After several months of negotiations, the friction between the postal union and Royal Mail (LSE:RMG) is reaching a climax. Four strike dates have been confirmed, the first of which will be on Friday. As a potential investor, I need to be careful in understanding the implications of a conflict here and what it could mean for Royal Mail shares.
Short-term implications
In coming weeks, four days of strike action are planned, by a workforce of 115,000. This is going to cause delays to postal services around the UK, as well as impacting revenue for the business during the period.
Royal Mail have said that contingency plans are in place to deal with this labour shortage. Yet clearly it isn’t going to be possible to make up for such a large shortfall.
In my opinion, the reputational damage in coming weeks could be worse than the financial hit. Having friction between unions and management isn’t in anyone’s interests. This situation has been escalating for a while now and is one reason why the share price is down 11% over the past three months.
Issues for the long run
The Communication Workers Union is requesting a pay rise in line with inflation. It’s also pushing for a strategy to increase the focus on letters.
A jump in pay of this size would cost a lot for Royal Mail. Not only would this be an expense for 2022, but the higher pay would reflect as a cost for each year going forward. It would need to find a way to either cut costs somewhere else or increase revenue in order to offset this impact on the company accounts.
As for the push on letters, this goes against the transition that the business is making towards the parcel division. As I flagged up last month, the Q1 revenue drop of 11.5% can be partly contributed to the structural decline of letters. So the strategy clash between two stakeholders here could paralyse Royal Mail if neither side gives in to what it believes to be the right direction for the future.
Royal Mail shares in a pickle
There’s no problem with a union pushing for the rights of workers. It’s a great thing to be able to be a part of, to ensure that people are treated fairly. Ideally, a smooth working relationship between the union and the management of the company is achieved.
With the case of Royal Mail, I don’t think a resolution is going to come anytime soon. As a result, I’m worried about Royal Mail shares. The reputational damage, financial implications and distraction from core operations that this causes is all negative.
The share price is down 45% over the past year. Although it does look undervalued, I’m going to stay away until there’s more clarity on the situation.