European business sparkles despite postal misery for Royal Mail

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General Logistics Systems, the European parcels operation, is turning out to be the jewel in the crown for Royal Mail, which has seen profits slashed in its domestic letters business over the past year.

GLS increased its operating profit by 15 per cent to £115m on sales of just over £1bn for the financial year 2006-7. And there was also good news from Parcelforce Worldwide which made an operating profit of £10m – double the figure for last year and the second year running of profit after more than 15 consecutive years of losses.

Royal Mail said Parcelforce Worldwide grew its revenue by 7.3 per cent in a market that became even tougher, and delivered a record operating profit of £10m. GLS grew its revenues by 4.9 per cent in a very competitive market and its operating profit increased to £115m. “The results of both GLS and Parcelforce Worldwide demonstrate the group’s potential in areas where it is allowed to compete freely without regulatory constraint.”

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However, profits were slashed from £344m to £194m in the letters business which has also gone through a damaging strike.
“Inland addressed mail volumes fell by 2.3 per cent – the first decline after many years of growth,” said Royal Mail. “The growth in email undoubtedly played a key factor in the fall and the realistic prospect facing the Company is for further volume decline. The peak in mail volumes looks likely to be behind us.”

Post Office Limited, which contains the Posts Offices, saw a decline in its traditional Government business, leading to lower customer footfall and sales, meant its underlying revenues last year fell by £45m. Its underlying loss on the same basis increased by 57 per cent to £174m.

The cost of servicing the company’s pension plans rose steeply in 2006-07 by £193m to £722m and accounted for the bulk of the drop in the Group’s profit. In addition the Group faces making cash payments to the pension fund of around £800m annually for 17 years to cover both ongoing contributions and the funding of the deficit. At the year-end the deficit stood at £5.0 billion in accounting terms. It is now seeking support for a string of proposals to control the deficits.

Looking ahead, Royal Mail says the mail market in the UK is declining by around 2.5 per cent per year and Royal Mail is losing 40 per cent of bulk business mail to rival postal operators.

“Overall this year, rivals will handle one in five of all letters posted in the UK. Our rivals are 40 per cent more efficient not because their people work harder but because they have already modernised.”

In addition, it says, its rivals pay their people 25 per cent less than it does.

It forecasts that the combination of pension costs, revenue decline through losses to competition and the overall fall in mail volumes means that Royal Mail’s letters business is heading towards breakeven in the current financial year.

“Combined with the continued losses we will see in the Post Office network and expected profits from Parcelforce Worldwide and GLS, this means that the Group as a whole is expected to be near breakeven in the current financial year or return a small profit. Without the contribution from GLS, the group could again become loss-making,” it said.

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