Royal Mail calls for radical review of postal market regulation

Falling mail volumes and intensifying competition are putting massive pressures on Royal Mail’s ability to keep delivering a one-price-goes-anywhere service for every customer, the company said today. It urged the postal regulator to allow Royal Mail to compete freely and fairly while ensuring everyone can continue to post to the UK’s 27 million addresses at uniform, affordable prices.

Royal Mail’s comments came as it published its detailed response to Postcomm’s strategy review on the future of the UK postal industry. Royal Mail’s response proposes four steps which Postcomm should take to create a fairer market:

• The one-price-goes-anywhere Universal Service should be re-focused specifically on stamped mail rather than including business products.
• Cross-subsidies should be removed to create transparency for business customers and to ensure that competition is sustainable.
• Business mail services should be fully deregulated because competition has now replaced the need for regulatory constraints.
• Operational integration of the postal network should continue as separation would create confusion, introduce complex and costly interfaces, endanger quality of service and jeopardise Royal Mail’s modernisation programme.

Adam Crozier, Royal Mail’s Chief Executive, said: "We welcome a debate on the future of the industry. The regulatory framework is no longer fit for today’s environment where Royal Mail is competing against a growing number of rivals on a wide variety of mail services.

"The best solution to the massive pressures building up against Royal Mail is for Postcomm to focus the Universal Service on stamped mail to ensure its future for everyone while lifting regulatory constraints on Royal Mail to allow it to compete fairly for business mail."

"We need to be able to compete freely and fairly in the business mail market," said Mr Crozier. "The current arrangements do not allow that."

The Competitive Environment

The emphasis on promoting competition has resulted in an explosion in activity by rivals targeting business mail with competitors now handling 2.5 billion business letters a year – around one letter in every eight posted in the UK. This means that rivals now handle around 25% of bulk business mail. The level of competition will grow further, making it even harder for Royal Mail to keep delivering the Universal Service, unless there are changes to the regulatory regime.

The problem is compounded by the fact that Royal Mail is now losing money on the access price of 13p it receives for delivering mail collected and transported by rival companies.

At the same time Royal Mail’s operating profits have fallen by 86% to just £22m in the first half of 2006-07, competitive activity has intensified and overall mail volumes are falling – after around a quarter century of growth. Businesses, who account for 93% of all letters posted, are sending fewer letters or switching to rivals, and the growth of broadband is driving a switch from letters to emails. Business customers are also downtrading by switching from First Class to less-expensive services, increasing the pressure on Royal Mail’s revenues.

Preserving A Universal Service Fit For Purpose

Against this backdrop there is no realistic prospect of future volume growth generating new profits and revenues to sustain the Universal Service. But the latest financial results also reveal an even more worrying trend: for the first time, the Universal Service, which has previously been profitable overall, is now running at an underlying loss.

Every stamped letter – such as the mail posted by small businesses and the birthday cards and personal letters posted by consumers – loses on average 6p. Stamped letters are subsidised by profits from business mail, but the more profits from business mail are squeezed, the harder it will become for Royal Mail to continue paying a cross-subsidy to deliver loss-making stamp mail – putting at risk Royal Mail’s ability to deliver the Universal Service.

These changes will inevitably mean dearer stamps, as the price of delivering a stamped letter would – in the absence of a cross-subsidy from business mail – have to rise to a realistic level to fund the service. At the moment the average UK household spends less than 50p a week on postal products with social mail such as birthday cards and personal letters accounting for only 7% of all mail.

Commenting on the situation Mr Crozier said "Business customers now have a lot of choice and they do not want to fund stamped mail. There has to be a balance and something has to give.

"Royal Mail is determined to ensure its prices remain affordable and among the lowest in Europe. However allowing the current regulatory framework to be maintained will inevitably lead to Royal Mail losing money which in turn would mean even higher stamp prices," he said.

He added that the five-year investment and modernisation programme for Royal Mail – agreed earlier this month – will deliver crucial improvements in efficiency that will significantly boost Royal Mail’s competitive position, as well as providing the ability for Royal Mail to tackle its £6.6 billion pension fund deficit.

Tackling Unfair Competition For Business Post

But a new regulatory framework is also essential to ensure the interests of all customers are best served, as easing the regulatory burden on Royal Mail should drive a market that was fair and open – not one biased in favour of other companies exploiting pricing cross-subsidies.

As part of the most recent price control it was forecast that the market would grow but it is now declining. It was also originally thought that competitors would take until 2010-11 to reach the sort of volumes they are already handling today. Royal Mail’s own calculations showed that rivals would have won a 30% market share by that date.

A key factor driving the growth of competition is the price control, which is allowing Royal Mail’s rivals to exploit artificially high prices for business mail services. At present, rivals can offer attractive prices to business customers, not because they are more efficient than Royal Mail, but because they are exploiting the historic cross-subsidy where business mail makes a major contribution to funding the price of stamps.

Commenting further on this unfairness Mr Crozier said, "The message the price control is sending to rivals is that it’s better to enter the market as a cream-skimmer than as an innovator. Royal Mail is, in effect, subsidising its biggest rivals."

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Royal Mail’s prices are among the lowest in Europe, while Quality remains high.
Royal Mail’s response to Postcomm’s Strategy Review.