The fireworks and fanfare accompanying the F1 Australian Grand Prix in March mark the beginning of another season of 17 races for the world's most high-tech cars. They also mark the beginning of another season of staggering spending. F1 burns through cash faster than the cars guzzle fuel and by the end of the season the teams, sponsors, circuits and rights holders will have spent around £2bn. But, believe it or not, this year costs have been cut.
Nothing in F1 comes cheap. Team budgets soar up to £200m per year with typical engine development and construction costing around £50m. The engines epitomise engineering expertise revving to over 19,000rpm and coming close to 1,000bhp. They are the core cost involved with producing the cars with a complete vehicle having material value of around £1.3m. Even the steering wheel is far from average costing a cool £13,000.
The cars lining up on the grid at Melbourne are the fruits of hundreds of hours of windtunnel and track testing which costs each team around £25m per year. So even though the world's biggest carmakers, including BMW, Renault and Ferrari, own their own teams, it's easy to see why they concluded that spending had accelerated out of control. F1 teams may give the impression of being awash with cash but every drop of capital counts.
Until recently the 11 F1 teams had a raw commercial deal from the sport receiving between them only around 23% of its £500m annual spoils with the remainder ending up in offshore companies with shadowy ownership.
A group of rebel carmakers threatened to pull out of F1 if it didn't become more transparent and if the teams' take didn't increase. Their window of opportunity was the expiry at the end of 2007 of the Concorde Agreement - the contract binding the teams to race in the sport. They got what they wanted.
In May last year the manufacturers signed a Memorandum of Understanding (MOU) with the sport's supremo Bernie Ecclestone agreeing to race in 2008. Their F1 fortunes were substantially increased. Prior to the deal the teams' only source of funding from F1's commercial rights was 47% of its £190m television rights revenue. However, under the MOU the teams now receive 50% of the underlying profits from all revenues including the annual estimated £70m from corporate hospitality, £90m from trackside advertising and £145m from race hosting fees. The catalyst for this was a change in ownership of F1.
In November 2005 a majority stake in F1 was sold to venture capital company CVC which immediately set to work on building the bridges between the sport's factions. The new owner's end game is clear: cashing out and making a profit. But to do this required all the valuable F1 stakeholders remaining involved. The manufacturers were offered board seats on F1's ultimate holding company and respected non-executive directors were appointed including advertising boss Sir Martin Sorrell and Nestlé chief executive Peter Brabeck-Letmathe. In a nod to increased transparency CVC also bought F1's key offshore firms and brought them under one umbrella. The sale to CVC was a master-stroke for Ecclestone, the silver-haired 76 year-old son of a Suffolk trawler-man who has single-handedly built up F1 into a global sport and has cashed out over £2bn from it. As I discovered on being hired by him five years ago, Ecclestone is a softly-spoken man whose deals are done on a handshake. However, CVC's hand was one he was keen to grip and for good reason.
From 2009 F1 cars will include mandatory devices capable of energy-recovery and re-use from braking. The practical implication of this will be that the massive investment piled into F1 research and development will enable these mechanisms to be made smaller, quicker and lighter for usage in road cars. It also has obvious environmental benefits and from 2011 the sport will introduce bio-fuels. As a prelude to this the Honda team will be running sponsor-free this season with the car instead emblazoned with an image of the earth comprised of the names of fans who donate to an eco-friendly scheme.
The sport's short-term future seems secure but CVC's acquisition has also meant that long-term growth is now a necessity. In January I revealed in the Sunday Express newspaper that the company had taken out a £1.5bn loan to partly finance its purchase of F1 saddling the sport with a staggering debt unlike any it has previously had. To support the repayments, F1 has little choice but to move more races into untapped areas of the globe in order to increase revenues. This move has already begun.
Earlier this year Ecclestone signed a contract for Abu Dhabi to host an F1 race from 2009, paying an estimated £15m per year for the privilege. South Korea will join the calendar the following year with Singapore, India, South Africa, Russia and Greece all expected to speed onto the F1 scene soon. Although it's almost 60 years-old, the F1 world championship is only just beginning to rev up.
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