First half profits slip at Royal Mail despite cost savings

Royal Mail has reported a "resilient" first half.
Photo: Katie Collins/PA Wire

Royal Mail has reported a "resilient" first half. Photo: Katie Collins/PA Wire - Credit: PA

Moves to slash costs helped limit the decline in underlying operating profits, which fell by 2% to £342million in the six months to September 27.

Royal Mail said new contracts had helped drive a 1% rise in parcel revenues but that revenue from letters declined by 5%, with trading conditions remaining “challenging”.

It also confirmed a hit from the recent roll-out of Amazon’s delivery network, which it said would knock its UK parcel deliveries market by around 1% to 2% a year.

The group is also facing tough competition in the parcels business, with rivals slashing prices to target consumers and small businesses, although it said it was fighting back by winning new contracts with retailers and online sellers such as John Lewis, Waterstones, House of Fraser and Asos.

Royal Mail, which last month saw its privatisation complete with the sale of the Government’s final stake for just over £591m, is also axing jobs and reducing costs across the business to help shore up its balance sheet, having cut its workforce by nearly 3,000 in the past six months alone. It has saved itself around £200m in annual costs over the last three years and is aiming to save another £500m by 2017-18.

Despite these actions, operating costs remained flat in the half-year.

On a bottom line basis, pre-tax profits fell to £116m from £167m.

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Royal Mail chief executive Moya Greene said: “We have delivered a resilient performance in the first half, demonstrating our ability to respond to a competitive trading environment.”

She added that full-year results will be highly dependent on its “important Christmas period, for which we have extensive preparations in place”.

Royal Mail’s shares rose 4% in early trading as the fall in half-year earnings was lower than many analysts expected.

Richard Hunter, head of equities at Hargreaves Lansdown Stockbrokers, said: “This is the expectedly difficult half of the year for Royal Mail, with these numbers putting even more emphasis than usual on the critical Christmas period.”

Its Global Logistics Systems (GLS) arm - a ground-based delivery network across Europe - reported an 8% rise in first-half revenues, although earnings fell to £52m from £56m a year earlier.

Royal Mail said while it continued to see a drop in overall letter volumes, down 4%, the decline was at the lower end of expectations.

It notched up a 3% rise in marketing mail revenues in the first half after launching a campaign to highlight the importance of traditional letter mailings for charities, trade unions, businesses and consumer groups, as well as its Mailmark initiative to allow groups to better analyse mailings.

In its parcels division, it is also extending its collection network to cover more than 11,700 Post Office branches and Enquiry Offices, while increasing the number of products collected from business customers at weekends.

It plans to launch parcel automation soon, with the first parcel “sortation” machine expected to be installed in Swindon in December, with more planned in the busiest mail centres over the next two years.

Ms Green has had a challenging year following the launch of Amazon’s postal service, as well as in July, the launch of an Ofcom review that could see it impose a cap on prices.

The regulator said it may roll back some of the commercial flexibility it granted Royal Mail in 2012, including the ability to put up its prices, as the business has strengthened over the last three years.

Its privatisation completed in October, in total raising £3.3billion from the sale for the Government, with proceeds used to pay down the national debt.