Why Royal Mail’s second class post shake-up won’t save it from losses

In a further headache, Royal Mail risks another clash with unions after bruising strikes last year that cost the company £1m a day.

The changes are expected to cut the number of delivery routes by up to 9,000 – a move that is expected to lead to around 1,000 redundancies.

While Royal Mail has said the vast majority of the cuts can be managed through natural turnover with no compulsory redundancies, the support of the union bosses will be crucial in pushing through any reform.

Regardless of the political repercussions, though, there remains a fundamental question over whether the proposed changes would be enough to save Royal Mail.

The company, a division of London-listed International Distributions Services (IDS), made losses of £319m in the first half of the year, with Ofcom estimating that the USO is burdening it with £675m in costs each year.

Bosses have said its proposed changes would allow it to save up to £300m a year, both from reduced costs and higher revenues from shifting deliveries to first-class.

Peel Hunt expects Royal Mail to post pre-tax losses of £370m this year and £77m in 2025. “If implemented, this would give the company a route to profitability,” says analyst Alexander Paterson.

Yet the bullish forecasts depend on the speed of the reforms. Royal Mail has urged Ofcom to introduce new rules by next April at the latest, and warned changes could take up to two years to implement beyond that.

In a sign of growing frustration, Martin Seidenberg, chief executive of IDS, said the company had “serious concerns that the urgency of the situation is not properly recognised by Ofcom”.

The savings will also hinge on how quickly letter sending continues to decline. The company has warned that letter volumes could fall to four billion in the next five years, down from a peak of 20 billion two decades ago.

As a result, the reforms alone may not be enough to turn Royal Mail’s fortunes around.

As the ecommerce boom continues and letter sending declines, parcels are a key area of focus. The company has expanded its pick-up and drop-off services with corner shops around the country and will this month roll out its first parcel lockers.