Losses deepen at Royal Mail

Royal Mail has called for “urgent reform” of its universal service obligation, after banking an adjusted operating loss of £319mn in the six months to September. The courier said it is “simply not sustainable to maintain a network built for 20bn letters when we're now only delivering 7bn”. UK letter volumes fell by 9 per cent in the period, contributing to a 3 per cent sales dip. 

Parent company International Distributions Services (IDS), which includes profitable European courier GLS, reported flat revenues and an adjusted operating loss of £169mn, down from a loss of £57mn last year. The group’s statutory figures were even worse due to a £130mn one-off payment for UK employees and the £5.6mn penalty imposed by Ofcom for poor service.  

IDS’s new chief executive, Martin Seidenberg, said he was focused on “rigorous cash management, controlling our costs and ruthlessly prioritising high-return projects”. He is also “recruiting faster than ever before” at Royal Mail to reduce reliance on agency workers, and is offering staff £500 bonuses for hitting quality targets. 

This might not be enough, however. While Seidenberg blamed Royal Mail’s lower revenues on the “overhang of industrial action and weaker macroeconomic conditions”, many of its problems relate to structural decline. Letter volumes are falling, and parcel volumes are unlikely to return to lockdown highs anytime soon. Meanwhile, posties are still legally required to deliver letters six days a week to every address in the UK.

Although Royal Mail is managing to keep costs under control –  its total adjusted operating costs were flat in the period – it is still incurring major losses and lacks any obvious route to profitability.  

Regulatory reform could prove crucial, and IDS has urged Ofcom and the government “to do their bit”.  

“The UK is not immune to the trends that we see across the world. Many other comparable countries have already reformed their universal service, and the UK is getting left behind,” it said. “We welcome the fact that Ofcom will be reviewing options for the universal service, but the need for reform is urgent”.

For now, management has tempered its outlook for the full year, saying IDS’s adjusted operating performance – excluding voluntary redundancy costs – will be “around breakeven”. It was previously targeting a profit. The group is still hoping to return to profitability in 2024-25, but this feels very optimistic without major regulatory changes. Sell

Last IC View: Sell, 221p,18 May 2023