Mail price curbs 'could trigger £3bn default'

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Royal Mail could default on its £3bn loan facility from the Government and end up in administration unless the postal regulator Postcomm agrees to ease price curbs on the organisation.

The threat came as the Royal Mail announced a one-third reduction in its trading losses but suffered its first drop in turnover in more than a decade. Royal Mail's chairman, Allan Leighton, also revealed details of a phantom options scheme under which its 200,000 staff will be eligible for cash payments of £800 each if the organisation makes a profit of £400m in 2004-05.

The £3bn loan facility is made up of £2bn from the National Loans Fund and £1bn of Treasury gilts financed from past profits made by the Post Office. Royal Mail will pay commercial rates of interest on the loans and must have sufficient profits to cover those payments three times over or risk breaching its loan covenants.

However, a default will also be triggered if Royal Mail is unable to reach a satisfactory price settlement with Postcomm. Mr Leighton said he had insisted on the condition being written into Royal Mail's agreement with the Government. "If we do default on the loan then we will have a solvency problem," he said.

Royal Mail claims the draft price curbs announced by Postcomm in October would reduce its revenues by £460m and threaten its survival. At the time Mr Leighton described the proposals as a "disaster" and "regulation gone mad". Postcomm is under pressure from ministers to water down its price curbs when it meets to decide on a final set of proposals in late December.

Trading losses for the six months to the end of September fell from £219m in the same period last year to £147m. However, turnover also fell marginally to £3.99bn as Royal Mail pulled out of unprofitable areas of the parcels business.

The pre-tax loss after one-off exceptional charges and redundancy costs, was £542m compared with £282m last year. Mr Leighton said Royal Mail had not yet been turned around "but we have stopped sinking".

So far Royal Mail has achieved 13,000 of the 30,000 job cuts it has targeted as part of a £1.4bn cost reduction plan and the aim is to get to 16,500 by the end of this financial year.

Details of the employee incentive scheme are being posted out along with share certificates over the next few days and Mr Leighton said sums of up to £1,000 could be made if Royal Mail exceeded the £400m profit target.

Mr Leighton also announced a new crackdown on bullying and harassment inside Royal Mail describing it as "one of the worst places in the country" for this sort of behaviour. Employees found guilty of bullying and harassing colleagues will be summarily dismissed and a special 24-hour hotline will be set up for complainants.