Inside F1:The Fast & the Frugal

What could possibly stop a 1,334 lbs car with 18,000 RPM and G-force capability traveling at the blistering speed of 360 kmh (220 mph)? Two words - global recession. Well, either that or Superman.

Formula One is a multi-billion dollar global business. With a rich history, a huge fan base and presence on most continents, it's hard to imagine the sport facing financial difficulty.

Yet these days, even the brightest optimist can't deny the recession's impact on Formula One. Not after Honda announced it was pulling the plug on its team this past December. Not after sponsors such as RBS and ING stated they were not renewing sponsorship deals. And not after F1's governing body, the FÈdÈration Internationale de l'Automobile (FIA) recently put forth a spending cap proposal for the 2010 season.

While times are tough now, it could get worse. Chris Slyt, an expert on F1 business and co-author of Formula Money, said the problems could easily snowball for F1.

"The biggest issue facing F1 at the moment is the survival of its participants - the teams, races and sponsors. So far we have seen teams such as Honda, sponsors such as ING and races such as the French and Canadian Grands Prix pull out. If too many of these participants leave then the sport will be faced with a dramatic slump in revenues which could result in the commercial rights holder struggling to pay back the more than $2 billion of debt it owes," says Slyt.

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F1's problems all connect in a potentially dangerous way. Fans, sponsors and auto manufacturers subsidise the cost of operating a team. All of them feel the economic crunch. Some teams such as Toyota have been forced to significantly cut their budgets, while others may have to drop out entirely such as Honda GP. Meanwhile, as revenues from ticket sales decrease, race locations need to figure out if the $35 million it costs to host an event is worth it.

Finding a unified solution to address these problems could actually present the biggest issue of them all. Slyt says getting the sport's three biggest players: the Formula One Teams Association (FOTA), FIA and Commercial Rights Holder CEO Bernie Ecclestone, to reach an agreement will be problematic.

John Howett, Vice Chairman of FOTA, says: "We made moves to minimize the risk for teams to drop out. It helps the teams like Brawn GP survive. It has made it more accessible for new entrants like a US team. We've acted quickly, decisively and positively for the future, security and sustainability of the sport."

Howett doesn't seem to believe money is the differentiating factor in determining the outcome of the races. He says quality of the team, no matter the budget, is the outlying dynamic to success. However, Slyt sees it in another way. He says the teams with the bigger budgets will always find a way to tinker around the system.

"The problem with any measures to cut costs in F1 is that the teams who have money will always find ways to use it. If you cut costs in one area, spending just moves elsewhere so the smaller teams will always struggle to catch up."

Promise for the future

F1's administrative problems came to light recently. After the release of FOTA's proposal, FIA came out with plans of their own.This included the implementation of a voluntary spending cap of $43.5 million and a point system modification. Following this proposal, FOTA released a statement of opposition to the plan, and stressed the need for a unilateral solution. In reaction to FOTA's response, FIA backed down on the point-system change.

Despite its internal problems, optimism is still in the air in F1 circles. Slyt says: "There are still some companies that can benefit if they use their sponsorship in the right way."

Howett sees promise in the exploration of new markets and technologies. North America, India and Russia are a few places he sees as opportunities to grow the fan base. Not coincidentally, two of the sports' veterans, Ken Anderson and Peter Windsor recently announced plans to create a Formula One team based in the United States.

At the end of the day, Howett believes F1's global presence will allow it to recover.

"I think overall we have a great sport. I believe we will survive as we're a strong sport with a huge following. We have global support and are not dependent on one market. We know certain markets will recover more quickly than others and that'll be our strength," says Howett.