Regulator to let Royal Mail raise price of 2nd class stamps by 17%

Royal Mail has been given the go-ahead to increase the price of a second-class stamp to 29p by 2010 but has been told by the postal regulator it must get its act together in order to remain competitive.

Postcomm said that the ball was now firmly in Royal Mail's court "to address urgently its very high cost base".

The move came as postal workers agreed to call off a 24-hour strike that was scheduled to have started at 7pm yesterday. Workers are unhappy about plans to limit pay rises as thousands of post offices are being closed.

The regulator said it is giving all the help it can to enable Royal Mail to "tackle its deteriorating financial situation" and said that "reining back on competition" was not the answer.

Royal Mail asked Postcomm in March to review prices as it struggles in the face of competition from TNT and UK Mail in an age when email has broadly replaced the letter for personal correspondence. Postcomm had previously said second-class stamps could rise from 24p to 26p.

Nigel Stapleton, Postcomm's chairman, said the regulator is providing short-term help by giving Royal Mail greater pricing flexibility so it can align prices for loss-making products more closely with costs. "It is plainly wrong to suggest that competition from new mail operators is to blame for Royal's Mail's problems," he added, pointing out that in those areas where competition has developed, volumes are growing but Royal Mail has lost share. In parts of the market where Royal Mail is not experiencing competition, volumes have declined as customers resist the higher prices the company charges to recover costs, he added.

Royal Mail rejected suggestions it had not capitalised on growth opportunities in the postal market. Alex Batchelor, the marketing director, said: "Despite intense competition, Royal Mail is delivering around 60 per cent of all items bought online and we continue to develop new products and services to support this sector." However, he acknowledged that in order to succeed "in a very tough and open market we urgently need to modernise and become more efficient".

"Royal Mail is losing business to rivals whose costs and prices are lower than ours because they have the modern technology Royal Mail urgently needs to install," he said.

TNT and UK Mail had also requested Postcomm to look at "access mail". This is when Royal Mail delivers letters "the final mile" for operators who have already collected and sorted the letters and carried them across the country. TNT and UK Mail believe the prices they pay are too expensive while Royal Mail believes it is too generous.

Postcomm rejected requests to change the status quo and said prices are overall "set at a fair level".

Royal Mail and the Communication Workers Union have committed to reach an agreement by 4 September.