High inflation, the cost of living crisis and a fall in demand for Covid-19 test kits have seen Royal Mail’s total parcel volumes plummet, with the company currently losing £1m a day, according to Keith Williams, chair of Royal Mail.

The Board is warning that if “significant changes” are not achieved it will considering separating Royal Mail and GLS. It has also announced the holding company Royal Mail is to be renamed International Distributions Services to reflect the group structure of two separate companies , Royal Mail and GLS, which will retain their brands.

In its latest trading update for the three months to 30 June, Royal Mail has revealed that its total parcel volume fell 15% with revenue down by 15.1% compared to the prior year. In addition, total parcel volume only grew by 1% and revenue by 15.6% compared to the same period in pre-pandemic 2019.

Domestic parcel volumes were also 15% lower year-on-year with domestic parcel revenue falling by 13.9%, which Royal Mail said was due to “recent wider trends in retail”, cost of living increases, and reduced demand for Covid-19 test kit volumes, following the end of free universal COVID-19 tests. Domestic parcel revenue was 13.9% lower, reflecting price increases and mix.

However, compared to pre-pandemic (Q1 2019-20), domestic parcel volumes were up 14% and revenue up 26.1%, reflecting strong positive price/mix.

International volumes were also been hit, down 16% year on year, which Royal Mail said is an improvement on recent trends but nevertheless reflects ongoing challenges in the cross border parcel market. Volumes were down 44% when compared to Q1 2019-20, with revenue down 18.4%, due to price increases and import and export mix.

Letter performance was slightly ahead of expectations. Total letter revenue was down 6.7% year on year, with addressed letter volume down 6%, which Royal Mail said reflects a return to the long-term structural decline in letters. Compared to Q1 2019-20, total letter revenue was 12.9% lower, which also reflected the impact of local and EU elections in May 2019.

Overall, total revenue declined by 11.5% year on year in the first quarter and was broadly flat compared to Q1 2019-20.

Cost performance was also “disappointing” according to the update, despite reducing reliance on temporary staff and overtime. The company also reported that progress on its transformation programme has stalled “due to the current industrial relations environment and lack of CWU support” with overall productivity 1.8% lower year on year in Q1.

Royal Mail said that as a result Q1 financial performance was “materially impacted” resulting in an adjusted operating loss of £92m.

On a brighter note the company reported the launch of its Super Hub in Warrington in June and good progress in its plans to have 70% of parcels automated by year end and to roll out dedicated parcel routes from around 350 parcel depots from October, to meet growing demand for next day and larger parcels.

The company said it has also recently launched Royal Mail Health, to target the growing healthcare at home industry and is growing its Sunday delivery volumes.

However Royal Mail warned that the company is at a “crossroads”, adding that the need to reach agreement with CWU on new ways of working "is becoming ever more urgent.”

Pointing to planned industrial action by the workforce, the company said it had offered its employees “the biggest increase for many years” conditional on CWU members agreeing to flexible working, an increase in Sunday deliveries, changes to its absence policy and a move to later start times.

It warned that industrial action “will only serve to damage the future prospects of the business and undermine the long-term job security we want to offer our team.”

GLS, Royal Mail’s subsidiary and former German parcels company, faired better in the period. Despite seeing a volume fall of 3%, due to weaker B2C volumes, these were partly offset by growth in B2B and competitive pricing moves, which helped revenue grow by 9.8% year on year.

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Keith Williams, Royal Mail chair, commented: "Whilst GLS delivered a solid performance in the first quarter, the performance of Royal Mail was disappointing with an adjusted operating loss of £92m resulting from of a decline in parcel volumes post the pandemic and a lack of progress in delivering efficiencies."

"The pandemic boom in parcel volumes bolstered by the delivery of test kits and parcels is over. Royal Mail is currently losing one million pounds per day and the efficiency improvements which are needed for long term success have stalled."

'We can however be a long-term success story. We have advantages in scale and reach and a strong balance sheet and asset base which are the foundations for a successful future. We need to act now in moving to that future in the interests of all stakeholders, employing those advantages to the maximum."

Simon Thompson, CEO of Royal Mail, said: "We have made progress building the infrastructure we need for Royal Mail to compete, especially given the growing demand for more larger parcels, delivering the next day - including Sundays - and in a more environmentally friendly way. But building the infrastructure is not enough. We have to transform the way we work too. We need to change - and change now. This is how we can give our team the job security that they deserve for tomorrow and not just for today. I am ready to talk about pay and change at any time. But it has to be both."

Martin Seidenberg, CEO of GLS, added: "GLS continues to deliver a good performance, with weaker B2C volumes partly offset by growth in B2B. Pricing actions have mitigated volume declines and revenue grew by 9.8% year on year in Euro terms.

“Given inflationary pressures, operating profit margin contracted, as expected. Whilst we anticipate further cost pressures in the second half, we are maintaining our full year outlook."