Royal Mail: TNT Post UK Plans Threaten Universal Postal Service

Royal Mail is claiming that delivery plans by its rival TNT Post UK will reduce its revenue by £200m and threaten the viability of the universal postal service.

It made the claim in a submission to Ofcom as part of a request that the industry's regulator open immediately a review into competition in the direct delivery market.

"Based on our estimates of the impact of TNT Post UK's publicly-stated plans, this could reduce Royal Mail revenue by over £200m in 2017-18," said Royal Mail.

"Our analysis indicates that the underlying economics of the UK postal market would create strong incentives and opportunities for TNT Post to achieve a wider roll-out and larger market share than its current publicly-stated plans suggest."

It said unless Ofcom steps in to curb TNT Post, Royal Mail would struggle to hit a profit margin of between 5-10% that it needs to maintain its Universal Service Obligation (USO).

There is an ongoing tussle between TNT Post UK and Royal Mail over direct delivery. It centres around Royal Mail's "Access" contracts to deliver mail sorted by others, such as TNT, on the last leg of its journey.

In January, Royal Mail said it would offer a discount on Access contracts of 0.25p per item for customers who provide monthly forecasts of mail volumes that allow the firm to better prepare itself for deliveries.

However, the newly privatised firm also hiked Access contract prices by as much as RPI inflation plus 1% to protect revenues as the UK postal market declines in size.

TNT lodged a complaint with Ofcom about the rises and the watchdog opened an investigation. As a result of the probe, Royal Mail suspended its planned price rises.

Royal Mail has said competition from TNT is threatening its ability to meet the USO, which requires it to run a high-cost infrastructure so it can deliver mail six days a week to all parts of the country.

This is because TNT has begun to deliver and sort its own mail in Manchester and some parts of London, rather than use Royal Mail's Access service.

While Royal Mail is obliged to target loss-making areas for delivery, such as remote parts of countryside, the firm says TNT is able to "cherry pick" profitable areas, putting it at a competitive disadvantage.

"Royal Mail's call for a review of competition completely misses the point about the real issue facing their letters business ie the internet," said a TNT spokeswoman.

"They need to focus on their inefficiencies to address this issue, not attack embryonic competition.

"Competition is the best news in years for the postal sector – we are creating jobs for thousands of people, many of them young or long-term unemployed who have changed their lives by working at TNT Post."

She added that TNT Post delivers less than 1% of the UK's mail and so it does not pose a threat to the financial stability of the Royal Mail's USO.

"Having removed the vast majority of regulation on Royal Mail, the regulator has said that postal competition is one crucial ingredient for making a more efficient Royal Mail," said the TNT spokeswoman.

"There is not a shred of evidence that postal delivery competition is a threat to the USO.

"Royal Mail should respond to the challenge of the internet and the opportunity presented by postal competition which will actually make for a more sustainable Royal Mail which is better able to deliver the USO in the years ahead."

Ofcom does not think there is currently a threat to Royal Mail's universal service.

"We will consider the report Royal Mail has given us carefully," said a spokeswoman for Ofcom.

"Protecting the universal service is at the heart of Ofcom's work, and our current evidence clearly shows that the service is not currently under threat.

"We would assess any emerging threat to the service quickly, in the interests of postal users."

Royal Mail was privatised in October 2013 in a controversial flotation onto the London Stock Exchange. The government has been accused of undervaluing the firm by as much as £750m.