UK Royal Mail to post GBP200m profit

Royal Mail, the former postal service monopoly now facing growing competition, is set to make operating profits of GBP200m this year despite the GBP40m cost of last autumn’s unofficial strikes.

But Adam Crozier, chief executive, and chairman Allan Leighton are warning government and staff that the state-owned group faces formidable obstacles before meeting its goal of at least GPB400m pre-tax earnings by the end of the next financial year.

Mr Crozier told friends at a private meeting last week that Royal Mail, as it approached the end of the second year of Mr Leighton’s ambitious three-year “turnaround” programme, had surpassed its profits goal in the current year which ends on March 31, despite strikes over pay and productivity.

He said the group, which made a £3m pre-tax profit in the first half, its first for five years, has made around £200m of operating profits in the full year. This contrasts with a loss of £197m last year – and pre-tax losses of £1.1bn in 2001 and of £611m in 2002.

But he warned that the group still had to secure 12,000 more agreed job losses over the next three months, part of the £1.3bn cost-cutting plan approved by the government which will eventually see 30,000 employees axed.

It is understood that around 800 of RM’s 1,400 delivery offices have agreed to implement the radical changes, including a single daily delivery, which will trigger an overall pay increase of 14.5% over 18 months for the 160,000 postal workers.

The deal, which includes 3% basic pay rises from October last year, a 10% increase for agreeing to the changes and a further 1.5% next month, will cost the group £340m in a full year. This will be offset by reduced labour costs of several hundred million pounds. Mr Crozier is warning ministers that future profits will also be under pressure because the service has to find up to £150m a year to fill a looming gap in its pension fund.

It could also face compensation payments of some £80m to business customers and extra fines from regulator Postcomm because of missing its agreed target for delivering first-class mail. In the three months to the end of December, this fell to 84.9% reliability compared with the target of 92.5%. Second class deliveries were 97.6% reliable against a 98.5% target.

The doubts about RM hitting these targets have intensified because of last year’s strikes, the lack of local negotiations on efficiency during the prolonged Christmas holidays, a new transport distribution system and the need to implement operational changes at almost half its delivery offices within a few weeks.

Mr Crozier is now in the throes of detailed negotiations with rival operators, particularly Dutch group TPG and Germany’s Deutsche Post, over access to RM’s network for delivering bulk business mail from companies such as banks and mail-order businesses.

In advance of full scale competition in 2007, RM last month reached a deal with Business Post over delivering pre-sorted business mail which could see it lose 5% of its market but the bigger European groups may want to bypass RM’s delivery network and set up their own, eating further into its 300-year-old monopoly.