Obsolete equipment threat to UK mail competitiveness

The Royal Mail is using obsolete equipment to sort letters and needs to spend £2 billion to remain commercially viable when the postal market is opened to competition in the New Year, its chief executive warned today.

Adam Crozier told MPs that rival firms, including TNT and German-owned Deutsche Post, had modernised their businesses 15-20 years ago.

There had been “chronic” under-investment in Royal Mail’s network, so that it only sorted 50% of its letters mechanically, compared with 90% for competitors, the Trade and Industry Select Committee was told.

The Royal Mail said in a report to the MPs: “Much of the network depends on obsolete equipment and the business has significant distance to close to achieve best practices and processes.

“Royal Mail requires significant investment and substantial operational change if it is to remain not only competitive but also commercially viable in a fully liberalised marketplace.”

Mr Crozier said that as well as the £2 billion investment, the Royal Mail also had a £4 billion deficit in its pension fund.

He raised fears that competitors will “cream skim” profitable deliveries in city centres from January, leaving the Royal Mail with unprofitable parts of the business.

An under-performing Royal Mail would struggle to deliver the universal price service across the UK, he warned.

A proposed pricing structure would limit the Royal Mail’s profits to £175 million a year, which would put pressure on the universal service, he told MPs.

The balance between protecting the universal service and driving through competition was wrong, said Mr Crozier.

He told the committee that the Royal Mail lost 5p delivering every first class letter and 8p on second class letters.

The true economic cost of a first class letter, currently 30p, was between 45p and 47p, he said.

“We need sensible stamp price rises over a period of time.”