FT Editorial on Leighton vs Postcomm
Allan Leighton’s appointment as chairman of Royal Mail Group was an act of genius. The former Asda boss has driven through cost cuts to lift this once highly profitable monopoly out of the red. He has begun to put it on a firmer footing to face competition as the market is opened up over the next three years. And he is ambitious enough to plan returning the post office network to profit by turning it into “the EasyJet of banking”. All this while the foremost advocate of “going plural” continues to hold a fistful of other top jobs.
There is a downside in all this, however. Running Royal Mail during these most testing of times would be no easy matter full-time. Less than full-time, quick judgments must be made – and there is a premium on short, sharp campaigns against threats to the business plan. In most cases it is Postcomm, the regulator, that is the scapegoat – most recently over its proposals for price controls.
Royal Mail has asked for an extra penny on first- and second-class post to bridge a Pounds 170m annual income shortfall in its forecasts. Postcomm will grant its wish, provided it accepts other conditions to freeze the average charge – including previously unregulated products – and then ratchet it down at 2 1/2 per cent under the inflation rate. Royal Mail estimated this would claw back most of the extra income: as competitors began to cherry-pick the most profitable bulk mail, it would be forced to cut prices on more expensive items to keep the average on target.
Deciding who is right is tricky. Much depends on variables such as trends in the mail market and the amount of volume lost to the new competitors. What is unarguable, however, is that the Postcomm package could leave Royal Mail in a hole, since it has borrowed Pounds 3bn for a plan that assumed it was given the extra Pounds 170m a year with no hidden clawback.
There will undoubtedly be heated discussions but a compromise should be possible. It could include the right of Royal Mail or Postcomm to reopen the settlement every six months if either bankruptcy or a profit bonanza threatened. It should allow Royal Mail flexibility to respond to competition but prevent predatory pricing.
Reaching that compromise would be made easier by recognising two realities. For Postcomm, the most important task is to introduce competition while allowing Royal Mail to restructure for the new commercial environment. It has a duty to protect the consumer – but short-sighted price control could jeopardise the long-term creation of a competitive market that would be of much greater benefit to users. If fatter margins resulted there would inevitably be tabloid ire but new competitors would be enticed to enter the market to grab a slice.
As for Royal Mail, it needs to remember that excessive doom-mongering is wearing and may be counter-productive in the long run. It is good to have in Mr Leighton a champion to inspire and lead but a little less bunker mentality would save the eardrums.
Copyright © 2002: Financial Times Group
