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28 September 2022

The Royal Mail break up is inevitable

Postal strikes are just PR cover – the split has been planned for years.

By Will Dunn

The consultants who rebranded the Royal Mail’s parent company in 2001 were looking for a name that could mean anything, to encompass the fact that the Post Office plc (as it was then) was embarking on a future in which it did far more than deliver letters. They settled on a name that meant nothing – Consignia – and after just over a year of contempt and derision, they changed it to Royal Mail Group.

In July, the name changed again, and if anything the new name (International Distributions Services) is even more tedious, but this time it does actually mean something. This is a company of two parts: the Royal Mail, which has committed to deliver a letter anywhere in Britain for a fixed price since 1839 and was privatised in 2013, and the less memorable GLS (General Logistics Systems), an international parcel delivery service based in Amsterdam. The rebrand to International Distributions Services implies a commitment to the latter and, almost certainly, the splitting off of the Royal Mail.

The rebrand was announced in the group’s first-quarter earnings report published on 20 July, the day after 115,000 postal workers voted to strike over a deal that had offered them a real-terms pay cut of more than 7 per cent. The report notes that the group “has increasingly become reliant on GLS for returns”, but that “there should be no cross subsidy” between its companies. “The Board will consider all options to protect the value and prospects of the Group,” it notes, “including separation of the two companies”.  

The postal strikes provide useful PR cover for breaking up the Royal Mail but, in truth, they are not the reason for it. This split is a move that the company and its investors have talked about for years. Postal industry analysts I’ve spoken to believe it makes business sense: GLS is a highly profitable international parcel service with opportunities for growth, while the Royal Mail is a public service that is currently losing a million pounds a day.  

Other postal services have managed this dichotomy. France’s La Poste runs both its domestic post and the successful international delivery service DPD. But La Poste is publicly owned, whereas Royal Mail has a fiduciary duty to deliver returns to private shareholders.  

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The Royal Mail’s biggest problem is that the core service it is required to provide – universal delivery at fixed prices – is expensive to operate and declining in popularity. Addressed letter volume has fallen by 23 per cent since 2019 and is now back to the level of the mid-1930s. This doesn’t mean people write anything like as many letters as they did back then (one in ten UK adults say they never use a pen), instead that large volumes of automated post are sent out, and this too will be eroded by paperless billing. Even the annual surge of Christmas cards appears to be in decline.

[See also: Can Liz Truss’s tax cuts save the economy?]

The Royal Mail’s other challenge is shared by many established businesses in a country that has aggressively exposed its low-income workers to market forces. Being a postie is, thanks largely to a unionised workforce, still a much more stable job, with better prospects and employment rights, than the insecure gig-economy employment that provides a lot of the labour in the rest of the delivery sector. This is very good in human terms, but it does mean that other companies serving the e-commerce boom, which are free to choose their area of delivery and treat workers as a more disposable resource, have a competitive advantage.  

It’s worth noting that the social value of the Royal Mail’s services is high; its communication services are still relied upon by millions of people, a significant proportion of whom are elderly or vulnerable. And in an ageing society, a regular door-to-door presence could be vital; some in the industry have suggested a further diversification into services such as meter readings. The state can provide such social goods and always justify the cost. Even at its current level of loss-making, it would take the Royal Mail more than a century to waste as much money as the Test and Trace programme pointlessly (according to the MPs of the Public Accounts Committee) blew in two years.

Indeed, the taxpayer is already responsible for the most expensive part of the Royal Mail. Before privatisation George Osborne, the chancellor at the time, used the pension fund’s £28bn in assets to bump up the government’s numbers in the short term, and left the taxpayer with liabilities that amounted to £48.6bn by March 2021.  

It is all but inevitable that the Royal Mail and GLS will split. And yet, even Margaret Thatcher, as she sold off Britain’s national industries, said she was “not prepared to have the Queen’s head privatised”. The government will then have to decide whether a company that has been integral to British identity for five centuries is worth taking back on as a public service or being allowed to wither away, becoming another bankrupt subsidiary of UK plc. 

[See also: Is this the energy industry’s “Lehman moment”?]

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