Royal Mail’s request to UK regulators to impose extra conditions on its rival TNT Post UK, as the company continues its trials of end-to-end mail delivery services, has been rejected.
Postal regulator Ofcom said today it did not believe it needed to intervene – for now – as TNT Post runs full collection-and-delivery services in its West London trial area.
But, acknowledging the concerns from Royal Mail that any expansion of TNT Post’s end-to-end service could impact on the financial viability of Britain’s universal postal service, Ofcom said it was not ruling out intervening in the postal market in future.
The regulator said it will continue closely monitoring the TNT Post project, which has been running since mid-April, and will consult this Autumn on formal guidance of how it will continue to monitor and response to the rise of this kind of competition in the UK postal market.
“TNT Post is under an ongoing obligation to notify Ofcom of expansion plans,” the regulator said. “Ofcom will continue to assess developments in the market and react to them in a timely manner to address any risk to the universal service, if this is required in the future.”
The UK postal market has been open to competition since 2006, but with Royal Mail as universal service provider enjoying VAT exemptions that competitors cannot take advantage of to cut service costs, rivals have so far largely kept to “Downstream Access” activity. This involves running collection and/or processing services before entering mail into the Royal Mail network for the final stage of delivery.
Royal Mail has begun to add VAT into its pricing for some of its services, but as it started its new end-to-end trial in West London in April, TNT Post said VAT remains a barrier to expanding its end-to-end services. Royal Mail still delivers more than 99% of mail over the last mile to the UK’s 29m addresses.
TNT Post UK is the second largest postal operator in the UK, and part of the Netherlands-based PostNL Group. It argues that its end-to-end services will bring better competition for business mailers and therefore better quality of services to the UK postal market – as well as 20,000 new jobs over the next five years as services expand.
Royal Mail warns that its rival is “cherry picking” the most lucrative, urban routes, and doing so could take away its most profitable services, leaving its universal service suffering.
Today Ofcom, which said it received “highly confidential and commercially sensitive” information from TNT Post on how the West London trial was going, judged that the company’s current trial and expansion plans “in the early years” do not pose a threat to the universal service.
The regulator said the financial risk in future from end-to-end competition would be greater than the access market, since in the access market Royal Mail retains 85% to 90% of revenue.
But, it said even with TNT Post “is hoping to roll out a broader end-to-end service if conditions are favourable at the conclusion of its trial”, in the short term TNT’s market share was expected to be on the low side.
Ofcom said that along with the confidential data supplied by Royal Mail, its financial analysis “indicates that TNT Post’s entry plans are not likely to have a material impact on Royal Mail’s cash flow position in the short term and, as such, are not likely to undermine the financial sustainability of the universal service in the near future.”
The regulator noted that TNT Post’s business model for the end-to-end service was yet to be tested, and there was also a significant uncertainty in how Royal Mail will respond commercially to the new competition, particularly in the light of its new regulatory freedom to set its prices as it likes.
Perhaps some form of zonal pricing could be introduced for urban areas where competition takes place, the regulator suggested.
“Royal Mail has options to respond competitively to TNT Post’s end-to-end entry. This could be achieved, for example, by generating greater efficiency savings in the business as a result of additional competitive pressure,” said Ofcom.
“It could also be achieved by adjusting its commercial strategy in response to competition. Under the new regulatory framework set out in the March 2012 Statement, there is now greater flexibility for Royal Mail to negotiate contractual terms with access operators, giving greater commercial freedom, for example, to address geographic cost differentials (i.e. zonal pricing).”
Intervening in the market
Under the UK’s postal reform bill laid last year, Ofcom can impose a General Universal Service Condition on private sector competitors of Royal Mail if it feels they are posing a threat to the viability of the universal service.
This General Universal Service Condition would be some measure to support provision of the universal service, such as requiring end-to-end competitors to provide certain delivery standards like six-day-a-week delivery, or provide funding for operation of the universal service.
While it considered that it was not currently necessary to impose such duties on TNT Post UK now, Ofcom said if circumstances change and evidence suggests it is needed, it would take appropriate action.
In the mean time, Ofcom said it would continue to monitor developments in end-to-end competition, and issue a consultation on new guidance on how it will monitor the market, factors that could lead it to intervene in the market, and the ways it could intervene to protect the universal service.
The consultation should be out in the autumn of 2012, for final guidance to be in place in early 2013.