Big cutbacks announced at Royal Mail

Addressed letter volumes have fallen sharply due to Covid-19
Addressed letter volumes have fallen sharply due to Covid-19

Royal Mail is taking drastic action to cut costs by more than £400m, and plans to take out 2,000 management roles at its UK business.

Alongside its year-end results the postal operator's interim executive chair, Keith Williams, outlined a new three-step plan to get the business back on track.

"In recent years, our UK business has not adapted quickly enough to the changes in our marketplace of more parcels and fewer letters. Covid-19 has accelerated those trends, presenting additional challenges,” he said.

“We're accelerating the pace of operational change in the UK to address long-standing challenges and be sustainable for the long term.”

Some 2,000 management jobs will go, more than 20% of the current total of 9,700 management positions. Royal Mail said the biggest reductions would be in “senior executive roles and non-operational functions”. The restructure will cost about £150m, and will result in annual savings of £130m.

Capex will be reduced by £300m across the group over the next two years, with £250m of the cutbacks affecting the UK.

There will be no dividend, and no annual bonus for executives in 2019-2020. 

Postal workers are typically members of the CWU, with management workers usually members of Unite.

Unite described the news as “devastating” and said it was the result of “poor decision making in the past by Royal Mail’s top bosses”.

Separately, Royal Mail continues to be in dispute with the CWU.

“We are seeking to open talks with CWU on the need for change, future pay, and to address the issues raised in the ongoing industrial dispute. We expect that any pay inflation will be funded from productivity improvement cumulatively to March 2022,” the group said.

The Universal Service Obligation (USO) also appears to be up for discussion again. “We're working with all stakeholders to underpin the USO to ensure it reflects user needs and is modern, contemporary and sustainable. We want to ensure Royal Mail remains a key part of the UK economy, a good employer, and the nation's delivery partner of choice,” Williams stated.

In the year to 31 March overall group sales were up £259m to £10.84bn. Operating profit slumped by £124m to £217m, “driven by lower UKPIL profitability”.

Williams gave “profound thanks” to all the firm’s workers. “Our UK postmen and women are playing a crucial role in mitigating the impact of the COVID-19 pandemic. They are key workers on the frontline. Our GLS colleagues have also gone the extra mile in the many countries in which they operate to support their customers and communities.”

The Covid-19 has resulted in reduced letters business, and a big increase in costs. Addressed letter volumes fell by 8%. Adjusted operating profit margins of 1.5% “reflect lower UKPIL profitability”.

Total costs were up £80m, “driven by overtime and agency resource costs due to high levels of absence, social distancing measures, protective equipment and parcel related volume costs”.

The pandemic has resulted in a huge jump in UK parcel volumes of 37%.

Volumes at overseas parcel business GLS were up 5% including acquisitions, with sales rising by 9.5%. Operating profit margins increased to 6.6%.

B2C parcel volumes grew, but B2B volumes were hit by Covid-19.

Regarding the outlook for the current financial year, Royal Mail said the “unprecedented nature of pandemic” meant the situation was “challenging and volatile”.

The Royal Mail UKPIL business is expected to be “materially loss-making”, while profits at GLS could potentially be reduced. In the first two months of the new financial year UKPIL sales were down £29m and addressed letter volumes were down 33%.

The group has laid out two stark scenarios for how the business could perform in the coming year:

Scenario 1: assumes a UK GDP decline of 10% for 2020-21 and Covid-19 restrictions continue to ease post-June. Royal Mail (UKPIL) revenue £200m-£250m lower year-on-year, with £140m of additional costs related to Covid-19 and £110m due to higher parcel volumes. GLS revenue growth 5-%, operating margin of around 6%.

Scenario 2: assumes a deeper recession, with a UK GDP decline of 15% for 2020-21. Royal Mail (UKPIL) revenue £500m-£600m lower year-on-year, with £155m of additional Covid-19 related costs and £100m of costs associated with higher parcel volumes. GLS revenue growth of 0-2%, operating margin of around 5%.

Royal Mail shares fell by 11.5% to 159.10p following the announcement.

Williams took over as interim executive chair after the abrupt departure of controversial CEO Rico Back in May.

Alongside the results, Royal Mail also announced that Martin Seidenberg would replace James Rietkerk as CEO of the GLS business with immediate effect.

There was also a hint that the GLS business could be sold or demerged from the group at some point in the future.

"Royal Mail and GLS are different businesses, with different strategies. At Royal Mail, our focus is on a step change in transformation; at GLS we aim to continue to grow. Our new structure brings more focus and accountability and whilst there are few synergies today between Royal Mail and GLS, in the medium term an international presence is clearly important, and the opportunity remains to create more value for shareholders,” Williams said.