Royal Mail mess

Horror stories about the state of Royal Mail abound. But there is a good chance that these tales are not circulating in the form of a letter, stamped and mailed at a post office. That loss of market share lies at the heart of Royal Mail’s problems: its operations are a shambles – not entirely its own fault – and the company is facing ever more competition it is not equipped to handle.

Good news, then, that after weeks of sporadic walkouts, the Communication Workers Union – a bastion of resistance to modernization – has called off further scheduled strikes and sat down with management to reach a deal for 130,000 employees.

In these negotiations, both sides need to understand the two kinds of competition Royal Mail faces: digital communication technologies and more digitised competitors.

E-mail, text messaging and other forms of mobile and electronic communication will only become more important in the future. That means fewer delivered letters, the company’s traditional core business, where it is also losing ground to nimbler competitors.

Every day, Royal Mail sorts millions of letters by hand and rewards its staff handsomely for the trouble: on average, its employees earn 25 per cent more than their colleagues in private companies. But it is also 40 per cent less efficient than the automated competition.

Reforms need to come fast. Today, one in five letters is handled by competitors. These private delivery services mainly focus on profitable business such as large corporate delivery contracts. If Royal Mail does not modernise its operations soon, it will be left with only unprofitable parts of its operations.

To be sure, the costly duty of providing a universal service leaves the state-owned operator at a disadvantage. Its private German and Dutch competitors are under no obligation to deliver letters to every one of 27m addresses in the UK.

Regulators need to give greater clarity about which aspects of the business they consider a public service. That should help Royal Mail to avoid cross-subsidising its work as a utility with income from profitable units. Flexibility should extend to price-setting as well. Royal Mail needs to be able to raise prices in smaller steps and at greater frequency.

Yet rate rises alone are not the answer. In a deregulated postal services industry the state-owned Royal Mail is hamstrung. Had it been privatised 10 years ago, it would not be in this situation now. Floating Royal Mail shares is not the answer to all its problems, but, ultimately, it will be the only hope for its success, if not survival.