Postcomm calls for radical action over Royal Mail's costs

Postcomm, the independent regulator for postal services, has today responded to Royal Mail’s statement on the future of the UK postal industry.

Postcomm Chairman Nigel Stapleton said:

“Royal Mail is using an attack on the regulatory structure as a smokescreen for its own lack of progress in tackling their high labour costs. Since Single Daily Delivery was introduced in 2004, every initiative that the company has taken to improve efficiency has been absorbed either by higher wage rates or increased pension costs. Royal Mail has failed to bring its costs into line as would be expected of an efficient mail operator.

“Royal Mail has not asked us for an increase of 6p on the price of a stamp, and competition and regulation are not threatening the Universal Service. Royal Mail remains the dominant player and retains well over 90 per cent of the addressed letters market, and still delivers more than 99 per cent of all mail in the UK. It has a unique VAT advantage which acts as a significant barrier to competition for new entrants. Competition has taken less volume away from Royal Mail than was predicted a year ago and, on 95 per cent of the volume they have lost, they retain more than 70 per cent of the revenue to cover their costs of delivering over the final mile.”

“The decline in Royal Mail’s profits is not due to competition from other postal operators. It has two root causes: Royal Mail’s inability to control its costs, and its need to finance their growing pension fund deficit. In the six months to 30th September 2006, Royal Mail raised its prices on average by over 4 per cent, but this generated only 1 per cent in additional revenues to cover labour and pension costs.

“This is the key threat to the USO, and one which Royal Mail and its shareholder must now address very quickly. As part of the Strategy Review, Postcomm will make sure that the regulatory framework evolves to meet changing customer needs, securing the Universal Service, as well as promoting effective competition.”

Postcomm has received more than 30 responses to the consultation on our Strategy Review, which concluded nearly six weeks ago. All of these are being very carefully considered by Commissioners but it is noteworthy that no respondents share Royal Mail’s assessment of the impact of competition.

Notes for editors

Postcomm’s four-year price control, put in place from April 2006, allows the company GBP1.2 billion from mail revenues for new investment and an average of GBP320m a year to help Royal Mail reduce its pension fund deficit.

On competition, the small but increasing market share held by Royal Mail’s competitors is made up almost entirely of letters that are still delivered by Royal Mail, through “access” arrangements. “Access” arrangements are when rival postal operators, or large mail customers, pay Royal Mail to deliver letters on their behalf, having themselves sorted the letters and carried them across the country using their own transport networks.

As a result, although competitors now handle around 10 per cent of letters at some point during their journey, they actually deliver less than 1 per cent.

So, the business that is being “lost” is actually shared between the new operators and Royal Mail, with Royal Mail still getting the lion’s share of the revenue. That is, Royal Mail is still paid around 13p of the typical price of an average access letter while the new operators typically receive 2-3p.