Royal Mail: financial crisis deepens as posties invoke the Santa clause

The man in red might be late this Christmas. No, not Santa Claus. Those who really deliver the presents: Britain’s posties.

Locked in a pay dispute with employer Royal Mail, postmen and women will strike again over the coming weeks. The UK business of International Distributions Services faces rising costs, a darkening economic outlook and an overbearing service obligation. A proposal to scrap unnecessary Saturday letter deliveries is one of few straightforward options to ease the pain.

The stagflationary storm led unions to reject a deal that would have given posties a steep real terms pay cut over the next two years. IDS confirmed this week that it expects an operating loss from Royal Mail of up to £450mn this year, including the costs of industrial action. A restructuring programme including up to 6,000 redundancies is intended to turn that round.

Royal Mail revenues in the first half fell 11 per cent. Volumes of letters and parcels were down 6 per cent and 16 per cent respectively as a pandemic era boom fades.

Balance sheet preservation is now the priority. Almost £300mn of free cash flow was burnt during the first half. The company has reduced its UK investment plans by £100mn and the interim dividend has been shelved. Group cash of £768mn might fall by a further £100mn by March, according to Visible Alpha consensus.

IDS shares languish at about a quarter below their 330p privatisation price. But they may well have found a bottom, based on the continuing strong performance of international business GLS. Valued on estimated operating earnings, it is worth at least as much on its own as the group’s enterprise value of £3.3bn. An increasing shareholding by acquisitive billionaire Daniel Křetínský, with over a fifth of the shares, testifies to the break-up value. The worsening crisis at Royal Mail adds to IDS’s vulnerability.

Scrapping the obligation of Saturday letter deliveries could save up to £225mn a year, thinks Ofcom. It could also reduce the chance of another foreign takeover of an underperforming UK asset.