Red letter day

Nick Morrison looks at what the dispute is all about, and what it means for the future of the ailing Royal Mail.

A GENERATION ago it was a source of national pride, a byword for all that Britain does best. A truly national service, it was efficient, relatively cheap and valued by the community. The NHS may have lost its lustre, our railways may have hit the buffers, but the British postal system was still the envy of the world.

But it's been a heady descent into the foothills. From making profits of more than £600m a year just four years ago, Royal Mail is losing £750,000 a day. Sub-post offices are being closed more quickly than you can cash a giro, with 3,000 to be axed by 2005. Almost 17,000 jobs have already gone, with another 13,000 destined for the chop over the next two years. It all adds up to such a heap of troubles that even a name change - to the short-lived and much derided Consignia - was unable to stop the rot.

Now the mail is facing what could be its toughest challenge yet. The Communication Workers Union (CWU), which represents the bulk of Royal Mail employees, yesterday started sending ballot papers to its 160,000 members, asking them to support strike action. If the vote goes in favour, it will mean the first national postal strike in seven years.

All this would be bad enough for a business already struggling to get back on its feet, but coming as the Government is opening the postal system up for competition, it could prove nothing short of disastrous. But what is the dispute all about, and what does it mean for our future postal system?

How near are we to a strike?

Ballot papers are now going out asking CWU workers to vote on strike action, even though last gasp talks to try to settle the dispute were still going on last night. The result will be known on September 17, and if the vote is in favour the first stoppages could be announced straight away. Following months of uncertainty over restructuring plans and job losses, post office staff are thought likely to back a strike.

What is the dispute all about?

It's a traditional argument over pay. Royal Mail has offered its employees a pay rise of 14.5 per cent over 18 months, which, on the face of it, seems generous, but in order for the full rise to be implemented, substantial improvements in productivity will be required. According to the CWU, the offer came with "more strings than the Philharmonic", and meant employees would be guaranteed only three per cent from October, and 1.5 per cent from next April.

The CWU is holding out for more money, claiming that most postmen and women earn less than £262 a week, but Royal Mail insists there is no more money available. Chairman Alan Leighton has written to employees, saying the money on the table was their final offer, and the best for ten years, claiming that if the productivity targets were achieved, almost all the 14.5 per cent would be paid by Christmas and staff would have secured their jobs.

Why is Royal Mail in such a parlous state?

Critics put its problems at the door of management, as a series of acquisitions, including German parcels and Swedish city deliveries, have drained cash but not added to its profitability. Costs have also been allowed to run out of control, as new sorting and delivery offices have opened, but those they were meant to replace have not closed.

Royal Mail itself blames the lack of investment and the postal regulator's refusal to allow it to raise the cost of a stamp, meaning its delivery service is running at a loss. To try and counter these problems, Royal Mail has embarked on a restructuring programme, aimed at cutting up to 30,000 jobs by 2005 and scrapping the second delivery.

What will happen if the strike goes ahead?

For customers, they won't get their mail, but there are higher stakes at play for the postal system itself. In the short-term, Royal Mail estimates it will lose around £20m a day - money it can ill afford when it is running a deficit of around £611m a year, itself an improvement on the previous year, and is putting £100m a year into its pension fund, to try and plug a £4.6bn black hole.

According to Mr Leighton, Royal Mail would not be able to recover from its parlous state if the strike went ahead, and a vote for industrial action would be "commercial suicide", a warning the CWU chief negotiator Ray Ellis called "bizarre".

But what makes a dispute particularly damaging for Royal Mail now is the spectre of competition. At the moment, companies can apply for a licence to deliver bulk mail of 4,000 items or more, but by 2007, the entire system will be open to competition, meaning customers will be able to choose who handles their letters.

Although this means the end of Royal Mail's monopoly, it does not necessarily mean the end of Royal Mail. Indeed, with its existing delivery network covering the entire country, competitors are likely to want to use Royal Mail's postmen and women for the final stage in their operation, while selling the stamps and sorting the mail themselves. The problem for Royal Mail is, at a time when it would want to be getting its finances in order so it can withstand the competition, it will instead face further losses.

A strike could also see the Government suspend Royal Mail's monopoly over letters costing less than £1. This was done during the last national strike, in 1996, and is a course of action advocated by consumer group Postwatch. "If a strike is called, we will ask the Government to suspend the licensing regime so that other companies can come in and deliver mail," a spokesman says. "If Royal Mail can't deliver letters, then other companies should be given the opportunity to do so."

This could provide a trial run for the days of open competition, allowing other companies to test the water, overcoming the reluctance to enter the market which has so far seen few challengers to Royal Mail's crown.

"We think competition is a good thing, and if the licensing regime were to be suspended for a certain period, it would not necessarily be for ever but it would enable other companies to come in and take up the opportunity," according to Postwatch.

Despite its recent track record, Royal Mail still remains a strong brand, and has an enviable distribution network. It still has work to do before it can be confident of surviving the transition to open competition, and if it is to become more efficient and robust, then a strike is the last thing it needs.