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Will a strike cancel Christmas for Royal Mail's boss, Rico Back?

13 Oct 2019, 14:07

https://www.thetimes.co.uk/article/will-a-strike-cancel-christmas-for-royal-mails-boss-rico-back-hpmm6k7gf

Will a strike cancel Christmas for Royal Mail’s boss, Rico Back?

The chief exec faces a workers’ ballot this week, and his problems don’t stop there

John Collingridge
October 13 2019, 12:01am,
The Sunday Times

The results of a strike ballot of the Royal Mail’s 110,000 postal workers may confirm fears of a mass walkout at one of the busiest times of the year

When Rico Back jets from his home in Switzerland to London this week, he will fly into a gathering storm.

The German chief executive, who splits his time between an exclusive apartment overlooking Lake Zurich and running Britain’s former postal monopoly, Royal Mail, will arrive to an ominous announcement.

On Tuesday, the Communication Workers Union (CWU) will reveal the results of a strike ballot of its 110,000 postal worker members over conditions, pay and alleged bullying. The results are expected to confirm management’s worst fears: a mass walkout at its busiest time of year, during the Black Friday shopping frenzy at the end of November, or Christmas — or both. The last ballot, in 2017, returned an 89% vote in favour of strike action.

The timing could not be worse. The 503-year-old postal service is in a vicious downward spiral: emails and instant messaging are eroding what remains of letter deliveries, nimbler rivals are undercutting it on parcels and wage inflation is further damaging its cost base. It has crashed out of the FTSE 100 index. Meanwhile, Labour wants to take it back into public ownership.

Back, 65, has not enjoyed much stability since taking over from Canadian Dame Moya Greene last year. His £5.8m “golden hello”, paid to lure him from Royal Mail’s GLS parcels subsidiary, which he founded and sold to Royal Mail in 1999, attracted one of the biggest revolts in British corporate history when almost three-quarters of voting shareholders refused to support his remuneration package last year. Boardroom turmoil ensued. Chairman Peter Long, who appointed Back, was forced out after 34% of shareholders rejected his reappointment, concerned over the pay deal and Long’s other commitments. His replacement, Les Owen, did not last long, replaced by former British Airways chief Keith Williams. UK boss Sue Whalley also was ousted.

A profit warning and dividend cut have driven Royal Mail’s shares to just 218.1p, down two-thirds since their May 2018 high, and valuing it at £2.2bn. Worse may lie ahead. Liberum analyst Gerald Khoo said: “The valuation is wholly unreflective of the structural challenges facing the group.”

The contrast with Royal Mail’s 2013 privatisation is stark. Ministers were criticised for selling the company on the cheap, depriving taxpayers of greater proceeds. Bankers and politicians were hauled before MPs to explain their actions after its shares surged 38% on the day of the float.

Back’s revival plan, published in May, involves cutting costs deeper and faster while attempting to grow its parcels business. The 40% dividend cut will pay for £1.8bn of investment, including three giant parcel hubs, and adding a second, van-delivery parcel service.

Standing in the way of all that is the knotty problem of productivity — and getting staff to agree to changes, such as shrinking a postie’s hours from 37 to 35 a week. Staff agreed to the closure of its final salary pension scheme last year, but they are now digging in for a battle.

Royal Mail’s workforce forms the majority of its costs — 70% in its UK business. Thanks to the universal service obligation, the Ofcom-enforced law that says it must deliver letters six days a week to every address in the UK for a set price, those costs are notoriously difficult to cut. Letter volumes fell by 8% last year and Royal Mail expects 5%-7% more this year. As volumes fall, the company is forced to put up prices to cover the cost of maintaining deliveries — but this risks driving even more customers into the hands of rivals.

These have already made life hard for Royal Mail. Despite its incumbent advantage and huge network of depots, vans and staff, competitors such as Yodel and Hermes have undercut it by using cheaper gig-economy workers. Amazon is increasingly taking deliveries in-house as it rolls out features such as one-hour slots. Royal Mail still struggles to offer same-day delivery.

A national strike threatens to erode competitiveness further, but unions fear that another motivation lies behind Back’s overhauls — a plot to erode the universal service obligation by stealth. Their fears may have some foundation. While Royal Mail insists that the £1.8bn of investment is about “protecting the universal service”, City sources are increasingly sceptical that it can be maintained and reckon the board is preparing for inevitable changes, which could see Royal Mail reduce deliveries to five days a week or fewer. Dropping to five-day delivery would cost 20,000 jobs, the CWU estimates. Royal Mail denies such plans.

“It does not look like universal service [is sustainable],” said David Kerstens, analyst at the investment bank Jefferies. “You are looking at [labour-cost] inflation in the high single digits. That’s impossible to offset. If you increase prices too much, you can get further substitution.”

Jefferies estimates that cutting the working week by an hour would add at least £100m to Royal Mail’s costs because it would not be matched by a rise in staff productivity. Throw inflation into the mix, and costs could soar out of control.

Attempts to save money using technology have been met with resistance from the CWU. Royal Mail issued 70,000 handheld scanners to workers in 2015, allowing them to track parcels and customers to sign for deliveries. However, the union is not happy with one function — the device’s ability to monitor the location of staff and how fast they complete their rounds. “We don’t want people tagged like they’re criminals,” said a union source.

The CWU reckons plans for a second delivery, which would run at different times from letter deliveries and handle bigger parcels, is an attempt to create a new workforce. General secretary Dave Ward said: “We are confident our members will deliver a massive ‘yes’ vote. They know this is the fight of our lives — to defend their jobs but also the service they provide.”

Back has a battle on his hands. In a belated admission that he may have lost touch with his workforce, he is recruiting a director to run the UK business once again. It may be too little, too late.
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