Royal Mail PLC (LON:RMG) has said it still expects to make a “material loss” this year though revenues are on track to be better than expected thanks to higher parcel volumes because of the coronavirus pandemic lockdown.
The postal services group reported parcel volumes up 34% in the first five months of the year but letter volumes were down 28%, with 1.1bn fewer letters sent since the start of April this year compared to last.
READ: Royal Mail turnaround plans seen as 'underwhelming'
Group revenue for the five-months to August 30, 2020, is up £139mln compared to last year, with parcels revenue up 33.1% but letters down 21.5%, though that was not as bad as was reported earlier in the year.
GLS, Royal Mail's overseas parcels business, enjoyed a 19% increase in volumes to drive revenue up 18.6% year on year.
In a statement ahead of the company’s annual shareholder meeting, which is being held online this year, Royal Mail said, however, that its letters legacy “has held back operational changes needed to adapt our business” and so the shift from handling more parcels and fewer letters resulted in costs increasing by £85mln.
Coronavirus measures themselves added another £75mln of costs, from such things as elevated levels of staff absence, social distancing and additional protective equipment.
For the full year, these two cost lines are expected to reach £260-280mln.
“We continue to expect Royal Mail to make a material loss this financial year 2020-21 and will not become profitable without substantial business change,” the company said.
The shares rose 15% to 201p on Tuesday morning.
Nicholas Hyett, equity analyst at Hargreaves Lansdown, said: “The huge increase in the number of parcels making their way to our doors as shopping moves online is expected to boost revenue this year. The international business in particular is really flying, as both revenues and margins soar.
“However, the collapse in letter volume and cost of managing the transition means the group’s been unable to fully capitalise on the tailwind, blowing a hole in UK profit not helped by over £100m of extra costs related to coronavirus.
“Most businesses have struggled due to coronavirus though, and Royal Mail is a long way from being the worst off, our concern is that many long running problems remain unresolved. A heavily unionised workforce and watchful regulator make Royal Mail inflexible, and have made it difficult to prepare for a shift from letters to parcels which has been going on for more than a decade now. Historic underinvestment in automation means hundreds of millions need to be spent in the next few years, and since that’s likely to mean job losses confrontation with the group’s unions is probably inevitable.
“Interim Executive Chair Keith Williams has experience with industrial relations from his time at British Airways, and looks keen to put his stamp on the business – flagging handwritten sign-in sheets and redundant letter sorting capacity as examples of where the business has been slow to adapt.
“As things stand Royal Mail is looking at one of two futures – either it uses its position as the UK’s universal postal provider as a spring board to dominate the delivery of the UK’s e-commerce revolution or it fades into a ‘postal also ran’ in a far more fragmented market.”
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