Why Royal Mail can't deliver

Wondering exactly why your mail's even later than usual? Jody Clarke looks at why postal workers have gone on strike and whether the Royal Mail can overcome such hurdles in its drive to modernise.

Why is my mail even later than usual?

Royal Mail postal workers began the first of two 48-hour strikes on Thursday 4 October. The Communication Workers Union, which represents 130,000 members of staff at the UK's main postal service, opposes modernisation plans, which it claims will result in the loss of over 40,000 jobs, longer shifts and a paltry pay packet for their members, who are already treated like slaves, says CWU Deputy General Secretary Dave Ward. The second 48-hour strike started last Monday, with further stoppages expected by mail centre and airport staff early next week. The CWU says it will embark on a rolling programme of strikes from 15 October until the dispute is resolved. According to The Sunday Telegraph, although the immediate cost of the strikes to Royal Mail will be £50m-£60m, it could eventually cost the company up to £260m.

What does Royal Mail say?

Royal Mail boss Adam Crozier rubbished claims that employees were treated like slaves. On a BBC Radio 4 show on Tuesday he said, "We are simply asking people to work the 37 hours and 20 minutes they are getting paid to work and if they have to work longer, then of course they get paid overtime. For the union to say they can't accept that is frankly not a tenable position." The company has offered a 2.5% pay rise, but wants to close its final-salary pension scheme in favour of a new contributory scheme. The 12,000 members of Unite, which represents management at Royal Mail, have accepted the offer. However, the CWU, a big contributor to the Labour party, is still not happy. They want a postal worker's salary to be in line with the national average wage of £395 a week within five years, a rise of 27%.

Why the changes?

The Royal Mail's pension scheme has a huge £6.5m deficit. Covering over 160,000 staff, the cost of funding it has risen in recent years to about 20% of staff salaries from 12.4%. The company says it can pay off the deficit in the next 17 years, but only by scrapping the scheme. But Billy Hayes, the CWU General Secretary, wants the Government to intervene. "If this was Northern Rock they would be pouring money in," he said last week. But unlike Northern Rock, the Royal Mail has been nursing losses for a long time. The post office network lost £111m between 2005 and 2006, even though the Government props it up with £150m a year. One of the biggest drags on profit has been Britain's 8,000 rural post offices, 6,500 of which cost more to run than they make. The Government plans to close up to 2,500 of these, which critics say will make life far harder for OAPs in rural areas. However, even consumer group Postwatch backs the closures, as the current network is unsustainable. Meanwhile, liberalisation means that the post office is facing growing competition.

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Is the competition a real threat?

Since the liberalisation of the postal market in 2006, 17 other companies have started delivering post alongside Royal Mail. They have already taken 40% of the lucrative corporate mail market and have won Government contracts from the main postal service. Royal Mail claims the failure to restructure has also cost it a recent £8m deal with Amazon, the online retailer. According to Royal Mail Chairman Allan Leighton on a recent edition of Sky News, its rivals in the postal market are 40% more efficient; the Royal Mail has yet to move to fully automated letter sorting, for instance. John Hutton, the minister responsible for the Royal Mail, says that "there's no future for the business if it's locked into the perennial cycle of industrial action It is going to lose market share." Couriergram, the UK-wide telegraph service, has already taken a third more business since the strike started.

So why can't we just stop using the Royal Mail?

Private companies still use Royal Mail for the last mile of delivery, so are also caught up in the strike. They could make the final mile delivery if they wished, but have chosen to focus instead on collecting and sorting post. "Competing with Royal Mail is very difficult because of the company's sheer size and economies of scale. Delivering mail end-to-end, or from A to B, would mean having to establish a network on the size of Royal Mail, which has 14,000 post offices nationwide," says David Whitely at Postcomm. There are reports that TNT Post is looking at establishing its own "end to end" services, but this has yet to be confirmed. As a result, Royal Mail still delivers more than 99% of UK post. On the continent, however, the scale of liberalisation has increased more rapidly. Deutsche Post has lost almost 10% of its share of the "end-to-end" market, while in the Netherlands the old state monopoly has lost 12.5%.

Where do we go from here?

Royal Mail staff are 40% less productive, but get paid 25% more than their rivals, so it's clear that something needs to be done. The Daily Telegraph reckons "the state of the Royal Mail resembles that of the Fleet Street print unions up to the mid-1980s", with "weak middle management" and a "centuries-old monopoly," leaving the group "ill-prepared for private-sector competition". Companies are already abandoning Royal Mail, the latest being Warranty Direct, which last week said it would stop posting 12,000 letters a month and rely on email instead. "As a business we can no longer rely on the Post Office", said the car warranty provider, whose contract was worth £100,000 a year to Royal Mail.

Jody Clarke

Jody studied at the University of Limerick and she has been a senior writer for MoneyWeek for more than 15 years. Jody is experienced in interviewing, for example in her time she has dug into the lives of an ex-M15 agent and quirky business owners who have made millions. Jody’s other areas of expertise include advice on funds, stocks and house prices.