simply testing agreements, which have now been blown wide open by the Pirelli tyre tests.

The manufacturers spend, spend, spend without restrictions save those imposed by their own boards who are desperate for motorsport glory, with selective bonuses provided by CVC fuelling that spend. Then the venture fund actually laments domination and tedium at the sharp end.

Teams such as Williams - a company listed on the Frankfurt Stock Exchange - need to turn profits to remain in business, and as such, expressed in simplistic terms, exist to sell performance. Good performance in turn attracts sponsorship or partnerships, while the better the championship classifications, the higher its FOM revenues - bonuses excluded. Yes, Williams is paid a heritage bonus, but at $10m annually, it is a pittance.

At Force India the picture is little different. Every drop of red ink needs to be guaranteed by directors or shareholders, or the company closes. The difference to Mercedes is that every penny flows from private wallets, not corporate coffers, making the two-tier revenue structure doubly hard to swallow for the likes of Vijay Mallya, who is in any event fighting a host of economic wars in India, his home country.

Toro Rosso stands apart due to its ownership structure as part of the Red Bull empire, which means it has its budget largely underwritten by the sales of energy drinks. But as a non-CCB team it, too, could do with an equalised revenue structure. Just imagine how close it could run sister team RBR with an injection of £15m or so.

Sauber recently received a cash injection after a takeover by a Swiss-Swedish consortium that thrives on secrecy, but clearly has no intention of covering the costs of 2017-specification Ferrari engines after the team announced that it would next year rely on '16 engines in order to concentrate on aerodynamic gains.

How old engines help square 2017's regulations only a Swiss outfit can rationalise, but more worrying is the engine decision, for it flies in the face of the team's position on this topic exactly a year ago. Asked about possible regulation changes to permit year-old engines, team boss Monisha Kaltenborn was vehemently opposed.

"We would not support anything that leads to a two-tier system - I think there's a danger in it as well, that it sets a precedent for other areas," said Kaltenborn. "If you do this on the engine now, what if then you come up on the chassis or parts that you could also save costs there?

"A team can very well be in a situation where you take up this option before you have to close your team - but nevertheless it's a dangerous route, and we should make sure it's not a precedent for other areas."

So Sauber gets itself saved, then chooses a future direction it publicly believes could "close the team"? Whatever, the point is simply that the $17m the team is missing out on this year (and next, and...) could well cover the cost of current-spec power units, proving once again how the two-tier payment structure jeopardises performance.

On to Manor: Records reveal owner Stephen Fitzpatrick was forced to provide a £11.5m credit line to enable his team to make ends meet in 2015. Consider that the team was short-changed to the tune of $15m due to F1's revenue structure, and the shortfall is so close to that £11.5m as makes absolutely no difference. That surely must hurt the energy entrepreneur, who is in F1 not to turn a massive profit, but certainly plans to minimise losses...

Haas joined the party late, and as such had to fight for a share of revenues, with founder Gene Haas telling Autosport that at one stage "Bernie said I don't need a commercial agreement to race...".

True, but if the US-based team adds value to the grid - and its US entrant's licence surely contributes to that - then it should be entitled to a fair share of F1's "pot". That is, of course, a pipedream. As as an independent, albeit one underwritten by a billionaire, it qualifies for no more than the rest of the herd, and even that it needed to push for. This is in direct contrast with Renault.

The French-owned team re-entered F1 via the back door courtesy of a Lotus buyout and encouraged by a deal that allegedly promises Renault the same financial privileges as Mercedes in the (albeit unlikely) event that it scores double constructors' championships, plus a heavily back-loaded bonus structure from 2020, when current covenants expire.

Given that a new team (read "Haas") is at least as welcome as a takeover of an existing team staring collapse in the face, and that Renault returned in the same season as the US team made its debut, surely the two should have been offered equal terms. That this is not so is a commercial and sporting travesty.

Therein lies the moral of the tale. Aided and abetted by revenue structures that are not only skewed in favour of manufacturers and corporates, the majors are able to outspend the independents to the degree that their bonuses in most instances exceed the total budgets of teams such as Force India, which, despite its handicap, is snapping at the heels of Ferrari. Imagine the effect of another 20 million bucks.

If F1's new controller, Liberty Media, seriously wishes to return sporting chance to the sport it has bought into, the first step should be to equalise the revenue structure post haste.

Of course, there will be resistance. But he alternative is continued domination by a handful of teams - which cannot be good for the F1 "show" Liberty intends to "spice". Plus, it would provide true measures of team profitability.