The British government announced today that it has approved a £1.75 billion financing packagefor Royal Mail designed to help plug the UK postal operator’s £5.6 billion pensions fund gap. The
statement came as Royal Mail reported a strong rise in its 2005-06 operating profits to £355million, including £100 million from GLS.Under the new financing framework, Royal Mail will have commercial freedom to develop itsinvestment programme and reach a comprehensive deal to manage its pension deficit. It will beallowed to transfer £850 million from reserves into a special back-up pension account, while thegovernment will extend its debt facilities so that £900 million is available for use by Royal Mailon commercial terms.
Expenditure for the retail network, Post Office Limited, including Social Network Paymentsfor the next two years and any funding after 2008, will be met by the UK government rather thanfrom Royal Mail reserves. Public financial support for the network after 2008 will depend on thefuture network strategy.
The British Trade and Industry Secretary, Alistair Darling, said: “This financing framework willgive Royal Mail the right basis from which to take forward an ambitious modernisation programme,helping to deliver a world class service. Giving Royal Mail the freedom to use its financialresources to invest for the future puts the company in a stronger position to successfully competein the marketplace and also deliver a financial return for the taxpayer.”
Royal Mail, meanwhile, announced that its operating profit rose by 17.5% to £355 million in theyear ending March 31, 2006. This represents a 3.9% return on sales which rose to a record £9,056million. The financial result has triggered a £418 Share in Success payment to Royal Mailemployees, amounting to a total payout of nearly £100 million.
Royal Mail’s letters business made a £344 million operating profit, up £1 million from theprevious year. There was a decline in inland addressed mail, exacerbated by some bulk mailcustomers switching to lower-priced services, primarily under access arrangements with rivals.Business mail, which amounts to around 90% of all mail, continues to subsidise the loss-makingFirst and Second Class stamped business. The Post Office network made a £111 million operatingloss, a £12 million improvement on the previous year despite the end of the over-the-counterpension and benefit payments.
In the parcels segment, GLS delivered another star performance with a 37% improvement inoperating profit to £100 million with a 9.6% margin on revenues that grew to £1,037 million. It isnow established as a significant contributor to the group’s profits, and aims to improve itsperformance further. Parcelforce Worldwide made its first full-year operating profit – £5 million –after a long haul involving a focus on business customers, getting out of loss-making contracts andcutting costs.
Allan Leighton, Royal Mail’s chairman, said: “Royal Mail and its people have delivered recordquality of service to customers and achieved an outstanding financial performance in 2005-06. The results show that Royal Mail has consolidated the gains it made during its three-year renewalplan when the business returned to profit and began to hit service targets instead of routinelyfailing them.”
But he warned: “There can be no let-up, especially as the market is now open to full competitionwith rivals last financial year handling more than one billion letters under access arrangements, anumber set to hit three billion in two years’ time, if not sooner.” Talks are continuing with thegovernment over giving employees a 20% holding in the company, he noted.
