Universal postal service more secure, but targets not met

● Royal Mail on a stronger financial footing

● But the company must improve on quality of service

The universal postal service is moving closer to long-term financial sustainability, following improvements in performance at Royal Mail, Ofcom said today.

But Ofcom, which regulates the UK postal sector, has told Royal Mail it must improve important aspects of the service it provides to postal users after missing key performance targets.

Ofcom’s annual monitoring update on the UK postal sector¹ covers the year to the end of March 2013, and examines aspects of Royal Mail’s financial and operating performance, the effect of competition and the satisfaction of postal users.

Performance targets

The report shows that Royal Mail has missed some of the quality of service targets set by Ofcom to ensure high standards in the 'universal service', under which it must deliver to every address in the UK, six-days-a-week at a uniform price.

The company missed a requirement to deliver 93% of all First Class letters on the day after collection, reaching 91.7%.

The company is also required to meet a certain level (91.5%) of next-day delivery for First Class in almost all of the UK's geographic postcode areas.² This is an important target because it requires the company to provide a good level of service across the UK, and not just in more densely populated areas. Royal Mail achieved this level in only 62% of the required postcode areas.

Royal Mail met other targets, however, including a requirement to deliver 98.5% of Second Class letters within three days of collection. It either exceeded or narrowly missed targets relating to areas such as special delivery, parcels and delivery to the correct address.

Ofcom is concerned about Royal Mail's failure to meet certain service targets, and has made clear to the company that it must take all necessary steps to meet these in future.

Ofcom will continue to monitor Royal Mail’s performance closely. Should it miss the targets in future, Ofcom will consider opening a formal investigation which could result in enforcement action, including the possibility of fines.

Security for the universal service

This is Ofcom's second annual postal monitoring update, and covers the first full year since the new regulatory framework for post was introduced in March 2012. The report helps Ofcom to meet its primary duty of securing the universal postal service, which was under threat when Ofcom began regulating the sector.

In order to protect the universal service, Ofcom decided in March 2012 to allow Royal Mail more commercial freedom by removing the majority of controls on its prices, while imposing a safeguard cap on the price of Second Class services to ensure stamps remain affordable for vulnerable consumers.³

In the financial year 2012-13, Royal Mail increased the price of services.⁴ Partly as a result of this, the report notes that the profit margin on the regulated part of Royal Mail’s business rose to 2.6% in the year to March 2013, an improvement on last year (-0.5%) and the highest margin for the last five years. This is closer to the indicative 5-10% range which Ofcom considers is consistent with a reasonable commercial rate of return for a financially sustainable universal service in the longer term.

Today's report highlights that the increase in parcel volumes would not itself be sufficient to offset the overall decline in addressed mail, had price increases not taken place. In the year to March 2013, Royal Mail reported that the amount of letters sent by postal users fell (-8.1%, compared to -6.7% the year before). This was partially offset in revenue terms by a 6.6% rise in the volume of parcels (compared to 4.8% the year before).

The report also notes that Royal Mail’s productivity is gradually improving, while competition in delivery from other operators still only accounted for less than 1% of total volumes in the UK postal market in the last financial year. This was despite an increased presence from competitors such as TNT Post UK.

Satisfaction with postal services

In July 2012, Ofcom began regular surveys to track how consumers and businesses use postal services, and their attitudes towards them.⁵ Overall, satisfaction is high among the majority of consumers. Today's report summarises the findings, including:

• nearly nine-in-ten (86%) of residential consumers are satisfied overall with postal services; 6% are dissatisfied, and 8% are 'neither';
• seven-in-ten (71%) are satisfied with the time of day when post is delivered; 16% are dissatisfied, and 11% are 'neither'; and
• just over half are satisfied with the cost of postage; 30% are dissatisfied, and 16% are 'neither'.
• business users, who account for around 90% of all mail sent, are also largely satisfied with Royal Mail's service (66%, with 7% dissatisfied and 26% ‘neither’).

Future monitoring

In March this year, Ofcom outlined measures to continue to safeguard the universal postal service. These included protection for rural post boxes, and guidance which explained that Ofcom would review the need to intervene in relation to end-to-end competition if its monitoring of the postal sector identified a potential material threat to the universal service.

Ofcom will continue to monitor and report annually on important areas of the postal market, such as the financial sustainability of the universal service and the effect of competition in the market - as well as Royal Mail's performance and consumer levels of satisfaction. This will allow Ofcom to monitor the effectiveness of the regulatory regime in securing the universal service, and ensure that postal users' needs continue to be met.

ENDS

NOTES FOR EDITORS

1. This is Ofcom's second annual monitoring report on the postal market (the first was published in November 2012), and is the last to relate to a period throughout which Royal Mail was entirely Government-owned. In October 2013, the Government sold the majority of its shares in Royal Mail. The sale did not change the regulatory framework under which the company operates, nor its requirement to meet quality of service targets. (These targets originally stem from a requirement in the EU Postal Services Directive 1997 that universal service providers be subject to such targets).
2. The target applies to 118 of the UK's 121 postcode areas: it does not apply in HS (Hebrides), KW (Kirkwall, Orkney) and ZE (Lerwick, Shetlands). There is often severe weather in these remote, offshore areas which makes achievement of the target unrealistic.
3. The price of second class stamps for letters and small parcels up to 2kg is capped at 55p in 2012 prices, and may only increase by inflation (as measured by the Consumer Prices Index).
4. In the current financial year Royal Mail has not increased prices for First and Second Class stamps for standard letters and large letters,
5. While the report covers Royal Mail’s financial year, the data from Ofcom's research on postal users' attitudes and satisfaction is for the period of July 2012 (when that research commenced) to June 2013.