Royal Mail calls for more flexibility on USO

Jo Francis
Friday, November 19, 2021

Royal Mail has announced record first-half profits along with plans to “level up” its parcel offering with a seven day, one price, go everywhere service – while at the same time aiming to ensure its postal Universal Service Obligation remains sustainable, which could mean changes for downstream access operators.

Royal Mail's Sunday parcel delivery service is “rapidly approaching a 15m items a year” business
Royal Mail's Sunday parcel delivery service is “rapidly approaching a 15m items a year” business

Sales in the six months to 26 September were up 7.1% at £6.07bn, and the group posted operating profits of £311m compared to the prior year’s £20m loss. 

Adjusted operating profit was £404m (2020: £37m), with a margin of 6.7%. 

Royal Mail said it expects to make an adjusted operating profit for the full year of around £500m. 

CEO Simon Thompson commented: “We’ve made an impressive start to our reinvention for the next generation but there is much more to be done.”

He said there had been “enormous change” this year, with the business half-way to its 90% automation target, but it was only the start of what would be an ongoing process.

“We need to look at our working patterns to make sure we can deliver 24/7, and a parcel on a Sunday or a Monday at the same cost. We need to change how our delivery offices work – they are optimised for letters and we need to be optimised for parcels.”

Royal Mail: "We need to change how our delivery offices work"

Domestic parcel volumes have settled down after last year’s Covid-induced spike, but are still up around a third compared with pre-pandemic.

He revealed that customers were sending 60% fewer letters than they were at the peak of demand in 2004-2005, down from more than 20bn letters to around 7bn now – while at the same time the number of addresses has grown by around 3.5m in the same period.

In the first half, Royal Mail reported a “partial recovery in letter volumes compared to the significant decline we experienced during the Covid-19 pandemic”. 

Year on year addressed letter volumes (excluding elections) were up 11%, but that figure is still down 19% compared to two years ago.

“We love letters at Royal Mail and we believe there’s an important role for them in society. But Ofcom’s recent user needs review suggested that our customers are open to change,” Thompson stated.  

“So now is the time to define what a sustainable USO looks like.”

The Sunday parcel delivery service that it began rolling out earlier this year has “grown strongly” with 45 companies using the services and the offering “rapidly approaching a 15m items a year” business. 

Regarding the future for the USO, CFO Mike Jeavons pointed out that the Ofcom review had asked for broader input from the whole market. 

“The sort of things Royal Mail asked for as a part of this review were things like more flexibility to innovate our products and services that we offer within the USO – for example starting to offer tracking services within the USO product set that we’re not currently allowed to offer – like photo on delivery rather than a signature. We were looking for flexibility to do more of that to modernise the services we can offer within the USO,” he explained. 

“Separately we asked them to take another look at the access mandation regime – where on letter services we are forced to offer a service for final mile delivery to downstream access operators at a given price. We have asked for fulfilment large letters – items that are not really letters, they’re fulfilment items from retailers – to be taken out of that service.”

Jeavons said that Ofcom would now be in the process of assessing all of the evidence that had been submitted from Royal Mail and other parties.

“In the coming weeks we expect them to go out to consultation on their initial view on what they might change.”

Alongside the results Royal Mail also announced a £200m share buyback programme to reduce its share capital. 

Royal Mail’s share price jumped on the news, subsequently rising from 439.10p to 497.2p. 

 

 

 

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