Royal Mail strike - How much does it cost to stop?

UK Strikes

We all know that the UK is in a dire situation with so many strikes going on and many essential services such as Rail, NHS staff, Ambulance etc. being inaccessible. For those reading it without much information about the strikes, I can tell you that now we have a monthly calendar for strikes and this is what the calendar for February looks like:

Source: Sky News (Explainer)

As you see from the above, we are in a state where the necessary services are unavailable to the public and I know that you will see a lot of blogs and news articles about how bad the situation is and what all services are impacted. However, I decided to spend some time looking at the root cause and analysing if a solution can be found. To process all of this, I started my analysis with the postal service, yes, Royal Mail.

Royal Mail

This is no secret that the biggest demand for the staff going on strike is wages. They are requesting to be paid rightly for their work and with an increased cost of living in the UK, managing the expenses with their current wages is becoming difficult. As per Office for National Statistics (ONS), the Consumer Prices Index (CPI) rose by 10.5% in the 12 months to December 2022. Therefore, for the Royal Mail staff to manage their current lifestyle and expenses they are requesting a pay increase which is above the current inflation in the UK, which is 10.5% (Remember this number). 

The Communication Workers Union (CWU), which is the main trade union in the United Kingdom for people working for telephone, cable, digital subscriber lines and postal delivery companies, has rejected a pay rise of up to 9% in exchange for changes to working hours. This shows that the Unions won't settle for anything less than 10.5%. Now let's have a look at how much this 10.5% actually means in terms of monetary value and what needs to be done to stop the strikes.

Royal Mail Financials

All calculations are based on the FY2022 financial statements from Royal Mail and below is a summarised view and what we need to know.

We can see that the group revenue for FY22 is £12.7B and the total expenses stand at £12.1B. Of these £12.1B of expenses, c.55% of the expenses come from the people cost, which includes all the costs associated with Royal Mail staff such as salaries, pension contribution, medical expenses and other associated benefits. 

As per the report, Royal Mail has a total staff (FTE) count of 179,049 and based on this number the average cost per employee stands at ~£37.2k. Note that this number is an average and is skewed due to the high pay at the upper management level. With this in mind, let's look at the demands again and calculate the financial amount required to fulfil the expectations with the pay rise.

To be on the safer side, I have assumed the 'Expected increase' to be at 11.0%, slightly above inflation. This 11.0% increase in wages results in a total amount of £733.2m. Although this includes the salaries of upper management, who would like to settle for much less than the 11.0% increase, I have taken the overall increase to be 11.0%, to give us a fair bit of buffer to solve the problem. Now we know how much we need, we can shift our focus to how we will find this money.

Sourcing the £733.2m

Now the question is, does Royal Mail have £733.3m to stop the strikes? They don't have it right in the bank but they can manage it by utilising their finances. The Profit for FY22 was £662m, so most of the money can come from there. In addition to that, Royal Mail paid £50m in taxes and running at no profit (in FY23) will give them an additional £50m, leading to a total of £712m. Taking a bridge loan to fund the remaining £21.3m will certainly help to stop the strike in the short run and get the staff to normal working hours. Although this will make Royal Mail a zero-profit business in the short run, let's understand why it is necessary to do so.

Why is it so important to stop the strikes ASAP?

Royal Mail has lost approximately £200m in 18 days of strike since August 2022 (Source: BBC). This means that every additional day of strike costs Royal Mail around £11.1m from its top line, so the more days workers go on strike, the more money Royal Mail loses from its top line. Therefore fulfilling the needs of the front-line workers as soon as possible is the best financial solution for Royal Mail. We understand that this will decrease the profitability in the short run but will keep the wheels running thereby not missing any additional revenue. In the long run, certain measures can be taken to increase profitability sans affecting people-cost.

A quick look to increase profitability!!

There are a lot of ways to increase profitability and one of them is reducing non-people costs. This can be achieved with a higher level of automation and other operational efficiencies. This has helped Royal Mail to save £350m in the last financial year and can be continued further. Additionally, focusing on Parcel deliveries (specifically the B2C parcels such as Amazon deliveries), whilst maintaining the dominance in the letters segment will lead to a better price mix and a growing market, thereby providing additional top-line growth to the business.

Conclusion

As per the union demands and the cost of strike per day, Royal Mail is running on a battery life of 66 days. If the strikes go on for more than 66 days in total (including the past strikes of 18 days), the money Royal Mail will lose from its top line could have been used to fulfil the staff and union demands. Therefore, the best route for them will be to fund the demands right away and then look for ways to increase their overall revenue whilst reducing their non-people cost.

I hope this article provided you with some insights about the behind-the-scenes of the Royal Mail strikes. Do let me know your thoughts on the same, below!!

Best regards,

Varun