UK Royal Mail prices still do not reflect costs of handling mail

New figures from Royal Mail show that the company has been unable to make much progress in rebalancing postage prices to reflect the real cost of collecting, sorting and delivering 84 million items of mail to the UK’s 27 million addresses every working day. Without the rebalancing, Royal Mail will not be able to compete fairly when the market is opened up to full competition on 1 January 2006.

This imbalance arises because stamp prices are currently subsidised by business prices and pricing is currently driven by weight, whilst cost is driven mainly by size – so heavier items continue to subsidise lighter items.

The new figures are included in Royal Mail’s audited regulatory accounts which have been given to the postal regulator, Postcomm.

The accounts show that items weighing 0 – 100g recorded a loss from operations of £212 million – which accounts for 83.5% of the 22 billion items Royal Mail handled last year. These losses were covered only by the profits generated by some bulk business and heavier items of mail, said Royal Mail’s Chief Executive Adam Crozier.

“Royal Mail’s postage prices should reflect the cost to us of handling the mail,” Mr Crozier pointed out. “This is why we have proposed a new pricing structure that moves our prices into proportion with our costs or, more simply, that reflects size. We welcome competition – but we need a fair and flexible pricing regime that allows us to compete for profitable business mail on a level playing field. That’s the key to maintaining the services on which we all depend as consumers.”

“We need the ability to set our prices to cover our costs and generate revenue to continue improving customer service and to invest in our company and our people,” he added.

Royal Mail’s proposals for pricing mail in proportion to costs would see postage prices mainly based on the size of the item being sent – removing some of the hidden cross-subsidies that can arise from the current weight-based pricing structure. The changes, which are subject to regulatory approval, would leave 70% of mail unaffected and would not be introduced until April 2006.

The regulatory accounts also show that overall stamped mail made a loss in 2004-05 of £235 million – equivalent to a loss of 5p on every item of First Class stamped mail and 8p on every item of Second Class stamped mail.

“If we cannot compete fairly in an open market, we risk losing significant business to our rivals and our ability to provide the one-price-goes-anywhere universal service will be jeopardised. This wouldn’t be good news for customers,” added Mr Crozier.

Ends

Issued by Royal Mail:
148 Old Street
LONDON
EC1V 9HQ
www.royalmail.com

NOTES TO EDITORS
· In 2004-05, losses from operations on First Class stamped mail were £106 million, compared to a loss from operations of £91 million in 2003-04.
· In 2004-05, losses from operations on Second Class stamped mail were £129 million, compared to a loss from operations of £156 million in 2003-04
· Business mail subsidises social mail: First Class metered mail made a profit from operations of £148 million and First Class PPI mail made a profit from operations of £66 million. Second Class metered mail made a profit from operations of £3 million and Second Class PPI mail made a profit from operations of £15 million.
· Heavier items subsidise lighter items: the 0 – 100g service made a loss from operations of £212 million. Items weighing 101 – 350g made a profit from operations of £112 million and the non-licensed, 350g and over made a profit from operations of £527 million.
· Royal Mail’s stamp prices remain among the lowest in Europe – a First Class stamped letter weighing up to 60g would cost 30p in the UK, £1.11 in Italy, 95p in Germany, 85p in France, 79p in the Netherlands, 61p in Portugal and 44p in Spain.
· Full competition is being introduced in the UK on 1 January 2006, several years earlier than in most of the rest of Europe.
· More information about Royal Mail’s proposals to price mail by size can be found at www.royalmail.com/pricinginproportion.