Formula 1 teams have warned of rising labor costs as energy prices and inflation pile pressure on a sport that depends on developing cars at high-tech factories and sending parts and drivers around the world to race.
Bigger salaries would compound a surge in costs for car parts, travel and energy, as F1 teams grapple with how to protect the real income of their staff in a sector characterized by fierce competition for engineers and demand for raw materials.
In a technical and travel-intensive world championship, teams are exposed to global supply chains as they source parts and move staff across continents to stage grands prix.
Rising costs also pose the first big test for the sport’s newly introduced spending rules, which cap team budgets to prevent any one group outspending rivals to dominate.
“You can see this inflation coming through everything,” said Aston Martin F1 chief financial officer Robert Yeowart. “We’ve got it in raw materials but that’s fed by the energy price as well. I think the next thing that’s going to hit us is salary inflation, directly and indirectly.”
Aston Martin F1’s energy bills more than doubled when its 12-month contract expired in the middle of the year, although Yeowart is more concerned about the knock-on effects of rising wholesale prices.
Mercedes warned: “The risk is that further [energy price] rises will place pressure on labor costs which come under the cost cap, at the same time as we work to ensure our employees are able to maintain their living standards in an inflationary environment.”
“Shipping and energy are the two big ones,” said the chief executive of another team, “and salaries are rising”.
Ferrari said the situation risked a “vicious circle” teams should have to cut labor costs to manage surging energy bills, with top employees likely to leave if their salaries stagnate.
F1 introduced its so-called budget cap in 2021. Initially set at $145mn, the cap was reduced to $140mn this year and was set to fall to $135mn from 2023 — representing a huge drop from the $400mn that some teams would spend prior to its implementation.
The ceiling was designed to level the playing field in a sport dominated by the largest teams, namely Ferrari, Mercedes and Red Bull, which historically outspent rivals and won more races on track. Cost limits were also designed to make teams more attractive to investors by putting profitability within reach. The cap excludes certain things such as finance, marketing and HR costs, as well as driver salaries.
F1 introduced its so-called budget cap in 2021, with the goal of helping smaller teams compete © Andrej Isakovic/AFP via Getty Images
The Fédération Internationale de l’Automobile, the sport’s governing body, has a range of options to punish teams for breaching the cap, including fines and points deductions. In an extreme scenario, the FIA could exclude a team from the championship, but this would be for a “material” overspend.
Although teams struggled to agree on the financial regulations, they agreed to implement the cap when the coronavirus pandemic put smaller rivals — and the championship — at risk.
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However inflation has forced the FIA to allow for some flexibility this year and next.
At the Austrian grand prix in July, it recognized that inflation had created a “risk of non-compliance” with the financial rules and allowed for a 3.1 per cent increase in 2022.
Next year’s $135mn will be adjusted by this 3.1 per cent allowance, and compounded by the G7 inflation data that will be published by the IMF in March 2023.
The FIA said it is “confident that the measures taken to mitigate the current global economic challenges are the right compromise . . . the variation in financial resources available across the 10 different teams meant that finding a compromise that was acceptable to this majority was a significant challenge”.
However increasing the frustration for some is the fact that many teams are receiving a revenue boost from the weakness of the pound and euro because F1 pays prize money in dollars. The problem is that they cannot spend this freely because of the financial regulations.
Although they have stopped short of calling for the limit to be scrapped, there is deep frustration at some teams. Larger teams, in particular, have already redeployed staff or made cuts to meet the original cap. Inflationary pressures also risk job cuts.
“The right thing to do is allow the cap to be flexible for real challenges. And this is a real challenge,” said Yeowart.
Ferrari, which is second in this year’s rankings, said that the budget cap “at the moment is too low”. The team remains under the ceiling this year, it added.
“It’s quite simple, in order to partially cover the increased costs we have to save money in other areas, predominantly at the development of the car,” said the Italian manufacturer.
However, the chief executive of another team who preferred to remain anonymous said: “We all need to figure it out. We’ve been given enough leeway to address it.”
Mercedes said that it “will not be easy” to absorb cost increases within the adjusted cap, although it is “committed to doing so”.
Although teams have their own interests to consider, there is also concern that multiple breaches of the cap could hurt the integrity of the spending rules.
“This is the first real test of the cap since we brought the rules in,” said Yeowart. “If the cap fails on its first test, it won’t survive.”
