UK mail deal sets precedent for market liberalisation

A significant hurdle to the liberalisation of the postal market was cleared yesterday after Royal Mail agreed for the first time to deliver letters collected and sorted by a private company.

The terms of the agreement are likely to set a precedent for deals between the state-owned mail group and companies such as Deutsche Post of Germany and TPG of the Netherlands, who have tried to break into the UK market for several years.

From April, Royal Mail will deliver post that is collected and sorted by Business Post, its private sector rival. Rather than emptying post boxes on the street, Business Post, through its subsidiary UK Mail, will collect mail from businesses such as phone companies and utilities that send letters in bulk. The company aims to win contracts by undercutting Royal Mail’s bulk mail charges, then make a profit from efficiencies at the collection, transport and sorting stages.

UK Mail will take its post bags to Royal Mail’s 73 sorting offices, where it will be transported to local delivery offices and distributed by postmen and women. UK Mail has agreed to pay Royal Mail 13p per letter weighing less than 60g for access to its delivery network, if the mail is fully sorted and 13.375p per letter if it is only sorted by postcode area. Larger letters will cost 14p each to deliver. Business Post tried to strike a deal with Royal Mail for two years, but the two parties disagreed on access prices. Deutsche Post also had abortive talks with Royal Mail.

Postcomm, the postal regulator, stepped in last year to try to break the deadlock and suggested a charge of 11.5p per letter. Royal Mail protested this would lose it money. At the end of last year Postcomm was preparing to recommend a new access price when Royal Mail and Business Post surprised the market with the news that they were back in talks and close to a deal.

Both parties yesterday said they were pleased with the price agreed, and said they could make money at that level.

Adam Crozier, Royal Mail chief executive, said: “This is a far fairer price, that both sides can be happy with, than Postcomm’s suggestion last year.” One postal analyst estimated that on average door-to-door delivery accounts for half of the group’s costs and that a charge of less than 13p would be loss-making.

Paul Carvell, Business Post chief executive, said the price was in line with the rising price of stamps and that “it is better to get an agreement amicably agreed rather than imposed by a regulator”. Royal Mail was seen as the winner in terms of the conditions of the rolling one-year contract with Business Post. The private sector group has agreed to cater for a spread of customers around the country rather than try to “cherry-pick” lucrative contracts involving shorter journeys or less sorting, such as post sent by London councils.