Can the Royal Mail continue to provide a universal postal service?

The Royal Mail produced some pretty decent results last week. Their operating profit for the first six months of their financial year doubled to £177million - a welcome return to profitability for a mail network that has come under huge pressure from increasing competition within the recently deregulated market.

But the Royal Mail’s “universal service obligation (USO)” continues to act as a major drag on the costs of the business. Under the USO it must deliver mail to every UK address every working day and provide appropriate collection points for mail across the UK. In addition the Royal Mail must charge the same price for a letter regardless of the distance it travels. The price of a first class stamp for a letter from London to Oxford is the same as one from London to Inverness.

The USO is often justified on grounds of externalities - the social benefits of people and businesses knowing that there is a genuinely national network of delivery addresses and collection points - providing the necessary oil in the wheels for thousands of smaller businesses who rely on an efficient postal system to keep their firms ticking over.

But for the Royal Mail it acts as a huge financial constraint. And then add in the pressures created by a shift towards email, e-mail, internet advertising, and rival operators such as Business Post and UK Mail who are now handling almost one letter in every three posted in the UK.

The universal service provision inevitably means that the royal mail postal service runs at a loss. The new entrants into the market for mail have tended to focus on collection and sorting - leaving Royal Mail employees to deliver ‘the final mile’ to homes and businesses - whilst paying Royal Mail a small access charge for this service.

The longer-term competitive threats to the Royal Mail are now accentuated by the recession. Mail volumes are likely to decline as businesses and individuals cut their costs and there is a downturn in the direct-mail industry.

Adam Crozier, CEO of the Royal Mail argues that, unless the business is given greater flexibility to raise extra finance for much needed investment, the viability of the universal service provision will come into very sharp focus in the next year or so.

That is worrying news for millions of people living in outlying areas for which a reliable postal service is an essential part of the economic and social fabric of their community.