Royal Mail seeks urgent reform of USO, posts huge loss

Thompson: "we need change to survive"
Thompson: "we need change to survive"

Royal Mail wants to ditch Saturday deliveries and its parent group has confirmed that it will separate the business, which has racked up losses of nearly £220m at the half-year, if “significant change is not achieved”.

International Distributions Services (IDS) has also canned its interim dividend due to the poor performance of the Royal Mail business. 

In the 26 weeks to 25 September, Royal Mail posted sales down 10.5% at nearly £3.65bn. Addressed letter volumes, excluding elections, fell 6% to 3.6bn items, while parcel volumes were down 15% at 613m. 

Despite the fall in sales, Royal Mail’s operating costs rose by 0.7% to £3.87bn, resulting in an adjusted operating loss of £219m compared to the prior year’s £235m profit. 

Royal Mail said a number of factors had impacted its performance: it had been unable to reduce headcount fast enough, weak parcel volumes, the inability to deliver the productivity improvements agreed with the CWU, and macro-economic challenges. 

The figures also reflected the unwinding of temporary benefits due to Covid-19. 

Non-executive chairman Keith Williams said that progress on a deal for frontline employees “has been blocked by the actions of CWU”, but the business had started to implement changes anyway including reductions to the workforce. 

“We believe that this is the best course of action for the long-term survival of Royal Mail even if it results in short-term disruption,” he stated. 

“A sustainable future must also include urgent reform of the Universal Service. Government has now been approached to seek an early move to five day letter delivery, whilst we continue to improve parcel services.”

IDS said that letter volumes were down 60% compared to the historic peak, and cited research by Ofcom that Monday-Friday deliveries would meet the needs of 97% of consumers and SMEs.

IDS said that the impact on adjusted operating profit of the three days of industrial action that took place during the first half of the year was estimated to be around £70m.

The additional five days of industrial action during October, had an estimated additional impact of £30m. 

However, IDS said that Royal Mail’s balance sheet was robust enough to withstand further industrial action and it was confident the business would return to profitability in the future. For the full year the loss for Royal Mail is expected to be between £350m-£450m. 

Royal Mail CEO Simon Thompson commented: “We have always been clear we need change to survive. We have started turning the business around and will do whatever it takes. We have worked hard to deploy our contingency plans to minimise disruption to customers and impact on revenue. Our infrastructure plans are on time and we are now making the operational changes to turn Royal Mail into a thriving business that will provide great service for our customers at a competitive price and long-term job security for our people.

“We would prefer to reach agreement with the CWU, but in any case we are moving ahead with changes to transform our business.”

Ahead of the interim results announcement the CWU accused Royal Mail management of “gross mismanagement” and said strikes planned for Thursday 24 November, Friday 25 November (Black Friday), Wednesday 30 November and Thursday 1 December, were likely to go ahead. 

General secretary Dave Ward said: “No business making record profits of £758m in May this year should be losing over £1m a day in a matter of weeks without gross mismanagement.

“Dramatic errors of judgement have been made, like announcing 10,000 job losses to threaten striking workers, abandoning previous agreements and handing over £567m to shareholders while neglecting the pay of employees who generated that profit.”

Ward said the CWU would not accept Royal Mail becoming another Uber-style gig economy courier.

“We firmly believe these reckless decisions have been informed by power struggles in the boardroom, in the full knowledge of a potential future takeover bid – backed up by the government’s green-lighting of Vesa to increase their shareholding.”

Previously, then-business secretary Kwasi Kwarteng had said he would take action under the National Security & Investment Act if foreign investor Vesa increased its already substantial stake in Royal Mail. 

Subsequently, the new business secretary Grant Shapps notified IDS that no further action would be taken under the NSI Act in relation to the potential increase of Vesa’s shareholding in IDS to more than 25%.

Overseas parcels business, described as having a “balanced and flexible business model, GLS posted sales up 9.5% at £2.2bn, but operating profits slipped by 4.2% to £162m on volumes down 2% at 410m parcels.

Overall group sales at IDS were down 3.9% at £5.84bn, and its operating loss was £57bn (2021-22 profit: £404m).

The group’s share price initially fell in early trading on the news, but was up 1.07% at 242.37p at the time of writing (52-week high: 531.40p, low: 173.65p).