Last month, Royal Mail said that three days of strike action by postal workers had cost the business £70mn. It even claimed that customers moving elsewhere to avoid future strikes could result in its adjusted operating loss growing from £350mn to £450mn for the full financial year.
Royal Mail – now officially known as International Distributions Services (IDS) – is keen to emphasise the damage inflicted by industrial action in a bid to make it stop. However, the financial impact of strikes on other sectors is less well documented. This makes sense in the rail industry, where government contracts shield train operators from virtually all cost and revenue risk. Most companies don’t have that luxury, however, and investors should keep a close eye on unhappy workplaces.
BT’s divided network
Telecommunications is not a particularly unionised industry. Most companies in the sector are young, with few links to the public sector and no contentious legacy issues such as pensions to contend with. BT (BT.) – which was part of the Post Office until the 1980s – is an obvious exception. This year, around 40,000 BT and Openreach staff went on strike, following a flat-rate £1,500 pay rise for frontline workers.
Management is adamant that the walkout has not impacted BT’s financial performance. On an earnings call this month, chief executive Philip Jansen said the industrial action was “desperately sad” but “it hasn't really hit us from a financial point of view”.
This makes sense in the short term. Staff who are on strike are not paid (or do not have to be paid, under government rules), meaning the group saves money on wages during industrial action. Meanwhile, unlike trains or postal vans, BT’s broadband network largely runs itself. It is only when something goes wrong, or when a new phone or internet line needs to be fitted, that a human presence is needed.
This isn’t infrequent, however, and BT’s expansion plans must also be borne in mind. Between July and September 2022, 40,000 new lines were not connected as a result of the strike action, contributing to a fall of 89,000 in Openreach’s broadband base. Not only does this generate more compensation payments for disappointed customers, but it risks less work in the future as would-be clients turn to other providers.
On the November earnings call, one analyst predicted that 200,000 lines could be lost on an annualised basis if strikes were to continue, which was dubbed “material disruption”.
More industrial action seems likely, as management continues to dig its heels in over pay. Jansen told investors this month that the £1,500 pay increase was “industry-leading”, representing a rise of between 3 per cent and 8 per cent depending on salary, and that “the matter is closed”. Relations have been further soured by the fact that Jansen’s own pay packet swelled by 32 per cent to £3.5mn last financial year.
Even if workers do stand down, however, a £1,500 increase for frontline staff would have an impact on BT’s cost base. Wages and salaries account for over 20 per cent of BT’s operating expenses, and the group is already under pressure from inflation – particularly in relation to energy. This comes at a time when capital expenditure is also very high (£2.6bn in the six months to 30 September) as the group invests heavily in fibre broadband.
Management is confident that any margin pressure from wages will be more than offset by price rises. BT currently raises its consumer prices in line with the consumer price index – the UK’s key inflation statistic – plus 3.9 per cent. This means that customers were slapped with a 9.3 per cent price hike at the start of the year, and worse is likely to come next January.
So far, the strategy seems to be paying off: adjusted Ebitda in the consumer division jumped by 20 per cent in the first half of the year, and churn remains in line with expectations. Some analysts are sceptical, however. “We worry that there is a tilt towards protecting near-term Ebitda at the expense of the longer-term business (ie price rises today at the expense of volumes lost tomorrow),” Deutsche Bank analysts warned in a recent note.
Airline turbulence
Before July, BT had not experienced a strike for 35 years. The aviation sector is rather more familiar with industrial action, but even airlines seemed taken aback by the number of disputes this summer. Air traffic controllers (ATC), baggage handlers, pilots, cabin crew and check-in staff across Europe all went on strike at some point, resulting in cancellations and lengthy delays.
And it’s not over yet, with hundreds of airport workers threatening to strike for three days this month in the run-up to the football World Cup in Qatar.
Some airlines have coped better than others, however. In July, Ryanair’s (IE:RYA) chief executive Michael O’Leary said there had been “a lot of PR about strikes and disruptions here this year... Actually it's been more PR and noise than reality”.
The group has since admitted that “numerous” ATC strikes and delays had damaged customer satisfaction, but O’Leary’s bullish stance has largely been corroborated by a strong set of half-year results. Between April and September, the budget airline swung back into profitability, reporting a pre-tax profit of €1.42bn (£1.24bn), compared with a €100mn loss in the same period last year. This summer, it operated at 115 per cent of its pre-Covid capacity.
The same cannot be said for Wizz Air (WIZZ). The budget airline, which focuses on central and eastern Europe, said it had “suffered a profound impact in terms of financial damage to the business” after a summer of strikes, combined with a “famous runway meltdown in Luton” during the July heatwave. Between April and September 2022, the group fell to a deeper pre-tax loss of €390mn even as its passenger numbers doubled on the year before.
Savanthi Syth, airlines analyst at investment bank Raymond James, said the impact of the strikes was exacerbated by general staffing problems. “Wizz fell short there. It was really aggressive on the growth front but flat-footed when it came to staffing,” she said. By contrast, Ryanair retained a lot of its staff during the pandemic, meaning it could bounce back more easily when passengers returned.
Wizz chief executive József Váradi said that the group’s performance had normalised as the year progressed, with flight cancellations and disruption returning to historical levels. Assuming it stays that way – and that is quite a big assumption – the big question is whether the pay rises that have been agreed will affect profits going forward.
“Ultimately, it’s down to supply and demand, and right now a lot of supply is not back up to pre-Covid levels,” said Syth. “That’s creating a healthy environment [for airlines]. But anything that increases an airline’s costs – be it salaries or fuel – will weigh on capacity. And it’s hardly like they were over-earning before.”
For now, fuel remains the most pressing issue. At Wizz, fuel costs exceeded €1bn in the first half of 2022, compared with €436mn before the pandemic struck. Ryanair has also seen fuel costs rise – albeit less steeply – from €1.59bn in the first half of 2019 to €2.3bn in the same period of 2022. Staff costs of €180mn and €584mn seem relatively small in comparison, but will do little to ease the pressure.
Outsourcing the problem
The world of outsourcing has received little attention in strike coverage. However, pockets of discontent are beginning to emerge. In Plymouth, Serco (SRP) barge crews went on strike over an “impossible roster system”, and refuse workers based in London also staged a brief walkout before accepting an improved pay offer. There have been similar incidents at Mitie (MTO) this summer, when hospital workers walked out.
Serco and Mitie employ 50,000 and 77,500 people respectively. Small outbreaks of strike action are unlikely to have much effect on the bottom line, therefore. However, such disputes underline how important it is to keep workers on side. Serco and Galliford Try (GFRD) have both issued one-off payments to help staff cope with the cost of living, and Liberum analyst Alex da Silva O'Hanlon suggested more support services companies could follow suit.
Such companies face growing pressure from new trade unions such as United Voices of the World, which represents outsourced staff and gig economy workers, and which is increasingly using litigation as a tool to challenge big corporations.
The problem for outsourcers is always profitability. Mitie has an operating margin of just 4.2 per cent, while Serco’s sits at 5.6 per cent. It is essential, therefore, that their contracts can absorb wage increases.
Mitie and Serco are better placed than many. The former said between 80 per cent and 90 per cent of its contracts contain clauses that enable it to pass on the majority of cost increases to customers. Meanwhile, half of Serco’s contracts have indexation, and another third are short-term or ‘cost-plus’ (ie with a fixed mark-up).
Nevertheless, as inflation worsens and outsourcers continue to reward shareholders with buybacks and dividends, investors should not forget to keep a finger on the workplace pulse.
