The “borderline” team compromise that staved off an F1 crisis

Following the introduction of Formula 1’s budget cap, the one thing which seemed inevitable was that its limits would soon be tested. Coping with factors inside F1 was one thing: financial allowances were made for the addition of sprint races and the ever-expanding nature of the calendar.

Turn to factors outside F1’s control, and the shrinking nature of the global village and its impact on every facet of staging a world championship becomes evident. COVID-19 proved that. F1 ground to halt in spring 2020 and is still dealing with the pandemic’s effects on global travel, supply chains and logistics. As a result this year’s budget cap, a ceiling of $140m on each team’s race car design, manufacturing and operations, was already at odds with a world of variation, fluctuation and unpredictability.

Yet nothing could have prepared F1 for president Vladimir Putin’s decision to authorise Russia’s invasion of Ukraine on 24 February. The man who presented Lewis Hamilton with the winner’s trophy at the inaugural Russian Grand Prix in Sochi, 2014, anticipated that a short, sharp ‘special military operation’ would overthrow the government in Kyiv in three days.

War – what is it good for?

It turns out that Putin could have done with a decent F1-style strategy room, because his hopes of a fast and easy victory have been thwarted by Ukraine and its allies. War in Europe has emerged. War of the old-fashioned bombers, rockets, tanks and soldiers-in-trenches variety, the kind which we thought was so last century.

The impact has been dramatic. The human cost, at the time of writing, is estimated at 34,000 troops killed on both sides along with 5718 civilian deaths, and a further 8199 injured. This is happening just 1500 miles from London. The political impact has been enormous too: Europe and its allies have imposed stringent sanctions on Russia. Finland and Sweden have applied for membership of NATO while Germany is set to re-arm in a manner not seen for 90 years.

War has also led to complete economic upheaval in Europe, a region which relied on Russia for 40% of its gas. Some countries, such as Lithuania and Finland, sourced 80% of their oil from across the border. Energy prices, surging in the wake of the pandemic, have leapt further as Europe has battled to source supplies from elsewhere – notably the Gulf, with a particular focus on Saudi Arabia’s Aramco, sponsor of both Formula 1 and Aston Martin. Crude oil, which hit $12 a barrel at the start of the pandemic in April 2020, climbed to $120 a barrel in March of this year – a ten-fold increase. No one told oil markets about F1’s budget cap.

The F1 drivers came together in Bahrain to speak out against Russia's invasion of Ukraine

Photo by: Mark Sutton / Motorsport Images

The impact of the war in Ukraine on F1 motor racing might appear immaterial, even irrelevant, yet the category employs 12,000 people. It drives the economies of the towns in which the teams are based, as any hairdresser, coffee shop owner or supermarket check-out assistant will tell you in Brackley, Woking or Milton Keynes.

F1 is a multi-billion-dollar business which has weathered the storms of the global pandemic only to be struck by war in Europe in the first year of the ‘new normal’. The Russian Grand Prix is gone, almost certainly for as long as Putin’s regime remains in power.

The budget cap, negotiated in happier times, was not designed for this.

Why the latest wrangle was inevitable

While the 2021 cap of $145m went by without too much hand-wringing, the reduction to $140m this year and $135m for 2023 was always going to cause some complaints and finger-pointing. Teams always seek to
push the sporting and technical regulations to their limits, yet shout loudly if they suspect a rival of overstepping the mark – and the same applies to the budget cap.

For those teams accustomed to spending more, hitting the budget cap requires predictability and discipline

Every costly race accident or car upgrade prompts allegations that someone must be spending more than they should. The Cost Cap Administration, responsible for policing the budget cap, has strict controls in place.

The filing deadlines, such as the interim report which teams must submit by 30 June or the full report which is due by 31 March, are themselves policed. When Williams missed the full reporting deadline in March this year it incurred a financial penalty of $25,000 as a result of a ‘procedural breach.’

PLUS: The one thing that can't be sacrificed amid Red Bull’s F1 overspend controversy

The types of breaches are detailed, together with the potential penalties, and this is something all team principals are very aware of. It rather focuses the mind. A ‘Minor Sporting Penalty’ for a breach could cause a team or its drivers to lose points or face a race suspension, while the list of Major Sporting Penalties includes suspension or exclusion from the world championship. In this context, none of the teams can afford to take chances above and beyond ensuring that every dollar is spent wisely and recorded properly.

Aston Martin and Red Bull are under the spotlight for F1 cost cap breaches

Photo by: Lionel Ng / Motorsport Images

So why have so many of them hit the emergency alarm and suggested that they’re prepared to go over those boundaries? The downward glide-path of the budget cap and its fixed annual ceiling are firmly at odds with the increased costs teams are facing. Energy costs are significant, particularly when teams have been increasingly switching to renewable energy, now in high demand. In the first three months of this year each kilowatt hour of electricity used by UK industry was 66% more costly than one year earlier. We were getting into the territory of teams having to switch their windtunnels off – McLaren, for one, spoke of “putting the handbrake” on car development.

Freight costs have also spiralled, something Christian Horner flagged in May when he told the BBC’s Andrew Benson: “Freight has quadrupled. That’s not something we can control.”

Indeed, control is the key word here. For those teams accustomed to spending more, hitting the budget cap requires predictability and discipline – and freight costs are fluctuating, a key component being the cost of aviation fuel which reached a peak in May and June, doubling in price in just one year.

In the UK, where eight of the 10 F1 teams have headquarters or technical facilities, producer inflation – the rate applied to manufacturing companies – is significant. By June this year the cost of inputs, including materials and fuel, had risen 24% year on year – the highest rate since input records began in 1985.

In Italy, home to Ferrari and AlphaTauri, the position was even worse: producer inflation is running at 34.6%. In Switzerland Alfa Romeo had a mere 6.9% to contend with, thanks in part to 60% of the country’s electricity coming from its 650 hydro-electric power plants.

So far, so much analysis, but it provides the context behind Christian Horner’s much-publicised comment that, “Seven of the teams would probably need to miss the last four races to come within the cap this year.
It’s not just about the big teams, it’s teams in the middle of the field who are really struggling with inflationary issues. Energy bills, costs of living, costs are going exponentially, and Formula 1 is not exempt.”

Although much of the response to this can be summarised as, “Well, he would say that, wouldn’t he?” there is no question that, against the inflationary pressures listed above, a non-negotiable budget cap suddenly appeared impractical. Particularly for those larger teams for whom the budget cap genuinely limits expenditure – think Red Bull, Mercedes, Ferrari and McLaren.

Christian Horner and Toto Wolff have locked horns over the F1 cost cap in recent weeks

Photo by: Mark Sutton / Motorsport Images

Renegotiating the non-negotiable

Mercedes’ Toto Wolff, with 1700 employees to think about, points out that one of the reasons for considering an inflation-adjusted increase was to help staff who will inevitably want pay rises in order to meet the increased cost of living. In the UK average household energy costs have increased dramatically, up 12% in 2021, 54% by April 2022, and likely to rise a further 40%-50% this coming winter.

“It’s literally allowing people to have their salaries compensated for the extraordinary inflation they are suffering from,” said Wolff.

“I think the worst for the sport is having a stubborn position that some of the smaller teams think the big ones are trying to gain an advantage and we’re actually going to screw them by not allowing them to do this, and us on the other side seeking to lift the ceiling, which we don’t want to do.

“And I can tell you from my position as a team owner, I don’t want to lift the ceiling just to have a cost cap ever increasing and basically outmanoeuvring the initial concept, but I want my people to be well paid especially in such tough circumstances.”

"Some teams were already in breach of the budget cap for the year and at least to find a compromise was important" Mattia Binotto

In April a meeting of the F1 Commission discussed a budget cap adjustment for inflation based on the International Monetary Fund’s figures which, for consumers at the time, were 7.4% for the UK, 5.3% for Italy and 2.3% in Switzerland. Within two months those figures were 9.4%, 8.5% and 3.4%. Initially Alfa Romeo, Alpine, Haas and Williams voted against an adjustment. Their budgets are lower to start with, so the likelihood of bursting through the cap, even with inflationary pressures, was less of a concern.

Alpine’s Otmar Szafnauer was clear his team had set a budget allowing for inflationary variances and was not inclined to grant the larger teams a budget cap increase. A man who spent many years juggling Force India’s perilous financial position clearly knows a thing or two about managing finite budgets.

Another factor affecting budgets has been currency fluctuations. A topic one team’s chief financial officer described to this author as “one of the dark arts of day-to-day financial management in the middle of an unprecedented pandemic, an unpredictable war and a budget cap which looks great on paper but poses significant challenges in reality.”

Crash damage has also been a key factor in the F1 cost cap concerns for teams

Photo by: Andy Hone / Motorsport Images

In short, the teams are paid prize monies and sponsorship in US dollars, and that’s the currency applied to the budget cap. However the UK teams pay staff salaries and domestic suppliers in pounds sterling, Alfa Romeo Racing in Swiss francs, Ferrari and AlphaTauri in euros.

The FIA’s budget cap rate – known as the Initial Applicable Rate – was based on $1 being equal to £0.78 of December 2021. By July that rate was £0.83, a small move you might think, until you realise that makes $140m worth about £7m more for a team.

For the teams based in Italy, the situation has been even more significant as the euro has fallen dramatically against the dollar. In December a dollar would buy you €0.88, in mid-July the two currencies reached parity – every dollar would buy you one euro. These swings make it very difficult to plan a budget, and create inequality between the teams.

Taking the major shifts in inflation rates, the ongoing war in Ukraine, an global energy crisis and continued exchange rate fluctuations, July’s F1 Commission announcement of a 3.1% increase in the budget appears modest, but it translates into $4.9m. A further 3% will then be applied to next season’s cap.

The FIA, Formula 1 and nine of the teams agreed. Only Alpine demurred, its management certain that any increase in budget cap allowance will only favour the larger teams given that they have the ability (in terms of infrastructure) to make full use of it.

No one was entirely a happy, a sure sign that compromise had been reached. The small teams wanted no increase at all, the larger teams a greater rise than was eventually agreed.

Ferrari’s Mattia Binotto admits the agreement came just in time, but was sufficient to ease immediate fears. “In terms of timing, we were borderline – some teams were already in breach of the budget cap for the year and at least to find a compromise was important,” he says. “Thanks to the smallest teams because they have been comprehensive and constructive. Certainly, as a big team you are always looking for more but this compromise is enough to give us a breath.”

The matter has been addressed for now. What happens in the future depends greatly on factors outside Formula 1’s control.

With a bleak European winter beckoning and the energy sector warning of shortages, F1 remains a passenger on a journey with an uncertain destination. In many respects what happens next is down to those sitting in the Kremlin, Kyiv, Brussels, London and Washington. 

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Photo by: Mark Sutton / Motorsport Images