Rivals' unfair advantage contributes to RM shares plunge

[TrueBlueTerrier]

Rivals' unfair advantage contributes to Royal Mail shares plunge

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How are those super, soaraway Royal Mail shares doing? Not so soaraway. Priced at 330p at flotation, the stock hit 600p in January but touched 415p this week, the lowest they have traded. The market has had a serious rethink about prospects.

This does not mean business secretary Vince Cable was right all along about the Royal Mail's valuation. The silliness of privatisation lay in the sale of 60% of the shares in one go. It would have been much better to sell in stages: slip out 20% initially and allow the market, rather than ministers and civil servants led by City advisers, to assess the right price.

That argument can be put on the shelf until Lord Myners offers a view in his report on privatisations in the autumn. The question now is why Royal Mail's shares are falling so rapidly.

Three reasons are obvious. Competition has stiffened in the parcels market across Europe; Amazon in Britain is delivering more of its parcels itself; and Royal Mail's GLS operation in France is one of several companies suspected of anti-competitive practices.

All could be filed under everyday thrills and spills. A fourth factor should concern everybody, not only shareholders. It is the seemingly haphazard way in which competition is being injected into the UK letter delivery business, especially the end-to-end market where new entrants can use their own postmen to cover "the final mile".

"Direct delivery is in reality not level playing field competition that brings benefits to consumers," complains Royal Mail. "Rather it is 'cherry picking' arbitrage." That is a self-interested view but it is persuasive. Royal Mail's obligation to deliver to every address in Britain six days a week at a uniform price – the Universal Service Obligation, or USO – relies on cross-subsidies. The lucrative bits, such as serving densely populated cities, subsidise deliveries to rural areas. If rivals have a free hand to operate only in cities, and to deliver only pre-sorted utility bills and bank statements, the USO will become unstable at some point.

Royal Mail has been a tizzy ever since TNT Post, which operates an every-other-day service, announced plans to cover 42% of UK addresses, but only 8.5% of the UK geography, by 2017. TNT postmen are already on the beat in London, Liverpool and Manchester.

Ofcom, the postal regulator, points out that end-to-end letter competition was less than 1% of market volumes in March this year and that it will assess any "emerging threat" to the USO. Okay, but what's missing here is a clear vision of how many cherries it is safe to remove, and how quickly, in the interests of kicking Royal Mail to keep modernising.

Royal Mail chief executive Moya Greene complains that without regulatory intervention she won't be able to achieve the 5%-10% profit margin deemed sufficient to protect the USO. She may be exaggerating – bosses of regulated utilities have form on that score. But her broad argument that cross-subsidies, once lost, are hard to restore seems correct. Ofcom should get on with its review now, not wait until the end of next year.

[Senior Service]

As I have said before I believe that the 6 day USO is doomed and in the future the government will say that it is no longer economic and in the modern competitive world it will have to go; of course they will say its a sad day and that they never wanted it to happen etc etc. But like the railways in the 60's once gone it will never be back. What about the public do I think they will mind - dare I say it probably not that much. I have 2 years until I am 60 so it will still be around for me but for younger opg's I think they will see it go and trigger even more massive changes. Who the hell said the future is bright!