Royal Mail said its ‘legacy in letters’ had held back changes needed to adapt the business to a market with more parcels
Royal Mail said its ‘legacy in letters’ had held back changes needed to adapt the business to a market with more parcels © REUTERS

Royal Mail’s share price leapt by more than 20 per cent after it predicted greater parcel deliveries this year, even as the postal operator warned its UK business will not become profitable without “substantial” change.

The FTSE 250 group has benefited from the boom in online shopping during the coronavirus crisis, but a steep slump in letters and higher overheads mean it still expects the core domestic operation to make a “material” annual loss.

This did not stop investors cheering an updated financial outlook of higher parcel revenues and overall sales than previously forecast. The stock climbed 23 per cent on Tuesday to 216.1p, valuing Royal Mail at £2.14bn.

The 500-year-old organisation has struggled to modernise following its 2013 stock market flotation, with progress stalled by a series of industrial disputes.

After the abrupt departure of chief executive Rico Back in May, executives have held talks with the Communication Workers Union and Unite to end a long-running labour conflict.

Royal Mail expressed disappointment that no agreement had yet been reached and insisted that “substantial business change” was required for the UK business to return to the black.

The company also hinted at the need for reform of the Universal Service Obligation — its duty to deliver the post six days a week across the country — as the watchdog Ofcom prepares a new regulatory framework for 2022.

While it remained committed to the “one price goes anywhere” nature of the USO, Royal Mail said it wanted to deliver items that customers want more often. “To do that we need a regulatory system fit for the future rather than the past,” it added.

Given the political sensitivities still surrounding the postal service despite its privatisation, the remarks will send a shot across the bows of unions and government ministers.

Royal Mail’s main UK division recorded a one-third growth in parcel revenue in the five months ending on August 30. However, its “legacy in letters” held back operational changes, resulting in an extra £85m in costs from handling more parcels and fewer mail.

Covid-19 piled on a further £75m in expenses, through a mixture of staff absences, social distancing and personal protective equipment, while the chronic decline in letters accelerated, with 1.1bn fewer — or a drop of 28 per cent.

Management laid out a potential increase in revenue at the unit of £75m to £150m in 2020-21, compared with a previously expected fall in sales of as much as £250m.

Royal Mail’s overseas parcels subsidiary, GLS, fared better with an increase in profits on the back of a one-fifth rise in revenue. The division’s revenues are scheduled to increase by 10 per cent to 14 per cent this financial year, compared with a previous estimate of 5 per cent to 7 per cent.

“Overall, this is a net positive and should be a welcome surprise,” wrote Daniel Roeska, an analyst at Bernstein.

Royal Mail is slashing 2,000 management jobs to save £130m and reducing “non-people” costs by a further £200m.

It has also committed to reducing capital expenditure by £250m, even as investment in two major parcel hubs and automatic sorting machines is critical to making the rapidly growing parcel business profitable.

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