Royal Mail profit jump makes case for privatisation

Royal Mail said today that preparations for privatisation were now underway, and that “all options are being considered” for bringing in external investment to help continue its transformation into more of a parcel business. However, with talk of Barclays and UBS being called in to help the government engage with potential investors, an important part of the preparations came with a huge increase in profits for the British universal postal service provider.

The parcels business has helped bring Royal Mail its second consecutive year of profit growth, but even letters revenue grew thanks to April’s price rises.

Half-year group operating profits, including transformation costs, jumped to GBP 144m from GBP 12m a year ago.

Revenues for the six months increased 3.3% year-on-year to GBP 4.35bn, with the group’s margins extending by three percentage points to 3.3%.

The core UK parcels, international and letters unit turned around a GBP 41m loss into a GBP 99m profit, with its margin improving from negative 1.2% to positive 2.7%.

Royal Mail said it was still in the process of adapting its network from its traditional focus on letters to one that handles more parcels, and that privatisation was at the heart of its plans to do so.

“Our need for external capital is central to our transformation programme,” said Moya Greene, the Royal Mail chief executive.

“So too is the successful completion of our modernisation, as we become a more efficient and effective organisation.”

The company stressed that arrangements for privatisation were still “a matter for the government”, and that there was no certainty about the outcome. UK newspapers have reported that government officials will start courting potential investors from next year.

Along with improved profitability, this year’s first half saw the UK government taking Royal Mail’s legacy pension responsibilities off its hands, while Ofcom’s deregulation of Royal Mail’s pricing also makes the company more attractive to investors in a difficult postal market. Ofcom reduced its regulatory controls from about 80% of Royal Mail’s revenue down to less than 10% back in April.

UK business minister Michael Fallon said today that the government was not yet decided on how privatisation would occur.

“Parliament decided, via the Postal Services Act 2011, to inject private capital into the company in order to secure the future of the universal postal service,” he said. “The structure and timing remain open, but Government is committed to doing that to ensure the ongoing viability of the company.”

Parcel growth

Parcels now represent 47% of the group’s revenues, while 18% comes from Royal Mail’s international activities, led by its Europe-based GLS subsidiary.

Parcels brought in just over GBP 2bn in the six months, 4.6% up on the same period last year, with a 13% increase in domestic parcel revenues, to GBP 1.35bn. Group parcel volumes increased 4.2% year-on-year, while domestic and outbound UK parcel volumes grew 5.6% in the half to 491m items.

The GLS business saw its revenues dip by 8% compared to last year’s first half, to GBP 712m, and its operating profit by 22% to GBP 45m, but the company said this was partly from a weaker Euro, with underlying results “broadly unchanged” and volumes level at 182m items.

Royal Mail’s letter revenue actually grew 2% in the half, although it was helped by April’s price rises. Traditional letter volumes declined by a hefty 9% compared to the same period last year, which the company said was “in line with expectations”.

Greene said letters remained a “key part of our portfolio” as she noted the importance of parcels and international operations.

“We have made significant progress across all fronts,” she said. “But more remains to be done. We are focused on continuing the turnaround of our business and securing the external capital we need to complete the transformation of Royal Mail.”

Transformation

Royal Mail has a GBP 75m investment programme in place to expand its express parcels business, Parcelforce worldwide, over the next four years. A new partnership with Chinese express company ZJS is also expected to bring international parcels growth, working with GLS to provide a gateway for Chinese manufacturers shipping parcels into Europe.

And, Greene indicated that more cutbacks were on the way, as “almost every aspect of work at Royal Mail is being transformed”. Royal Mail revealed last week that it is closing more mail centres as it looks for efficiency improvements.

Talks with the Communication Workers Union are underway about additional measures, the Royal Mail CEO said. “I believe our people generally understand the need for the company to continue to adapt to a rapidly changing postal market,” said Greene.

The CWU said today that Royal Mail’s latest results were “proof” that modernisation was working in the public sector, although the union said the results were “masking some of the problems in the industry”.

The union wants more regulatory controls on rival postal operators to protect the universal service, and is opposed to any kind of privatisation.

Dave Ward, the CWU deputy general secretary, said today: “There is no need for privatization as a solution to business transformation. Change is being successfully delivered by postal workers daily throughout the company.”

Ward claimed that despite the profit jump at Royal Mail, private sector competitors were undermining the universal postal service.

“The regulator must now step in to protect the universal service,” he said.

“We want a fair day’s work for a fair day’s pay bringing quality postal services to everyone. That’s being undermined by the way competition destabilises the universal service – companies being allowed to cherry-pick profitable contracts while paying low wages.”

Ward added: We don’t want competition at any cost. Closures, bullying, cost cutting and privatisation will destroy the industry. We’ll stand up to protect it.”