Royal Mail turnround still needs the workers’ stamp of approval

How many roads must a man walk down before you can call him a postman? The answer is central to the Royal Mail investment case — even though most investors seem to have forgotten that.

Royal Mail shares have jumped 40 per cent since the Communication Workers Union voted in mid-December to accept a one-hour reduction in the working week. The stock had already doubled since September, helped along by signs of a more cordial atmosphere between the company and its frontline employee union.

Relations became more peaceable thanks in part to a virtuous circle of improved trading. More parcels meant fewer job cuts, which gave management more leverage to push for changes it sees as necessary to improve workforce productivity. The pandemic helped in other ways too. By classifying posties as essential workers industrial action became unpalatable just as the switch to parcels from letters reached a tipping point.

All this was visible in Royal Mail’s trading update on Thursday, in which the company hiked profit guidance for the March year end by more than a quarter. Operational gearing and pricing power meant parcels revenue in the Christmas quarter jumped 43 per cent on volume up 30 per cent. The growth overshadowed the inexorable decline in UK letter volumes, down another 14 per cent year-on-year, though even that represented an improvement on the 28 per cent drop reported for the first half.

A better than expected update extends a honeymoon phase for Simon Thompson, who took over as Royal Mail chief executive last month.

While relations between the CMU and his predecessor Rico Black had deteriorated, Thompson’s team was able to quickly secure important wins including an agreement on the pension scheme. Ofcom also improved his chances of pushing through workplace reforms by finding few problems with a cut in letter deliveries from six days a week to five. If put into law that change alone could save Royal Mail up to £225m a year.

But can the golden period outlast lockdown? Year-on-year comparisons are getting tougher just as pressure mounts on management to deliver a modernisation programme that is decades behind peers. Staff costs at Royal Mail’s core UK division were equivalent to 69 per cent of revenue last year, compared with 39 per cent at Bpost of Belgium and 52 per cent at Deutsche Post.

About 11 per cent of Royal Mail staff are over 60 so some of the inevitable headcount reduction can be via retirement. But relying on attrition alone risks underestimating the sensitive business of tweaking delivery routes and replacing bag carriers with box-sorting robots. As the specifics are still in negotiation, less than two months of relative peace between management and unions should not be allowed to eclipse the previous 500 years.

Investors have embraced the idea that Covid-19’s ecommerce boom will kickstart Royal Mail’s long-awaited transformation. The shares have risen to their highest since 2018 and are valued at about 13 times the raised current-year earnings guide, bringing them in line with its European peer group. Yet analysts’ forecast range for next year is too disparate to be useful and investment demands offer little prospect in the near term for dividends to return. They are paying no small price for a company that has promised a lot, but whose delivery is never guaranteed.

Dash for cash: redux

Sequels are rarely as popular as the originals. Take travel café owner SSP, which is looking to raise up to £500m with a rights issue.

The owner of Upper Crust and Caffè Ritazza already tapped investors for £216m last March to stay within debt covenants. Another £500m would mean SSP had raised enough cash to cover its expected cash burn in the financial year ending September almost exactly. Shareholders will have paid for SSP to tread water, in preference to sinking.

Among the first UK companies to tap investors twice for Covid funds was JD Wetherspoon. The pub group was able to argue last month that another cash infusion meant exiting lockdown stronger. Companies like SSP that rely on global travel markets will struggle to make similar claims. New variants and slow vaccine rollout programmes have stifled all optimism around when governments might lift international travel restrictions. With no exit route apparent, there is no way to disguise that new equity is needed to keep the lights on.

Where does that leave the airlines? EasyJet and British Airways owner IAG have been reducing cash burn following fundraisings launched in June and July respectively. Yet mandatory hotel quarantines starting Monday are unlikely to help forward bookings, and any deterioration in the 2021 summer season outlook leaves them vulnerable again.

Then there is Tui, which is already on its third German government bailout. The holiday group burns around €400m a month and has an ambitious target for summer of running at 80 per cent of its pre-Covid capacity. Things might get tight again if reopening schedules slip and cancellations start eating into its €1.7bn of customer deposits.

Confirmation that SSP is looking at fundraising options sent its shares plunging to their lowest level since November. The market has shown little appetite for never-ending stories, which will make the looming second round of cash calls a lot more tricky.

bryce.elder@ft.com