Royal Mail Group report third quarter profit

Third quarter revenue of £2.6 bn compared to £2.5 bn last year. All four businesses in profit for first time in almost 20 years. 3rd Quarter revenue of £2.6 bn compared to £2.5 bn last year. All four businesses in profit for first time in almost 20 years.Year-to-date profit of £255 m compared to £162 m for the whole of 2007-08.

Royal Mail said that despite the severe economic downturn and further falls in mail volumes driven by more use of email and other electronic communications, overall Group revenue rose nearly 3% during the first nine months of the 2008-2009 financial year to £7.2 bn. For the first time in almost 20 years, all of the Group business units are in profit, with Royal Mail Letters, the Post Office and Parcelforce Worldwide making an operating profit along with GLS, the Group’s European parcels business.

A trading update covering the nine months to Christmas showed Royal Mail Group making a £255 m operating profit before exceptional costs – compared to £162 m for the whole of 2007-08. Royal Mail said it is on track for an annual profit nearly double the level it achieved last financial year.

The improved financial performance while upholding customer service comes as Royal Mail continues to modernise the Letters operation, which has now automated the handling of almost 80% of total mail volumes, compared to less than 65% two years ago. During the last 18 months, the company has begun to upgrade automatic sorting equipment in many mail centres nationwide, the installation of the first of a new generation of "intelligent" letter sorting machines has commenced, more technology to sort more A4-sized mail – including catalogues and magazines – has been installed, and Royal Mail drivers have been equipped with hand-held scanners which read the barcodes on Special Delivery and other tracked mail and can provide electronic confirmation of delivery within minutes.

Adam Crozier, Chief Executive of Royal Mail Group, said: "Royal Mail’s modernisation plan agreed with our shareholder, the Government, is on track to deliver across the period of the plan, with more than £600 m spent on transforming the Letters business since the investment plan was agreed in 2006-2007. We have plans in place to spend every penny of the £1.2 bn commercial loan agreed by the Government in 2007 over the plan’s lifespan to 2011, which will clearly help us to improve efficiency and deliver even better service for our customers. There will be a need, however, to access further investment in a timely and flexible way as we compete increasingly with electronic communications as well as with other postal operators, while at the same time dealing with the effects of the current economic recession. We have therefore welcomed the Government’s intention to raise further funding through the sale of a minority stake in Royal Mail, which will also allow us to retain and bring in people down through the business with the right skills and experience in operational change we need for the next stage of our transformation."

The huge challenges still facing the company include:

• The accelerating structural decline in mail markets around the world, with volumes expected to decrease by around 7% in the UK over the next 12 months, and the increasing competition facing Royal Mail with electronic media already costing the company five times more profit loss than the impact from rival mail companies;
• The effects of the current economic recession;
• The one-price-goes-anywhere universal service remains loss-making and under threat;
• The urgent need to tackle the growing legacy pension fund deficit so that the financial benefits of modernisation and greater efficiency can flow through to customers in the form of better services rather than being absorbed by unsustainable payments into a volatile pension fund.

Royal Mail has already firmly welcomed the recommendations of the Hooper review, as the report’s conclusions address these major challenges. The Government has also said it endorses both Hooper’s analysis of the challenges and the review’s recommendations, including the sale of a minority stake in Royal Mail to help accelerate its transformation plans while securing the future of the Universal Service, the Government addressing in some form the historic legacy of the pension fund deficit, the Post Office remaining 100% in public ownership, and the recognition that Royal Mail is competing in a wider communications market, not just against other mail operators.