Royal Mail chief hints at postal rate rise above 20%

Mailers in the UK could be facing increases in Royal Mail postal rates above 20%, once Ofcom brings down the company’s regulatory price controls. That was the suggestion from Royal Mail chief executive Moya Greene today, as she faced a barrage of questions from a Parliamentary committee about her company’s pricing plans.

She said Royal Mail had only recently become a cash positive business, but had lost GBP 1bn from its business in the past four years, including GBP 120m from the universal service last year. The UK’s universal service costs about GBP 6.5bn a year to run.

After various efforts by MPs to gain some kind of idea what kind of price increases could be coming up, Greene eventually revealed that across Royal Mail’s entire portfolio, it needed to bring in an extra GBP 250m-300m in annual revenue to cover its costs.

And, the Royal Mail CEO added that the company destined for privatisation would also need to make a commercial return on top of that revenue increase.

“I think we would be talking overall, if we take out the Post Office, about an increase of about 8-9% overall,” she said, adding that a commercial return would have to be added on top of this general rate increase. “If we look at other postal administrations that are able to access capital, I think a reasonable commercial rate of return in this business would be between 10-15%.”

Pricing

Greene was criticised by various members of the House of Commons Business, Innovation and Skills Committee because she said Royal Mail cannot calculate specific costs for its individual postal services for use in determining prices.

The Royal Mail chief said pricing needed various factors had to be included in pricing, such as what customers would be prepared to pay and competitors’ pricing. However, she admitted that under the previous regulator, Postcomm, postal rates in the past had been “arbitrarily attributed” to service costs.

Simon Kirby, the Conservative MP for Brighton Kempton, said to Greene today: “If you are not able to tell us today that you need to charge a certain level to break even on either a Second Class or a First Class stamp, you can’t justify any increase at all.”

Green responded that Royal Mail’s financial statements clearly showed it had been losing money in the core universal service business, but facing repeated questions about the inability to account for specific service costs, she could only respond that this was the way the company ran its accounts.

“We have a very big team that works on pricing, that looks at the factors that go into what would be a reasonable price for us to charge,” she said.

“There’s no question that it is a very complex matter, particularly when you are a business that has undergone the kind of structural changes that mailings have experienced.”

Affordability

Greene said there would “certainly be some fall off in demand” for mail as her company increased its prices, but insisted Second Class mail would continue to be affordable for low-income households, particularly compared to other utilities and forms of communication like the Internet.

There was particular concern from MPs about the affordability issues associated with Second Class mail, the only category that would keep a price cap under Ofcom’s proposals, but which could be allowed a 53% price rise under the price cap being offered by the UK postal industry regulator.

Greene said there was “no evidence anywhere” that raising the Second Class stamp from the current 36p to as much as 55p would bring affordability problems for consumers, since households spend less than GBP 50 on postage each year. MPs dismissed her argument as “weak”.

However, the Royal Mail CEO did offer the commitment to MPs that her company would develop a Christmas Stamp this year, so that low-income households would be able to mail during the festive season at the same rates seen during the 2011 festive season.

Royal Mail prices are set to rise from April, including an 11% increase in business mail rates with individual categories facing uplifts varying from about 8% to 20%.

Regulator Ofcom said last week in front of the same Commons committee that Royal Mail has more expertise than a regulator regarding the postal market in setting its prices, and that it knows excessively high prices would push its customers into alternative communication channels.