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Royal Mail sees "significant increase" in strike risk over Christmas, parcels growth offsets letters decline

The postal carrier said online shopping drove parcel revenues up 5.6% in the six months to the end of September, “more than offsetting” continued letter revenue decline of 1.4%

Royal Mail PLC -

Shares plunged at Royal Mail PLC (LON:RMG), after the postal carrier reported a “significant increase in the risk of industrial action taking place” as it heads into the busy Christmas period.

Last week, the FSE 250 deliveries group blocked strike action by members of the Communications Workers Union (CWU) over low pay and pensions when the High Court ruled that the union’s ballot had been unlawful.

READ: Royal Mail successfully blocks Christmas strike action with High Court injunction

On Wednesday, the CWU has lodged an appeal against the High Court’s ruling, and Royal Mail said in its half-year results on Thursday that, while the risk of a strike over Christmas and the UK general election “remains low”, the company continues with “operational contingency planning” to mitigate the risk.

“We want to change, working with our unions, but we can only do so through an affordable resolution,” said chief executive officer Rico Back, saying that the firm’s investment has ramped up because of the industrial relations environment.

“When combined, revenue and cost headwinds could possibly result in a break-even or loss-making position for the UK business in 2020-21,” he added.

Fewer letters, more parcels

The postal carrier's half year results on Thursday showed that that it delivered enough parcels to compensate for the continuing decline in letters, with online shopping driving parcel revenues up 5.6% in the six months to the end of September.

This helped by “more than offsetting” letter revenue decline of 1.4%, which was not as severe as feared thanks to the European elections.

Addressed letter volumes continue to slide, down 8% in the first half because of the negative impact of GDPR in the first two months of the year, the impact of weakening GDP and ongoing business uncertainty.

Overall revenues rose 5.1% to £5.2bn, with UK sales up 1.8%, their best performance in five years.

Nevertheless, adjusted operating profits sank 13.2% lower to £165mln, owing to slumping UK profitability as margins dropped to 3.2 per cent from 3.9%.

Back said that Royal Mail “has to adapt” to the reality that “people are posting fewer letters and receiving more parcels”.

“The challenging financial outlook in the UK means now, more than ever before, we need to make the changes required - and accelerate them - to ensure a successful UK business,” as it goes ahead with a £1.8bn package of investments, including automated post-boxes for parcels.

Looking ahead, Royal Mail maintained its expectation that it would deliver full-year operating profits between £300-340mln in 2019-20, but said that “continuing weak GDP and ongoing business uncertainty” means that it now expects addressed letter volumes to fall between 7-9% for the full year.

Uphill struggle

Nicholas Hyett, analyst at Hargreaves Lansdown said that Royal Mail "misfired badly" in its battle with low letter volumes.

"Royal Mail’s investment case always rested heavily on the argument that years of public ownership had left the group bloated, underinvested and with lots of low hanging efficiency savings to harvest. Well that may have been true up to a point, but any low hanging fruit is long gone, and a heavily unionised workforce is making future cost savings difficult, if not impossible, to deliver.

"The combination of falling revenues and stubbornly high costs is stamping out the group’s profit margins,” he concluded.

Shares collapsed, falling 17% to 191.4p in Thursday morning trading.

Quick facts: Royal Mail PLC

Price: 198.2 GBX

Market: LSE
Market Cap: £1.98 billion

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