Royal Mail profits slump due to pensions, mail competition

Royal Mail Group yesterday announced a sharp drop in profits for the yearending March 31, 2007 due to higher pension costs and increasing competition in the

The British postal operator said that its profits fell in line withexpectations by about one third to £233 million from £355 million one year earlier. Group revenuerose by 1.4% to   £9,179 million from   £9,056 million. The main reason for the profit slump was a sharp risein pension fund costs by £193m to £722m. Underlying profits, omitting the benefit of £75 millionfrom the Government’s Social Network Payment to support the loss making Post Office network showeda steeper decline, at £158m, less than half the prior year’s result.

Royal Mail added that pressures on its performance from rising pension costs,falling mail volumes and increased competition underlined the urgency with which it now needs toput the next stages of its modernisation plan into action. The group now had in place the keyelements on which that programme is built, including the recent agreement with the postal union CWUand a £4bn commercial funding package from the UK government to finance modernisation and enableincentives.

In 2006/07, the mail business, Royal Mail Letters, saw its operating profitdrop to   £194 million on flat revenue of   £6,857 million from a previous year profit of   £344 million. Inland addressed mail volumes fell by 2.3%, which wasthe first decline after many years of growth. Royal Mail said that growth in e-mail undoubtedlyplayed a key factor in the fall and further volume decline is “the realistic prospect” facing thecompany.Mail competition was more intense than originally forecast, and competitors had about 12%of the letters market last year, rising to an expected 20% this year.

The European parcels business, General Logistics Systems (GLS), increased itsoperating profit to £115 million on revenue of £1,082 million compared to operating profits of £100million on revenue up 4.9% to £1,037 million in 2005/06. The domestic parcels business, ParcelforceWorldwide, made an operating profit for the second year running after more than 15 consecutiveyears of losses. It doubled the operating profit to £10 million on revenue up 7.3% to £337million.

The Post Office network reduced its operating loss to £99 million from £111million one year earlier, with revenue up to £868 million from £838 million one year earlier. Butthe underlying loss, excluding a government revenue subsidy of £75 million, increased by 57% to£174 million.

In a joint statement, Chairman Allan Leighton and Chief Executive Adam Crozierstressed that a key priority is to restructure financing of the pension fund, which had a £5billion deficit at year-end, in order to reduce future payment obligations. Above all, the groupnow had to implement its planned modernisation measures in order to remain competitive.

During the first five trading months of the current year, 2007-08, thepressures of falling mail volumes and competitor activity in the wider communications market havebecome significantly more pronounced, with revenue in the Royal Mail Letters business down £78mcompared to the same five months in 2006-07, Royal Mail disclosed. Pension scheme funding,declining mail volumes and heavy investment in modernisation meant that Royal Mail now expectedonly to be operating at breakeven during the current year and 2008/09.

“The emerging picture is that the combination of pension costs, revenuedecline through losses to competition and the overall fall in mail volumes means that Royal Mail’sletters business is heading towards breakeven in the current financial year. Combined with thecontinued losses we will see in the Post Office network and expected profits from ParcelforceWorldwide and GLS, this means that the Group as a whole is expected to be near breakeven in thecurrent financial year or return a small profit. Without the contribution from GLS, the Group couldagain become loss-making,” Leighton and Crozier declared.