Royal Mail profits ‘could be 27pc lower this year’ as letters decline

PROFITS at Royal Mail could be more than 25pc lower this year as the number of letters and parcels being sent looks set to fall further and its costs increase, analysts have warned.

The company has moved away from letter delivery in recent years and is forecast to make more than half of its revenue from parcels in 2017-18, as it serves the UK’S love of online shopping and increasing business-to-business delivery. But analysts have said that the total volume of mail being sent is continuing to decline and a weakened economic outlook in the UK will weigh on its business.

David Kerstens, equity analyst at Jef- feries, said the operating profit for UKPIL, Royal Mail’s UK arm, would be 27pc lower this year, at £400m. This was driven by factors “including rising wage inflation to 2.1pc” and falling revenue, he said. Meanwhile, Damian Brewer at RBC warned that stagflation in the UK could result in increased letter mail decline, heightened consumer risk and pressure on labour costs.

“Short term this looks like an increasingly probable challenge that RMG [Royal Mail Group] may face – with limited short-term capacity to respond through costs to unexpected drop-offs in mail demand,” he added. The firm’s first-quarter revenues were boosted by an increase in political mail during last month’s general election and a strong performance in its overseas divisions.

In the three months to June 25, Royal Mail’s group revenues rose 1pc thanks primarily to a 5pc growth in volumes in GLS, its international parcel delivery service. The election helped to soften the decrease in revenues from letters in the UK, although total letter revenue was still down 4pc. The company said that decline would have been worse without “higher than expected revenue associated with the UK political parties’ 2017 general election mailings”.

“GLS continues to be a driving force for the group,” said Moya Greene, Royal Mail chief executive. “Its ongoing, focused international expansion is increasing our geographic diversification, scale and reach.”

The results come a week after Royal Mail made its latest offer to workers in a long-running battle over its pension scheme. The postal service said that employees would be able to choose between a new defined benefit scheme or a defined contribution scheme, set up as a new section of the Royal Mail Pension Plan and available for all plan members.

The Unite union said last week that it believed the offer was the “best available deal” for Royal Mail workers.

£400m The operating profit expected to be posted by UKPIL, the Royal Mail’s UK arm. The figure has been hit by falling revenues