The 1997 season saw the introduction of two new teams, Stewart and Lola. Footwork reverted to their previous name, Arrows, and secured Yamaha engines, while Ligier was acquired by Alain Prost and rebranded as Prost Grand Prix. Tyrrell also switched to Ford engines.
A significant driver change was Damon Hill's departure from Williams after winning the World Championship. He joined Tom Walkinshaw's Arrows team, with Pedro Diniz as his teammate. Williams retained Jacques Villeneuve and signed Heinz-Harald Frentzen to replace Hill. Villeneuve was considered the bookmaker's favorite for the season. Ferrari maintained their lineup of Michael Schumacher and Eddie Irvine, Benetton kept Jean Alesi and Gerhard Berger, and McLaren retained Mika Häkkinen and David Coulthard. Jordan introduced two new drivers: Giancarlo Fisichella from Minardi and Ralf Schumacher, Michael Schumacher's brother. The new Prost Grand Prix team kept Olivier Panis and added Japanese rookie Shinji Nakano. Sauber signed Ferrari test driver Nicola Larini after Frentzen's move. Tyrrell retained Mika Salo for a third year and brought in Jos Verstappen from Arrows. Minardi, using V8 Hart engines, signed Ukyo Katayama and Italian driver Jarno Trulli. Heinz-Harald Frentzen and Olivier Panis both made their 50th race entries, while Johnny Herbert reached his 100th entry.
The new Stewart Grand Prix team signed Rubens Barrichello and Jan Magnussen. Lola recruited Ricardo Rosset, formerly of Footwork Arrows, and Vincenzo Sospiri, a former Benetton test driver.
Bridgestone made its official return to Formula 1 as a tyre supplier, ending Goodyear's exclusive reign since 1992. Bridgestone supplied tyres to Minardi, Arrows, Prost, Stewart, and Lola. The company had previously supplied tyres for Japanese entrants at the 1976 and 1977 Japanese Grand Prix.
The British television coverage of Formula One moved to ITV for the 1997 season, with former driver Martin Brundle joining Murray Walker in the commentary box.
In the lead-up to the race, Michael Schumacher described the Albert Park circuit as "not particularly special," drawing criticism from locals. Protests also occurred, including diesel being poured onto the track the week before the race. A tram strike forced spectators to use buses, prompting Jeff Kennett, the Premier of Victoria, to label the strikers "bloody minded."
Jacques Villeneuve secured his fourth career pole position with a lap time of 1:29.369. Heinz-Harald Frentzen qualified second with a 1:31.121. Villeneuve had set an even faster lap of 1:28.594 in the second practice session, beating his pole time by 0.775 seconds under similar conditions. Only six drivers qualified within three seconds of pole position. The session was red-flagged with just over two minutes remaining after a collision between Gerhard Berger and Nicola Larini. Damon Hill struggled due to an oil leak and barely qualified within the 107% limit. Both Lola cars failed to qualify, being over ten seconds slower than Villeneuve in their only F1 qualifying session before the team withdrew due to lack of funds. Pedro Diniz also exceeded the 107% time but was allowed to race because he had set a time within the limit during practice.
On the parade lap, Damon Hill's throttle jammed, forcing him to retire before the race even began. At the first corner, Eddie Irvine misjudged his braking and collided with both Jacques Villeneuve and Johnny Herbert, eliminating all three from the race. Williams opted for a two-stop strategy, while most other teams planned for one. Jos Verstappen spun off on lap two while attempting to overtake Ukyo Katayama.
Heinz-Harald Frentzen quickly established a lead, extending it to 2.7 seconds on lap one, 3.7 seconds on lap two, 5.3 seconds on lap three, and 7.2 seconds on lap four. Both Jordan cars retired early, with Ralf Schumacher experiencing a gearbox problem and Giancarlo Fisichella spinning off while passing Rubens Barrichello. By lap 12, Frentzen eased his pace, maintaining a 17-18 second gap to second place for the next six laps. He pitted on lap 18 and rejoined in third.
Jean Alesi retired after running out of fuel, much to the frustration of his Benetton team, who had been trying to call him into the pits for five laps. Frentzen then closed the gap to Coulthard and Schumacher but lost time in traffic while struggling with his brakes. Coulthard and Schumacher pitted mid-race, allowing Frentzen to regain the lead and run quickly for several laps before his pace faded. On lap 40, Frentzen made his second stop. His pit stop was delayed by a problem with the right rear tyre, allowing Coulthard and Schumacher to move ahead.
David Coulthard maintained his lead, followed by Michael Schumacher and Frentzen. Frentzen closed in on Coulthard and Schumacher, who were running together, but Schumacher had to make an unscheduled fuel stop late in the race, promoting Frentzen to second. Large quantities of dust had been emanating from Frentzen's brakes for some time, and with three laps remaining, a brake disc failed, sending him into the gravel trap at the end of the start/finish straight. Coulthard went on to secure his second career victory, marking McLaren's first win with Mercedes as an engine supplier and Mercedes' first victory as an engine manufacturer since the 1955 Italian Grand Prix.
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