International Distributions sags as Royal Mail tumbles into loss

The parent company of Royal Mail has blamed weak parcel volumes, strike action and faltering productivity for a hefty operating loss, and has repeated plans to cut 5,000 full-time roles by next spring. 

Revenue at International Distributions Services (IDS) only decreased by 4 per cent between April and September, and remains in line with pre-pandemic levels. However, the group has fallen from an adjusted operating profit of £404mn to a £57mn loss because of difficulties at Royal Mail, which reported a loss of £219mn. (The group’s European business, GLS, had a calmer year, delivering operating profit of £162mn.)

Strike action among frontline workers is partly to blame. Management claimed that three days of industrial action in the first half of the year reduced adjusted operating profit by about £70mn. An additional five days of industrial action in October are said to have cost the business £30mn.

However, this is just the tip of the iceberg. UK parcel numbers have fallen by 18 per cent year on year, while letter volumes are down by 6 per cent. This decline – caused in part by the cost of living crunch – has collided with a hefty cost base and inflationary pressures. While management had identified theoretical savings of £350mn, IDS's operating expenses have not budged year on year and adjusted people costs have actually risen by 2 per cent. 

Management is adamant that the business needs to be “rightsized”, which involves cutting 5,000 full-time roles by March 2023 and 10,000 by the end of August, which is likely to involve between 5,000 and 6,000 redundancies. However, with more postal strikes planned for this month, it is unclear how or when this will be achieved. 

Other cost-cutting plans could also prove difficult to implement. Management has asked the government’s permission to cut its letter delivery service from six to five days. However, unlike other couriers, the group is bound by a ‘universal service obligation’, so there is no guarantee its request will be granted. 

Management said it was still considering whether to separate Royal Mail from GLS in order to unlock value. What this means for shareholders is unclear, however, and a backdrop of weak parcel volumes, angry staff and inflationary headwinds is far from appealing. Downgrade to sell. 

Last IC View: Hold, 299p, 19 May 2022