Royal Mail seeks fair play

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Decreasing mail volumes and growing competition are placing "massive pressures" on the British postal service's ability to continue delivering a one-price-goes-anywhere service for every customer.

That was the Royal Mail's response to Postcomm's strategy review on the future of the British postal industry. The postal service has urged the postal regulator to let Royal Mail compete "freely and fairly" while ensuring everyone can continue to mail to Britain's 27 million addresses at uniform, affordable prices.

"The regulatory framework is no longer fit for today's environment where Royal Mail is competing against a growing number of rivals on a wide variety of mail services," Royal Mail chief executive Adam Crozier said in a statement last week.

"The best solution to the massive pressures building up against Royal Mail is for Postcomm to focus the Universal Service on stamped mail to ensure its future for everyone while lifting regulatory constraints on Royal Mail to allow it to compete fairly for business mail," he said.

Royal Mail proposes four steps Postcomm should take to create a fairer market. They include:

• The one-price-goes-anywhere Universal Service should be re-focused specifically on stamped mail rather than including business products.

• Cross-subsidies should be removed to create transparency for business customers and to ensure that competition is sustainable.

• Business mail services should be fully deregulated because competition has now replaced the need for regulatory constraints.

• Operational integration of the postal network should continue as separation would create confusion, introduce complex and costly interfaces and endanger quality of service. It would also jeopardize Royal Mail's modernization program.

Thanks to the new emphasis on business-mail competition, Royal Mail's competitors now handle 2.5 billion business letters a year, or about one letter in eight mailed in Britain. This also means that rivals now handle about 25 percent of bulk business mail in that country, Royal Mail said.

Increasing competition will make it harder for Royal Mail to continue delivering the Universal Service unless there are changes to the regulatory regime, the postal service said.

"The problem is compounded by the fact that Royal Mail is now losing money on the access price of 13 pence (25 cents) it receives for delivering mail collected and transported by rival companies," Royal Mail said in the statement.

But Postcomm said last week that Royal Mail is using an attack on the regulatory structure as a smokescreen for its own lack of progress in tackling its high labour costs.

"Since Single Daily Delivery was introduced in 2004, every initiative that the company has taken to improve efficiency has been absorbed either by higher wage rates or increased pension costs," Nigel Stapleton, chairman of Postcomm, told DM News.

"Royal Mail has failed to bring its costs into line as would be expected of an efficient mail operator."

Mr. Stapleton said Royal Mail remains the dominant player and retains well over 90 per cent of the addressed letters market, and still delivers more than 99 per cent of all mail in Britain. He also said it has a unique value-added tax advantage that acts as a significant barrier to competition for new entrants.

"Competition has taken less volume away from Royal Mail than was predicted a year ago and, on 95 percent of the volume they have lost, they retain more than 70 per cent of the revenue to cover their costs of delivering over the final mile," Mr. Stapleton said.

Postcomm has received more than 30 responses to the consultation on its Strategy Review, which concluded nearly six weeks ago. They are all being very carefully considered by the commissioners. But it is noteworthy that no respondents share Royal Mail's assessment of the effect of competition.

Mr. Stapleton said the decline in Royal Mail's profits is not due to competition from other postal operators. Instead, it has two root causes: Royal Mail's inability to control its costs and its need to finance its growing pension fund deficit.

In the six months leading up to Sept. 30, 2006, Royal Mail raised its prices, on average, by more than 4 percent but this generated only 1 percent in additional revenues to cover labor and pension costs, Mr. Stapleton said.

"This is the key threat to the USO [Universal Service Obligation, and one which Royal Mail and its shareholder must now address very quickly," Mr. Stapleton said.

"As part of the Strategy Review, Postcomm will make sure that the regulatory framework evolves to meet changing customer needs, securing the Universal Service, as well as promoting effective competition," he said.

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