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Royal Mail finally breaks union deadlock

An agreement with the Communication Workers Union should finally allow the delivery group to modernise and invest in automation
Royal Mail finally breaks union deadlock
  • A new pay deal brings a bitter two-year dispute with the union to an end
  • The breakthrough should allow Royal Mail to pivot more quickly to the fast-growing parcels market

Following a two-year dispute over job security, pay and hours, Royal Mail (RMG) has finally reached an agreement with the Communication Workers Union (CWU). The deal entails a one-hour reduction to the working week and employees will receive a 2.7 per cent pay increase backdated to April and a further 1 per cent increase from April 2021.

If the proposal is approved by CWU members in January – which is likely, given that the CWU has called it an “excellent agreement” – Royal Mail should be able to modernise its operations, investing in automation and other technology to help expand its parcels business and capitalise on the long-term rise of online shopping.

As interim executive chairman Keith Williams has reiterated, the group has been “far too slow to adapt in the past and now need[s] to deliver change much more quickly”. Indeed, around two-thirds of parcels are still sorted by hand at present.

Royal Mail will now look to introduce automated parcel hubs, run a 24-hour parcels operation and move to a seven-day delivery service. Its lack of Sunday deliveries has been a major advantage for rivals such as Hermes and DPD. A network review due to complete next year is also considering more frequent deliveries throughout the week.  

The union breakthrough comes after a difficult 2020 for the group, when, despite the parcels boom, higher costs saw the UK business swing to a £129m adjusted operating loss in the six months to 27 September. With lockdown restrictions driving more people to do their shopping online, Royal Mail has also had difficulty delivering parcels on time during the busier-than-normal festive season. That’s despite hiring 33,000 temporary workers to help handle peak volumes.

Still, investor sentiment towards Royal Mail has been improving as the pandemic accelerates the structural growth of the parcels market. The shares are up more than two-fifths so far this year and short interest has collapsed from a peak of 9.6 per cent of the issued share capital to virtually zero. This follows Czech billionaire Daniel Křetínský buying into the group and becoming its largest shareholder. We still have concerns over Royal Mail’s exposure to the declining letters market and its ability to keep costs under control. But breaking the union deadlock could prove the turning point needed on its journey to a parcels-led business – provided it’s not too late. Move to hold at 336p.

Last IC View: Sell, 308p, 19 Nov 2020