Outlook: Leighton delivers a deal to get postal competition moving

BAA break-up; Nuclear option
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The Independent Online

Allan Leighton, the chairman of Royal Mail, has abandoned his usual megaphone diplomacy and declared the outbreak of peace with his tormentors at Postcomm and those competitors who would cherry pick the business to death.

Six months ago, Mr Leighton warned that being forced to deliver the mail on his rivals' behalf for as little as 12p a letter would herald the "destruction" of the company's one-price-goes-anywhere service. He summoned up the spectre of a two-tier postal service where it would be cheaper to drive from Land's End to John O'Groats with the post than put it in a letter box at one end.

Now Royal Mail has voluntarily struck a deal with one of its rivals, Business Post, on what appear to be pretty much the same terms. Perhaps Mr Leighton's punishing routine (BSkyB, BhS, lastminute.com and, until last week, Leeds United) has dulled his appetite for another corporate tussle. Or perhaps he has taken a look at the number of Christmas cards arriving by email and decided that a smaller share of a competitive market is better than a 100 per cent share of a collapsing one.

Tiny little Business Post is never going to cause Mr Leighton to lose too much sleep, even if it does one day reach its target of a 3 per cent market share. But it is the big beasts which follow in its footsteps in the shape of the Dutch post office TPG and Deutsche Post that ought to worry him since Royal Mail will be obliged to offer them exactly the same terms. The Royal Mail chairman must be confident, therefore, that he can make money delivering his competitors' mail for 12p while it costs the rest of us 28p to post a letter.

The scurrilous thought occurs that when Mr Leighton was warning of the death of the postal service six months ago, he still had to push through the change to a single daily delivery and 30,000 job losses. What better way of softening up the workforce than by exaggerating the competitive threat the Royal Mail is facing?

Since then, Mr Leighton has defeated the unions in a strike ballot and announced Royal Mail's first profit in five years. Meanwhile the single delivery, by far the biggest element in Royal Mail's recovery programme, is being rolled out at a rate of knots.

Mr Leighton also knows that it takes an awfully long time to unseat a monopoly. Just look at BT, which still has 70 per cent of the residential fixed line market 20 years after competition was introduced and dominates the market for broadband connections.

The good news is that competition is at last arriving, albeit slowly, into postal services. The bad news is that it is confined to the type of post no one wants to receive - bank statements, utility bills and junk mail. Then again, Rome was not built in a day.

BAA break-up

As the vapour trail fades from Alistair Darling's airport expansion White Paper, one of the (many) unanswered and pressing questions left behind is who will pay for the new runway at Stansted. Airport passengers right across London, says BAA. Over our dead bodies, say British Airways, Virgin and bmi, who have about as much interest in flying to the moon as flying to Essex. Even the no-frills carriers who have made Stansted what it is today think the runway should be financed only by those who use it.

The question is how much finance is needed. BAA has offered to halve the cost to £2bn. But easyJet reckons it will have to halve that number again before it is even vaguely in the ballpark and Ryanair's Michael O'Leary thinks it can be built for just £120m.

If BAA spends too much, then airlines and passengers will vote with their feet. Supposing it did cost £2bn, then airport charges might roughly need to double to cover BAA's financing charges. For easyJet, which made £52m in profit last year, that would cost an extra £30m, only part of which could be passed on before passengers stopped flying as regularly. The planes may stack up but the numbers do not. The arithmetic suggests that BAA will have to sharpen its pencil a lot more and produce a design that airlines are prepared to pay for rather than a landing charge that will fund what it would like to build.

The alternative of seeking cross-subsidies from its other two London airports merely plays into the hands of those who would like to see BAA's monopoly in the South-east broken up.

The idea that this would result in competition between the airports and hence lower prices for passengers is almost certainly overstated. BA would no sooner relocate to Stansted than Ryanair and easyJet would be lured to Heathrow for reasons that have nothing to do with landing charges.

A break-up would, however, make the costs of operating from the three airports more transparent and concentrate the minds of airlines on the value and best use of the slots they possess. For instance BA, instead of belly-aching about the lack of a third runway at Heathrow, could finally give up on its perennially loss-making European and domestic business and devote itself to long-haul routes, maximising the value of its slots.

This would free up huge extra capacity at Heathrow, encourage passengers in the regions to fly from their home airports and maybe even hasten the introduction of an environmentally friendly high-speed rail network, making UK domestic air travel a thing of the past.

Nuclear option

If only British Energy could burn investment bankers in its reactors then it would be making money. The assorted advisers working on the rescue of the nuclear generator that dare not speak its name are eating their way through the cash faster than a fuel rod in meltdown.

So far the bill stands at £72m, which is £1m more than BE lost in the first half of the year. By the time the rescue is (hopefully) complete next summer, it is likely to be nearer £130m. Put another way, that is nearly five times the company's stock market value, which just goes to show that while it has presided over a truly heroic destruction of shareholder value, the banks and lawyers have made sure they are not out of pocket.

BE is forking out for the advice of no fewer than six firms of investment bankers and lawyers - those working for the company, the Government and the bondholders. Since BE was forced to press the nuclear button largely because of its own mismanagement, there is some justification in this. Nevertheless, the bill will ultimately be borne by the taxpayer. An extra £130m or so on top of the £3bn bail-out which the Government has already agreed might seem small beer. But this is real cash, not funny money discounted back at a notional rate from some distant point in order to clean up the nasty pile of waste that BE will leave behind for future generations.

Yesterday's results were plastered with the array of health warnings that have become familiar to investors since BE went critical 15 months ago. And indeed, it remains touch and go whether the rescue will make it to financial close. The latest blow is the prolonged shutdowns of the Heysham 1 and Sizewell reactors, which are now expected to cost nearly double the initial estimate.

The sale of BE's stake in Three Mile Island should be enough to prevent another China Syndrome but Brussels still has the ability to put the kibosh on the whole restructuring. In which case the tax payer will pick up BE's eight UK stations for £1 a time. Cheap at half the price.