NEWS ANALYSIS: The global economic downturn has hit Formula 1 hard, write Christian Syltand Caroline Reid
THERE REMAINS plenty to race for in this year's Formula One championship but, off the track, the sport has gone into reverse gear as the global economy stalls.
Oxfordshire-based Williams F1, the only one of the sport's 10 teams not owned by a car manufacturer or a billionaire, reported a £21.4 million (€27.39 million) net loss in its 2007 accounts, halving its shareholder funds to just £15 million (€19.2 million).
Williams' bottom line was up by £6.3 million (€8 million) on 2006 but the team has sought further backing. With the gloomy economy putting the brakes on sponsorships, Williams, which counts troubled Royal Bank of Scotland among its sponsors, last year had revenues of just £67 million (€85.75 million) but costs of £88 million (€112.6 million).
To plug this hole, the team took out a loan from Barclays that trebled net debt to £25 million (€32 million). It now has access to £33.8 million (€43.2 million) of borrowing facilities and hopes this will be enough to power it through two seasons.
"What is broken in Formula One is the revenue available to the teams is less than the costs of participating in the sport," says Adam Parr, chief executive of Williams. Over the past two years, Williams has burnt up losses of £50 million (€63.95 million) and its new finance agreement adds to the pressure as it trebles annual interest payments to £1.5 million (€1.92 million).
Williams now has only £13,000 (€16,645) in the bank. Furthermore, Baugur, the Icelandic investment group, was rumoured to be interested in buying a stake but this now seems unlikely, given Baugur's current financial turmoil.
At the other end of F1's spending spectrum is Renault's F1 outfit which, in 2006, had the highest costs and turnover of any UK-based F1 team. However, in 2007, revenues fell 16 per cent as a slew of Spanish sponsors departed in the wake of their home hero, Fernando Alonso, leaving to drive for rival McLaren. This doubled after-tax losses to £3.9 million (€4.99 million) in spite of an injection of £33 million (€42.2 million) from ING, the Dutch bank, which became Renault's title sponsor.
As the credit crunch clamps down, it raises the question of how long banks will be able to justify their involvement in F1. Their presence is critical to the security of the sport since they provided an estimated £74 million (€95 million) this year.
An even more immediate hurdle to signing new F1 sponsorship deals could come from changes made to the sport's calendar. The US Grand Prix was axed last year and, last week, the Fédération Internationale de l'Automobile (FIA), F1's governing body, announced that the Canadian Grand Prix would be dropped from 2009. This leaves F1 with no race in North America for the first time.
F1's response to the financial crisis is to cut costs that have soared to more than £150 million (€192 million) a team. At the FIA meeting it was decided that, if the teams failed to reach agreement on cost-cutting measures, the governing body would act.
"It had become apparent, long before the present economic difficulties, that Formula One was unsustainable," said Max Mosley, FIA president. "You can't run a business where the outgoings are two to three times the income - not for very long," he added.
The changes are likely to include a standard engine and gearbox for F1 that would be produced by an independent company and rebadged for each manufacturer. This could come as soon as 2010 with the introduction of some standardised car parts to follow.
However, although this would reduce expenditure, insiders say that it could drive some manufacturers out of the sport since there is little marketing benefit from winning with a different company's equipment.
Given the vast sums they invest in F1, the chance of this return is critical. - FT Service