Royal Mail is in a royal mess

Perhaps what’s most surprising about Royal Mail is that it got through nine years of privatised life without a national strike.

That period of superficial industrial harmony formally ended last week, when Communication Workers Union members walked out in a spat over pay. Royal Mail has offered workers a rise of more than 2 per cent only if they agree to other changes to their working conditions; the union reckons that with inflation running well above that, a bigger pay bump is needed regardless. Wednesday was the second day of strike action.

Everything else about the postal service’s predicament feels utterly familiar: a diminishing core letter business and a parcel unit not quite able to pick up the slack. Its costs remain too high. It is insufficiently flexible. It faces a host of more cut-throat competitors for profitable deliveries. Then there’s the six-day-a-week obligation to deliver letters across the UK for a single price.

It was 2008 when Richard Hooper warned in his pre-privatisation review that the organisation had to “modernise or decline”. Current Royal Mail chair Keith Williams is delivering much the same ultimatum now.

The trouble is, Royal Mail seems to have managed only enough modernisation to moderate its decline rather than reverse it altogether. Its share price languishes around a sixth below its IPO price and has resumed a downward slide after a pandemic-induced hiatus.

Williams has no doubt talked down Royal Mail’s prospects with his warning in July of £1mn a day losses: the full-year outlook before the strike impact was still for break even on an operating basis. But the profits of the pandemic parcel boom aren’t about to return overnight either. Some things are going to have to give. Williams is right about what needs doing. What’s less obvious is that he’ll be able to do it.

Part of the problem is that Williams’ threat to the union — to split the troublesome UK business from its prosperous international arm GLS unless progress is made on modernisation — is hard to take too seriously.

In theory it makes sense. GLS is expected to generate operating profit of €370-410mn this year to Royal Mail’s zero. Berenberg analysts calculated in July GLS was worth about 390p a share. With Royal Mail added on the price is more like 275p. Demerging GLS or selling it off could unlock a classic conglomerate discount for shareholders.

It’s possible a sale could also result in a healthy pay-off for Royal Mail’s posties, as the price of allowing the group to sacrifice financial security.

In the real world, though, it’s also plausible that a spin-off would expose the remaining Royal Mail business as an unattractive asset that would struggle to attract investors to back it through further periods of upheaval.

It’s hard to imagine politicians permitting such a deal, given that the government appears to have designated it “critical national infrastructure” that falls within the scope of the new national security and investment regime, calling in for review Czech billionaire Daniel Křetínský’s move to increase his stake last week. If they did allow a split, it’s less tricky to imagine the company requiring state support within the space of a decade.

Williams’ other warning, that he could move to terminate a historic contract with the union governing terms and conditions, also struggles for credibility. Relations between union and management may be bad. But moving to formally end an agreement that has ensured an accord, however uneasy, for the past nine years would mark a breakdown that could be hard to recover from.

Williams is an experienced negotiator thanks to his years spent as boss of British Airways. He surely appreciates that any change is going to mean worse terms and conditions for Royal Mail workers. Likewise, while it’s understandable that the union wants to use its position of strength to resist, changes to working patterns will ultimately be unavoidable. So will redundancies. That both sides have nonetheless found themselves so rigidly opposed is a mark of the right royal mess Royal Mail is in.

cat.rutterpooley@ft.com
@catrutterpooley