Formula One Must be Economically Adaptive to Weather Inflation

Since the start of the 2022 Formula One season, there’s been quite a bit of chatter about how inflation could have serious consequences in the final stretch for many teams. The budget cap was intended to create a level playing field between the top three teams in Mercedes, Red Bull, and Ferrari and the teams with significantly smaller budgets, such as Haas and Williams. Now the clock is ticking on inflation, and team bosses are concerned about penalties for going over the cap just to maintain team costs. In addition to risking the product on track, inflation hits to team budgets also compromises team payouts, so it behooves all parties to get on board.

Unfortunately, not every team thinks raising the cap is in the best interest of the sport. In early June, Alfa Romeo Team Principal Fred Vasseur said “I can understand their situation, but if we have some increase on energy or freight [costs], the best solution is to switch off the wind tunnel to stop bringing updates every single weekend.” For those who are new to Formula One, the wind tunnel is a sophisticated component used to study and develop the aerodynamics of the cars. Meaning, these wind tunnels (which cost between $60-100 million) serve to test whether simulations in the team computers are actually effective or not. Remember that Formula One cars require downforce to grip the corners on track and drag slows the car, so a lot of money is spent trying to determine how much time is lost to drag. This is why the wind tunnel, simulators, and engineers are so important to the entire operation.

In a sport where milliseconds determine championships, this cap situation certainly doesn’t help the top teams. This is especially critical for teams like Ferrari, which is struggling to finish races with power unit issues, and Mercedes, which is trying to play catch up to the Red Bulls with cars that are inconsistent with the product Mercedes fans are used to.

Perhaps, Vasseur was speaking in jest when he said teams should “switch off the wind tunnel.” However, he continued by saying, “We are in this situation and, sooner or later, we will have to stop the development of the car because we will be at the limit of our budget, and I think everybody can do the same.” Vasseur isn’t wrong, but it’s easier for a mid-tier team to say something like that; they have less on the line, and with former Mercedes’ driver Valtteri Bottas driving well in the Alfa Romeo now, it would benefit them to see one of the top three teams suffering in the final stretch due to cap issues.

Back in May, Red Bull Team Principal Christian Horner said “I think about seven of the teams probably need to miss the last four races to come within the cap this year, from the consensus that there has been up and down the paddock.” The 2022 cap is set at $140 million per team, and in 2023 it’s even less at $135 million. But Vasseur didn’t hold back. “We knew perfectly in November or October when we did the budget that we will have inflation, it’s now up to the teams to decide if they want to develop the car throughout all of the season and miss events, or if they want to slow down now and do the full season.”

Vasseur is essentially telling Horner and others that everyone up and down the paddock was made aware last year that inflation would weigh heavily on the teams’ budgets this season and it was up to them to plan for it.

Once again, Vasseur isn’t wrong, but with both Red Bulls in the hunt for the championship and Mercedes picking up the pace, you have to wonder if racing fans would be as enthusiastic in the final stretch of the season without the a-list drivers. Globally, the sport is still gaining traction and the Verstappen’s, Leclerc’s, and Hamilton’s are what drive fans to races. Cap concerns by mid-tier teams are one thing, but the economics of raising the cap makes sense for the Formula One brand itself.

In 2020, Formula One merchandise sales on its official online store grew 40 percent globally, with the United States market accounting for the majority of the growth. Moreover, with a 200 percent increase in sales since 2017, Formula One and Fanatics renewed its contract indicating that the sport is here to stay. Individual contracts between sponsors and drivers have also seen significant growth. For example, for the last couple of years, Lewis Hamilton sported IWC Timepieces, which gave the brand massive global exposure. And now with Max Verstappen the reigning world champion, Tag Heuer is having a moment and so is Verstappen’s “lucky charm” timepiece. I imagine if Verstappen couldn’t finish the season, luxury sponsors such as Tag Heuer would have some choice words for whom it may concern.

But this isn’t just front row drivers and luxury sponsors that are at risk should the cap impact performance, participation, or strategy down the line.

Horner thinks the cap will hurt middle of the field teams as well, and even factored in staff concerns, too. “The FIA needs to address the issue because energy bills and cost of living are going up exponentially, and F1 is not exempt from that.” Horner also noted that freight costs have “quadrupled, and that’s not something we can control.”

Since 2020, global inflation rose more than six percent, and since F1 is a global circus with thousands of employees, teams might have to take staff salaries into consideration, too. In 2020 as the Coronavirus shut Formula One down, McLaren, Williams, Haas, Racing Point, and Alfa Romeo had to take advantage of government aid from the United Kingdom and Switzerland to pay staff salaries during that period of uncertainty. During that time, Ferrari’s Mattia Binotto said, “We must not forget we have different situations, and it’s important we find a common ground where maybe the answer is not a single budget cap equal for all teams.”

While the situations have changed, the circumstances and collateral damage have not.

Teams have already had to trim their staff to prepare for the cap, and ahead of the season opener in Bahrain in 2021, Horner said, “We’ve had to resize, repackage ourselves, and that’s really tough when you’re saying good bye to members of the team–some of which have been there for 25 years.” In response to the 2021 cap which was set at $145 million, all teams throughout F1 had to deal with redundancies, forcing creativity and efficiency. But with added elements such as sprint races, came added challenges for staff budgets. “We are really struggling to just come in below budget cap.” Said Mercedes team principal Toto Wolff in May 2021. “And we’re talking about tens of thousands of pounds and not hundreds of dollars.”

Is Formula One going to sacrifice human capital to deal with inflation issues? Or are they going to remember that the teams and drivers are the ones that make Formula One money, and come to the table with a new cap? According to MotorSport, in 2019, F1 paid out a collective $1.012 billion compared to $711 million in 2020. Remember that in 2020, the season was delayed and shortened due to the Covid pandemic. In 2021, F1 recovered and paid teams $1.068 billion and turned a $92 million profit. With rising popularity and expansion this season, F1 could see record profit, but we know that profit is driven by fan experience and engagement, and if teams can’t compete, it will hurt Formula One’s bottom line.

“Everyone who planned to operate at the budget cap must definitely put on the handbrake at the moment.” McLaren’s Andreas Seidl told Sky Deutschland in May. “But even if we do that, we cannot compensate for these costs that have just exploded, and we have no influence upon at this point in the season.” Sure, teams could have done a better job forecasting unexpected inflation costs, but you can’t have quality races when you have to compromise performance to pay for freight and energy costs.

During the pandemic, drivers took salary cuts and teams were faced with en masse furloughs, but right now, profits aren’t the issue. With F1 already making pandemic adaptations by pushing some of the new 2021 regulations to this season, they must also adapt to the current economic conditions and make adjustments accordingly.

Viewership numbers indicate that Formula One has the opportunity to overtake NASCAR as America’s premier motor sport. In order to maintain that momentum, the product has to get shinier, but that isn’t possible if polish isn’t in the budget.