Royal Mail increased its profits by 26% last year, prompting union leaders to warn that renewed calls for privatisation could jeopardise its recovery.
The coalition government confirmed this morning that it was seeking "an injection of private capital" into Royal Mail, which last delivered 13m fewer letters a day than it did in 2005. The move could plunge the postal service into another pitched battle with the Communication Workers Union.
The CWU blasted the plan, contained in the full coalition agreement published on Thursday, as "old politics wrapped in new language".
Dave Ward, CWU deputy general secretary, said the service had proved it could be a strong leader in the mail industry. "However, the only way to sustain success and deal with the real challenges that lie ahead, is for Royal Mail to remain wholly within the public sector," he warned, "and for the company to work with the union – with managers at all levels recognising that transformation can only be delivered with the support of the workforce."
In March CWU members voted in favour of a three-year deal to bring new machinery and working practices into Royal Mail but secure jobs. The deal followed a series of strikes last October.
Royal Mail's annual results show the impact of those strikes, the recession in the UK and increased competition from email and rival mail firms. Although operating profits increased by £83m last year to £404m, that was on the back of cost-cutting.
Revenues actually dropped for the first time in a decade. Royal Mail, which in April lost its chief executive Adam Crozier to ITV, said revenues in the year were £9.4bn, down from £9.6bn a year ago.
As it cut costs, Royal Mail's staffing levels dropped by almost 8,000 last year – without any compulsory redundancies – and it is sorting more mail automatically than ever before. More than 80% of mail is now sorted to the level of the individual postman's or postwoman's round. Five years ago, just half the mail was being sorted automatically.
But the business is operating in a tough environment. UK mail volumes declined by 7.3% last year, the steepest fall since average daily volumes peaked at 84m items in 2005, with the average daily mailbag now containing about 71m letters, packets and parcels. The decline is expected to continue. Rival firms, meanwhile, are eating into Royal Mail's share of the declining market: in the UK the volume of mail handled by other firms rose more than 20% last year.
More than one in three letters – a total of 6.4bn items – were posted with a competitor last year – but delivered by a Royal Mail employee under rules which allow rivals access to Royal Mail's network. This so-called "access mail" now accounts for more than half of all business mail.
Royal Mail is also still spending more cash than it earns as it ploughs through its £2bn investment programme announced in 2006. The company has spent three-quarters of the cash so far and coupled with payments into the pension scheme, it suffered a net cash outflow of £517m in 2009.
Its pension fund is deeply in the red – Royal Mail trustees are currently working out the size of the deficit but it is expected to be far higher than the figure of £3.4bn reached four years ago. In 2010 the group paid £867m into the pension schemes, of which £291m was to help fund the historic deficit.
"The strikes called by the CWU in 2009 clearly had an adverse effect on Royal Mail Letters," said chairman Donald Brydon. "I am delighted that the recent ballot of union members endorsed the agreement struck between the group and the CWU which will allow for still further progress towards our modernisation goals and help us to protect the universal service, while providing a fair reward for our people and recognising the important role they play in achieving the transformation we so urgently need."
Royal Mail said all four of its businesses remained profitable last year, but people posted fewer letters and the recession forced many people to downgrade from first- to second-class postage. This led to a drop in revenues at Royal Mail Letters to £6.6bn from £6.7bn, but cost-cutting saw operating profit more than double to £121m.
Revenues from the Post Office network dropped by £70m because of lower income from the Post Office Card Account. Parcelforce Worldwide maintained its revenues at £399m, while its operating profit rose to £17m – a 42% increase. Its European parcels operation GLS saw revenues drop 0.5% year-on-year because of tough economic conditions, particularly in Germany. To deal with the downturn, the business slashed costs and operating profit was down just 10% at £112m.
• This article was amended on 21 May 2010. The original said that the Royal Mail delivered 13m fewer letters in 2009 than it did in 2005. This has been corrected.
