UK Mail deal opens door to delivery network

Royal Mail is in preliminary talks with the Dutch and German postal services, TPG and Deutsche Post, about allowing them access to its delivery network
after reaching a ground-breaking deal with a British rival yesterday.
UK Mail, a unit of Business Post, became the first commercial operator to break Royal Mail's 300-year-old monopoly on postal services by agreeing to pay the state-owned group about £113m a year to deliver bulk mail.

The deal is the first of its kind in Europe and was concluded after two years of talks. It in effect freezes regulator PostComm out of the process of enabling access to Royal Mail's network of 73 mail centres and 1,450 delivery offices.

Adam Crozier, Royal Mail's chief executive, indicated that the deal, by averting the cherry picking of lucrative services and guaranteeing the universal service, would become the template for other potential operators.

Business Post – which expects to add £150m annual sales within three years – almost doubling its £186m turnover, has agreed that UK Mail will bring Royal Mail pre-sorted mail resembling an average national postbag.

The rival operator has in effect avoided the charge that it is "cream skimming" the market by picking up only bulk mail – 4,000 items or more – from businesses such as mobile telephone operators or banks in wealthy areas, such as London's West End.

Mr Crozier said the deal "gives Royal Mail a commercial income stream without undermining our ability to continue providing a 'one price goes anywhere' universal service to the UK's 27m addresses".

It is understood that negotiations on a similar deal have already begun with TPG, which has a full licence, and with Deutsche Post, which is holding talks with PostComm on a winning a full licence to compete in Britain.

Other groups waiting in the wings are Hays and Express Dairies. The UK Mail deal could eventually allow it direct access to delivery offices but excludes local delivery of mail, or use of loss-making pillar boxes.

The deal comes just days before PostComm was due to propose its own "access" charge, and sees UK Mail pay a basic 13p a letter to Royal Mail for "last mile" delivery by 80,000 postal workers.

Originally, the regulator proposed an access charge of between 11.46p and 13p, prompting Royal Mail to claim this would cost it £650m in annual profits. Mr Crozier said the deal was a lot fairer, but the regulator said it was "not that far away" from its final proposal.

PostComm chairman Nigel Stapleton said the deal set a "valuable benchmark for other customers" and "it is far better that the parties involved have negotiated their own access arrangements rather than have the terms and conditions imposed by us".

Paul Carvell, the Business Post chief executive, said UK Mail hoped to win 3% of the 82m letters delivered each day and the business would be profitable by the second year of its operation.

He said UK Mail would be giving 75% of its income to Royal Mail, implying it would be charging just over 17p a letter, against Royal Mail's offer to bulk mail customers of 16p-18p. "We will be competing ferociously," Mr Crozier said.

Mr Carvell, who hopes to undercut Royal Mail's second class mail with his two-day delivery service, said margins would be in a range of 5-6%, compared with the group's more normal 10%. Sharehold ers, he claimed, were "ecstatic". Postal workers union the CWU welcomed the deal, despite reservations about "artificial competition" and said it would seek recognition talks with Business Post.

"We need to ensure that the industry does not revert to a low pay, casualised and insecure workforce," said Billy Hayes, the CWU's leader.