Further Supplementary written evidence from Royal Mail (USO 53)

I thought I would also take the opportunity to provide some additional information which may assist the Committee ion their deliberations.

The Committee spent some time in its hearings on 26 November considering how employment standards vary across the postal sector. Royal Mail is not party to the full details of other companies’ terms and conditions for their postal workers, but we have a strong relationship with our trade unions. We are proud to pay our people a fair rate and that all of our people, including temporary staff, receive competitive wages and benefits. The table below summarises Royal Mail employment standards:

Access pricing

It has been claimed that cherry picking is not possible because of the existence of zonal access pricing and an implication that Whistl paid zonal access prices.

During the financial year 2013-14, of the c.7.1bn items posted as Downstream Access only c.0.3bn of these (c. 4.3%) were paid for on Royal Mail’s Zonal Price Plan tariff (ZPP1). The remainder of downstream access items (c. 6.8bn) were paid for on the two National Price Plan tariffs (NPP1 and NPP2).

Whistl UK, has publicly stated in its 2013 Annual report that it: “handles about 55% of DSA volumes”.

If Whistl only used the Zonal Price Plan (ZPP1), this would mean that c.3.9bn of the c.7.1bn Access items (55%) Downstream Access items would have been paid for on a zonal basis. However, as stated above, only c.0.3bn items were paid for in this way.

The situation in Europe and Germany

Royal Mail welcomes fair competition. We already operate in the most open and liberalised postal market in the EU.  We face a highly competitive marketplace for both letters and parcels and have done so for the last decade.

It is important to recognise the unique position of the Access market in the UK. As a result of the mandated downstream access regime introduced by the previous regulator, Postcomm, competition in the UK postal market is far more developed than in any other EU country.

Focusing purely on current national market share of direct delivery competitors masks the fundamental risk to the Universal Service and does not show the extent to which the upstream collection and sortation of mail has transferred to operators other than Royal Mail. In the UK, 70% of addressed letters posted by large businesses, which represents 50% of all addressed letters posted in the UK, is collected and processed by companies other than Royal Mail. The nearest equivalent in the EU is Germany, where access competitors control just 11.4% of letters.

The existing access market provides the ability for the direct delivery operator to very quickly grow their volumes. Such operators can use their existing customer relationships to switch mail into their own direct delivery network. The key question is how quickly direct delivery could grow in urban markets and what level of harm this could cause to USO finances. Once undermined, the position will likely be irreversible. On the balance of risk, action to protect the USO would seem justified. This point seems not to be addressed in detail in Ofcom’s recently published documents.

Whistl stated during the Committee’s evidence session that there is “way more competition in EU countries”. However, the combination of a very developed access market and unfettered direct delivery competition makes the UK one of the most open and liberalised markets in the world. This market position, combined with the UK’s unique economic geography, creates an acute risk to the future finances of the USO in the UK. Nowhere else in the EU faces such a situation.

Every major country in the EU has less than 5% downstream access competition, apart from Germany (11.4%). This has meant direct delivery has grown at a much slower pace in other European countries, as direct delivery operators cannot use their access position to leverage the growth of their direct delivery operations.

Even where direct delivery levels are higher, such as in Germany, the rivals to the main postal operator tend to be smaller, local operators. They do not have the same potential to grow from their existing strong customer base as Whistl.

The German postal market, for example, was liberalised in 2008, two years after the UK. In contrast to other European countries, Germany’s domestic mail volumes have remained stable rather than falling . Since then direct delivery competition has grown to around 10% of the market by both revenue and volume. Access mail accounts for just 11.4% of Deutsche Post’s total volume. This is significantly less than the UK (c.50%).

Deutsche Post is required to provide access to its network, but only where it is “economically reasonable”. Access can, therefore, be refused if operational capability or operational reliability would be endangered or there is no capacity. Prices are agreed on commercial terms.

In contrast to many other European countries, letter volumes in Germany increased until 2008 and aside from a decrease of 6.6 per cent in 2009 due to the economic recession. They have continued to rise [till 2011]. However, volumes have not yet reached the pre-2008 level. [WiKs efficiency report for Ofcom; http://stakeholders.ofcom.org.uk/binaries/post/postal-efficiency/wik.pdf].

December 2014