- New proposals from Ofcom
- Positive share price reaction
Royal Mail could be allowed to cut delivery days from six to three, under proposals set out by the communications regulator. Shares in parent group International Distributions Services (IDS) have risen by 5 per cent as a result.
Ofcom said the postal service “must modernise” in order to survive, and estimated that Royal Mail could achieve an annual net cost saving of £400mn-£650mn if letter deliveries were reduced to three days a week. It could save £100mn-£200mn a year if it moved to a five-day week.
The universal service obligation currently forces Royal Mail to deliver letters Monday to Saturday, despite the fact that letter volumes have almost halved in the past decade. Parcels are required to be delivered Monday to Friday, under the obligation, although are often delivered on Saturdays as well. Reforming this framework would require a change of primary legislation. This is where the change is likely to face opposition.
The prime minister's spokesperson told media earlier this week that the Saturday letter service must remain. "The prime minister’s strong view is that Saturday deliveries provide flexibility and convenience that are important for businesses and particularly publishers and the prime minister would not countenance seeing Saturday deliveries scrapped," the spokesperson said.
On top of the cut to Saturday letter service, the regulator has also suggested altering the first and second class delivery system.
Under the proposal, most letters would be delivered through a slower three-day service with next-day delivery still available for urgent letters. Ofcom estimated that this would save Royal Mail £150mn-£650mn.
Downgrading delivery targets is not an option for reform, however. “In fact, it will be important to consider whether additional safeguards are necessary to ensure people’s needs are fully met,” Ofcom concluded.
Royal Mail banked an adjusted operating loss of £319mn in the six months to September, and IDS as a whole reported a loss of £169mn. There was a “marked improvement in performance” in the run-up to Christmas, but the group still only expects to break even for the full year, and this does not account for voluntary redundancy costs.
IDS chief executive Martin Seidenberg said last week “urgent” action was needed to reshape the postal service. “We are doing all we can to transform, but it is simply not sustainable to maintain a delivery network built for 20bn letters when we are now only delivering 7bn."
However, the regulator warned that simply reforming the universal service would "not provide the answer to the financial and operational challenges Royal Mail faces”.
“We expect Royal Mail to improve its reliability and resolve any operational issues that contributed to its failure to meet its delivery targets in 2022/23.”
Ofcom has asked the public to respond to its proposals by 3 April and will provide a further update in the summer.
