What's behind the postal strike?

The postal strikes are about to get worse as the Communications Workers Union (CWU) votes for national action on 22 October. What's the dispute all about, and how will it affect business? Simon Wilson reports.

What's happening?

Barring a last-minute peace deal, national postal strikes are set to begin as early as Thursday 22 October. These are likely to come as a series of rolling strikes affecting different parts of the country. The action comes on top of 15 weeks of co-ordinated stoppages affecting at least 230 different Royal Mail (RM) facilities. The result is an emerging mail mountain estimated at up to 30 million items in London alone.

Ominously for any settlement, the Communication Workers Union's Billy Hayes and RM bosses can't even agree on what the dispute is about it centres on a flexible working and pay deal in 2007 that has now unravelled. RM wants to introduce more flexible working alongside automated processes. The union wants guarantees limiting job losses and protecting pensions.

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Are these issues new?

The Royal Mail has always suffered from "public-sector unions being out of control", says Edward Heathcote Amory in the Daily Mail, but at least it used to "deliver our letter and parcels around Britain cheaply, quickly and frequently".

But due to "a government greedy for funds, a failure to understand the impact of private-sector competition and interference from unthinking bureaucrats in Brussels", the service has deteriorated and morale among staff and management has hit new lows. So much so, says Ian King in The Times, that the two sides have been reduced to an unedifying public scrap over whether or not the CWU has a mandate for its action.

The union claims a 76% 'yes' vote (on a 67% turnout of its 120,000 members) endorses its stance. RM, meanwhile, claims the strike has only minority support. Either way, the planned industrial action is set to cost UK businesses dear. According to the London Chamber of Commerce, the 2007 strikes cost £300m in the capital alone.

Is Royal Mail inefficient?

Very. In even its own accounts for 2006/2007, the group estimated that it is 40% less efficient than competitors. Sir Richard Hooper's 2008 report into the future of Britain's postal services identified several reasons why.

He claims RM has done nothing to restructure or trim its network of mail centres and delivery offices. Plus, levels of automation are far lower than comparable European businesses. For example, 'walk-sorting' (getting letters together for one postman's round) is 70% automated. Europe manages 95%. Worse, 'walk-sequencing' (putting the letters in the right order) is 85% automated at leading European organisations, but is done entirely by hand here.

So costs are high?

Astronomic. According to Hooper, RM labour costs are 66% of revenue, higher than everywhere in Europe except Spain. It is also weighed down by a crushingly expensive defined-benefit pension scheme (now closed to new members, but with 452,000 legacy pensioners). The scheme has a confirmed deficit of £3.4bn, although a revaluation is expected to show that ballooning to £10bn. What makes wage costs truly tough to control is a long tradition of irregular, expensive working practices. These include inflexible roles and generous overtime rules.

Can all this be solved?

As Amory notes, "as a private-sector firm management could have forced through changes without constantly having to look over their shoulders at the political backlash". But as things stand, RM made a lowly £58m profit in 2008 on a turnover of some £6.7bn, its many structural problems remain, and it faces commercial threats (for example, the advent of email means mail volumes are currently falling 10% a year). Frustratingly, the Hooper report was embraced and then abandoned by the Labour government.

Despite several big criticisms, it concluded that RM had a potentially bright future. But it also warned that unless it modernised, it would not survive without emergency government support. Hooper's solution, adopted by the business secretary, Peter Mandelson, was to sell off a 30% stake in the wholly state-owned business to bring in outside cash and commercial know-how. The aim of this move was to create a diversified, modernised, profitable postal service on the German or Dutch model.

But Labour MPs, afraid of upsetting the unions, forced Mandelson to kick that plan into the long grass in June this year, after some 140 of them opposed it. The Tories, if elected, may well pass similar legislation, but have yet to announce their plans. Meanwhile RM limps on as a "parable of failure".

Are Royal Mail's rivals celebrating?

Not in the short term. Private delivery businesses such as TNT and DHL will also be hit hard by the strikes. That's because practically all mail is delivered to the customer by RM postmen, regardless of who collected and processed it.

The regulator, Postcomm, defines 'mail' as items weighing less than 350 grammes or costing less than £1 to send an astonishing 99% of this mail is put through letterboxes by RM staff handling the 'final mile' of the delivery chain. So during a strike, all mail (other than special deliveries) arrives late.

When it comes to parcels, online retailers have more scope to make alternative arrangements, and many are. Longer term, however, rivals such as Business Post may have cause to celebrate should this strike prompt the regulator to break RM's monopoly.