UK Royal Mail and the Unions disagree on the real cost of a strike

With days to go before we know if 160,000 Royal Mail workers have voted for the first national postal strike since the one that was led by the now Labour Education Minister, Alan Johnson, in 1996. Most seasoned observers have little doubt as to the outcome. Martin O'Neill, chairman of the commons Trade and Industry Select Committee, says: 'I think they will get a stonking majority for strike action.'

A strike would be very difficult for Royal Mail, which is now in the second year of a three-year plan initiated by chairman Allan Leighton. This involves cost-cutting and 30,000 redundancies to turn around the group's pounds 1.1 billion loss in the year to March 2002. Officials insist there is no room for brinkmanship, despite last week's appeal to the workforce by Leighton and chief executive Adam Crozier to accept their 14.5 per cent productivity-related pay offer – raising pay to pounds 300 a week – or risk 'commercial suicide'.

Like other unions, the Communication Workers Union is turning up the heat in public. They want an 8 per cent pay increase with no strings attached. O'Neill says: 'You have to remember that in today's industrial relations climate unions are almost forced to seek strike ballots before [companies] get to their real negotiating position.'

Royal Mail says its offer, under which 10 per cent of the deal is linked to productivity improvements, will initially cost pounds 340 million, and will only be affordable if productivity recoups the bulk of that sum. But a strike would take a heavy toll. A spokesman said: 'Instead of cutting costs, we would be incurring them.' He added that the potential for competitors to strengthen their position in the market during a strike 'threatens our ability to do business in future and keep the business we have got'.

How much of this is bluster – and what will the cost be? Leighton says that a strike could cost pounds 20m a day. However, Royal Mail says the CWU has not indicated what kind of strikes it plans – a prolonged national walk-out, a series of one-day strikes, or regional stoppages – so the cost is obscure.

Royal Mail has also said it would threaten its aim of achieving a profit on its operations this year – it aims for pounds 100m. This compares with a pounds 197m loss last year, not with the overall pounds 611m pre- tax loss figure, which includes costs such as redundancies. So this year's headline pre-tax figure could still be a loss, regardless of a strike.

On top of this comes the longer-term impact of increased competition. Royal Mail has indicated this could result in it losing its monopoly on delivering items below 100g sooner than planned, allowing competitors to 'cream-skim' profitable business.

Regulator PostComm plans a three-phase liberalisation of Royal Mail's letter monopoly. This began in January, when competitors were allowed to collect and deliver bulk mail above 4,000 items (about 30 per cent of the market) and ends in April 2007, when all restrictions go.

Royal Mail fears that the spectre of industrial action will drive customers, particularly businesses, to competitors. It already expects to lose hundreds of millions of pounds to them in the next few years.

Will a strike really hasten this process? Potential competitors want to know where Royal Mail makes its money. That's complicated: of the pounds 197m loss, the core mail business made a profit of pounds 66m – but only thanks to sales to stamp collectors and special deliveries.

It makes money on first-class post (about pounds 60m), but loses it on second (pounds 240m); makes it on heavier items (pounds 558m over 100g) but loses on lighter ones (pounds 480m below 100g).

Competitors want to judge the market on different criteria. Does bulk mail (the banks and utilities that make up Royal Mail's top 10 customers send 12 per cent of all letters) make a profit? What bulk items do? Where are the profitable routes; what distances make money? All this information is commercially confidential.

In addition, the potential competitors with licences – Hays DX, TPG (the Dutch post office), Express Dairies and UK Mail (a subsidiary of Business Post ) – are equivocal.

Ian Paterson of Business Post said: 'The strike will generally weaken Royal Mail's operation and will help other people who want to operate in the postal market in the UK.'

He added that there were opportuni ties for Business Post to emphasise to existing customers it could offer similar services to Royal Mail. But there is no direct impact – UK Mail is not up and running and even if it was, its licence is to collect and sort bulk mail while relying on Royal Mail postmen to take it to final destinations, so a strike would have impacted them.

Hays DX and Express Dairies both say they have no plans for major pursuit of new business if there is a strike. The costs exceed the benefit. Other operators have the same view.

The CWU has to be careful – in many ways its interests are aligned with Royal Mail, where the bulk of its membership is. It does not want to see a shift in high-volume direct marketing from mail to other channels. It does not want to hasten market opening, bringing in non- unionised companies, presenting the challenge and cost of organising outside a single company. And it does not want serious financial harm done to Royal Mail, where 30,000 jobs are already going. Royal Mail officials says further job losses are likely if strikes cause financial damage.

And the CWU must play its hand carefully with an employer that is likely to be backed by the Government. The last high-profile industrial dispute in the UK ended in defeat for the Fire Brigades Union after it misplayed its hand.

The CWU differs from the FBU, as the Royal Mail does from the Fire Service. But there are similarities. While the CWU's 8 per cent is lower than the FBU's 40 per cent demand, the union has gone public on a sum that is still a long way from what Royal Mail appears willing to agree.

Deputy general-secretary Dave Ward, like FBU general-secretary Andy Gilchrist, is also being propelled by a militant membership. The arguments are as much about new work practices as about pay.

The CWU will have to be cautious over the kind of strikes it calls. The licences granted to Royal Mail's four competitors impose tight restrictions on what they can do. These would be lifted (see box), allowing competitors to carry out any of Royal Mail's activities for up to 92 days, depending on the length and severity of strikes. Despite the present timidity of competitors the CWU is unlikely to want to risk any 'cream-skimming'.

Royal Mail says it does not know what will happen, but expects a similar pattern to 1996, when eight one-day stoppages occurred. One senior CWU source said one-day stoppages were most likely.

The union will also want to avoid Trade and Industry Secretary Patricia Hewitt using her powers to suspend Royal Mail's monopoly for up to six months, as she is entitled to do if there is a strike. The Government stood firm against the FBU's pay claim. They are likely to do so against the CWU. Behind the bluster, all sides will be treading carefully.