Proactive Investors - Ofcom said the Royal Mail (LON:IDSI) could reduce letter delivery days in the service from six to five or even three, in proposals aimed at modernising the postal service.
Two primary options for the service were laid out:
- Making changes to existing First and Second Class and business products so that most letters are delivered within three days or longer, with a next-day service still available for any urgent letters.
- Reducing the number of letter delivery days in the service from six to five or three.
For the second option to be passed it would require Parliament to vote in favour of changing primary legislation.
Downgrading delivery targets is not an option for reform, Ofcom stated.
Its estimated Royal Mail could achieve a net cost saving of £100-£200 million if letter deliveries were reduced to five days; and £400-£650 million if reduced to three days, the watchdog said.
If most letters were delivered within three days, it could achieve net cost savings of £150-£650 million, Ofcom added.
“Under any scenario, Royal Mail must modernise its network, become more efficient and improve its service levels,” the report revealed.
Reaction
Shares in IDS, the owner of Royal Mail, are up 5.35% but analysts remain sceptical that changes to delivery days will get through Parliament.
Postal Affairs Minister Kevin Hollinrake said the Government was committed to a six-day service from the Royal Mail.
Hollinrake told Times Radio: “The Prime Minister [has] been very clear on this, six-day delivery is really important for many people in this country, many of our citizens, but also for many of our businesses.”
He was even clearer on the BBC, describing the 6-day service as “sacrosanct.”
'A six day service is really important... Saturday deliveries are sacrosanct'Post Office Minister Kevin Hollinrake spoke to #BBCBreakfast after a consultation was launched into Royal Mail which could reduce the number of letter deliveries per weekhttps://t.co/ZQirTB8I67 pic.twitter.com/XWWOXOsREI
— BBC Breakfast (@BBCBreakfast) January 24, 2024
Liberum’s Gerald Khoo suggested the political incentives for approving changes are asymmetric and “skewed entirely to the downside.”
“The government has rebuffed previous requests to reduce deliveries to five days per week, and we see no upside to any government to approving changes until the status quo is imminently untenable,” he said.
Peel Hunt (LON:PEEL) noted the plans would require parliamentary approval, “and unhelpfully, Downing Street indicated it would not support them.”
On Monday, a spokesperson for the Prime Minister said, “he would not countenance seeing Saturday deliveries scrapped.”
Changes in Europe
Similar proposals have been made for other national services like Germany’s Deutsche Post (ETR:DHLn), owned by DHL.
Germany’s Federal Ministry of Economics suggested increasing letter delivery targets from one day to three days, while also hinting at the use of machines to meet these obligations.
In August, the German federal network regulator rejected the postal services plea for a stamp price cap to be lifted in the hope of reducing some of the rising costs.
In France, La Poste has been criticised for abolishing its first-class mail service, which offered next-day delivery.
Under the state-owned post office’s former rules, letters could be delivered within a day, three working days or within four days, with different priced stamps for each service.
Now, letters can only be sent within three working days.
To deal with emergency letters, the La Poste offers a service where people can write their message out on its website, where it will be printed out at a post office before being put in an envelope and delivered.
French nationals expressed dismay at the decision, with news magazine L’Obs calling the scheme “within a whisker of reinventing the fax machine”.
Why the review?
Concerns about the universal postal service becoming unsustainable have been at the forefront of both the Royal Mail and the regulator's minds.
Both claim the services are at risk because it is failing to evolve to current trends of people sending more parcels and fewer letters.
Officials would have to cast their minds back more than a decade to 2011, when changes were last implemented to the service.
During this time, letter volumes have halved.
Royal Mail reported half-year losses of nearly £320 million in the first half of the 2024 financial year.
Boss Martin Seidenberg has called for changes to the universal service agreements or risk turbulence at the postal group.
In a letter to Liam Byrne, the chair of the business and trade select committee, he said: “Delivering the current universal service requirements – in a financially sustainable way – is increasingly difficult, if not impossible, to achieve as the mix and number of parcels and letters changes.
“It is simply not sustainable to maintain a delivery network that was built for 20bn letters when we are now delivering only 7bn.”