Royal Mail strikes: Will it lead to a breakup of IDS?

Josh Warner
By :  ,  Market Analyst

The cost-of-living crisis that erupted this year has prompted a wave of industrial action to be taken across the UK as unions push for better pay and conditions for workers that are seeing their wages face the biggest squeeze in decades. That comes at a time when most companies are struggling to cope with rising costs in the inflationary environment and are now trying to protect profitability.

For Royal Mail, it has led to the first strikes in 13 years and caused £100 million worth of losses in the six months to late September alone. More action is planned to start today and tensions between the Communications and Workers Union (CWU) and Royal Mail, which recently changed its name to International Distributions Services, remain high. The CWU has said it will continue to strike next month and in 2023 if the company doesn’t meet its demands, while Royal Mail is saying it will end talks if the union takes anymore industrial action – meaning this could be a crucial week for both sides.

Let’s have a look at the situation and what it could mean for the company.

 

When are the Royal Mail strikes?

The CWU, which represents 115,000 postal workers that deliver and sort through letters and packages at Royal Mail, has called on its members to strike for four days – on Thursday November 24, Friday November 25 (Black Friday), Wednesday November 30 and Thursday December 1.

The CWU, stepping up its fight, announced last week that it is also planning further action for six dates in December that could cause significant disruption over the busy holiday season – on Friday December 9, Sunday December 11, Wednesday December 14, Thursday December 15, Friday December 23 and Saturday December 24.

More strikes could happen in 2023, the CWU has said.

 

Royal Mail vs CWU: What’s the dispute?

The main disagreement between Royal Mail and the CWU is about pay. The union wants a pay increase for its workers that meets inflation, while Royal Mail wants a smaller increase so it has more funds to address other major problems facing the company.

‘The pay dispute is not complicated. Our members are striking for a pay rise that fully addresses the current cost of living. Our members need it, our members deserve it – the company can afford it,’ the CWU has said.

Royal Mail raised its offer last week to the equivalent of a 9% pay rise for CWU workers, up from its previous offer equal to 5.5%. This was not accepted. Royal Mail said yesterday that it made its 'best and final offer' that was also rejected, with the company previously warning talks would ‘cease if further industrial action goes ahead’.

Notably, the company has managed to strike a deal for a 5.5% pay rise and £1,000 one-off lump sum with workers under Unite unions that represent much smaller numbers of workers.

‘The CWU claim they are open to change but they now need to show it. We’re urging CWU leadership to accept the change and pay offer, call off future damaging strike action, for the good of our customers and our people,’ Royal Mail said in a statement last week.

That implies negotiations could now break down entirely considering the strikes are set to go ahead today.

The battle has escalated, and we are at a standoff. Royal Mail, having raised its offer and settled with other unions, is steadfast that it will pull out altogether if the strikes go ahead, while the CWU is threatening more industrial action after becoming disgruntled with the slow progress and the fact Royal Mail has already started to take action, including job cuts, while negotiations are ongoing. One side will need to give in, or a compromise is needed. Otherwise, it means further disruption for Royal Mail and more disappointment for dissatisfied workers.

 

What is the impact of strikes on Royal Mail?

The CWU represents the majority of the 150,000 workers at Royal Mail, so any large-scale industrial action has a huge impact. It forces the business to prioritise special deliveries and tracked parcels, most letters go undelivered, and collections are also affected. Ultimately, it causes delays for post and parcels. Just eight days of strike action in the first half of the financial year caused £100 million worth of losses and, with many more pencilled-in before the end of the year, the cost could be hefty.

Industrial Distribution Services has warned Royal Mail will book hefty losses over the full financial year to the end of March 2023, which will swallow up the profits made by the other arm of the business named GLS, the European-based giant that handles some 870 million parcels each year.

The industrial action plunged Royal Mail to a loss in the first half, caused Industrial Distribution Services to burn through cash and forced it into cash preservation mode as it slashed its capital expenditure budget and decided not to pay its shareholders a dividend. The inability to reduce its headcount as fast as it wanted has also prevented the company from achieving its cost-cutting goals this year, with it now expecting to make just £200 million worth of savings compared to its original goal of £350 million.

 

Royal Mail vs GLS: Stark difference

Royal Mail plunged to an adjusted operating loss of £219 million in the first half to September 25 and saw revenue fall by over 10% after being hit by strikes. However, Royal Mail would have still been in the red even if it avoided any industrial action as the macro environment remains tough. Demand for the likes of ecommerce has fallen as consumers tighten their belts and the boom seen during the pandemic unwinds. This means Royal Mail cannot just solve its problems by addressing its differences with unions and must undertake other drastic changes to get it fit for the current age.

Royal Mail sank to heavy losses thanks to strikes in the first half

Meanwhile, GLS has proven far more reliable and resilient in recent years and still remains on the right trajectory. Revenue rose 9.5% in the first half and, although earnings dipped amid the weaker environment, it was a much milder fall.

‘The difference between the performances of our two companies could not be more stark. GLS has adapted well to inflationary pressures across its geographies. However, we have been standing at a crossroads with CWU in the UK for several months. We are now heading in a clear direction in light of the substantial losses in Royal Mail,’ said the company last week.

Royal Mail is underperforming compared to GLS

 

Will Royal Mail and GLS be separated?

International Distribution Services is in a position where Royal Mail is now dragging down its far more successful GLS business. The situation is so dire that the company has said ‘in the event of the lack of significant operational change in Royal Mail it will look at all options to preserve value for the group including the possibility of separation of the two businesses.’

‘Achieving transformation is not optional; it is urgent. The losses that we have suffered to date, exacerbated by the industrial action, are not sustainable. Management is committed to doing whatever it takes to turn this business around and complete the transformation,’ Royal Mail said last week.

No further details on any potential separation have been announced, but it would lead to Royal Mail and GLS becoming two publicly listed businesses. It would be likely that existing shareholders would then have a stake in both firms once they are disentangled from one another.

 

Royal Mail: Five-point plan

For now, International Distribution Services is doing what it can to stop the bleeding and shore up Royal Mail the best it can, albeit at the risk of stoking further action from unions. The ultimate aim of its overhaul, according to the company, is to make the business ‘better placed to serve our customers’ needs in parcels, as well as letters, bring it back to profitability and provide a sustainable future.’

Royal Mail, due to its age and role as the universal postal service, has not been able to adapt to the fast-changing environment over recent years like its competitors. It has been hamstrung by ‘unique, complex, costly and highly restrictive union agreements and structures built up over many years’. This means, for example, that Royal Mail has not been able to adjust the size of its workforce to meet demand like its rivals or prevented from changing certain conditions, such as those related to Sunday working.

‘The business has to date failed to rightsize its resources to the lower parcel volumes, and this is now a critical priority for the coming period, where the focus is on continuing action to address this inefficiency, focus on cash management and modernise working practices,’ said the company.

Some of these restrictions are now expiring and Royal Mail is now pursuing a new five-point plan to turn the business around.

  1. It has already completed one stage of the plan after trimming the layers of management from eight to five, resulting in savings and smaller teams while providing sums for it to invest in remaining managers.
  2. It plans to cut 10,000 roles by the end of August 2023. Importantly, it hopes a crackdown on overtime and temporary workers will mean only 5,000 to 6,000 redundancies will need to be made. Of the 10,000 cuts, 5,000 will be made before the end of March 2023.
  3. Spending is being cut, including the capital expenditure budget for the current financial year to £250 million from £350 million.
  4. A new recruitment model is being introduced to reflect the updated conditions now that certain restrictive policies have lapsed, such as the removal of a cap on the number of owner drivers working for Parcelforce, new requirements concerning Sundays for new starters, and a new attendance policy to address absenteeism caused through sickness, which it says remains heightened since the pandemic.
  5. It also aims to leverage its network and assets by improving efficiency through the adoption of more technology and by continuing to rollout dedicated parcel hubs, including its ‘Super Hubs’ that serve large regions.

The goal of the five-point plan is for Royal Mail to start generating cash and escape the red at the adjusted operating level in the financial year to March 2025.

We believe that this is the best course of action for the long-term survival of Royal Mail even if it results in short-term disruption,’ said the company.

The company does not intend to stop there, and more action will come after the five-point plan is completed. It is also trying to change its universal role after asking the government if it can start delivering letters just five days a week as part of its shift toward parcels.

Royal Mail plans to continue close Mail Centres as it adjusts capacity and shifts more demand toward its Super Hubs. Some of its 1,200 Customer Service Points are also at risk considering there has been a 50% drop in footfall since the start of the pandemic. It is looking to rebalance geographical coverage between Royal Mail and Parcelforce, which currently overlap in some areas, and plans to look for ways to upgrade its fleet to electric in a ‘capital light’ way while speeding-up testing of new delivery and sorting technology.

 

Where next for Royal Mail share price?

International Distribution Services shares have jumped by over 33% since sinking to a two-year low at the end of September, although the stock is still down by more than half since the start of 2022.

The recent rise allowed the stock to close the gap created when it plunged lower in mid-September after recovering back above 249.0p, but it has met what appears to be a tough level of resistance around the 252.0p, which pushed the RSI on the cusp of entering overbought territory. If it can find some renewed momentum, then the stock can try to once again close the gap and target the 259p level of support we saw throughout late July to the end of August.

From here, it can eye a larger jump toward the July-peak of 294.5p, which is aligned with the 200-day moving average. Notably, the 14 brokers that cover International Distribution Services have mixed views on the stock, although the average target price of 299.46p suggests there is over 22% potential upside from current levels. That has been severely curtailed following the industrial action in recent months, having sat at over 356p just three months ago.

We have seen a new potential level of support emerge over the last week at 233p. This is the supportive level we saw over two years ago that has been tested and held a couple of times in the last week. Any move below here could see it fall toward the 190p mark, although the two-year low of 180.5p is still in play. The low was tested several times in late September and early October and held, suggesting this could act as a reliable floor going forward. If these levels fail to hold then the stock could tumble toward 170p, marking the low of September 2020.

Where next for the Royal Mail share price?

 

How to trade the Royal Mail share price

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