Letter volumes fall but UK Royal Mail Group’s overall profit rises 20% with boost from European parcels business

Royal Mail Group today announced a 20.5% increase in operating profit to £159 million for the first half of 2005-06 but warned that profits in its letters business had fallen as growth in addressed mail volumes went into reverse.

Allan Leighton, Royal Mail Group’s Chairman, said the downturn in letters profits and volumes meant the biggest part of the Company was no longer contributing to the Group’s overall growth in profitability. But he praised postmen and women for delivering to customers the best quality of service on record.

The Group operating profit of £159 million in the six months to the end of September 2005 was a £27 million improvement on the same period a year earlier.

But the increase was driven by better financial performance in General Logistics Systems (Royal Mail’s European parcels business), Post Office Limited and Parcelforce Worldwide. Operating profit in the letters business had fallen as addressed mail volumes declined for the first time in a quarter of a century.

GLS performed particularly strongly with a £43 million operating profit in the first half of the year – almost double the £23 million profit in the same period a year earlier. There was strong growth in external revenue helped by further gains in operational efficiency and Mr Leighton said GLS, whose business is not subject to regulatory control, had enormous potential to grow profits and revenue even further.

“GLS is the star performer in the Royal Mail Group with an impressive record of revenue and profit growth,” he said.

Elsewhere in the Group, more Post Office® products and services were launched, including a credit card, and while Post Office Limited’s overall revenue decreased by £70 million due to reduced benefit payments revenue, the operating loss slightly improved to £57 million. This was down to further growth in banking revenue and the Post Office®’s range of financial services as well as new revenue from HomePhone but Mr Leighton said the business still faced a tough challenge to create a viable, sustainable network.

Despite the increasingly tough conditions in its market, Parcelforce Worldwide increased its external turnover by £10 million (7.2%) and, together with a 10% increase in operational efficiency compared to last year, its operating loss reduced from £13 million to £1 million during the first six months of 2005-06.

However, the letters business, which accounts for around 76% of Royal Mail Group’s revenue, made an operating profit of £168 million – down 3% on the £173 million during the first half of last year.

The fall came despite a below-inflation 1.8% overall rise in postage prices at the beginning of April 2005.

Mr Leighton said: “These latest results underline the massive and unprecedented challenges facing Royal Mail.

“We’ve come a long way since we launched the Renewal Plan in 2002 when the Company was losing more than £1 million every working day.

“But in just over a month’s time, the postal market opens to full competition and Royal Mail is facing the prospect of the Regulator imposing a price control which will undo the remarkable turnaround achieved in the last three years by our people.”

He said Royal Mail very much wanted to see a way in which the Company’s people could have a real stake in the business.

“We are a people business and we need to ensure our people have the right incentives to continue delivering consistent service to customers. We would like to see our people having a 20% stake in the Company,” said Mr Leighton.

He stressed that Royal Mail’s number one priority was unchanged – to deliver even better service to customers. First and Second Class mail had now been performing at or above target levels for more than a year – with around 94% of First Class letters arriving the next working day after posting, beating the 93% target. Mailsort for bulk mail services, Presstream for magazine and catalogue mail, and PPI (Postage Paid Impression) services for mail posted in pre-paid envelopes, were also all performing above target, according to the latest figures.

But he warned that apart from a dip three years ago, addressed mail volumes had fallen in the last six months for the first time in 25 years.

Profitable bulk mail – used by Royal Mail’s biggest customers – had slumped by 7.1%. First Class fell by 4.2% and Second Class by 3.8%.

Meanwhile, there was a huge rise in the volume of “Access” mail – letters collected and handled by rival companies or customers before being presented to Royal Mail at a lower price than other business mail for delivery by the Company’s postmen and women. Access volumes had climbed to around 90 million letters a month and by the end of this financial year, more than one billion letters will have been handled by this service – compared to only 13 million last year.

Royal Mail also saw some growth in unregulated unaddressed mail – the leaflets and booklets delivered to every address on a postman and woman’s walk – but still saw profitability fall as the Company receives a much lower income from unaddressed mail than the postage prices of addressed mail.

Adam Crozier, Royal Mail’s Chief Executive, said the downturn in profits in the letters business reflected the slowdown in the UK economy and the impact of lower revenues from Access services.

“The Regulator had predicted it would take four years for Access volumes to reach the sort of levels we are seeing today and had also been predicting growth in the overall mail market. Royal Mail has to live in the real world – not the theoretical one of regulatory economists – and the reality is that we are seeing a significant decline in regulated mail volumes,” said Mr Crozier.

“Royal Mail is at a critical point. The massive rise in Access services – which other EU national postal companies do not allow on the terms available under regulation in the UK – demonstrates that the battle for competition will be in the market for business mail, which accounts for 93% of all letters posted.

“Royal Mail needs to have a fair and balanced pricing structure to compete for business mail. Instead, the Regulator is proposing a pricing straightjacket.

“The Regulator must take full account of the huge obstacle posed by the £4 billion accounting deficit in Royal Mail’s pension fund.

“We also need to invest £2 billion to replace ageing equipment and vehicles and invest in new technology to equip Royal Mail with the capabilities and efficient operations that rival companies already have.

“We believe it would be an unrealistic approach for the Regulator to set efficiency targets for our mails operations far above the gains we made during the three years of our Renewal Plan when 33,000 people left the business. The result is the biggest threat we’ve yet faced to the continued provision of the one-price-goes-anywhere universal service to the UK’s 27 million addresses,” said Mr Crozier.

“If Royal Mail is unable to compete successfully then no other company will be able to replicate the universal service.”

Mr Crozier stressed the importance of making a further Share in Success payment of £400 to Royal Mail’s people, by hitting financial targets despite the fall in addressed mail volumes.

“We are determined to hit our target and reward our people. We know Royal Mail can compete in an open market and, with our people fully engaged in our business, we are confident we can have a successful future if the regulator allows us the same sort of freedoms as rival companies.

“That means Royal Mail must get a realistic price control from the Regulator in order to invest in the Company and tackle the pension fund deficit.”

Ends

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Notes to Editors
· All references to operating profit are before exceptional items.
· The prior year figures quoted have been restated for the impact of the transition to International Financial Reporting Standards.