Is the Royal Mail about to implode?

Striking employees, losses in their millions, increasing competition. There's no doubting these are seriously worrying times for the Royal Mail. Jon Ashworth reports on a beleaguered institution and wonders if it can realistically survive recent batterings

It has not been a happy few months for the UK's Royal Mail. The chaos arising from last November's unofficial strike action brought home to everyone that this was a business with some serious problems.

Faced with the non-delivery of all those cards, bills and unwanted credit card applications, even little old ladies at home began to realise that all was not well with Postman Pat.

What makes it all the more unbelievable is that Royal Mail, until just a few years ago, was a huge cash-cow. Profits increased every year during the 1980s and 1990s, making the business, then called the Post Office, one of the best-performing postal services in the world. In 1998, the letters division alone made a profit of £547m. This was an £8bn a year business, with a workforce of more than 200,000 people. It looked unassailable.

The outlook changed dramatically in the summer of 2000, when the Post Office revealed its first full-year loss in almost 25 years. The business suffered a post-tax loss of £264m after the Government announced plans to pay benefits directly into bank accounts from 2003. Consequently, it wrote down more than half a billion pounds of assets linked to computerising post office branches.

In January 2001, it was announced that the Post Office was to be renamed Consignia. The name - based on 'to consign', as in 'to entrust to the care of' - was intended to distinguish the Post Office from competitors as it looked to opportunities overseas. The change of name - at a cost of £500,000 in consultancy fees - enraged employees, who accused the business of dumping 350 years of heritage.

Much of the anger was directed at Neville Bain, the New Zealand-born executive who was appointed chairman in 1998. During his four-year term, Consignia became a byword for appalling industrial relations. At one point it was responsible for half of all the strikes in the UK.

The business was criticised for lacking innovation and for ignoring the opportunities of the Internet. Expansion into overseas markets was deemed a failure because Consignia had spent too much buying badly performing businesses.

Bain departed in 2002 with no successor in place. It was not clear who would want the job. Consignia's protected monopoly position left a legacy of inefficiency, under-investment and poor productivity. The protective wrapping came off in March 2001 when the business became a state-owned Plc responsible to an independent regulator, Postcomm.

Into this unenviable setting stepped Allan Leighton. As sales director of Asda from 1992-2000, he was credited with turning round the ailing supermarket group ahead of its sale to Wal-Mart. Leighton then 'went plural', snapping up a range of directorships and chairmanships.

Leighton joined the Consignia board as a non-executive director in April 2001. His appointment as chairman in March 2002 coincided with the launch of a three-year recovery plan designed to cut costs by more than £1.4bn by April 2005 and put the business back on a secure long-term footing. It was warned that 30,000 jobs would be lost. Describing the situation as 'perilous', Leighton said the measures were essential to restore profitability, deliver positive cash flow and improve services.

Parcelforce, losing £15m a month, would concentrate solely on the growing market for time-guaranteed and next day and two-day express deliveries. It would withdraw from three-day plus deliveries, with the closure of five parcel distribution centres.

Consignia was to rationalise its air, rail and road transport operations to create a more efficient single network. Less mail would be transported by rail. Four of 16 mail distribution centres were to close.

It was action that should have been taken years earlier. Consignia unveiled a £1.1bn pre-tax loss for the year to end-March 2002. The business had lost £318m on its day-to-day operations - equivalent to £1.2m every trading day. Leighton announced plans to move to a single daily postal delivery, saving the business £350m a year. The second delivery carried 3% of the UK's mail but incurred 20% of delivery costs.

New automated sorting equipment and other operational improvements would deliver annual savings of £330m. Restructuring the UK parcels business would save £500m a year.

John Roberts, chief executive for the previous seven years, was among the casualties. He announced that he would step down later in 2002 once a successor had been appointed. The reviled Consignia name was dropped in favour of Royal Mail Group.

Leighton blamed the dire figures on problems dating back more than a decade, adding: 'Management mistakes have been made over a number of years, including a failure to resolve deep-rooted industrial relations problems.'

By the time the UK mail market was fully opened to competition in April 2007, Royal Mail expected to lose about 30% of its market share. The renewal plan was intended to minimise the impact.

The management shakeup at Royal Mail ended with the appointment as chief executive of Adam Crozier, former head of the Football Association. Faced with recalcitrant unions and a demoralised workforce, it would take all his diplomatic skills to turn Royal Mail round.

Last year's walkouts were a sign of a workforce that had simply given up caring. Something similar happened to British Airways in the late 1990s. When BA's chief executive, Bob Ayling, threatened to 'sack or sue' staff who went on strike, hundreds of employees called in sick, disrupting thousands of flights and costing BA £125m.

Unlike Royal Mail, BA has moved from state ownership fully into the private sector. Although heavily unionised, BA has been able to push through unpopular decisions such as outsourcing maintenance contracts. When Royal Mail proposed outsourcing its van fleet to private operators, staff blocked the move by threatening to strike.

The closure of urban post offices has created a PR backlash, although Royal Mail insists there are not enough customers to sustain the existing network.

Amid all the gloom, Royal Mail delivered a token profit of £3m in the six months to end-September 2003. Most of this was down to adding 1p to the price of stamps, which brought in an extra £90m. Leighton warned that Royal Mail still faced up to £1bn of extra bills because of a pay rise for staff and increased pension contributions.

Royal Mail is walking a precarious tightrope. Competitors are queuing up to steal its business, and the disruption late last year pushed business straight into their hands. Clients including Tesco switched to private operators, and Royal Mail has been trying desperately to persuade them to return.

Leighton and Crozier find themselves in an unenviable position. Huge leaps in efficiency are required if Royal Mail is to have a fighting chance. And yet, with this game of brinkmanship, it is hard to tell exactly where the truth lies. Management mistakes over years have allowed Royal Mail to become bloated and complacent, yet the unions suspect that problems are being exaggerated to push through deeper cuts than are necessary. It is not long since Royal Mail was churning out bumper profits.

There is always the risk that Royal Mail will implode under the strain. The core letters and parcels businesses are directly open to attack by competitors. The post office branch network has been fragmenting for years.

Perhaps Postman Pat will soon be working for DHL.

Jon Ashworth is business features editor at The Times.