Moya Greene, the chief executive of Royal Mail, still isn't happy. She's got her privatisation, she's got her freedom to set the price of a first-class stamp, and she's got her lower cost of borrowing. Now she's grumbling about regulators generating headwinds that could blow her ambitions for Royal Mail wildly off course. The key line in Royal Mail's first set of full-year results as a public company was: "Without timely regulatory action, direct delivery could undermine the economics of the universal service and our ability to generate sustainably a 5%-10% ebit [earnings before interest and tax] margin in our reported businesses."
In other words, the arrival of TNT Post, which has placed its own delivery staff on the streets of London, Liverpool and Manchester, represents wasteful competition. The argument is that the newcomer is cherry-picking the most lucrative parts of the postal market, leaving poor old Royal Mail to cover the hills, dales, highlands and islands where the economics are poorer if prices must be nationally uniform. What's more, Royal Mail's staff are still obliged to wheel their (presumably lighter) trolleys around London, Liverpool and Manchester.
The usual special pleading or a legitimate worry? It's the latter. Greene's analysis seems broadly correct. Having competing sets of delivery staff on the same patches seems more likely to generate economic waste than beneficial competition.
In any case, competition is no longer meant to be the primary regulatory goal. The number one aim is sustaining the universal service. Some degree of competitive heat is clearly required within that framework to prod Royal Mail to keep modernising and to keep it honest. But if TNT is serious about operating end-to-end deliveries to 42% of the population (but only 8% of the geography) by 2017, we're not talking about pinching a few cherries, but several orchards.
Regulator Ofcom ought to take a look urgently, as Greene urges. Its current stance – that it sees no present threat to the universal service – may be dangerously complacent. Quite how, in practice, the regulator could design ringfences around end-to-end deliveries is another matter. But the current arrangements look a mess.
None of which alters the fact that Royal Mail was privatised too cheaply – the starting dividend yield was 6.1% – and Greene's warning does not (at least, not yet) imperil the prospect of higher dividends to come. Thus the share price, despite yesterday's 10% fall, is still 57% above the float price, which probably won't help Greene's lobbying efforts.
Ofcom's job, however, is not to look at share prices, but to implement sensible policy. For the sake of consumers, as opposed to Royal Mail's shareholders (who can look after themselves), the regulator should address Greene's arguments in detail – and soon.
