Royal Mail's Q1 update today has done little to bolster enthusiasm for its shares, as the UK postal service reported an 11.5% decline in revenue year-on-year.
This comes after the business announced full-year numbers in May, which led to the Royal Mail share price continuing its downward slide – the shares are down more than 45% this year. The postal firm fell out of the FTSE 100 in June, and its shares have had little respite since hitting an 18-month low at the end of last month.
Part of the decline in revenue during Q1 was due to the high base of last year. The reopening of the economy since then has resulted in fewer online orders and lower volumes for Royal Mail, while the end of free Covid test kits has meant that deliveries have cratered in that area as well.
Compared to 2019 there was an improvement, with domestic parcel deliveries increasing to 276m from 242m, a rise of 14%, boosting revenues by 15.6% to £843m. However, the international parcels business has been the big drag, falling 44% to 37m deliveries, while revenues dropped to £169m from £207m in 2019.
Addressed letters also saw a big fall and remain an area which is unlikely to improve, with revenues there falling 12.9% compared to 2019. This slowdown contributed to an adjusted operating loss of £92m, while the outlook has deteriorated due to concerns that this trend will continue amid a lack of flexibility to make operational changes.
Bosses threaten split
Yesterday’s vote for strike action by Royal Mail staff, even though the business is losing £1m a day, underscores the urgent need for operational changes if the business is to compete with the likes of Amazon, FedEx, and UPS. To that end, Royal Mail bosses have warned that the business could be split in two unless unions agree to changes in working practices.
Since Royal Mail was privatised back in 2013, a possible split and a drive towards modernisation had always been the elephant in the room. The pandemic has heightened the need for reform, and while it is understandable that Royal Mail staff want their pay to keep pace with inflation, a failure to agree any sort of deal will only endanger the long-term future of the business.
Royal Mail’s problem, as it has always been, is that the letters part of the business is very much a loss leader, while turnover in parcels, which is becoming an ever-bigger part of the business, is seeing capacity constrained by a lack of automation. This limits Royal Mail's ability to scale up and compete with its nimble peers.