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International Distribution Services (IDSLN; NR/BBB Neg/NR) Cuts back on flights

CONSUMER CYCLICALS
  • Co announced it was cutting its domestic flights by half to reduce plane use (as planned). Switch to road transport is ESG positive it says and will help meet growing demand for next day deliveries (less delays apparently). No impact to financials given.
  • It will keep some routes that will be needed to meet the USO next day delivery requirement (in the past this has been flights to Scottish islands etc). Reminder EP group has committed to keeping it as the Universal Service Provider in the UK for at least a 5yr period.

  • We are waiting for the new Labour government to green-light the deal; equities look confident pricing a ~73% chance of closing at the (now board-approved) 370p/share. Labour's manifesto was vague only saying it would "robustly scrutinise" the deal.
  • 28s (BBB Neg) trade well wide at Z+155; we think it screens some value regardless of outcome. Risk remains on IDS digging its larger Royal Mail segment (60% of group's revenues) out of a operating loss; it'll face structural decline in letter volumes (-9% last year and -32% since 2019/20) and potential weakness in Parcel volume (+6% last year) through that process.
  • Consensus is looking for group adj. EBIT to move to £345m in FY25 (12m to April) which implies, net of GLS's low to mid £300m contribution, that Royal Mail will be around breakeven (an improvement from FY24's -£350m loss).

  • Cheap hedge is to long the 26s as well; CoC with put at par kicks in if it gets dropped into HY (S&P language indicative that it won't do that on current financials). Risk/reward on the line we see as -0.5/+5pts; i.e. favourable and the -0.5pt is a reversion to FV - not a loss that needs to be realised - unlike the case in TPR.
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