Royal Mail is exploring “what a rebalanced Universal Service might look like” as the group warned of a material loss at its UK business this year, and said it had to move quickly to adapt its working practices and delivery structures. However, the PLC’s share price has spiked amid speculation about a possible break-up bid.
In a trading update issued ahead of its AGM meeting, and covering the first five months of this financial year, the PLC said that despite booming parcel volumes its “legacy in letters” had held back the operational changes it needed to make.
Costs increased by £85m due to the shift in work mix, while additional costs related to Covid-19 were the equivalent of £15m per month for the period. This included protective equipment, social distancing measures, and increased absence.
Royal Mail said that costs remained high and were likely to “remain challenging” for the rest of the year.
“There are still significant ongoing challenges including the impact of the recession, changes to international postal rates and the potential frictional impact on cross border trade from Brexit,” the group stated.
At the Royal Mail business in the UK, parcel volumes rocketed by 34% – 177m additional parcels – while addressed letter volumes were down 28%, equating to 1.1bn fewer letters.
The group said it was “disappointing” that it had not yet been able to reach agreement with unions CWU and Unite CMA on the changes it wants to make, which include: trials of separate daily parcel deliveries; doing away with “outdated ways of working such as handwritten sign-in sheets” by moving to automated clock-in, clock-out systems; the removal of old letter-sorting machines that are now unneeded; and regular reviews of processing and distribution to adapt to the decline in letter volumes.
“Without these changes, we cannot achieve essential improvements in operational efficiency and better focus our efforts on the ever increasing demands of our customers. We have increased the intensity of our discussions in recent weeks in recognition of the need to make progress more quickly,” Royal Mail stated.
Regarding the Universal Service Obligation (USO), Royal Mail said it had surveyed thousands of customers and held “hundreds of sessions with colleagues” about the future shape of the USO.
The findings included a continuing requirement for “one price goes anywhere” and an “affordable next-day letters service” which was described as being especially important for businesses during the working week. Customers also want more ways to send letters and parcels as well as more frequent and convenient parcel deliveries.
“We want to look again at whether there is enough customer demand for a seven-day parcel service,” the PLC said.
“We are currently exploring what a rebalanced Universal Service might look like. We remain committed to the universal, affordable “one price goes anywhere” nature of the USO, but we would like to deliver the items that customers want more often, not less. To do that we need a regulatory system fit for the future rather than the past.”
Royal Mail will share its findings with Ofcom and the government ahead of the upcoming Ofcom review of the USO and postal market regulatory framework.
“Any decision is a matter for the regulator, government and ultimately parliament – but we need to make sure this review process is considered swiftly given the rapidly changing customer needs and the financial sustainability of the Universal Service,” Royal Mail warned.
At the group’s GLS parcels business on the continent, volumes were up 19% although challenges facing the business for the rest of the year include recessionary impacts “in most GLS countries”.
Because of the uncertainty caused by Covid-19 Royal Mail said it remained unable to give specific guidance for the full year.
It has updated the first of two possible scenarios based on either UK GDP falling by 10% or a deeper recession with a decline of 15%.
Scenario one had originally involved Royal Mail’s UK sales falling by between £200m-£250m in 2020/21, but this has now been updated to a sales increase of between £75m and £150m. However, the expected increase in costs (excluding Covid-19) has jumped from £110m to between £140m-£160m.
Shares in the group rose by more than 20% to 210.52p following the announcement, amid city speculation that billionaire Czech investor and major shareholder Daniel Kretinsky could push for a break-up of the group by spinning off GLS.