Promise in the post: The competition count-down continues for UK Royal Mail

Higher prices and worse service do not make a compelling proposition for consumers, but that is exactly what Royal Mail has offered in the first half of 2004. The company responsible for delivering most of the country’s post says it is now back on track after the largest change management programme in British business for a generation. But with just over 2 1/2 years until it faces full competition in the postal market, time is running out for Royal Mail.

Yesterday’s performance figures for April to June show the organisation was still struggling to deliver the post months after reaching agreement with the unions on new working practices. It failed to hit any of its 15 performance targets during the quarter, continuing the abysmal achievement of 2003-4. With first-class letters, just 88.3 per cent were delivered next day against a target of 92.5 per cent – the poorest quarterly figure for three years.

Royal Mail appears to have underestimated the impact on its business of the abolition of the second post and the introduction of a five-day week for staff. Since a management shake-up in May that gave control of postal operations to chief executive Adam Crozier, it says performance has been improving. Four of the 15 targets were hit in August and with 92.4 per cent of first-class mail delivered next day, it was close to hitting that one also.

This is welcome news, coming after a penny increase on second-class mail in April and last year’s penny price rise. These increases have helped restore Royal Mail to profitability despite repaying more than Pounds 50m to customers for last year’s failures, which included unofficial strike action. However, Postcomm, the regulator, is still considering whether to impose a financial penalty on Royal Mail for its recent failure to meet targets.

Meanwhile, the clock is ticking for the completion of the liberalisation programme that will expose Royal Mail to full competition by April 2007. This will shift power from a regulator inevitably concerned with ensuring the survival of the only company that can guarantee universal service, to consumers who will have limited patience with excuses for poor performance.

If Royal Mail is to survive in this brave new world, it needs to act fast to protect itself from competitors already operating in deregulated markets. First it must raise its profitability to levels that will justify the investment needed to compete with foreign postal operators whose margins are already four or five times greater. It cannot rely simply on dearer stamps to achieve this – indeed, bulk customers will expect lower prices after liberalisation.

Second, it must ensure its pricing structure does not leave it vulnerable to competitors that grab its most profitable business and leave it with the loss-making parts. Aligning prices with costs has only just begun, but is a priority ahead of full liberalisation if Royal Mail’s finances are to be sufficiently robust to guarantee the universal service that only it can now offer.