Stamped out?

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October’s strikes reminded many businesses how much they need the Royal Mail- and others how easily they can do without it. EN asks what “modernisation” can really deliver.

The line that divides a national treasure from a national disgrace can be perilously fine. However, some organisations – the National Health Service for instance – appear to be able comfortably to straddle both positions. Another such institution is the Royal Mail.

Everybody loves their neighbourhood postie – even when he’s been on strike for a week – and the very thought of removing a redenamelled pillar box elicits the same reaction from the nimbys as bulldozing a row of thatched cottages and replacing them with a wind farm. Painted bright pink.

But the misty-eyed heritage lobby are just as likely to complain that they no longer receive their morning post early enough to peruse it with their pot of Darjeeling and buttered soldiers, that they can’t get their business correspondence completed in time for the new earlier collections, that they have to pay extra for Special Delivery if they want to be confident a letter will actually arrive, and that the Royal Mail’s workforce – en masse – are a throwback to the kind of industrial relations that brought this country to its knees in the 1970s.

It is unlikely to have escaped readers’ notice that all is not well at the Royal Mail. A planned part-privatisation has, effectively, been abandoned for the time being and the jury remains out as to whether national strikes at the end of October were the last roar of a wounded union lion or a mere glimpse of the battles to come as the company implements a modernisation programme without which its very survival is under threat.

The latest strikes have returned the Royal Mail to the spotlight. But the statements made on all sides
during this dispute have given the impression that the business is more of a basket case than the facts themselves would indicate.

The company does face serious issues – a £10bn pension scheme deficit, a letters market in structural decline, a statutory compulsion to provide a costly universal service while private sector competitors can nibble away at market share in the profitable parcels and “upstream” bulk mail markets, and fractious industrial relations that dog its attempts to alter working practices. But, nonetheless (with the exception of the pension scheme), it is not quite the albatross around the public sector’s neck that many assume it to be.

The Hooper Background report, published in December 2008, set out the challenges facing a company that had, in the year to March 2008, made an operating loss of £3 million on its £6.83bn turnover. The universal service (the obligation to deliver six days a week to any address in the UK for a fi xed price) had, over the same period, made an operating loss for the first time in its history – totalling a whopping £100 million.

Royal Mail is the letters and parcels delivery business of the Royal Mail Group, which also includes express parcels company Parcelforce Worldwide, European parcels business General Logistics Systems and, of course, Post Office Ltd and its subsidiaries.

For the purposes of the Hooper report’s proposals and any political plans put forward by any party for part or full privatisation, the Post Office (which even in years when it makes a profi t only does so courtesy of a £150 million government subsidy) is split out from the rest of the group and is to be retained in Crown ownership.

The problems identified by Hooper are various – but at the core of most lies a letters market that has, since 2005, been shrinking. During 2007- 8, the report says, Royal Mail handled three million fewer letters a day than it did in the previous year: a decline of 3.2 per cent.

And the market is getting worse. In the year to March 2009 mail volumes fell by a further 5.5 per cent. Royal Mail believes the fall in the current year will be even more severe – as much as ten per cent – as the business market contracts further in response to the recession.

Competition plays a part. Since the “upstream access” market was liberalised in 2006 alternative carriers have been able to collect, sort and transport mail before (in the vast majority of cases) passing it on to the Royal Mail for “final mile” delivery. In 2007-08 this accounted for around 20 per cent of all mail, cutting Royal Mail’s operating profit, Hooper estimates, by £100 million.

Not a figure to be sneezed at, though less than the £160 million operating profit lost through consumers switching to cheaper alternatives, such as from first to second-class mail, and – most signifi cantly – £500 million from the substitution of digital media for postal services (electronic billing by utility companies etc) over the same period.

Royal Mail has not until recently begun to modernise in the way of other European, predominantly privatised, national postal services – and Hooper echoes the company’s 2007 assessment that it was at that time 40 per cent less efficient than its competitors.

Since the publication of the Hooper report, however, the fruits of the implementation of the Royal Mail’s 2007 agreement with the Communication Workers Union, which represents 120,000 staff, on Pay and Modernisation have begun to work through. Royal Mail in 2008-09 made an operating profit of £58 million on a reduced turnover of £6.707bn.

This shows movement in the right direction, but at less than one per cent this is not exactly a comfortable margin. Something has to give. And, sadly – as the CWU suspects – that something is jobs (the Conservative Party, which favours full privatisation, estimates that more than 30,000 of the 162,000 Royal Mail staff could be dispensed with once new sorting technology is fully implemented).

Hooper explains, “The postal process for letters typically has fi ve stages: collection, sorting by region, transportation, sorting into ‘walks’, and delivery. Collection takes place from one of the UK’s 115,000 post boxes, 12,000 post offi ce outlets and around 87,000 business addresses. After initial sorting during the evening at one of 69 mail centres, letters pass through one of nine distribution centres on their way to a second mail centre.

“Each of the mail centres receives mail from different parts of the country, sorts letters at local level, and transfers them to one of 2,249 delivery offices. There, they are put into the right sequence and delivered to the door.

“Each of the 69 mail centres has an inward and an outward function at different times of the day. Bulk mail handled by Royal Mail which has been pre-sorted is taken directly to one of the nine distribution centres.”

Until the beginning of the modernisation programme only 50 per cent of Royal Mail’s letters were mechanically sorted into “walks”, a figure that by the time of the Hooper report had grown to 75 per cent. However postmen were still spending two-to-three hours per morning postmen were “walk sequencing” – putting their letters in the precise order for delivery – a process which the Royal Mail is now in the process of mechanising.

This, the CWU fears (almost certainly rightly) will mean either reductions in hours worked or fewer staff, an issue that – while it has signed up to the 2007 agreement on modernisation which is now around half way through its implementation – featured significantly in its latest dispute with management.

The Hooper review suggested that the Royal Mail business should take on minority investment from a third party company. One reason for this was that, the report claimed, the government’s position as sole shareholder made it impossible for sensible industrial relations to develop in the company. The union would always go over management’s head.

There’s more than a hint of truth to this. In the recent dispute Billy Hayes, general secretary of the CWU, repeatedly called upon business secretary Lord Mandelson to intervene, dubbing him the “minister without responsibility”.

Mandelson in turn labelled the strikes “suicidal”, in reference to the permanent loss of business – especially parcels – to competitors that accompanies each stoppage.

And the Government’s abandonment this year of its postal services bill, which would have allowed for part-privatisation, while blamed by Mandelson on market conditions, is widely believed to have had just as much to do with the CWU’s threatened withdrawal of support from the Labour party.

The pension deficit is one of the most interesting elements of the Royal Mail’s situation. With 250,000 members and a £10bn deficit, its existence makes the Royal Mail, according to Hooper, “balance sheet insolvent”.

This doesn’t stop the company trading, but does limit management’s room for manoeuvre. The postal services bill included a provision for the pension scheme to be taken off the Royal Mail’s books and onto the government’s.

The Tories say they would do the same as part of any future privatisation deal. Most interestingly, an element of the CWU’s dispute centres around its desire for the government to take on the pension scheme deficit – despite the fact that while the company remains saddled with the deficit it is, effectively, safe from privatisation. We asked the CWU to clarify the thinking behind this but have yet to receive a response.

In any event, part-privatisation is, for now, dead in the water. TNT, the Dutch national operator whose TNT Post subsidiary in the UK is the country’s largest private upstream business mail operator and is carrying out a long-running door-to-door business-to-consumer pilot in Liverpool, had been considered the front-runner to “partner” the Royal Mail under part privatisation.

Now that the Postal Services Bill has fallen TNT says, “TNT withdrew itself from the process when it became clear to us that there was no political support for the part privatisation of Royal Mail. We want to refrain from speculations on the future, so we don’t have an opinion on the statements made by politicians on that subject.”

What we do know, though, is that from 2012 all European postal markets will be fully opened to competition and that, possibly as soon as next summer, operators like TNT Post intend to develop door-to-door business mail services in parallel with the Royal Mail though, of course, without the latter’s constraints in terms of the universal service.

Seven years ago the Royal Mail was losing £1 million a day. It has turned that position around but, we suspect, if it is to do more than run to standstill over the next seven years we will see upheavals to come the likes of which, in industrial relations terms, haven’t been experienced since the 1980s.

Billy Hayes insists his words were taken out of context when in a recent newspaper interview he appeared to say the CWU was in a stronger position than Arthur Scargill’s NUM before the 1984 miners’ strike. Whatever he actually said, the fact that the comparison is being made is ominous.

The parallels are, of course, inexact. Nonetheless, all sides would do well to remember how that dispute turned out in the end.