Royal Mail’s second-class shake-up won’t prevent losses

Plans to scale back deliveries threaten businesses and may not even secure the company’s future. By James Warrington

As Emma Gilthorpe takes up her new job as boss of Royal Mail, one issue will be at the top of her in-tray. Just a day after her appointment was announced, the beleaguered postal operator outlined proposals for a shake-up of letter deliveries that it hopes will secure its future.

The plans, which were delivered to regulator Ofcom as part of its review of Royal Mail’s so-called universal service obligation (USO), are aimed at cutting costs at the heavily loss-making company without sparking yet more political backlash. For Gilthorpe, a former Heathrow executive, managing this delicate balance will be critical as she attempts to liberate Royal Mail from costly, outdated regulations and prepare it for the future.

But as losses mount, and the company struggles under its hefty labour costs, will the shake-up be enough to save Royal Mail?

Under the proposals set out yesterday, second-class letters will be delivered on every other weekday, leaving households with a maximum of three deliveries per week. Business post, such as bank statements and bills, will also fall into this category.

At the same time, Royal Mail will continue to deliver first class mail six days a week. It is also in talks with the NHS about special arrangements for time-sensitive medical letters.

For executives at Royal Mail, the overhaul is nothing short of a necessity, freeing the company from decades-old regulations that have put its future at risk amid a slump in letter sending. They also argue that the moves would bring the UK in line with

‘There is an element of continuing to ask customers to pay more for a worse service’

other European countries such as France, Italy and Greece, which have implemented similar measures.

Yet the plans represent a scaling back of Royal Mail’s demands following a backlash over plans to scrap Saturday deliveries.

Fraser Nelson, editor of The Spectator, said the move posed a “real threat” to the magazine industry, while greeting cards makers warned that Royal Mail risked falling into “terminal decline”. Rishi Sunak, the Prime Minister, also weighed in, saying the Government was committed to six-day deliveries. Bosses will be hoping that maintaining a Saturday service for first-class post while scaling back second-class deliveries will keep everyone happy. But the shake-up could be hard to swallow for consumers.

Under the plans, households would receive three second class letter deliveries one week and two the next.

Currently, a second-class letter posted on Wednesday should arrive on Saturday. If the changes go through, it may not be delivered until the following Tuesday. One industry analyst brands the reforms a “sleight of hand”, adding: “What you get is a downgrade of the second-class service. Basically, there is an element of continuing to ask customers to pay more for a worse service.”

Some businesses are also unhappy, warning that they will effectively be forced into paying for first-class post to ensure their customers receive deliveries on time. Sajeeda Merali, chief executive of the PPA, which represents magazine publishers, says many titles will be “at the mercy” of first-class post because of the time sensitivity of their products.

A spokesman for Royal Mail said the company recognises the importance of Saturday deliveries for publishers, adding: “As part of our proposal we would continue to offer a next day service over six days to meet this need, alongside a range of other services to give customers choice on speed and price.” In a further headache, Royal Mail risks another clash with unions after bruising strikes last year that cost the company £1m a day. The changes are expected to cut the number of delivery routes by up to 9,000 – a move expected to lead to 1,000 job losses.

However, there remains a question over whether the proposed changes would be enough to save Royal Mail.

The company, a division of Londonlisted International Distributions Services (IDS), made losses of £319m in the first half of the year, with Ofcom estimating that the USO is burdening it with £675m in costs each year. Bosses have said its proposed changes would allow it to save up to £300m a year, from reduced costs and higher revenues from shifting deliveries to first class. Peel Hunt expects Royal Mail to post pre-tax losses of £370m this year and £77m in 2025. “If implemented, this would give the company a route to profitability,” says analyst Alexander Paterson.

Yet the bullish forecasts depend on the speed of the reforms. Royal Mail has urged Ofcom to introduce new rules by next April at the latest, and warned changes could take up to two years to implement beyond that. The savings will also hinge on how quickly letter sending continues to decline. The company has warned that letter volumes could fall to 4bn in the next five years, down from a peak of 20bn two decades ago.

“Royal Mail’s fundamental problem is that it’s a high-cost business,” says an industry analyst. “Basically, their people work fewer hours and get paid more per hour than all of their competitors – and that isn’t offset by better productivity.” However, Royal Mail has pointed to the possibility of a taxpayer-funded subsidy.

But observers warn that a government intervention will only come when the service is on the brink of collapse – by which time it is already too late. Instead, it must seize the chances when they come.

“Royal Mail very sensibly have taken the view that they’re not going to solve this in one go,” the industry analyst says. “If they’re £300m better off that’s a very good start. Is it enough? Probably not. But is it better than not doing anything? Yes.”