Royal Mail demands to charge rivals more

The battle between Royal Mail and one of its leading competitors in the UK letters market, TNT Post, intensified yesterday with each side making conflicting demands for changes to the way prices are controlled.
At the heart of the struggle is the issue of how much Royal Mail can charge competitors for delivering mail those competitors have collected. Royal Mail argues that it needs to be allowed to charge more to compete in the key business mail market. It says the existing price structure “simply isn’t working”.
TNT Post claims the state-owned company already charges too much and allowing Royal Mail to increase its wholesale price would squeeze out competition.
Under current rules Royal Mail has to allow outside access to its network, with its own postmen and women delivering letters collected by competitors. It is allowed to charge around 13p for each letter handled under the access agreements.
The access price is crucial for both sides in the battle for the business mail market, where a relatively small number of customers account for a high proportion of the UK’s mail. Rivals to Royal Mail that have entered the market since it opened up at the beginning of last year see the sector as their best chance of winning business. They can collect bulk mail from business customers, pre-sort it, and then use Royal Mail to take it the “final mile”, without having to set up their own delivery networks. The amount Royal Mail can charge for this service is key to competitive pricing.
Nick Wells, chief executive of TNT Post, said: “Royal Mail is trying to squeeze us out of the market without any justification.
“Royal Mail recently stated that it costs its business 8p to deliver a letter and yet they are charging us around 13p, as part of a commercial agreement reached a couple of years ago. It is unbelievable that they are now seeking to charge us even more. An increase in wholesale prices could destroy our business and we want tougher controls which stop Royal Mail doing this in the first place.”
Royal Mail says it is hamstrung by the current regime and the market is opening up to competition faster than expected as competitors win an increasing share of a declining letters market. It said yesterday that competitors would carve out a 25% share of the business mail market this year, handling some 2.5bn letters.
It said it would now deliver 600m more letters this year than the regulator, Postcomm, had anticipated when it set the price control. It also said that, at 13p a letter, it lost money on delivering rivals’ mail.
“Royal Mail cannot compete fairly for business mail because the price control dictates that when we offer to lower our prices we have to reduce the amount we charge rivals to use our network by the same degree.”
Royal Mail said rivals had no interest in handling stamped mail such as personal letters and greetings cards because they lost money, but Royal Mail had to subsidise the stamped mail service from its business revenues.
“This is why Royal Mail believes that the basis on which the price control was set simply isn’t working under current market conditions – conditions that are clearly going to get even tougher in the future.”
Postcomm said it would look at both requests and would come up with its conclusions within the next six months.