The Profitability of the Mail Division of Deutsche Post

25 July 2003
By Dr. Richard Hern

This report provides an analysis of the profitability of the Mail division of Deutsche Post. The analysis focuses on the year 2002, though the profits of the Mail division are reported from 1998 forward.

On the basis of their analysis, the authors believe that profits in the Mail division, measured in terms of return on capital employed and based on Deutsche Post's accounts, are substantially above the estimated cost of capital. This applies in particular during the years since 2000. For example, the authors estimate that in the year 2002, the return on capital employed in the Mail division was 50.4 percent. By contrast, they estimate that the current cost of capital of the Mail division is between 9.0 and 10.6 percent before tax.

Deutsche Post is protected from competition by means of its reserved sector so that it can meet its Universal Service Obligation to serve the entire domestic German mail market. However, this protection is only required so that it can earn sufficient revenue to cover the costs of serving this market. These costs include an adequate return on capital, but there is no need to earn more than this cost of capital - indeed, the evidence that NERA has found of excessive returns in the Mail division implies that the company is afforded more protection than strictly necessary to meet its Universal Service Obligations. Article 7 of Directive 97/67/EC notes that postal services may be reserved "to the extent necessary to ensure the maintenance of universal service."

The authors do not believe it to be likely that these profits will come under pressure in the next few years, even when taking the July 2002 decision on Deutsche Post's tariffs by German postal regulator RegTP into account. They expect that profits will remain substantially above their estimated cost of capital even when taking the impact of this decision into account.