Parcel volumes +7% but Royal Mail profit sinks to £96M on employee costs

Royal Mail’s latest results capture the paradox of modern logistics: parcel volumes are booming, yet profits are collapsing because a low-margin letter business and ballooning employee costs are eating away gains. For supply chain operators, the 5.5% rise in employee costs—driven by government-imposed national insurance increases and a 4.2% pay settlement—underscores the threat of fixed labour cost inflation to last-mile delivery networks. The decision to scrap Saturday letters and move to alternate-day second class delivery is a vital efficiency play, but one that risks service quality while competitors like Amazon flex their own last-mile muscle.

Royal Mail, the centuries-old UK postal service now under private ownership by Czech billionaire Daniel Kretinsky’s EP Group, has reported a dramatic halving of annual operating profits, driven by a surge in employee costs that includes a £133 million hike in national insurance contributions. For the financial year ending March 31, 2026, Royal Mail’s operating profit fell to £96 million from £198 million a year earlier, while its parent International Distribution Services (IDS) saw group underlying earnings slump by a fifth to £222 million. The results, published on June 23, 2026, lay bare the intense financial pressures facing the universal postal operator as it navigates rising wages, regulatory mandates, a structural shift away from letters, and the costs of its recent £3.6 billion takeover.

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For supply chain operators, the 5.5% rise in employee costs—driven by government-imposed national insurance increases and a 4.2% pay settlement—underscores the threat of fixed labour cost inflation to last-mile delivery networks.

The key driver behind the profit collapse was a 5.5% increase in Royal Mail’s employee costs. This comprised a 4.2% pay rise for frontline staff—negotiated as part of an agreement with trade unions that unlocked the nationwide rollout of controversial service changes—and the additional employer national insurance contributions introduced in the UK government’s budget. The £133 million NIC bill alone represents more than the entire operating profit decline, underscoring how external policy decisions can tip a labour-intensive business into sharply lower profitability. The previous year’s results had been flattered by a one-off boost from election-related mailings during the 2024 general election, making the year-on-year comparison even starker.

Postal workers, who delivered 7% more parcels at 1.4 billion items, could not offset the relentless 10% drop in addressed letter volumes to 5.7 billion. This divergence—parcels rising on the back of e-commerce growth while letters continue their terminal decline—has been the central structural challenge for Royal Mail for years. Revenue rose 2.6% to £8.4 billion, and on an underlying basis Royal Mail eked out a small improvement from £2 million to £5 million in operating profit, but the headline numbers show the vulnerability of the legacy business. The wider IDS group was also dragged down by its GLS international parcel arm, where underlying earnings fell 17.1% to £237 million amid regulatory headwinds in Italy and a tough Canadian market, highlighting that Royal Mail’s problems are not only domestic.

The takeover by EP Group, completed the previous year, added £57 million in one-off costs, on top of £28 million the year before, further depressing pre-tax profits, which plunged by more than two-thirds to £141 million from £429 million. These acquisition costs, while transitory, have intensified scrutiny of the new owner’s strategy. Kretinsky must now deliver on his promise to modernise the 500-year-old institution while maintaining a universal service obligation that the company claims is no longer commercially viable. The deal was cleared only after commitments to protect services and jobs, but the financial reality is forcing faster change.

In response, Royal Mail is pressing ahead with an overhaul of the universal service, phasing out Saturday letter deliveries nationwide and moving to alternate-weekday delivery for second class post. This follows a hard-fought deal with trade unions, which had previously resisted the roll-out, and comes as regulator Ofcom applies pressure to improve chronic service quality. The agreement is a double-edged sword: it provides the operational green light for cost-saving reforms—potentially saving hundreds of millions over time—but required the company to swallow a significant pay increase that, combined with the NIC hike, has eroded short-term profits. The union deal also embeds a workforce that may need to shrink as letter volumes dwindle, raising the spectre of future redundancies or voluntary departures that could further strain industrial relations.