Could postal prices rise significantly?

Ofcom have announced a new review of Royal Mail regulation in an effort to ensure the Universal Delivery service for the future.

This has been triggered by the withdrawal of Whistl (formerly TNT Post) from offering an end to end delivery service in the UK. With no national competition Ofcom say that Royal Mail are now in a better financial position than when Ofcom last reviewed the postal framework.

It’s worth noting that Whistl were naturally cherry picking the most densely populated areas of the country (cities such as London and Manchester) to roll out their service. If they couldn’t make end to end delivery pay in cities what chance would they have had in rural areas where Royal Mail are obliged to delivery to every letter box six days per week?

How Postal Markets work in the UK

What will Ofcom will examine?

• What changes to the overall postal regulatory framework might be appropriate to secure the universal postal
• How best to ensure Royal Mail continues to become more efficient in the absence of national competition for the direct delivery of letters (so helping the universal postal service to remain sustainable);
• Whether Royal Mail’s wholesale and retail prices are both affordable and sufficient to cover the costs of the universal service; and
• Whether Royal Mail’s commercial flexibility remains appropriate in the changing market; and, if not, whether wholesale or retail charge controls might be appropriate.

The worrying phrase here is “both affordable and sufficient”. What’s affordable is open to debate, but what’s “sufficient” means do Royal Mail need to charge more to maintain the service? Whistl couldn’t cope in the best areas in the country when competing against Royal Mail’s prices. Of course there’s a chance that Ofcom could decide that Royal Mail’s prices are too high, but that seems somewhat unlikely.

Royal Mail responded to the Ofcom announcement saying “Royal Mail will continue to participate fully in Ofcom’s review. As the regulator notes, there is significant competition in the UK market in the mails and parcels segments. At the same time the letters segment is in structural decline of 4-6% a year. There is therefore a need for regulatory clarity and certainty for all market participants. It is essential that Royal Mail is able to sustain the UK’s valued, high quality, high fixed cost universal service for the benefit of all consumers and businesses“.

Separately Ofcom is currently investigating whether Royal Mail has abused a dominant position in contravention of the Competition Act 1998, by virtue of the access prices that it announced in November 2013 and January 2014. This follows a complaint by the then TNT Post UK (now Whistl).