Opening up the UK market appears to have been positive for all concerned

One year after the introduction of full competition in the country's postal market, everyone appears to be a winner.

Customers are benefiting from record levels of service and big business mailers are enjoying substantial savings in costs.

Eighteen new postal operators have been licensed and have seized a bigger share of the market than the regulator expected, handling more than 10 per cent of the mail.

Royal Mail remains the dominant force in the industry despite losing its monopoly. Its competitors hand over most of the mail to the state-owned operator for final delivery, leaving it with 97 per cent of postal revenues.

Postcomm, the postal regulator, declares itself pleased with the progress made so far. "Royal Mail has really raised its game, especially on quality of service," says Richard Moriarty, deputy chief executive. "And the competition has brought a range of new business models, with operators offering different ways of doing things, such as later collection times and guaranteed delivery."

The state-owned operator is on course to meet all 12 of its performance targets for the first time in the 2006-07 year – these require it to deliver 93 per cent of first-class mail on the next working day and 98.5 per cent of second class mail by the third working day. Two years ago, only four of the targets were hit.

The greatest benefits have accrued to the biggest mail users, which include banks, utilities, local councils and charities. Businesses account for 87 per cent of the more than 20bn items sent each year, with 500 companies providing half of all mail volumes.

Many of these have signed contracts with the new postal operators to collect and sort their post, before handing it over to Royal Mail for delivery over the "final mile". Royal Bank of Scotland, for example, reported that it had saved more than Pounds 5m a year in postal costs by contracting with UK Mail, the postal subsidiary of Business Post, to deliver some 200m items a year – with a fifth of customers receiving their maila day earlier than withsecond-class post.

UK Mail is typical of the new postal companies, operating out of new premises with the most modern equipment able to sort different types of mail at high speed. Its charges are slightly less than Royal Mail's, but it offers tracking services to its customers and two-day guaranteed delivery, which has won it contracts to deliver more than 1bn items a year.

"Royal Mail is too big to give tailored services to every customer," says Guy Busfield, Business Post chief executive, "but we can."

Around 80 per cent of the cost of UK Mail's postage goes to Royal Mail, which takes the sorted mail and puts it into its delivery network under so-called downstream access arrangements. UK Mail was the first of the new operators to sign up for access and Mr Busfield sees growth of access as the way forward.

TNT Post, however, has a different strategy. The British subsidiary of the privatised Dutch postal operator, it has also established a thriving access business, which handled 1.2bn items this year. It intends to extend its reach from the big bulk mailers to smaller businesses next year as it builds a series of hubs around the country.

But it also has plans to compete directly with Royal Mail, by creating a service that can deliver to homes and businesses directly – starting in large towns and cities. Deliveries are unlikely to be daily, but TNT's ambition raises the prospect of competing groups of postmen and women pushing mail through letter boxes in urban areas. "Our ambition is to be Royal Mail's main challenger," says Nick Wells, chief executive.

Realising that ambition depends on overcoming some formidable obstacles. Private operators must charge value added tax for postal services, putting them at a disadvantage when bidding for business against Royal Mail. TNT's end-to-end service could result in paying financial penalties to Royal Mail to compensate for skimming off the most profitable delivery business.

But Postcomm believes liberalisation of the postal market has shown what competition can achieve. "Opening up the market has improved efficiency and the quality of service," says Mr Moriarty.

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