Profits rise at Royal Mail despite volume drop

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Royal Mail Group saw its operating profit rise four per cent to £184 million in the first half of 2009/10 – up from £177m last year – despite a £73m drop in overall sales due to the continuing decline in mail volumes and economic recession.

For part of the half year, strikes by the Communication Workers Union disrupted services, but Royal Mail said the drop in sales was mainly caused by continuing decline in traditional mail volumes. UK letter volumes were down by some eight per cent during the half year due.

However a combination of cost reduction driven by modernisation and changes in price and product mix helped operating profit increase slightly to £48 million from £46 million in the same period last year despite a £55 million fall in letters revenue year on year.

Royal Mail said the traditional letter volumes are continuing to fall in the UK and around the world as electronic communications continues to grow: “for example the Dutch postal operator TNT has said that volumes in the Netherlands will fall by 7-9 per cent in 2010 while in some countries such as the US the decline is as steep as 13 per cent.

“In the UK, rival postal operators also continue to have an increasingly significant impact on Royal Mail. In the half year, rivals handled just over three billion letters – around one in three of the total of 8.2 billion delivered by Royal Mail in the first six months of the financial year – and although these competitors rely on Royal Mail to deliver over the “final mile” to customers on their behalf, we lose money in doing so. Around 60 per cent of bulk business mail is now handled by our competitors.”

Profits at Parcelforce Worldwide, Royal Mail’s UK parcels business almost doubled to £7 million from £4 million at the previous half year. The business saw strong export growth as UK companies take advantage of the weak pound to seek out new market opportunities. As a result, it launched in the summer a new suite of international products to give its customers a greater range of services.

GLS, Royal Mail’s European parcels business, saw a fall in operating profits during the period, largely due to the effects of recession in its main markets. GLS operates in 36 European states handling one million parcels every working day.

Despite the small improvement in profits, the business is struggling with major challenges – it reported a net cash outflow of £434 million during the six months, largely driven by continuing investment and the cost of voluntary redundancies.

It also had to make a cash payment of more than £300m into the pension fund. The pension fund deficit is currently being revalued with the historic deficit widely expected to be at least £10 billion compared with £3.4 billion at the last valuation three years ago.




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