UK Royal Mail warns of £650m black hole
Royal Mail is heading for a fresh clash with the industry regulator after warning Postcomm that its plans for giving rival operators access to Royal Mail’s local delivery network will cost the state-owned organisation £650m in profits over the next three years.
Senior executives say the loss-making business could be forced to raise the price of letters and other postal products or curtail the universal service unless Postcomm revises its proposals.
The price of first and second class stamps went up in May by 1p to 28p and 20p respectively, bringing an estimated £170m boost to Royal Mail’s earnings, but the new “black hole” in its finances is equivalent to a rise of more than 3p at least.
Royal Mail, which lost £611m before tax last year, will pursue the issue of “access charges” through the courts by a judicial review if the regulator does not back down.
Under Allan Leighton, its combative chairman, Royal Mail has engaged in high-profile battles with Postcomm, warning that the regulator’s squeeze on its business threatens its three-year “renewal plan” of making operating profits of £400m in 2004-05.
This time executives hope that by warning Postcomm in advance of the financial impact of its proposals – and by using independent consultants to verify the estimated hit for the first time – a full-scale war can be averted.
The warning is understood to have been delivered to outgoing Postcomm chairman Graham Corbett at the end of last week – six weeks before the August 20 deadline for consultations on the regulator’s proposals.
Mr Corbett has insisted that the proposed access charges will enable Royal Mail to reach a 6% margin in its postal business and be “revenue neutral”, while encouraging greater competition in the postal services market, in line with European Union directives.
But, amid growing anger among would-be rival operators such as Deutsche Post, Royal Mail insists that by setting access charges as low as 11.5p per item Postcomm is providing no incentive for competitors to establish alternative delivery networks.
Executives argue that bulk mail customers such as banks, already offered discounts by Royal Mail, will simply bypass its competitors, take their post to big regional or smaller local sorting offices and demand even bigger discounts.
Equally, they say, higher access charges of 21p or more per letter will discourage competition by making it very tough for rival operators to make decent margins on their activities. The best option, they say, would be to find a balance between the two.
The brewing row between Royal Mail and Postcomm prompted Klaus Zumwinkel, Deutsche Post chief executive, to attack the two for delaying the opening up of the UK market to competition. This is due to be complete by 2007.
The row comes as executives anxiously await the outcome of consultations by the main postal union, the CWU, with its members over a pay offer worth 14.5% over 18 months. Reports have suggested that the CWU executive will reject the deal because it has “more strings than the philharmonic orchestra”.
Mr Leighton has angered union activists by setting out the terms of the offer to all 180,000 Royal Mail employees in a personal letter but his colleagues insist that this is perfectly normal – and the offer is widely accepted by rank and file postal workers.
They say that the only “strings” attached to the deal are that employees in Royal Mail’s different businesses accept the need for significant change in working practices such as ending the second daily delivery. The deal is designed to be cost-neutral or even result in savings through the expected productivity gains.
