Royal Mail and DTI want £1.25bn

The Royal Mail has been improving its efficiency and service

The Royal Mail has won the backing of the Department of Trade and Industry in its bid to secure cash to modernise the firm and help plug its pension deficit.

The Royal Mail has made a formal request to the UK Treasury for a cash injection of £1.25bn, and greater access to £750m it has on its books.

The BBC's business editor Robert Peston said that with a £5bn pension hole the Royal Mail is "effectively bust".

He added the Treasury is likely to want the cash back if it grants the request.

First-class service?

Speaking on the 10 O'Clock News, the BBC's business editor explained that one of the biggest problems facing the Royal Mail is that its request comes at a time when the government is trying to rein in public spending.

Should the Treasury grant the Royal Mail's request, then it is likely to want the money back at a later date and one way for that to happen would be via a share sale, he continued.

The Royal Mail is having to reposition itself after the UK postal market was opened up to bring in greater competition.

Last year, the company's bosses said that they would need to invest as much as £2bn upgrading equipment if they were to survive.

Since then the company has been improving efficiency, and has seen profits improve.

However, the Royal Mail also has agreed to limit increases in stamp prices, leaving it little choice but to look elsewhere for funding.

Should it not get the money from the government, then Royal Mail's managers say the outlook for the company will be grim.