Last Post: Will the Royal Mail survive?

Along with Cockneys and Cabbies, Routemaster Buses and Buckingham Palace, the Royal Mail’s distinctive red pillar-boxes are considered an enduring symbol of all things British. Formally established by Oliver Cromwell as the General Post Office (GPO) in 1567 (The British Postal Museum and Archive, 2008) this is an institution with a long and robust history. However, as the latter day Royal Mail, its future is less certain. Against a backdrop of increased competition resulting from industry de-regulation in 2003 and 2006; a fractious relationship with employee unions that has led to wildcat strikes and severe disruption of business; and public and political censure at plans to close local post offices, Royal Mail faces a stark threat to both its survival as a business and its corporate reputation.

Royal Mail: What are the business issues?
By its own admission, Royal Mail has to contend with significant business challenges. Unlike other former state monopolies such as British Gas and British Telecom, Royal Mail was not privatised in the last decade, but remains a public limited company (plc) wholly owned by the UK government. As such it is fettered by dual obligations which appear to conflict – the requirement to run as a cost-efficient, commercially profitable enterprise since being made a plc in 2001 and a public duty, or ‘universal service’ requirement laid down by The Postal Services Act 2000 (OPSI, 2000).

  • The terms of the licence granted to Royal Mail by the UK regulator Postcomm include obligatory service standards, a cap on prices, and a requirement to provide a universal postal service – a ‘one-price-goes-anywhere’ delivery model.

Clearly, this makes it impossible for Royal Mail to increase profits simply by raising prices, but the terms of their licence also expose them to increased competition from other UK carriers, who operate as private companies and are not hidebound by government. Bulk mail services have been open to competition since 2003 and by 2011 the entire EU market will be fully liberalised. (Postal Services Regulator, 2008) This will make it extremely hard for Royal Mail to compete, let alone prosper unless their business model is radically overhauled.

  • Modernisation of the business model is another thorny obstacle. Despite an already huge transformation since becoming a plc, and turning losses of more than £1 million per day into a £534 million operating profit for the year ending 2004-2005, Royal Mail’s latest annual report indicates that the group is barely profitable, with operating profit down by 30%, and Royal Mail Letters and Post Office Limited recording overall losses of £3 million and £34 million respectively. (Royal Mail Holdings Plc, 2008) Additionally, they are sitting on a Pension Fund deficit of £3.4 billion which, given nose-diving capital markets and increased life-expectancy, could double the liability by the time the scheme is re-valued in 2009. Despite the UK government setting aside £1bn to cover any shortfall, it is incumbent on Royal Mail to make sufficient money to meet their obligations to the members of the scheme.

It is also unlikely that any future UK government will be willing to bail out Royal Mail in the way they have done for the Banking Industry – the perceived burden on taxpayers would cost votes. One option to greater profitability would be to privatise Royal Mail in order to secure an injection of capital – however the political obstacles to this route are considerable. The ruling Labour Government, which is funded by union contributions, is under duress from the Communication Workers Union (CWU) to keep Royal Mail in public hands. Indeed it made this promise in its 2005 election manifesto, and given the proximity of a general election, Labour may be reluctant to risk an internal party revolt as the UK government wrestle with economic downturn and a looming election.

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