Royal Mail optimistic about parcel sending boost despite higher costs

Royal Mail optimistic about parcel sending boost despite higher costs
Improving letter volumes and higher UK parcel revenues have buoyed the postal service. Photo: PA

The Royal Mail Group (RMG.L) said it expected a surge in first-half operating profit on Thursday, although warned of the headwinds of higher costs.

Improving letter volumes and higher UK parcel revenues have buoyed the postal service as an increasing shift to online shopping persists.

In the five months to August, revenue rose to £5.1bn ($6.97bn), up 8.2% from a year ago and a 17.7% increase compared to 2019. This reflected revenue growth at both GLS parcel service and Royal Mail despite a decline in total parcel volumes from 2020.

The pandemic continues to cloud growth forecasts, but Royal Mail expects first half operating profits to be between £395m and £400m, well beyond 2020 levels.

Despite the number of parcels being delivered by its UK business falling amid relaxed COVID-19 lockdowns, parcel revenue edged higher from last year and grew by a third year-to-date from 2019 levels. Total letter revenue rose 18.3% in the five months to August.

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“Longer term, Royal Mail still needs to work hard at improving operations and making them efficient. Parcel delivery remains an incredibly competitive space and letter volumes are likely to keep falling. To boost profit margins, Royal Mail must become a leaner, meaner business with even greater automation," said AJ Bell investment director Russ Mould.

"There’s more to the parcel decline than just difficult comparisons, though. Royal Mail was also plagued by customs processing issues and lower air freight capacity. That’s a similar story to what we’re hearing from quite a few UK businesses — supply chain disruption is weighing on results," said Laura Hoy, equity analyst at Hargreaves Lansdown.

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