Royal Mail Chief Outlines Postal 'Threat'

The boss of Royal Mail (LSE: RMG.L - news) has told MPs its UK postal obligation of 'one price goes anywhere' is uneconomic because its rivals are "cherry-picking" the best work.

In evidence to the Business Select Committee, Moya Greene accused rivals of undermining Royal Mail's universal service obligation (USO) under which under letters are posted anywhere in the country for the same price.

She put the annual cost of operating under the USO at £7.2bn, citing the high cost of delivering post to rural and remote areas of the UK.

Ms Greene argued that because it was essential for most people, the USO needed internal subsidies to make the economics work.

She said: "Low cost, high density areas are needed to cross subsidise suburbs and rural areas which are much higher cost.

"If you allow cherry picking you undermine the economics."

She said pressures included a 4-6% decline in annual letter volumes and competitors taking business off the Royal Mail in urban areas, where delivery costs were cheaper.

Union leaders echoed her remarks, but officials from Whistl and UK Mail (LSE: UKM.L - news) , who were also present at the hearing, denied they were cherry picking work, or that they threatened the universal service.

Ms Greene was speaking just a week after Royal Mail revealed a 21% fall in half-year profits and warned of a weaker outlook for parcels growth citing the start of Amazon's own delivery network.

Days later, Royal Mail signed a deal with the e-retailer to deliver Amazon parcels to Post Offices to expand the company's expanding pick-up point network.

Royal Mail commented on what it saw as the threat to the USO in its results statement.

It said: "We believe the current regulatory framework does not fully address the problem posed by unfettered direct delivery competition.

"We think there is an urgent need for a new framework that will secure the sustainable provision of the universal service for the future.

"We made an evidence-based regulatory submission to Ofcom in June 2014, showing the real and growing threat to the universal service from direct delivery.

"The submission asked Ofcom to accelerate its review of direct delivery competition, which is currently planned for late 2015."

A spokesman for Ofcom responded: "Protecting the universal service is at the heart of Ofcom's work, and our own evidence clearly shows that the service is not currently under threat."