Royal Mail: a more efficient service is needed to finance bigger pay

UK posties have begun to send their own message in a pay dispute. With ballots issued to 115,000 Royal Mail workers, this could become the biggest strike of the summer. The tensions highlight the structural problems of the UK’s biggest delivery group, recently demoted from the FTSE 100.

Postal employees, key workers in the pandemic, could attract public support. Royal Mail only offers to pay an extra 2 per cent rise, with an additional 3.5 per cent dependent on efficiency gains. A dramatic real-terms wage cut, says the Communication Workers Union.

True, but it is not clear that Royal Mail can afford more. CWU cites last year’s £758mn adjusted operating profit and the recent £400mn share buyback and special dividend.

That was based on a pandemic ecommerce boom that is unwinding. Witness the shares’ plummeting market value. These trade on six times forward earnings, less than half their long-term average and that of more automated continental peers such as Post NL.

Royal Mail’s operating profit margin, which should fall by a quarter this year to 4.4 per cent, is also well below its peers. Blame high fixed operating costs. Its pay bill, last year totalling £5.5bn, accounts for more than two-thirds of that.

Each percentage point on the pay offer would add an extra £45mn to the bill. Given flat revenues and difficulty passing extra costs to customers, Royal Mail needs productivity gains to finance pay rises.

A strike will damage Royal Mail’s reputation. But the impact on revenues may be modest. Sealed post boxes one day mean letters get mailed a day later. Business customers will find it hard to switch to rival delivery firms. Their capacity is much smaller than Royal Mail, which controls over half of UK parcel volume.

Postal workers have benefited from their union membership. The median pay for a postie is £25,272, compared with £21,000-£22,000 for a van driver at rival delivery firms. But to sustain big pay rises requires labour flexibility. Royal Mail needs to deliver this message, on time.