Royal Mail profits soar but sales are sliding

Royal Mail's profits shot up by 26 per cent last year, the company revealed yesterday, as the Government confirmed plans to part-privatise the group.

Operating profits soared to £404m despite steadily falling mail volumes and last autumn's strikes, thanks to cost-cutting measures which included 8,000 voluntary job cuts. But revenues dropped for the first time in a decade – by £200m to £9.4bn – as the postal operator handled 13 million fewer letters than five years ago. And three-quarters of the planned £2bn investment programme has now been spent.

Royal Mail's chairman, Donald Brydon, said: "These are good results against a backdrop of harsh economic conditions and the relentless reduction in the number of letters sent by customers, not just in the UK but around the world."

But he acknowledged that "huge challenges" remain, not least a yawning pension deficit, which is expected to be several times the £3.4bn estimate from 2006.

Plans for "an injection of private capital" into Royal Mail were included in yesterday's extended coalition agreement from the Conservative-Liberal government. But the statement set out no clear timetable for the scheme, and a similar plan was abandoned by the previous government in the face of stiff backbench opposition.

The new proposal will stir up further trouble with the Communication Workers' Union, which took industrial action last year. Billy Hayes, the trade union's general secretary, said: "This is old politics wrapped in new language. The British public has consistently rejected the privatisation of Royal Mail. The move to regurgitate failed policies will be deeply unpopular."