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Thursday, 13 June, 2002, 09:55 GMT 10:55 UK
Q&A: The Post Office crisis

The crisis at Britain's state-owned postal service Consignia shows no sign of abating, with losses for the latest financial year reaching 1.1bn.

The company, formerly known as the Post Office, has outlined a restructuring plan aimed at putting it back on its feet ahead of a full deregulation of the postal services market.

BBC News Online takes a closer look at Consignia's situation, and assesses its chances of fending off bankrutpcy.

How bad are Consignia's problems?

Financially, Consignia is looking very weak. Its operating losses climbed to 318m in the year to March 31 this year, equivalent to 1.2m a day.

And one-off costs stemming from its restructuring programme pushed the company's total losses to 1.1bn.

Letter deliveries are losing the firm about 1m a day. It spends 28p to deliver a 27p first-class letter.

The company says it needs to reduce its current costs by 15%, or 1.2bn.

The poor results are a sudden downfall from what was previously a healthy company.

The Post Office has been profitable during the past 40 years. In the last 10 years it has made a profit of about 350m every year except for the past two years.

Although Consignia's main shareholder is the government, it operates like any other company, offsetting losses against future revenues.

This means that the taxpayer will not be called on to plug the latest 1.1bn gap in the company's accounts.

But the government has agreed to return the 1.8bn in dividends that it earned from the Post Office over the last 20 years, when it was racking up hefty annual profits.

Why is the company losing money?

The sudden plunge into the red reflects a combination of events that have rapidly changed Consignia's balance sheet over the past two years:

  • Fewer letters being sent, due to e-mails and text messaging
  • The partial opening of the postal delivery market to private competition
  • The price of first and second class stamps has not been raised in line with costs
  • Stiff competition in the Parcelforce business has caused spiralling losses from its international division
  • Higher wages agreed with unions have pushed up costs further
  • A decline in revenue from junk mail deliveries due to the downturn in the advertising sector
  • The increased cost of using Britain's troubled rail service, which is plagued by delays
  • The high cost of maintaining branches in remote rural areas.
  • And its 40 years of monopoly status has undoubtedly meant that the Post Office has not paid enough attention to its efficiency and productivity levels

Who's to blame?

The management of the firm must take a great deal of the blame, according to Ian Senior, an economist who has written extensively about the postal service.

Consignia's main aim over the last two years has been to fend off government plans to liberalise the market for postal services, he said.

But the government is determined to break its monopoly, having allowed other companies such as Hays and Business Post Group to compete with Consignia to deliver some of the nation's letters.

Licences are already being awarded. So far these have not been for full scale competing services, but for small pockets of interest here and there.

Consignia was partly-privatised in March last year. It has a limited amount of commercial freedom, but is still subject to stiff regulatory control to ensure social objectives are met.

How does it propose to stop the rot?

Consignia has said it will cut 30,000 jobs over the next three years.

It is also likely to close more than 3,000 urban post offices.

The company plans to scrap the second daily delivery of post, a move which it claims will save about 350m a year.

In an attempt to boost its revenues, Consignia has asked the postal regulator Postcomm for permission to increase the price of a first class stamp by 1p to 28p.

Consignia has also confirmed that it will change its name to the Royal Mail by the end of this year, reverting to one of its established brand names.

The change to Consignia two years ago, which is thought to have cost the company more than 1m, never caught on with the public.

Is cutting jobs the right solution?

Many analysts say Consignia's workforce of about 220,000 is top-heavy, with too many senior managers.

Against a new wave of competition, Consignia must become more efficient.

Other countries such as Sweden and New Zealand have already abolished their postal monopolies, and they have found that cutting staff was necessary to increase efficiency.

In March, thousands of British postal workers marched through London, arguing that increased competition should not be allowed.

Communication Workers Union general secretary Billy Hayes said if the postal regulator Postcomm's proposals were accepted it would be "nothing less than a dagger to the heart of the universal service".

What are Postcomm's proposals?

Postcomm says the market should be liberalised in three steps:

  • Phase one from January 2003 to March 2005
    Bulk mail above 4,000 items and certain niche services - about 30% of Consignia's market by value
  • Phase two from April 2005 to 31 March 2007
    Open a further 30% of the market by lowering the bulk mail threshold to between 500 and 1,000 items per mailing
  • Phase three no later than 31 March 2007
    All restrictions on market entry abolished

The liberalisation programme was originally scheduled to start this year, but Postcomm agreed in May to postpone it by 12 months in order to give Consignia more time to restructure.

The decision followed warnings from Consignia that it could go under if deregulation was pushed through this year as originally planned.

What about the quality of our service?

While the news of the job cuts and the end of the second daily delivery has alarmed many people, a drastic overhaul at the firm may be good news for the nation's letter service in the long run.

The efficiency drive together with new strategic thinking - even if it means fewer staff - may just pay off.

But if Postcomm's plans become reality, postal services in rural areas in the UK may suffer.

While competition to deliver mail to densely populated urban areas will be fierce, regions like Cornwall, Wales or the Scottish Highlands could lose out.

Fewer post offices, less regular delivery and higher postage than, for example, in Birmingham or London, could be the result.

Consignia has also warned increased competition could force it to raise the price of first class stamp to 33p or more.

See also:

24 Mar 02 | Business
11 Dec 01 | Business
12 Dec 01 | Business
13 Jun 02 | Business
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