Royal Mail earnings hit by declining letters business

Royal Mail said it saw a “resilient” first half despite reporting a drop in earnings as ongoing falls in the numbers of letters being posted offset growth in parcel deliveries.

Man of letters - Christmas is a busy time for Royal Mail workers

Moves to slash costs helped limit declines in underlying operating profits, down 2 per cent to £342 million over the six months to 27 September.

The group said new contracts helped drive a 1 per cent rise in parcel revenues, but it was hit by a 3 per cent drop in letter sales and Royal Mail said trading conditions remained “challenging”.

Royal Mail said the recent roll-out of Amazon’s delivery network would knock its UK parcel deliveries market by up to 2 per cent a year. It is also facing tough competition in the parcels business, with rivals slashing prices to target consumers and small businesses.

But the group said it was fighting back by winning new contracts with retailers and online sellers, such as Asos, The Book People, House of Fraser, Hut Group, John Lewis and Waterstones.

Royal Mail – which last month saw its privatisation complete with the sale of the UK 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, cutting its workforce by nearly 3,000 in the past six months alone.

It has saved itself about £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, although it hopes to see a 1 per cent reduction at its main postal division over the full-year. It also said costs of its turnaround plan would be at least £180m over the financial year.

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”.

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.”

Royal Mail’s results showed that on a bottom line basis, pre-tax profits fell to £116m – down almost a third from the £167m reported a year ago.