Troubled Royal Mail could get postage rises above inflation

Royal Mail may be allowed to increase the price of postage by more than the rate of inflation after the government admitted that the troubled state-owned company risked going into administration in the face of increasing competition.

Postcomm, the postal regulator, is expected to approve a 1p increase in the price of both first and second class stamps by the end of January. But insiders hinted yesterday it could drop controversial plans to cap future rises at 2.5 per cent, the forecast level of retail price inflation.

Postcomm said: “Price rises are under review. If you look at how we responded to competition proposals we have got a track record of saying ‘If Consignia /Royal Mail needs more time to get its act together we will look at that’. It is in our interests that Royal Mail can carry out its licensed activities.”

In a stark warning, the Department of Trade and Industry has told the regulator that Royal Mail is in danger of failing because its cash flows are too weak to cover the cost of restructuring. “The company has been increasingly cash negative since July, as the implementation of restructuring builds up momentum,” the DTI said in a written response to Postcomm’s proposed price controls.

The DTI has lent the struggling postal service Pounds 1bn. Officials fear it will not be able to repay the money without more substantial price rises. DTI officials said debt financing at commercial rates would leave Royal Mail over-geared. Equity financing carried “an unacceptable risk that a dividend stream would never materialise”.

However, it must lend on commercial terms to avoid European state aid rules. The DTI said it expected auditors to conclude there was a reasonable case to make the investment on commercial grounds, but added: “The cash flows are, however, worryingly weak through the period.”

Any relaxation of the price controls would be opposed by PostWatch, the consumer watchdog. “It is unbelievable that they will allow the Post Office to increase its prices by more than the 1p/1p proposal. We agree they need the penny, which is Pounds 570m over three years, but that is enough from customers. We expect the new management to cut costs and run the business more efficiently,” said PostWatch.

Adam Crozier, who was last month appointed chief executive of Royal Mail, faces increasing competition as a result of the European postal services directive. The rules have reduced the part of the postal market that can be reserved to national monopoly operators.

At the same time, the domestic regulator is going further in opening up the market – allowing rival operators to handle the post of companies sending more than 4,000 items in one go. The directive will result in a significant opening of the UK market.