Royal Mail profits fall but shares rise after nearly 3,000 job cuts

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Royal Mail has reported a 30% fall in first-half profits, hit by growing competition and the redundancy costs of shedding nearly 3,000 jobs.

The business, which was privatised and floated on the stock market two years ago, said its full-year performance would depend on the Christmas period – its busiest time of year.

Revenues slipped to £4.4bn in the six months to 27 September from £4.48bn a year earlier, with falling UK letter revenues largely offset by growth in domestic and European parcels.

Nearly 3,000 staff left, mainly through voluntary redundancy, pushing up Royal Mail’s costs. This represented about 2% of the company’s UK workforce, which is 140,000 after the cuts.

This resulted in transformation costs doubling to £94m, and pushed pretax profits down to £116m from £167m. Adjusted operating profits excluding those costs slipped to £342m from £348m, in line with analysts’ forecasts.

The firm has stepped up its cost savings programme and expects operating costs to fall at least 1% over the year as a whole.

Royal Mail shares rose 5.8% or 26.3p to 480p in early trading on the news. The company increased its interim dividend from 6.7p to 7p.

Chief executive Moya Greene said Royal Mail had delivered a “resilient performance”. She added: “We delivered parcel volume and revenue growth in the UK, which continues to be a challenging market … As in previous years, the full-year outcome will be dependent on our important Christmas period, for which we have extensive preparations in place.”

Letter volumes in the UK fell 4% while parcel volumes rose 4%. The European parcel delivery division GLS did better, delivering 9% volume growth.

Royal Mail faces rising competition from the likes of Amazon, which is pushing into the parcel delivery market with its own network.

Others are also struggling. Rival delivery firm UK Mail, bugged by lengthy problems at its new automated delivery centre, warned that profits would be lower next year and cut its dividend after a sharp fall in first-half profits on Wednesday.

Jasper Lawler, market analyst at CMC Markets, said: “Royal Mail now has a stranglehold over letter (including Christmas card) deliveries since its main competitor Whistl quit the market, but parcels are where the money is. The boom in e-commerce and strong UK consumer confidence has brought about fierce competition between delivery companies. To date, Royal Mail has struggled in the fight for our online orders.”

A review from Britain’s postal regulator Ofcom, following a complaint from Whistl, also looms large. In its initial view, Ofcom said Royal Mail had breached competition law by proposing wholesale prices that are more expensive for any firm looking to run a rival mail delivery service. A final decision is expected next year.

The government sold its remaining 14% stake in Royal Mail a month ago, raising £591m for the Treasury. The firm’s flotation in October 2013 was highly controversial because the government sold 60% of the 500-year-old institution for 330p a share, only to see them rise sharply to 615p. A committee of MPs said taxpayers lost out on up to £1bn because the shares could have been priced higher.

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 ... The spectre of the Ofcom review remains a drag on prospects, whilst the ominous presence of Amazon also injects caution. More positively, the fact that the company is accelerating the transformation should be reflected further down the line in a leaner business.”