Regulator at odds with Royal Mail over warning on universal service

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Royal Mail was plunged into a row with its regulator yesterday as it declared that it needed help to continue providing a universal postal-delivery service because cheaper rivals are moving in on its territory.

Even as she unveiled a 12 per cent rise in full-year operating profits to £671m, Royal Mail's chief executive, Moya Greene, warned that "there is a prospect we will not be able to sustain a commercial rate of return" on its commitment to deliver mail to all of the UK's homes six days a week.

But a spokesman for Ofcom hit back: "We do not believe there is presently a threat to the financial sustainability of the universal postal service. Royal Mail [should] take appropriate steps to respond to the challenge [of] competition, including improving efficiency."

When the Government controversially sold off the 500-year-old postal operator for £3.3bn last year, the move included guarantees that Royal Mail would continue with its universal six-day service.

It also has to provide access to competitors such as TNT Post for final-mile deliveries.

But Ms Greene argued that TNT's plans to deliver post to almost half the addresses in lucrative high-density areas, such as London, which only represent 8 per cent of the UK, meant it could "cherry-pick easy-to-serve areas".

She added that this could take £200m off Royal Mail's revenues by 2017 and threaten the universal service. "Legally," Ms Greene warned, "we're not allowed to match [TNT] on price. It's very unfair and means there's a prospect we will not be able to sustain a commercial rate of return in universal service.

"Parliamentarians need to make a very minor change to the Postal Services Act so we can get a review of direct delivery done right away. Universal service is a precious thing, but a fragile thing."

But the postal economist David Stubbs said Ms Greene's comments on the threat to the universal service were a smokescreen. "Royal Mail is trying to intimidate the regulator and complain they can't meet the margins set," he argued. "But Royal Mail hasn't kept its side of the bargain and become more efficient. Staff costs are 70 per cent of the business. The disappointing part of their results was that staff costs have gone up. They have to exercise commercial discipline. Any decline in volume should be offset by reduced costs such as reduced employment costs."

The row came as Royal Mail unveiled its first full-year results since last year's flotation. It made more money delivering parcels than post for the first time in its history, with parcel revenues accounting for 51 per cent of its overall revenues, which rose 2 per cent to £9.5bn. Pre-tax profits increased 19 per cent to £363m for the year to April, and the decline in the number of posted letters slowed to 4 per cent. That, Royal Mail said, was partly because the amount of mail in its sacks was boosted by energy companies writing to customers about price rises in October.

Ms Greene, who moved to London from Canada to run the mail group, dismissed rumours that she may be looking for her next job, saying: "I love the Royal Mail. I still have great ambitions for this wonderful enterprise."

She also said she shouldn't receive a pay hike "when many in the country are struggling to make ends meet".

Ms Greene was paid a total of nearly £1.2m for 2013, but Royal Mail's chairman, Donald Brydon, had claimed she was the worst-paid chief executive in the FTSE 100 and must receive a rise. Yet Ms Greene said yesterday: "In this day and age when so many families are working so hard to put two eggs together, it hardly lies in my mouth to complain about my compensation."

Mr Stubbs added: "If Royal Mail had done what competitors like TNT in the Netherlands did and held pay, they would be in better shape. The growth in value of this business was about reducing costs, but this hasn't happened."

The shares fell nearly 10 per cent, or 56p, to 519p, but remain nearly 60 per cent higher than the Government's 330p float price in October.