Royal Mail Privatization Pushes the Envelope


The Royal Mail can trace its history back 500 years to the time of Henry VIII. Its bright red “pillarboxes” grace streets across the UK, from the Scilly Isles to Scotland.

But change is coming, as the British icon seeks to adapt to the decline in traditional “snail mail” and compete with the likes of Federal Express and UPS.

The UK’s coalition government laid out plans Wednesday to privatize the Royal Mail. Analysts have speculated that the company could be worth 3 billion pounds ($4.5 billion). The government plans to sell a majority stake, but it has yet to decide on the exact amount — it’ll leave that to market conditions.

“This is logical,” Business Secretary Vince Cable told the House of Commons. “It is a commercial decision designed to put Royal Mail’s future onto a long-term, sustainable basis.”

Tens of thousands of Royal Mail workers will be able to buy shares in the company, and the government plans to retain a stake, opening the possibility it will sell more shares in the future.

Although the red pillarboxes are protected by law, there are concerns that other parts of the Royal Mail — such as six-day-a-week delivery service — may be under threat once it has to make its way profitably in the private sector.

The Communications Workers Union, which represents Royal Mail workers, opposes the sale because of fears of potential job losses. There are also concerns that investors may be reluctant to buy knowing that the new company would operate under a constant threat of industrial action.

Cable tried to assuage fears Wednesday, claiming that privatized delivery services in Austria, Germany and Belgium all “produce profit margins far higher than the Royal Mail, but have continued to provide high-quality and expanding services.”

Nonetheless, there are also worries the Royal Mail’s quest for profit may mean remote — and therefore higher-cost — communities in the UK will not get the same service as cities and towns.

“The principle that has secured the universal service is one where the high-density areas, like the big cities, subsidize the rural areas,” said Dave Ward, the CWU’s deputy general secretary. “The countryside will be completely cut off.”

But Britain’s government is determined to move forward, describing the privatization as critical to the future of Royal Mail, which has seen its revenues shift more toward packages and away from the mail of the past.

The Royal Mail needs to invest in new technology to survive. Operating profit, excluding modernization costs, rose to 211 million pounds last year. Parcels accounted for almost half of the group’s 9.5 billion pounds of revenue in the last year.

In the U.S., the financially beleaguered U.S. Postal Service has no such plans to privatize. It is considerably larger than the Royal Mail, processing 160 billion pieces of mail last year.

The Postal Service is an independent agency — it gets no tax dollars for its day-to-day operations, but is still subject to congressional control.

And it has massive financial problems to contend with — running up a $16 billion loss last year. Most of the losses are due to a decline in mail volume and a congressional requirement that it make advance payments to cover expected health care costs for its future retirees. About $11.1 billion of those losses were due to payments for future retiree health costs.

The Postal Service is pursuing a major restructuring throughout its retail, delivery and mail-processing operations. Since 2006, it has reduced annual costs by approximately $15 billion, cut its workforce by 193,000 or 28 percent, and consolidated more than 200 mail-processing locations.

It is considering several options to fix its finances, including negotiations with unions to reduce labor costs and possible increases in prices. Earlier this year, it backpedaled on its plan to end Saturday mail delivery after running into opposition in Congress.

In the UK, the cash-strapped government desperately needs the Royal Mail privatization to work, as the country struggles to recover from the economic crisis. In a country that has imposed tough spending controls and austerity measures on all government departments, investing in the future means getting at the end of a very long line.

But tampering with a service so central to public life is also a delicate matter.

Even the late Margaret Thatcher, who championed the sale of state-owned companies such as British Telecom and British Gas, backed away from privatizing Royal Mail during her tenure as prime minister back in the 1980s.