Royal Mail to post GBP 2.6bn shortfall by 2010

Royal Mail will have made GBP 2.6 billion less than expected by the time that its price-control period ends in 2010, the company said yesterday.

The revenue shortfall from the present pricing plan, which controls the price of stamps, among other things, was attributed largely to Postcomm’s estimate in 2006 that the postal market would grow, rather than decline, as it has done.

In evidence to the government-commissioned review into the postal market, Royal Mail backed the initial findings that the “status quo is not tenable”.

Recently, Royal Mail said that it would need a new cash injection soon because of the declining market and escalating pension problems.

Its pension deficit could double to GBP 7 billion shortly and require GBP 1 billion a year in servicing. The postal group recorded a GBP 279 million pre-tax loss last year and operating profits fell 30 per cent to GBP 162 million.

Last week the regulator made a controversial call for private equity to be allowed to buy into the state-owned group — a move attacked as partial privatisation by unions. Last year Royal Mail received a GBP 3.9 billion rescue package from the Government.

The postal group’s evidence to the review said that it “fully recognises the need to accelerate its cultural and operational transformation, to become substantially more customer-focused, and to take costs out ahead of revenue declines”.

Royal Mail has been heavily criticised by the regulator for not curbing costs despite imposing 48,000 job losses over the past six years. The independent review’s early findings said that Royal Mail could not continue to offer a nationwide service at a flat price rate, which is its legal duty, in its present financial state.

The postal group called for a fundamental overhaul of the way in which it is regulated. It wants more business services to be excluded from its duty to provide a flat rate across the UK — the universal service obligation. Additionally, it wants that regulation to come from a super regulator that controls all communications markets and not just postal services. Royal Mail argues that its competition comes as much from Google and other advertising-carrying communicators as it does from postal service rivals.

Royal Mail said that it expected mail volumes to continue to fall as more people turned to e-mail. Last year, they fell by 3.2 per cent and the group’s universal service operation lost GBP 100 million, the first time that it had done so. The group said that the universal service would not break even until 2012 and that it would clock up losses of GBP 300 million by the end of the present price control in two years. It expects the loss of business to technology to continue by 2.5 per cent each year.

Royal Mail pleaded for its VAT-exempt status to be maintained. Rival operators, which do have to charge VAT, complain that the exemption gives Royal Mail an unfair advantage. TNT is challenging the special treatment in the European courts.