Royal Mail posts first loss in six years

Royal Mail slipped into the red for the first time in six years on its first and second- class and bulk business mail, incurring an operating loss of GBP 12m last year after a profit of GBP 197m in 2005-06.

The weak financial performance, revealed in its regulatory accounts on Wednesday, underlines the challenges facing the company as it seeks to cut costs and raise productivity.

Royal Mail’s operating costs were up GBP 181m at GBP 5.97 bn, despite shedding 6,300 jobs. The postal operator is likely to use the figures, which were submitted to Postcomm, the regulator last month, to press home its demand for an easing of price controls.

The company said the figures suggested it “is unable to recover fully its allowed revenue within a competitive market”.

The results help to explain why Postcomm proposed last week that Royal Mail should be allowed to increase the price of a second-class stamp from 24p to 29p by 2010 to help what the regulator called its “deteriorating financial position”.

The worse-than-expected results will also strengthen the company’s hand as it talks to the postal unions about pay and thousands of potential job cuts.

The unions earlier this month called off a fortnight of rolling strike action in protest at the 2.5 per cent pay offer and performance bonus scheme and agreed to talks.

A delay in publishing the regulatory results had prompted speculation that Royal Mail’s financial position might be healthier than expected and therefore less helpful to the management’s modernisation campaign.

But the figures illustrate the declining profitability of the company’s entire letters business, which at GBP 194 m was 50 per cent down on the previous year, and the difficulty it faces in cutting costs.

In its report, Royal Mail argued that it was suffering from a shrinking market as competition intensified and customers sought cheaper products that had not been anticipated by the regulator when it set its last price regime only 15 months ago.

The company is making an average loss of 5.6 p on each stamped item, amounting to GBP 185m for the year. It also lost GBP 61m on its bulk business mailing services. Its doorstep deliveries on behalf of other bulk mail operators that collect and sort the mail themselves doubled to over 2.4bn items under the new competitive regime introduced in 2006.

However, Royal Mail continues to make an operating loss on this so-called “downstream access” part of its business even though it takes 13 p out of the 18 p average delivery price for each letter.

Billy Hayes, general secretary of the Communication Workers’ Union, on Wednesday echoed Royal Mail’s line, saying GBP 43 m of the downturn in the company’s profits were the “direct result of downstream access”. He demanded a review of the impact of competition.

The regulator last week disputed claims that Royal Mail’s troubles could be attributed to competition.

The company still delivered 99 per cent of all mail in the UK, Postcomm said. And while contracts to deliver letters for other operators accounted for about 12 per cent of Royal Mail’s deliveries, its competitors delivered only 0.2 per cent of all mail themselves.

Similarly, Postwatch, the consumer group, said the onus was on the company to modernize and cut costs rather than pressing for higher stamp prices.

Royal Mail’s results also show that it made a slight profit, of GBP 27 m, on those services covered by its universal service obligation. This undermines the argument put forward by some of the company’s supporters that it is hamstrung by its duty to deliver mail to every address in the country at a standard rate.