Costs and margins
Despite its recent increase in annual profit, as a company 500 years in the making Royal Mail needs to move with the times. But is privatisation the best way forward?
I can't remember that last time I sent a letter; I send birthday cards to those less technologically savvy, but a quick ‘hello and best wishes’ via Facebook or an online greeting card have started to become the norm for me. Both are infinitely cheaper, more convenient and more conducive to a busy lifestyle.
It may sound impersonal and lacking in thought, but I’m certainly not alone in this move. The physical letters business in the UK alone has been suffering a decline for quite a while, with an average of only 58 million letters now sent every day; this is down significantly from the 63 million per day recorded in 2011-2012.
Given that no one has yet invented a ‘telepod’ that can transport inanimate objects, parcel delivery is nevertheless on the up. The number of parcels delivered in the UK has increased by 70 million to 1.4 billion compared to last year. This is mainly thanks to the increase in online shopping, so, while the internet has subtracted business in terms of letters, it has added to it greatly it terms of the parcel delivery business arm.
As a result of the online shopping boom, Royal Mail more than doubled its annual profit this year. A 60% increase in pre-tax annual profit was reported, taking the figure to £324 million. However, this new strategy to focus on parcels rather than letters is hardly rocket science, and is in truth borne out of necessity.
The company dates back to the 16th century and, while history is important, it is necessary to move with the times. Yet in light of the perceived profitability, is privatisation the way to go? The privatisation of the state postal operator would be the biggest in decades, with CEO Moya Greene aiming for a £2.5 billion flotation on the London Stock Exchange.
The idea has been greeted with opposition from trade unions and Royal Mail staff who fear that a sale to a private equity firm would destabilise workforce morale, contribute to greater workloads and lead to more redundancies as cost-cutting sets in. Postal services minister Michael Fallon has stated that ‘very few people now question whether the likes of BT, BP or Rolls Royce should have remained state owned’. Yet, in the aftermath of the privatisation of British Gas in the mid-1980s, much controversy was stoked when the then chairman received a pay rise of 66% on the back of a reported 42% rise in profit in 1991.
However, compared to other floated postal companies such as Austria Post and Deutsche Post, Royal Mail’s profit margins are significantly higher. The argument put forward is that in order to modernise, a capital injection is much-needed.
Postal staff have been promised 10% of the shares in the company, possibly for free rather than at a discount, which could be worth as much as £1500 each when privatised. If profitability continues to increase, based on the models of the aforementioned companies, these shares have the propensity to be of significant value in the medium term.
The deal is not yet struck, but it is on the cusp. Clinging to the past will not sway the decision. We can expect additional opposition to the move, but as the great philosopher Socrates put it: ‘The secret of change is to focus all of your energy, not on fighting the old, but on building the new’.
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