Letter volume woes continue for Royal Mail

By Max Goldbart, Thursday 16 November 2017

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Letter volumes are continuing to decline for the Royal Mail, in spite of efforts to redress the issue, while parcel volumes remain on the up.


A successful first half for Royal Mail despite "headwinds", according to Greene

In its half-year results to 24 September 2017, the group posted a slight sales increase of 2% to £4.83bn, while operating profit both before and after transformation costs were down sharply, from £206m to £89m and £148m to £26m respectively. Royal Mail put this down largely to an increase in its ongoing UK defined benefit pension service costs of £114m. 

Pre-tax profit fell 30%, from £110m to £77m, but post-tax profit almost doubled to £168m - largely due to a tax credit related to the closure of its pension scheme to future accruals. Net debt was down 15.5%, from £452m to £382m.

The group expects its net cash investment to fall to £450m for the full-year, down from £590m per annum for the past three years. 

Chief executive Moya Greene described the first half as successful despite the “headwinds we are facing”.

The group highlighted a fall in addressed letter volumes of 5%, excluding political parties’ election mailings, and it delivered a continued medium-term forecast of declines of between 4% and 6% per annum. Total letter revenue, excluding marketing mail (down 2%), was down 3%, while unaddressed letter volumes were up 8% due to a range of initiatives. 

“The rate of decline has moderated following last year’s sharp slowdown, which was driven by business uncertainty,” said Greene.

“GDP is a material driver for letter volumes. We are closely monitoring the economic environment in the UK, which remains challenging.

“We continue to defend letter volumes. We are working with mailing customers and access operators to incentivise customer mailings. We have also rolled out initiatives to help mitigate the impact of e-substitution and business uncertainty on letter volumes and revenue. Through our MarketReach business, we are demonstrating the positive impact marketing mail can have on campaign results.”

In its UK Parcels division, overall parcel volumes mitigated the fall in letter volumes by increasing 6% overall and 7% in its core network. However, revenues decreased slightly to £3.62bn over the same period last year (0.5%), while operating costs before transformation costs increased to £3.63bn (2016: £3.51bn) with an operating loss after transformation costs of £64m (2016: £75m profit).

Royal Mail put the increased parcel volume growth, which accounted for 58% of group revenue, down to a 4% increase in domestic account parcel volumes, excluding Amazon, where it won new customers and gained traffic from existing customers. It said its international parcels business benefited from a new initiative to attract cross-border traffic from Asia into Europe, which accounted for around 2% of parcel volume growth and 1% of revenue growth in the period.

It plans to open six temporary parcel sort centres for the festive period and will be recruiting more than 20,000 temporary staff to manage increased traffic.  

In its General Logistics Systems (GLS) division’s reported results, revenues were up 9%, from £942m to £1.21bn, while operating profits and costs also experienced similar rises, increasing 8% to £90m and 9% to £1.12bn respectively. Revenue increases in Germany and the acquisitions of GSO and Postal Express over the past year were both highlighted.

Also in her review, Greene discussed the group’s ongoing industrial dispute over pensions with the Communication Workers Union (CWU) and said that the industrial relations environment could impact second-half performance.

Embroiled in a pensions dispute since April over the proposed 2018 closure of its defined benefit pension scheme, CWU workers voted in favour of strike action in October but plans were halted just a week later after a High Court injunction ruled that the contractual dispute resolution procedures under the Royal Mail’s Agenda for Growth be followed before industrial action take place. 

“We remain committed to resolving the key issues with the CWU in a way that appropriately balances the interests of all our key stakeholders,” said Greene. 

“As one of the largest employers in the UK, we are proud to provide the best pay and terms and conditions in our sector. We remain committed to that high quality employment in a very competitive industry, where labour standards are often poor. In return, however, we need to make some changes to sustain our business now and in the future, particularly given the decline in letter volumes. This is about maintaining as many high quality jobs as possible.”

Greene also issued an update on the General Data Protection Regulation (GDPR) changes, due to come into force in May 2018. She said Royal Mail was trying to mitigate the uncertainty amongst some of its direct mail marketing customers and wants to encourage the authorities to provide as much clarity as possible about the new regulations. 

Royal Mail’s share price slipped 3.7% to 385.4p upon the announcement. 

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