Full story: Royal Mail could save £650m by switching to three-day-a week service, says Ofcom
Alex Lawson
Royal Mail could save up to £650m if it delivered letters just three days a week and £200m by stopping Saturday deliveries, the communications regulator has said (see 6.52am).
The watchdog said a reduction from six to five days a week would save £100m to £200m, and going down to three days £400m to £650m, my colleague Alex Lawson reports.
In a much-anticipated review, Ofcom laid out a series of options for the future of the universal service obligation (USO), which requires Royal Mail to deliver nationwide, six days a week, for a fixed price.
The regulator began gathering evidence to show how the future of the service may be reformed to better suit consumers’ needs, amid a long-term decline in letter volumes and a surge in the number of parcels sent as online shopping has grown.
It has conducted consumer research and modelled Royal Mail’s finances in the review, and will seek views with a further update planned later this year.
Key events
UK factories hit by Red Sea crisis, but recession could be avoided
Newsflash: the Red Sea crisis is hitting UK manufacturing supply chains and pushing up input costs.
Data firm S&P Global reports that its flash UK Manufacturing Output Index, which tracks factory production, has fallen to a three-month low of 44.9. Any reading below 50 shows a contraction.
S&P Global’s survey of UK purchasing managers has found that manufacturing supply chains suffered from longer wait times for container freight during January in the wake of the Red Sea crisis.
With supplies taking longer to arrive, firms have been running down their inventories.
S&P Global explains:
Supplier delays were overwhelmingly linked to longer international shipping times as vessels rerouted away from the Suez Canal. At the same time, preproduction inventories fell to the greatest extent since last August as safety stocks were depleted.
These longer delivery times are adding to costs, with S&P Global predicting UK inflation will remain “stubbornly higher” in the 3-4% range in the near future (it rose to 4% in December).
The better news is that services companies are growing at the fastest rate in eight months, with the UK Services PMI rising to 53.8.
That helped the wider recovery in private sector output gains momentum in January, lifting the overall UK PMI Composite to a seven-month high of 52.5.
That should help the economy avoid recession, they say.
💥 flash UK #PMI composite output index (manufacturing and services) rose again in January to 52.5 (December 52.1), a 7-month high… 👍
Touch and go whether the UK avoided a technical ‘#recession‘ in the second half of last year, but 2024 already looking a lot brighter 🤓 pic.twitter.com/EnvRB4oDHK
— Julian Jessop (@julianHjessop) January 24, 2024
Chris Williamson, Chief Business Economist at S&P Global Market Intelligence said:
“UK business activity growth accelerated for a third straight month in January, according to early PMI survey data, marking a promising start to the year. The survey data point to the economy growing at a quarterly rate of 0.2% after a flat fourth quarter, therefore skirting recession and showing signs of renewed momentum.
Businesses have also become more optimistic about the year ahead, with confidence rebounding to its highest since last May. Business activity and confidence are being in part driven by hopes of faster economic growth in 2024, in turn linked to the prospect of falling inflation and commensurately lower interest rates.
Shares in IDS keep rising
Shares in Royal Mail’s parent company, International Distributions Services, have now jumped 3.4% in London, as traders ponder the savings it could make from fewer deliveries.
That’re up 9p at 270p, adding to their earlier gains.
Royal Mail shares floated at 330p in 2013, and swiftly surged over 500p.
But they’ve had a choppy ride since, hitting record lows below 120p early in the pandemic before receiving a boost from parcel demand.
Victoria Scholar, head of investment at interactive investor, points out that there is opposition to Ofcom’s suggested improvements to the Royal Mail universal service obligation:
Royal Mail has long had its calls to scrap the government’s USO rejected. Now it looks like the tide could potentially be turning. Although there is still considerable opposition including from the Communication Workers Union (CWU) which argues a three day service would ‘destroy’ the company, as well as the Postal Affairs Minister Kevin Hollinrake who said the government is committed to a six-day service.
The company owned by International Distribution Services, has been facing a series of painful setbacks like the postal strikes, a fine from Ofcom for missing delivery targets and a cyber security incident. It has also been struggling with heavy operating losses on the back of a long-term structural decline in letter demand and the loss of its 360-year-old monopoly on delivery parcels from Post Office branches. Ofcom said letter volumes have halved since 2011, raising existential concerns about the future of Royal Mail and prompting calls for a drastic overhaul of the business to revitalise its finances and operations to ensure it doesn’t become ‘unsustainable.’
Shares in IDS are trading higher today reflecting optimism towards the regulator’s openness towards change at the embattled postal business. But shares are still sharply lower than the recent highs seen in 2021 during covid.”
Shares in easyJet have jumped 5%, despite the budget airline taking a £40m hit from the conflict in the Middle East.
EasyJet reported that there was a temporary slowdown in flight bookings for the wider industry after the 7 October attacks, as well as an ongoing pause on flights to Israel and Jordan.
But, it says, demand and bookings have recovered strongly from late November.
This allowed it to narrow its pre-tax loss in the last quarter, to £126m, from £133m in October-December 2022.
Over in China, policymakers are cutting the amount of cash that banks must hold in their reserves, to stimulate the economy.
The People’s Bank of China (PBOC) has announce it will cut the reserve requirement ratio (RRR) for all banks by 50 basis points (bps) from 5 February.
This is the first RRR cut this year, and should free up 1 trillion yuan (£110bn) to support lending.
China’s stock markets rose today, with the CSI 300 index up 1.4%. Mining stocks are rallying in London too.
Minister: Fujitsu should pay hundreds of millions of pounds compensation over UK Post Office scandal
Kevin Hollinrake, the minister for postal services, believes Japanese IT firm Fujitsu should pay “hundreds of millions of pounds” in compensation for its role in the Post Office scandal.
Speaking to the Today programme, Hollinrake said:
This will cost the taxpayer a billion pounds, maybe more than that.
He added that Fujitsu, which supplied the flawed Horizon software, should pay “a significant proportion” of that bill.
Last week, Fujitsu Europe’s boss admitted the firm has a “moral obligation” to contribute to compensation for sub-postmasters who were wrongly prosecuted due to Horizon reporting that money was missing from their branches.
The inquiry into Horizon also heard last week that some Horizone bugs were known about as early as 1999, but this information was kept from the courts.
Hollinrake says what has happened is “absolutely disgraceful” and a “horrendous scandal”, in terms of both its scale and depth, and the impact on people’s lives.
Abrdn to cut 500 jobs in cost-cutting drive
There’s bad news for workers at asset manager Abrdn this morning.
Abrdn is stepping up its cost-cutting programme, and today announced it will strip out another £150m of costs in 2024 and 2025, mainly across its group functions and support services.
The plan will eliminate around 500 jobs.
Abrdn says:
The programme includes the removal of management layers, increasing spans of control, further efficiency in outsourcing and technology areas, as well as reducing overheads in group functions and support services.
Citizens Advice are calling for proposals to tackle the causes of Royal Mail’s “persistent failings”.
Morgan Wild, interim director of policy at Citizens Advice, says simply cutting services won’t automatically make deliveries more reliable:
“Given Royal Mail has failed to meet its targets for nearly half a decade, it’s clear the current Universal Service Obligation (USO) is falling short of its fundamental purpose: safeguarding consumers. Any changes must prioritise their needs, not Royal Mail’s bottom line.
“We agree that improving reliability is essential. Late post has real consequences – people miss vital medical appointments, legal documents and benefit decisions.
“Cutting services won’t automatically make letter deliveries more reliable, so we must see proposals to tackle the cause of Royal Mail’s persistent failings. Ofcom and the government have to spell out how any revised USO will start to deliver for the millions of us who rely on it.”
Shares in Royal Mail parent company IDS rise
Shares in International Distributions Services, Royal Mail’s parent company, rose by 1.8% at the start of trading in London, as traders digest Ofcom’s report into its USO.
CWU: three-day delivery service would “destroy” Royal Mail
The Communication Workers Union (CWU) have said a three-day delivery service would “destroy” Royal Mail.
CWU general secretary Dave Ward said the union could not support such a plan:
“We are not resistant to change, but we will not sign up to a three-day universal service obligation, which would destroy Royal Mail as we know and would impact on thousands of jobs.
“Royal Mail has the biggest fleet in the country, a presence in every community, and boasts and unrivalled infrastructure.
“This is the bedrock that a serious growth agenda, and the future of the company, can be built.”
Ofcom CEO Dame Melanie Dawes is on Radio 4’s Today Programme now, to discuss the regulator’s report into Royal Mail’s Universal Service Obligation.
Q: Why should politicians make Royal Mail’s job easier? They’re failing to meet their current targets, and have terrible industrial relations….
Dawes agrees that Royal Mail is not delivering. It needs to improve their quality of service.
But there’s also been a “huge shift” in the postal markets, with letter volumes falling and parcel demand rising.
We have to respond to that, Dawes says, otherwise the service becomes too expensive, or worse, unsustainable.
Q: Are you saying that Royal Mail could go bust if their obligations don’t change?
Dawes replies that Royal Mail is currently loss-making, and has a big transformation ahead.
She adds that Ofcom fined them £5.5m, just before Christmas, because of their poor service (missing delivery targets).
Dawes adds:
We will remain absolutely vigilient in making sure they deliver what they are supposed to do at the moment.
But the regulator is also identifying where change is needed in the future, and wants to have a debate about this.
Q: So, Royal Mail could scrap Saturday deliveries, and maybe other days as well?
Dawes says some other countries already have an every-other-day service.
But that needs to be combined with a really good overnight service, for deliveries that are urgent.
Dawes says she isn’t proposing a third class of service, on top of 1st and 2nd class – (implying, I think, that 1st class would be a guaranteed overnight delivery).
Post minister: We are committed to six-day service
Postal Affairs Minister Kevin Hollinrake said that Government was committed to a six-day service from the Royal Mail (as flagged earlier).
Speaking after Ofcom suggested letter delivery days could be cut to five, or even three, Hollinrake told Times Radio:
“The Prime Minister been very clear on this, six-day delivery is really important for many people in this country, many of our citizens, but also for many of our businesses.”
Questioned over whether the six-day model for letters remained sustainable, Hollinrake said:
“Royal Mail made significant profits in previous years. They’ve had a couple of difficult years not least because of some of the industrial action they’ve been subjected to. But nevertheless we are keen to see Royal Mail become more efficient.”
He added:
“I believe the Royal Mail can build a sustainable model. But that sustainable model must be based on a-six day service.”
The UK’s Communication Workers Union says Ofcom’s report into the Royal Mail’s Universal Service Obligation is “completely dead in the water”.
The CWU is planning to produce its own report on the future of Royal Mail:
CWU general secretary Dave Ward says:
“The response to the leaked information over the week showed that CWU members, the public and politicians are united against the deliberate, manufactured destruction of the postal service.
“In the ongoing debate, Ofcom now have no credibility whatsoever, and their views are an irrelevance to the discussion that must take place between postal workers, businesses and customers.
“To produce a report without any input whatsoever from frontline workers or their union is an attempt to railroad through the failed agenda of the previous Royal Mail management team.
“The CWU will not stand for that. We will now launch an extensive engagement exercise and produce our own report on the future of Royal Mail, taking on board the views of our members and customers.
“This will be a blueprint for a sustainable Royal Mail that can grow our economy and our communities.
Full story: Royal Mail could save £650m by switching to three-day-a week service, says Ofcom
Alex Lawson
Royal Mail could save up to £650m if it delivered letters just three days a week and £200m by stopping Saturday deliveries, the communications regulator has said (see 6.52am).
The watchdog said a reduction from six to five days a week would save £100m to £200m, and going down to three days £400m to £650m, my colleague Alex Lawson reports.
In a much-anticipated review, Ofcom laid out a series of options for the future of the universal service obligation (USO), which requires Royal Mail to deliver nationwide, six days a week, for a fixed price.
The regulator began gathering evidence to show how the future of the service may be reformed to better suit consumers’ needs, amid a long-term decline in letter volumes and a surge in the number of parcels sent as online shopping has grown.
It has conducted consumer research and modelled Royal Mail’s finances in the review, and will seek views with a further update planned later this year.
Ofcom want to hear your views to its suggestion that Royal Mail could deliver letters slower, or less often.
The regulator is inviting views from interested parties by 3 April 2024, to understand the potential impact on people and businesses.
This includes vulnerable people, those in rural and remote areas of the UK’s nations, as well as large organisations who use bulk mail services.
Ofcom will hold events around the country to discuss the evidence and options, and after considering feedback it will provide an update in the summer.
