Royal Mail/unions: threat of administration is far-fetched

It is still postbags at dawn between Royal Mail and the UK’s Communication Workers Union. The latest talks to end an 11-month row over pay and conditions for staff failed this week.

Directors of the UK postal utility have accused unions of trying to drive the business into the ground so it is renationalised. Union bosses claim it is “those at the top” of Royal Mail who are causing a “difficult financial position”. Administration is not an immediate threat but would be a bad outcome for both parties.

Eighteen strike days have so far have cost Royal Mail £200mn, delivering an adjusted operating loss of £295mn in the nine months to the end of December. Royal Mail is losing £1mn a day after the pandemic boost to its parcels business wore off. It is trying to improve cash generation under a “five-point plan”. This involves workers starting later to meet demand for next day parcel services and regularly revising postal routes.

The position of Royal Mail’s UK-listed parent, International Distributions Services, is helped by its profitable international arm GLS.

IDS is forecast to have ended its financial year with a cash balance of £653mn, according to Visible Alpha estimates. The group had a £925mn bank facility that remained undrawn at the nine-month mark, although IDS would not be obliged to use that to bail out Royal Mail, according to Liberum analyst Gerald Khoo. Still, Royal Mail has further levers to pull, including selling off more property.

Under the worst-case scenario, Royal Mail would have to enter a government-backed “special administration” similar to the 2021 bailout of failed energy supplier Bulb. For staff there would likely be few guarantees. For IDS, a special administration would be a political headache.

Shares in IDS, at 222p, are a third below their 2013 flotation price of 330p. The stock is up 3 per cent since January. The market so far views administration threats as the latest gambit in a long-running game of brinkmanship.

Royal Mail is currently negotiating with customers over parcel delivery services for the festive season. It is desperate to avoid further strikes on the scale seen last year. Trust in management is clearly low among workers. Both sides need to work harder to reach a compromise.