What is happening to the Royal Mail?

Postal workers are set to strike as part of a dispute about pay, modernisation and working conditions at the Royal Mail. But why is the Royal Mail in trouble and how has the postal market changed in recent years?

Although there are around 30 other postal services in the UK, the Royal Mail remains by far the largest. It delivers 99% of all the letters in the UK, which in 2009 meant it handled 75 million letters each day.

However, the postal market in the UK is now in decline. The volume of letters delivered by the Royal Mail has fallen from a record high of 84 million a day in 2005.

One of the biggest factors has been the rapid increase of internet access, with 70% of homes in the UK now online.

The impact of the internet and other communication technologies, such as mobile phones, has been so great that it has actually severed the link between the postal market and economic growth.

Previously, fluctuations in the amount of post each year followed the changes in general wealth in the UK. But since 2002, that link has been broken and is unlikely to be restored.

As a result, the Royal Mail finds itself as the biggest fish in a shrinking pool. The Royal Mail letters and packages business has the largest turnover among the businesses that make up Royal Mail Group and employs the most people.

There have been large cuts as part of the company's modernisation plans and both Royal Mail Group and the Communication Workers Union agree further savings are needed. The proposed strike is over the size of the cuts and how it will affect those who stay.

The Royal Mail Group also faces a pension deficit estimated to be around £8bn.

The deficit has been a factor in the government's failure to find a partner for its planned part-privatisation of the Royal Mail, and it may now be forced to underwrite the scheme with public funds.