UK Royal Mail ‘needs GBP2bn to fight new competition’

Royal Mail said today that it needed to invest £2bn in modernisation as it braces itself for an onslaught of new competition from January 1.

Starting next year, Britain's postal system will be opened up so that rival companies can collect, sort and deliver mail for the first time since the reign of Charles II.

Royal Mail said today that it needed to invest £2bn in modernisation as it braces itself for an onslaught of new competition from January 1.

No less than 14 companies have registered with regulator Postcomm to handle post in the UK, including German firm Deutsche Post and Dutch postal service TNT.

Royal Mail said it would "fight for every letter", but stressed the importance of new investment.

"Royal Mail will fight hard for every single letter. Royal Mail is determined to compete successfully in the open market – but in order to do so we need a fair regulatory regime and the ability to invest £2bn in the modernisation of the business," Royal Mail spokesman David Simpson said.

Earlier this month, Postcomm proposed a rise of 2p in the cost of a first-class stamp to 32p next year, with the possibility that it could hit a maximum of 36p in four years' time.

The rise is part of a complex package of prices that Postcomm said would allow Royal Mail to modernise its operations, help plug a £4bn hole in its pension fund and maintain its universal service obligations – delivery to every home.

Royal Mail, which wanted first-class stamp prices as high as 39p by 2009-10, has until early March to decide if it is prepared to accept the new price regime.

The company currently loses 5p for every first-class letter delivered and 8p for every second-class letter, and has said that while it is ready to take on its new rivals its ability to compete would be hampered by years of under-investment.

The company said that only 50% of its letters were sorted mechanically compared with 90% among competitors.

Most of the competition is expected to be in the business mail sector. This accounted for 80% of the market and helped boost Royal Mail profits by 20% to £159m in the first half of 2005.

At present, rival companies can compete with Royal Mail in the bulk mail market for delivery for 4,000 items or more – around 30% of the market by value – but the company still has a market share of over 97%.

Much of the mail that is collected and sorted by rival companies is then passed on to Royal Mail for final delivery.

In the six months to the end of September, Royal Mail's competitors handled 350m items of mail, up 2,700% on the 13m a year earlier but still only 1% of the mail market.

Full market opening means that licensed operators can collect and deliver any mail, from single letters to bulk mailings, but Postwatch said that it expected most of the competition to remain in business mail and that rivals will continue to use Royal Mail for final delivery.

Large businesses would be the first to benefit from the reforms while social customers would see "little practical difference in the mail services they use", the watchdog said.

"A competitive market place will offer customers greater choice and better, more efficient services and is the best way to protect customers' interests. Competition will also reinforce, not undermine, the provision of a universal postal service. The main threat to this service is an inefficient Royal Mail," it added.

But the Communication Workers' Union (CWU) warned that universal service was "officially under threat".

"Postcomm is threatening the universal service. They should not underestimate the public affection for daily mail delivery to home addresses," Billy Hayes, the union's general secretary, said.

But the unions should be reassured by other examples of deregulation. In New Zealand and Sweden, the only other two countries to liberalise their postal markets, the original postal service in each country still supplies at least 90% of mail.

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