Formula 1 spent quite a bit of energy putting a cost cap into place for 2022 in May 2020 – but why are teams feeling the pressure of keeping costs under the $140 million ceiling and losing confidence they can make it to the end of the season?
Do you know what it takes for a Formula 1 team to compete in each race of a season? Let’s put aside the car and the research & development for a moment and focus on logistics, which have become a real problem at a global level.
Remember, the FIA approved the cost cap in May 2020 – a lifetime ago, considering the huge changes in the world since. Considering that, let’s see what has happened to shipping since that has team principals scratching their heads with worry.
Here are some rough numbers to show container costs for sea freight:
Jan 2019 – $1720
Jan 2020 – $1733
Jan 2021 – $5252
Jan 2022 – $9420
Contacts in global supply chains have told PlanetF1 that they are anticipating container pricing for 2023 to double again. That could put Jan 2023 container costs at $18840 and that’s almost an 11x increase in price since the cost cap was originally approved and put in place. Air freight costs follow similar trends.
Formula 1 consumes up to 300 trucks to head from race to race – multiply that by 23 races in 2022 and a potential 24 races in 2023. Lining up those 300 trucks would result in a line over five kilometres in length, according to DHL. The cost of moving those trucks around has also exponentially increased.
Trucking costs have reportedly tripled over the past year alone. If price pressure wasn’t enough, these rate increases come with looming shortages in availability, labour, and significant energy cost increases for diesel.
With global economic conditions threatening cost cap limits, team principals had started sweating over the possibility of their cars and equipment not even being able to show up for races.
With cost caps holding firm, a team’s shipping budget must be doubled annually if the trend lines continue. These 100% increases year-over-year trends place even pressures on a team to limit investment in upgrades and repairs after an accident.
Airfare has skyrocketed. Team personnel travel by plane, both commercial and private, all fuelled by…fuel. Inflation pushes the cost of people up, too. Airline pilots & staff need salary increases to sustain the cost of living and, as a knock-on effect, the increased cost of business is passed on to the customer.
Hotel prices have skyrocketed, especially when the local hotels know a race is in town. For the same reasons as above, hotel staff want more money.
Fuel and energy costs have skyrocketed. Demand is picking up as the global economy opens back up. Supply has been suppressed by green initiatives blocking access to producer’s capital. Economics 101 (supply & demand), demand grows, stores are reduced, then prices go up. It costs more to fuel the container ship, DHL planes, and transport trucks.
Teams have historically budgeted $300m–$400m annually to compete at their discretion. Teams are now forced to spend less than half of that, or risk being penalised. None of these listed factors were a huge concern when the cost cap rules were established in 2020.
$140m, as per the 2022 cap, doesn’t go very far when the cost to get cars, equipment, and personnel to each race continues to push up. On top of that, consider the implication when a driver puts the car into a wall. Or worse yet, another team’s driver causes your driver to crash.
How can Formula 1 help ease the squeeze?
What’s the solution? At the risk of making the budget cap like filing a tax return, there should be allowances in spending for fuel surcharges, increased shipping costs, or damage repair.
When this option gets too complicated, a team must hire more lawyers and accountants to understand and extract the best value in the guidelines. That costs more money and is applied to the cost cap.
It wouldn’t take much to add in repairing “like” parts to the damaged car and not apply it to the cost calculations. Teams cannot use the allowances to spend on developing upgraded parts.
The flip side is that a team wouldn’t willingly put a car in the wall for $100k to develop a new front wing. Teams wouldn’t do that, would they?
Teams will work with the FIA to address these concerns as the financial regulations advance, and it is hard to see the FIA being unreasonable in seeing the staggering economic conditions putting more sustained pressure on the teams.
A step in the right direction…
Luckily the FIA is open to these concerns and is working with the teams on sufficient increases. Recently, the FIA announced a 3% increase – around $4.4m – to alleviate the burden of inflation on the cost cap.
This adjustment still doesn’t feel adequate, given the dynamic nature of global inflation. A dynamic cost cap increase would seem more appropriate as there doesn’t seem to be an end to the current period of spiralling inflation.
There are too many compounding elements involved in the calculations as one economic indicator can domino into other areas. An example of this within freight costs would be political regulation on fossil fuels. A regulation forces producers to hire regulations experts, lawyers, and additional staff/resources.
These items (Cost of Goods) get transferred to their customers, refiners, marketers, gas stations, trucking companies, etc. These increases then apply economic pressures to producers, such as payroll taxes and benefits, which also get transferred.
These various elements at a global level cannot be predicted or capped. Teams, then, must react to this, which takes resources applied to the cap. If these can be modelled and predicted more accurately, teams still have to contend with things like car damage.
The FIA is certainly doing its part. It’s reacting with a sense of urgency for the teams to respond within the guardrails of the rules.