Royal Mail sees costs rise but confident in profits thanks to parcel boost

Royal Mail has forecast a jump in first-half profits, but cautioned over labour shortages and rising costs ahead of the peak festive season.

The group said it is facing increasing cost pressures across its Royal Mail and European and US parcel business GLS, with the latter also suffering amid “tighter labour markets”.

Despite this, Royal Mail reported higher revenues in the first five months of its year and said interim group underlying earnings are set to jump to between £395 million and £400 million.

This would mark a big leap on the £37 million posted a year earlier.

The group cautioned over “significant short-term uncertainty as we unwind from the impacts of the pandemic”.

But it said underlying earnings are still expected to be higher in the second half.

The group also brushed aside “month-on-month fluctuations” in parcel deliveries, insisting it is “increasingly confident” the trend for increased UK parcel deliveries is permanent after the shift towards online shopping amid the pandemic.

It reported a 9% fall in total parcel deliveries by volume across July and August, while parcel revenues fell 4.6% to £773 million.

The latest figures showed a more robust performance from domestic parcels, with volumes down by 3% and revenues edging 0.6% higher to £645 million.

Against pre-Covid levels in 2019, UK parcels by number jumped 32% higher in July and August.

Letter deliveries bounced back by 2%, with revenues up 7.7% against a lockdown-hit previous year, but remained 20% lower by volume on a two-year comparison.

Overall group revenues for the first five months lifted 8.2% to £5.1 billion.

Keith Williams, chairman of Royal Mail, said: “In Royal Mail, we are increasingly confident that domestic parcels are rebasing at a significantly higher level than pre-Covid and believe we are maintaining our share of the market.

“Whilst we continue to expect further normalisation of parcel performance as we unwind from the pandemic and anticipate some upward pressure on costs, both adjusted operating profit and margin are expected to be higher in the second half compared to the first half.”

Laura Hoy, an equity analyst at Hargreaves Lansdown, said there is “more to the parcel decline than just difficult comparisons”.

She added: “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.

“GLS, the group’s international arm, also turned out a strong performance though some of the gains evaporated due to exchange rates.

“Inflationary pressure has begun to creep in here, but should be manageable.

“We’re not totally convinced of this, particularly as labour shortages persist.”