Royal Mail sale undermined as letters arm slumps to loss

The challenges facing potential buyers of Royal Mail were laid bare yesterday when the state-owned postal operator revealed that its letters and parcels and international business had fallen to a £120m loss over the year to April from a £20m profit a year ago.

The weakness was pinned on falling volumes in the letters arm, which has been hit by the rise of texts and emails. The Parcelforce business, on the other hand, "had an exceptional year" – but the upbeat result came as it emerged that David Smith, Royal Mail's chief customer officer who was previously managing director of Parcelforce, and Robert Peto, the finance director of Parcelforce, had been poached by Rentokil Initial to turn around its City Link parcels arm.

Royal Mail's chief executive, Moya Greene, said the group's profit margin had fallen from 1.9 per cent to 0.4 per cent. "It is slim compared to other postal operators and not enough to re-invest in our business," she added.

Overall, group revenues declined to £9.2bn from £9.3bn the year before, mainly because of a 4 per cent fall in core mail volumes. Profits at the Post Office fell from £33m to £31m. At the same time, Royal Mail's operating costs eased from £9bn to £8.9bn as the group axed jobs and cut other costs. Over the year, 5,500 people left, taking the total job cuts since 2002 to about 45,000.

Ms Greene yesterday signalled further cuts. "We need to reduce our costs faster than the decline in revenues from our core letters business," she said. "The pace of change in our mail centres will continue. We expect that around half of the mail centres could close by 2016/17."

The results come as the Government steps up efforts to privatise the group, with Parliament recently clearing the Postal Services Act. However, a sale cannot take place before the European Commission approves state aid, which is unlikely before next spring.

The results also revealed that Ms Greene earned £637,000 in the nine months after joining Royal Mail last July, including a £142,000 bonus and £145,000 for relocating from Canada. Her predecessor, Adam Crozier, pocketed £2.4m in the year to 31 March 2010.

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