- Royal Mail lurches to first half loss
- Full year losses could be as much £450 million
- Postal service warns up to 10,000 jobs face the axe
Formerly known as Royal Mail, shares in International Distributions Services (IDS) were the biggest fallers on the FTSE 250 on 14 October. They slid 11% to 187p on a warning the postal service could deliver full year losses of as much as £450 million.
Operating as Royal Mail in the UK alongside its international parcels division GLS, IDS said it may need to cut up to 10,000 Royal Mail roles by next August, pinning the blame on strikes by workers and the ongoing decline of its core letters and parcels business.
WHY HAS IDS SLIPPED INTO THE RED?
IDS warned ‘significant and urgent’ change was needed at Royal Mail, which swung to an adjusted operating loss of £219 million in the first half to September 2022 versus a £235 million profit a year earlier, amid ongoing parcel volume deterioration and a direct hit from industrial action.
For the year to March 2023, IDS is now guiding to full year operating losses of ‘around £350 million’ for Royal Mail including the impact of strikes.
Alarmingly, this loss could stretch to as much as £450 million ‘if customers move volume away for longer periods following the initial disruption’.
‘If these take place, the loss for the full year would increase materially and may necessitate further operational restructuring and headcount reduction,’ said IDS, which plans to cut costs through the reduction of around 5,000 full-time Royal Mail employees by March 2023, and 10,000 by the end of August on a rolling 12-month basis.
HOW IS THE GLS BUSINESS FARING?
Outside of the UK, the GLS business is faring better and remains on track to meet full year expectations of adjusted operating profits in the €370 million-to-€410 million range.
IDS said a separation of the two businesses remains an option should Royal Mail’s trading not improve.
Russ Mould, investment director at AJ Bell, commented: ‘For years the company has been fighting a battle against a heavily unionised workforce to deliver efficiency improvements and the relationship between staff and management is now at an all-time low following the recent strikes.
‘To what extent the threatened redundancies represent brinkmanship to prevent further planned industrial action is an open question, but regardless the whole episode is hugely damaging to the business.’
Mould said Royal Mail has ‘singularly failed’ to take advantage of the momentum provided by a big increase in parcel volumes during lockdown and arguably could have done more to secure the goodwill of employees who were effectively frontline workers during the pandemic.
‘Arguments at the time of its privatisation that it had somehow been sold off on the cheap will now stick in the craw of anyone who invested at the initial 330p per share,’ he said.
‘Focus may turn to a demerger of the two businesses to allow the better-performing GLS business to thrive as a standalone entity - something the wider group has mooted, and which shareholders may now be keen to push for.’
DISCLAIMER: Financial services company AJ Bell referenced in this article owns Shares magazine. The author of this article (James Crux) and the editor (Daniel Coatsworth) own shares in AJ Bell.
