Royal Mail sees £350m in costs cuts as it faces inflation headwinds

UK letter and parcel carrier Royal Mail warned of price increases and £350m in cost cuts to combat soaring inflation after reporting a rise in full-year profits, although short of expectations.

The company on Thursday said underlying operating profits rose 8% to £758m for the year to March 31. On a reported basis, pre-tax profits fell 8.8% to £662m. Shares in the company fell sharply on Thursday, in line with the global equities sell-off.

For the Royal Mail group as a whole, which includes its European and north American arm GLS, revenues inched up 0.6% to £12.7bn. On a reported basis group operating fell 5.6% to £577 million. The total dividend was doubled to 20p a share from 10p last year.

Looking forward, Royal Mail said consensus forecasts of a £303m adjusted operating profit could be hit “with downside risk”, assuming it could reach a deal with unions on pay staff pay rises “and without material industrial disruption” as it faces potential industrial action.

Staff have been offered a 2% pay rise plus and extra 1.5% they agree to some working practice changes. The Communication Workers Union wants a “no strings” settlement at the rate of inflation, which earlier this week hit 9%, its highest level in 40 years.

REVENUE DECLINES

The company is forecasting a decline in UK revenue in the current fiscal year, especially in the first half which had strong comparatives against 2021 when Covid lockdowns were in force and high volumes of virus test kits were delivered and people did more online shopping.

Delivering Covid-19 testing kits made up 7% of volumes last year.

“For addressed letter volumes excluding elections, our current models suggest a high single digit percentage decline,” it added.

The warned of “significant headwinds” as it faces higher wage demands, surging energy and fuel costs.

In addition to the £350m in cost savings, the company said it was also looking at price increases. The group has already hiked the cost of posting letters by an average of around 7%, and parcel prices by an average of about 4%. A first class stamp now costs 95p, despite a sharp decline in its delivery performance during the pandemic.

“As we emerge from the pandemic, the need to accelerate the transformation of our business, particularly in delivery, has become more urgent,” said chief executive Simon Thompson.

“Our future is as a parcels business, so we need to adapt old ways of working designed for letters and do it much more quickly to a world increasingly dominated by parcels.”

AJ Bell investment director Russ Mould said the firm's turnaround, boosted by the surge in parcel deliveries during the pandemic, were now under threat in the face of inflationary pressures and a potential nationwide strike over pay.

“Pay increases can’t hope to keep pace with rising prices and demands for more flexibility from staff, including working Sundays, are unsurprisingly going down like a lead balloon," he said.

“Chief executive Simon Thompson seems to be deliberately raising the stakes – describing the transformation of the company ‘at a crossroads’. The direction it takes next could determine whether the privatisation will ever be considered a success, particularly for long-suffering shareholders.”