Royal Mail back in profit but must put its stamp on reforms

Royal Mail announced a return to profit yesterday for the first time in five years but warned that it still faced a huge challenge to remain in the black for the year.

First-half profits were £3m - a turnaround of more than half a billion pounds from the £542m it lost in the same period last year. Operating profits were £55m compared with a £147m loss last year.

Allan Leighton, Royal Mail's chairman, said the company was aiming for a £100m operating profit for the year to keep its three-year recovery programme on track but admitted there was a long way to go.

The operating profit was achieved with the help of a £161m increase in revenues, of which £90m came from the 1p increase in first and second-class stamp prices.

But in the second half Royal Mail faces additional wage pension and strike costs of at least £120m, which will have to be paid for from productivity improvements. In total, the 14.5 per cent pay deal agreed with the unions will cost Royal Mail an extra £500m a year. It plans to pay for this through the introduction of a single delivery across the country. So far, 542 of Royal Mail's 1,500 offices have signed up to the new productivity agreement and about 30 have introduced the single delivery. Royal Mail expects a big increase in the roll-out of single deliveries in its final quarter of the year after Christmas.

Adam Crozier, its chief executive, denied that Royal Mail had been exaggerating its financial plight so that it could play tough with the postal unions. "We are not trying to position our results," he said. "This is the cold, hard reality of the situation we face and unless we make changes to pay for the increased wage costs we will move straight back into losses."

Royal Mail's letter business made an operating profit of £127m, while Parcelforce cut losses from £98m to £59m. The deficit in the counters network, Post Office Limited, was reduced from £105m to £91m.

Mr Leighton said a major drive would be launched to win back business customers, such as Tesco, which had deserted Royal Mail after last month's wildcat strikes in London.