Do big profits mean that Royal Mail will leave the public sector?

Royal Mail has reported a huge increase in half-year profits as growth in parcel deliveries made up for a continued fall in the number of letters being sent. This is something of a surprise to many as the business had looked to be in long term decline. The chief executive has summed up the way in which the firm has found success: "Royal Mail has experienced the negative impact of e-substitution, which is driving the structural decline in the traditional letters market. Conversely, we are seeing the positive impact that online retailing is having on our parcel volumes”. Now that operations are in profit, this might speed up the business’ move from the public sector and into the private sector – a move referred to as privatisation. A future for the Royal Mail in the private sector was referred to in a previous blog. Here’s an update, and a reminder of some of the strategic issues at stake.

According to The Telegraph, parcel revenue rose 13pc, whilst that from letters gained just 2pc, taking operating profits in the six months to September up to £144m, compared with £12m in the same period last year. Parcels now represent 47pc of total group revenue.

The business made a formal announcement that it wants to proceed with privatisation. Why? The business says "Obtaining external capital is a key part of the transformation process as we become a more parcels-focused business and make the investment in technology to do so”. In other words, the Royal Mail hopes that as a PLC they will be able to sell shares and borrow money to finance their future growth. The chief executive said “we are focused on continuing the turnaround of our business and securing the external capital we need to complete the transformation of Royal Mail."

Implementing change isn’t just financially difficult. Stakeholders of the business are bound to experience upheaval. The chief executive also said Royal Mail's modernisation programme involved "painful, difficult change", with almost every aspect of work being transformed. "I believe our people generally understand the need for the company to continue to adapt to a rapidly changing postal market and that the company and the unions need to work together for the benefit of both our customers and our colleagues”. Critics of privatisation will be furious, but the boss claims that Royal Mail used to be in a "very deep hole" and is now climbing out, and all parts of the business are profitable.

The Communication Workers Union said the profit proved that modernisation of the Royal Mail can be successful within the public sector. "There is no need for privatisation as a solution to business transformation. Change is being successfully delivered by postal workers daily throughout the company. Royal Mail is doing its bit to change, but … competition from private companies is undermining Royal Mail's ability to provide an affordable service to every part of the UK. We want a fair day's work for a fair day's pay, bringing quality postal services to everyone …there's also a problem with pressure that Royal Mail managers are putting on delivery workers to make unrealistic cost savings."