After 360 years, could this be the last post?

Britain can't afford to let the Royal Mail lose out to new rivals. It needs help to defend its territory

Everyone has opinions about it, not all of them positive. But we all use it, usually daily and without thinking, the red postboxes and the queues at the local post office just ubiquitous, tedious parts of our everyday lives.

But things are set to change and, in the coming weeks, the Royal Mail will undergo one of the most radical overhauls in its 360-year history.

At the end of this month, Royal Mail's regulator, Postcomm, will decide how much it is allowed to charge. That decision will be followed by Sir George Bain, former head of the London Business School, and the Trade and Industry Secretary Alan Johnson - himself a former postman - revealing their views on the service's future. And finally, from 1 January, Royal Mail ceases to be a monopoly when the market opens to full competition.

Much has been done, under Royal Mail's chairman, Allan Leighton, and chief executive, Adam Crozier, to prepare the organisation. It has returned to the black after losing £1m a day, as jobs were axed, costs stripped out - including the second delivery - and prices increased. Performance targets were also, sometimes, met. Yet a plethora of issues and problems remain.

Pension-fund deficit

The biggest is the gaping £4bn hole in the Royal Mail's pension provision. Large deficits in pension funds are hardly new. The Royal Mail, however, runs a final salary scheme that is open to new members, something few private-sector companies have the luxury to do.

"This is fundamental to us," says a Royal Mail insider. "If we're going to change, and it's essential we get even more efficient, we're going to have to bring people with us. There's no substitute for people walking up the garden path to deliver the mail." The group employs around 200,000 staff, and has no plans to close the scheme.

Which will not help defuse the row. The Royal Mail blames previous management for taking payment holidays. It believes government and the consumer, in the form of price increases, should help pick up the tab.

Postcomm was against this, with its chief executive, Sarah Chambers, arguing that Royal Mail's priority should be improving efficiency (rather than just putting up prices, was the subtext). But since then the regulator is thought to have softened its stance, something Postwatch, which represents end users, is likely to be furious about.

"The private sector, where they have these problems, is working to find solutions," notes Postwatch's chairman, Peter Carr. "The one that isn't available is putting prices up. Consumers did not create the pension deficit so why should they solve it? It's a management problem and it's about time the Royal Mail faced up to the fact and solved it. It's the attitude and culture of a monopoly."

As it is, The Independent on Sunday understands a compromise will be reached, with the Government due to contribute around £2bn. This will free up cash: the Royal Mail has to pay £300m each year into the scheme, but is paying £500m because of the deficit.

Price controls

The cost of posting a letter is another thorny issue that, in its resolution, is likely to leave Postwatch unimpressed. In May, Postcomm recommended the cost of a first-class stamp should not go above 34p (it's currently 30p). That horrified the Royal Mail. It claims to lose money on first- and second-class mail and wants the price to increase to 39p, pointing out that it still would not make money. It believes only 45p to 47p would reflect the true cost of the service.

There has been intensive lobbying by Royal Mail, and even the Government is thought to be against Postcomm taking too aggressive a stance. The regulator, when it publishes its final proposals later this month, is now likely to allow the price to go over 34p, and could even permit a rise to between 37p and 39p by 2010.

Competition

The market has partially opened up, with 14 firms licensed to deliver mail, and the likes of TNT and Deutsche Post already taking business from Royal Mail. Postcomm has accelerated the UK's deregulation. "We felt that Royal Mail was ready for it," says a spokesman. "They turned round its performance remarkably, and it will be able to handle competition."

The service primarily affected is business-to-business, and business-to-consumer (junk mail, to put it in the vernacular). Birthday cards and the post you look forward to accounts for just 15 per cent of the market.

Staff have been warned that the business could suffer and jobs may be cut. Postcomm, though, is more sanguine. "Don't anticipate that the Royal Mail will lose its monopoly," says the spokesman. "We predict it will still have more than 90 per cent of the business by 2010."

Performance

In 2003-04, Royal Mail missed 15 of its 16 performance targets, triggering a £43m compensation payout to customers and the docking of £17m of revenues. But in September, the organisation said it had met nine of the 15 targets that quarter, with 93.8 per cent of first-class post arriving the next day - beating the 93 per cent goal.

The Post Office's international business, General Logistics Services, is also performing well. Royal Mail made various acquisitions in the late 1990s and now has operations across mainland Europe. GLS generated profits totalling £61m last year, a 144 per cent increase. The long-term plan is to have two distinct parts of the business: the regulated UK operations and the international arm, which it will continue growing and expanding. The Royal Mail is reported to have turned down a number of offers for GLS.

Yet at home, the Royal Mail says it needs £2.2bn if it is to succeed in a competitive market. "A lot of our equipment is obsolete," says the insider, "and we need new technology to do the sort of thing rivals already do."

The Post Office

The largest retail network in Europe, the Post Office boasts 14,600 branches - yet despite these impressive statistics, it notched up a £110m loss last year. The Royal Mail runs 525 larger sites, with the rest operated as franchises. About 8,000 are rural post offices, to which the Government contributes £150m a year.

The biggest problem is benefits. Payments used to represent 40 per cent of the network's business but they are now paid direct to bank accounts. The chain has new services, including credit cards and personal loans, but as the insider concedes: "The goal is to get a viable, sustainable network and we still need to work to get there."

Staff

Three years ago, the Royal Mail had the UK's worst strike record, losing some 50,000 days a year to industrial action. The combative Mr Leighton tackled this head-on. He turned up at meetings in person, putting forward the management's case and trying to win over workers.

Some 33,000 jobs have been cut, but salaries have risen and profit-sharing schemes have been introduced. Money was even given to sorting offices to spend as they liked - most went on widescreen TVs for staffrooms.

The strategy appears to be working. In the first quarter of 2005, just 866 days were lost to industrial action and morale has improved. "November is our busiest time and people would just collapsed, taking three days to clear the backlog," says one sorting office manager. "Now everything is being pushed through - people have got their heads down and are getting on with it."

Managers from different backgrounds have been hired and those not up to the job let go. Before, says the manager, "you just went to project land and wandered around with a clipboard".

But Messrs Leighton and Crozier are not universally popular. Postwatch's Mr Carr says that of Royal Mail's £537m annual profits, "£400m came from price increases, not from improved efficiency".

He adds: "We prefer to have marketing people than ex-civil servants. But they have got to change the culture. They continue to demand new price increases to solve their problems."

Ownership

Mr Leighton wants to give 20 per cent of the business to the staff, a move likely to get the thumbs-up from government. But not all are convinced, with the Communication Workers' Union viewing it as a step towards privatisation. In its Bain review submission, the union's, general secretary, Billy Hayes, said: "The CWU clearly favours a greater degree of employee involvement in the running of the business, and a permanent share in the success of the Royal Mail.

"But to suggest that some artificial inducements can be offered to create a greater sense of involvement than better wages and a secure pension scheme is not credible."

Property

The group owns swaths of property, from depots to post offices, and it is thought the Government is keen to see these assets work harder through sale and leasebacks. This would free up cash and allow management to concentrate on services and brands rather than real estate. But management is thought to be "resistant", preferring to retain ownership and control, and to raise cash elsewhere, be that via government or, ultimately, you and me, through price rises.

The Royal Mail has already changed dramatically and, over the coming years, it will continue to do so. Ultimately, however, it is not only a lumbering nationalised monopoly that needs to catch up with the 21st century. It also provides an essential service. As a Royal Mail spokesman puts it: "If the Royal Mail is unable to compete successfully in an open market, no other company will be able to provide a one-price-goes-anywhere, universal service to the UK's 27 million addresses." Change is inevitable. Just don't expect the debate and controversy to go away anytime soon.