It is now losing �750,000 a day, down from an average of �1.2m a day last year.

"We're largely still being pretty inefficient but this is the first time in five years the numbers have gone in the right direction," chairman Allan Leighton told BBC Radio 4's Today programme.

"I'm pretty confident we'll be profitable this year."

The really hard work is ahead of us as the middle year of any company's recovery plan is always the hardest Allan Leighton, Royal Mail chairman

But the group warned that it now had a �4.6bn black hole in its pension fund.

Like other companies, the Royal Mail's pension fund has been hit by the effect of plunging stock markets.

And new accounting rules oblige businesses to give full details of the state of their funds.

Mr Leighton said the company would inject �100m a year into the pension scheme until the deficit was cleared.

End of second mail

The Royal Mail is already one year into a three year renewal programme designed to turn the company round.

Nearly 17,000 jobs have already gone and more than 30,000 will have been lost by 2005.

As part of the restructuring, the company is planning to pay postmen and women more in return for agreeing to abolish the second mail delivery.

It said that about 80,000 postal workers would get a pay rise of �20 a week and an extra �1,000 bonus.

But they would have to work longer shifts and their delivery rounds would be extended.

The Communication Workers' Union has to give final approval for single deliveries which will be introduced in most of the country once agreement has been reached.

Closing post offices

Although losses were cut in the group as a whole, losses in the post offices part of the business rose by �31m to �194m.

The company said this underlined the need for its "urban reinvention" programme which will lead to the closure of 3,000 sub-post offices by 2005.

Parcelforce also went further into the red, doubling its losses in the past financial year to �187m. But it is on course to break even in 2004/5.

The number of days lost through strikes last year fell by 90%, making it the Royal Mail's best year for industrial relations in a decade.

"Our people have stopped the rot," said Mr Leighton.

"The really hard work is ahead of us as the middle year of any company's recovery plan is always the hardest.

"We have the keep the pension scheme on a sustainable footing and we face major regulatory pressure."

Earlier this week he said he was shocked that the regulator had decided the Royal Mail should deliver a rival company's mail for just 11 pence a letter.