Memorandum by Royal Mail Group plc (FOR
THE FUTURE OF THE RAILWAYS
Royal Mail Group plc welcomes the opportunity
to submit this memorandum outlining its perspectives as a rail
freight customer in the United Kingdom.
To use a transport metaphor, our company is
at a crossroads. We are near the mid-point of a three-year renewal
plan designed to transform an ailing, backward-looking business
into a thriving, profit-making one. Our Transport Review is one
of six major change programmes in our renewal plan. It is about
reshaping our transport network to move mail around more efficiently.
Earlier this year, Royal Mail decided to move
off rail because we could not agree on a new rail network with
our supplier at an acceptable cost. This was purely a commercial
decision based on price and the use of rail remains part of our
preferred strategic approach provided there is benefit in terms
of price and quality of service.
Royal Mail Group plc is a public limited company
wholly owned by the Government. We have annual sales in excess
of £8 billion and more than 200,000 employees. In the financial
year 2002-03, the Royal Mail Group made a £611 million pre-tax
loss and a £197 million loss from operations (before exceptional
items). This is an improvement of £121 million or 38% over
our losses from operations in 2001-02.
We became a plc on 26 March 2001, wholly owned
by the UK Government, our sole shareholder. The framework for
change was the Postal Services Act 2000 that created a commercially
focused company with a more strategic relationship with the Government.
The Postal Services Act 2000 also established a new regulatory
regime with an independent regulator, Postcomm, and a reformed
consumer body, Postwatch.
Through our predecessors, The Post Office Corporation,
the General Post Office and Consignia, we have a record of over
360 years of providing the public with postal services.
In the UK we operate under our trusted brands
Royal Mail, Post Office(r) and Parcelforce Worldwide.
Royal Mail provides an essential public service
relied upon by local residents, businesses, local and national
government, public services and the community generally. Notwithstanding
the introduction of e-mail and other electronic messaging, and
the continuing use of faxes, the volume of mail delivered each
day is some 82 million items.
We have a statutory duty to provide a letter
delivery service to each and every one of the 27 million addresses
in the United Kingdom at a uniform price, irrespective of the
distance travelled. This duty also includes an obligation to carry
out at least one collection daily from each of our letterboxes.
The Government, our shareholder, requires us
to operate the Royal Mail Group profitably, while our regulator,
Postcomm, requires us to achieve a target of 92.5% next day delivery
of First Class mail, or we face heavy penalties, potentially running
to millions of pounds. At the end of September 2003, Postcomm
announced that it intends to fine Royal Mail £7.5 million
for failing the licence targets last year for two First Class
business mail services.
3. ROYAL MAIL
We commenced a ten-year rail contract for the
carriage of letter mails in September 1996 with English Welsh
& Scottish Railway Ltd (EWS). The new network, "Railnet",
comprised fast, limited-stop, fully-containerised, trains. Additionally,
a dedicated rail facility at Willesden was central to the scheme
so, for the first time, road transfers across London, that had
proved such a drain on quality, were avoided.
The infrastructure required a large investment
and the deal had been agreed some years before the contract actually
commenced. To defray those costs acceptably, an unusually long
ten-year agreement was reached. We had, up to then, typically
contracted only for periods of five years.
This was done at a time when the commercial
environment surrounding both parties, then the British Railways
Board and The Post Office, was quite different. The Board, representing
the whole rail industry, was set for privatisation and The Post
Office, now Royal Mail Group, was itself under consideration for
the same transition.
In the intervening years, things have changed
significantly in both the rail industry and for ourselves at Royal
Mail. As part of these changes, our regulator, Postcomm, has started
opening up competition in areas of our business that had previously
been protected. This will inevitably have an impact on our business
volumes over time and we need to be able to respond decisively
to the challenges this presents. In addition, the changing nature
of mail products and services and their relative volumes, has
seen the growth of business bulk mailings and demanding targets
for First Class letters.
It was clear two years ago that the present
contract for rail freight services could not stay in place until
2006, partly because of the postal market changes outlined above
and partly because the Travelling Post Office (TPO) train carriages
involved would be life-expired before then.
In June 2001 we announced a comprehensive review
of our UK-wide road, rail and air transport links to reshape the
entire network to meet demands for cost effective and faster services.
We said our aim was "to achieve the best possible integrated
network, on the basis of cost, reliability, flexibility, growth
potential and environmental factors. Our future use of rail, air
and road services, and the balance between them will be judged
against those factors." The review was due to be completed
by the end of 2001, with changes to our transport network expected
to take place progressively in the following 12 to 24 months.
At the time our Transport Review was announced
over two years ago, Royal Mail Group was spending around £300
million annually transporting mail and parcels in the UK. Of the
80 million letters posted each day, some 12 million or 14% were
transported long distance by rail, 35 million travelled long distance
by road, and five million or 6% travelled by air. The remainder
is short distance and local. Our vehicle fleet numbered 40,000
vehicles of all types. We were also operating nearly 60 trains
each night and 39 air services.
4.1 Current Use
Royal Mail mainly uses rail for the movement
of First Class mail on an overnight basis. The services are dedicated
to mail movements and involve rolling stock owned by Royal Mail
(16 four coach sets of Class 325 Electric Multiple Units) and
EWS the operator. The services connect a mixture of locations
involving dedicated rail hubs, dedicated facilities at passenger
stations and use of passenger platforms at stations. All services
are multi-stopping and involve dropping mail off at intermediate
points on the journey and picking up more mail. Mail is still
sorted on 12 nightly services out of 44 services still running
(36 with effect from 1 October 2003). The rolling stock used for
the Travelling Post Offices is Mark 1a type which in other
forms from 31 December 2003 can no longer be used for fare paying
Mail trains have a higher degree of priority
on the rail network than passenger trains (which in turn have
a higher degree of priority than ordinary freight) but do pay
higher track access charges as a result. The performance regime
for Royal Mail train services is also more demanding upon EWS,
and in turn Network Rail, than is available to other rail users.
This regime though is only available until May 2007 and is unlikely
to be available to Royal Mail beyond then.
Despite the performance regime, and the preference
that mail trains get, Royal Mail has suffered similar problems
to other rail users in obtaining acceptable levels of service
performance. This has been particularly relevant post Hatfield.
In the last 12 months the average level of performance has been
about 91% against a target of 95% arrival within a 10 minute time
window. The equivalent figures are 96% for road and about 94%
for air. The latter level though varies from poorly performing
turbo prop aircraft which lack all weather capabilities to nearly
99% achieved by BAE146 jets.
With rail the prognosis is for ongoing renewal
for the network, and hence, despite the operators best endeavours,
an ongoing gap between Royal Mail's service aspirations and rail
network capability. As stated above, Royal Mail is now regulated
for mail products and faces fines for failure to achieve the required
standards. The issue on rail is not just overall performance level
but also the relative inconsistency on a night-by-night basis
that makes effective contingency planning difficult.
Quality issues and Royal Mail's financial position
led to a review of poorly performing services and an assessment
of the ability to transfer product movement from rail to road.
This work exposed that rail was not as effective in many areas
and that equivalent or better connectivity by road could be achieved.
The more detailed modelling Royal Mail then
undertook for their future network further highlighted that rail
was not as effective as had been previously believed. This modelling
used linear programming techniques and was able to switch flows
of mail between road, rail or air depending upon cost and the
ability to meet connection times. The model encompassed all UK
mail flows with their availability for transportation and required
connection times elsewhere in the network to meet Delivery Office
deadlines for on time delivery to recipients. The modelling indicated
that for overnight mail (principally First Class mail) road and
air were most effective. This led Royal Mail to look at using
rail to move less time critical products in bulk over long distance.
4.2 Factors Affecting Use of Rail for Royal
The key factors for Royal Mail in the use of
any transport mode are:
Connectivity: Royal Mail needs to connect all
parts of the UK with an overnight service to meet its Universal
Service Obligation. The last posting times around the country
with a next day delivery requirement means there is a need for
speed. There also needs to be consistency and reliability so that
the connectivity works each and every night. Road provides almost
100% connectivity, excluding islands. Air is quickest for connecting
extremities or offshore locations.
Quality of Service: the reliability of a transport
network is essential for confidence in planning. Without consistency
there is an inability to plan a robust network and have contingencies
should the network fail. Royal Mail has quality of service targets
agreed with its regulator, Postcomm, and so has to ensure its
transport networks do connect effectively. As commented above,
road provides the best quality of service in Royal Mail's transport
network. Plans are in place to raise the quality of air services.
Rail unfortunately has achieved only about 91%
on quality of service in the last year. Worse still is the inconsistency
of performance ranging from a low of 80% to the high 90's. These
fluctuations occur on a nightly basis, are unpredictable and have
a damaging effect on Royal Mail's quality of service.
Flexibility of Routing: there are many variations
on road for routing between two locations and so road traffic
is able to divert round traffic congestion, road works and so
on. Whilst rail has some flexibility it is less than road. Furthermore
when a line is blocked there is little alternative but for trains
to be delayed.
Another issue on routing is so called "Z
legs". Mail needs to get to rail hubs and passenger stations
by road. This means two road movements into and out of a rail
hub at each end of a rail journey. For a direct movement only
one journey is necessary. Even if a road hub were used there would
be only two road links via the hub rather than two road links
and one rail link. Rail will almost always need road support.
Cost: for Royal Mail's type of products and
movements costings to date show rail to be more expensive than
road. As an existing user, Royal Mail was not eligible for rail
freight grants. There may be opportunities for grants for future
usewhether these will bridge the cost gap is not clear.
"Dedicated" versus "Shared User":
Royal Mail currently runs dedicated trains. In order to achieve
economies of scale in train length and fill, mail needs to be
marshalled into a suitable volume equivalent to many truck loads
and so is effectively held back before despatch. Upon arrival,
time is then taken to unload and disburse mail. With road each
truckload can be despatched when it is ready thus departing earlier.
This marshalling and disbursement process with rail and the impact
of "Z legs" in many instances removes any time advantage
rail may have had when travelling at higher speeds.
Shared user services produce a smoother flow
and so this is an option Royal Mail is considering. However, departure
and arrival times are an inevitable compromise with the needs
of other users and network availability and so may not meet Royal
4.3 Possible Future Use
Looking to the future, it is forecast that road
congestion will grow and Working Time Directives will have an
impact. However, with rail it is clear that ongoing disruption
to the network is inevitable due to the need for renewal. Events
such as Hatfield were more damaging than 11 September as the impact
was more prolonged and more unpredictable in its duration and
Equally unclear for existing and potential rail
users at the moment are:
The timescale and impact of network renewal:
there has been much debate on funding availability and what is
required which creates uncertainty about when a higher degree
of reliability can be expected. There are in the meantime the
ongoing issues of disruption as renewal occurs.
Resolution of the conflicts between userspassenger
(inter city versus regional) versus freight (slow versus high
speed, dedicated versus shared user): these users have conflicting
needs on what appears to be a capacity constrained network. It
is unclear how these competing priorities can be balanced to ensure
access at times suitable for each customer's product.
Funding for freight users to offset the additional
costs of rail versus road: Royal Mail has not been able to access
these grants in the past. If it were able to then a degree of
security for ongoing access to them would be vital.
5. ROYAL MAIL
In March 2002, we announced our intention to
switch to an entirely new transport operation based on a regional
"hub and spoke" system combining road, rail and air
links. Royal Mail therefore made a strategic decision to seek
to retain the use of rail as a modal alternative to road and air.
This approach recognises that no one network is 100% reliable
and events (September 11th, major road closures, major rail incidents
such as Hatfield) impact on all modes at times so alternatives
The continued use of rail in these proposals
involved fewer trains carrying more mail in bulk and during the
day rather than at night. This proposal would have increased the
volume of mail carried by trains from around 14% to 18%.
Taken together these changes would save approximately
£90 million on current transport operating costs. In brief,
the key elements of the 2002 proposals included:
Using air and road elements in a
"discrete" overnight network based on the hub and spoke
model using high-volume articulated vehiclesas opposed
to the large number of smaller 7.5 tonne vehicles currently operating.
This would result in a reduction in annual road mileage and a
significant reduction in usage of smaller 7.5 tonne road vehicles.
The bulk network would use large
elements of rail transport for Mailsort/Presstream products and
Second Class items. Sending less time sensitive mail by rail would
mean transporting these products during the day and not being
so affected by the continuing rail infrastructure and maintenance
work being carried on at night and estimated to last up to five
Moving away from transporting mail
by rail overnight, would mean the requirement for TPOs would diminish.
As a result we announced ceasing the TPO network.
We would continue to use our existing
operational sites as far as possible. The intention being to transfer
work out of sites that are not up to the operational specification
of a "state of the art" distribution service and into
our sites that are fit for purpose. This would involve the creation
of a new distribution centre in the Midlands area with work transferring
from our existing sites in the area into the new hub.
Royal Mail would continue to use
air transport, but changing to fewer, larger containerised aircraft
thus reducing the number of flights and staff required for airport
operations. The use of jet freighters would also mean being less
susceptible to poor weather conditions.
Using fewer and larger vehicles would
greatly reduce the number of road vehicles and cut the amount
of carbon emissions our vehicles produce.
6. ROYAL MAIL
In June this year, following the failure of
protracted negotiations with our rail freight supplier EWS over
the transfer of existing services to the new network, Royal Mail
Group concluded there was no alternative but to move forward with
a restructure based on a road and air network only. To continue
talks would simply have caused unacceptable delays to our plans
to restructure our transport network, costing us money and impacting
on the service to our customers.
We were disappointed that, after two years of
discussions with EWS, we were unable to make any headway. EWS
were unwilling to quote a competitive price for the revised service
we requested, apparently taking the view that they needed what
they defined as "a critical mass of revenue" of about
£40 millionsimilar to current revenue levels. What
became apparentand was clearly articulated at a meeting
on 30 January this yearwas that it was £40 million
or nothing. Throughout the discussions EWS consistently refused
to share costings to allow any sort of debate. The EWS attitude
appeared to be that they did not believe the Government would
allow Royal Mail Group to cease using rail, so they were not taking
a risk with the "nothing" option.
EWS have never lowered their prices. We asked
them to provide cost visibility to allow a programme of cost reduction
to be instigated when Royal Mail Group first entered its time
of financial difficulty. EWS declined, mainly, we now understand,
because the contract with Royal Mail was very profitable. We then
started a programme of cancellation of the worst performing services
and transferring to road at lower cost and improved quality of
service. We then threatened further cancellations as EWS were
still unwilling to address the cost of services. In response EWS
offered a special discount off the invoice and to forego the price
indexation as allowed for under the contract. Both discounts were
time-limited to this calendar year.
The final quotations from EWS that were used
for decision-making were £25.9 million per year above the
As was made clear at the time of our announcement
in June, the decision to cease using EWS was a purely commercial
decision based on price, and the use of rail for some elements
of the distribution network remains our preferred strategic option
and has not been ruled out for the future.
It is vital if Royal Mail's wishes to maintain
a rail element in its transport strategy are successful that meaningful
discussions take place with other potential providers. Since the
announcement in June, seven other potential suppliers have come
forward and discussions continue.
Our current rail operation uses purpose-built
facilities at Willesden, Warrington, Wishaw, Bristol Parkway,
Doncaster, Low Fell and Tonbridge. Even if a road-only solution
is adopted, the facilities at Willesden, Warrington and Wishaw
will remain in use and rail-connected. Those at Doncaster and
Bristol will return to their landlords, EWS and Network Rail respectively,
to use as they so wish. We intend to retain the platforms at Low
Fell, alongside our Mail Centre, and at Tonbridge so they will
remain available for use if required in the future.
Royal Mail's new road and air network will reduce
the impact of our distribution network on the environment by a
30% reduction in carbon dioxide emissions compared with the current
network, and by 26% on the proposal which included the use of
rail. Under the road/air network we will reduce our road mileage
by some 20 million miles a year (26.5%) compared with the current
Royal Mail's figures on environmental issues
are laid out herewith:
|Air & Road|
|Carbon Dioxide Emissions kg per day||730,633
Miles Per Annum
Lorry Movements Per Day
There is an increase in road miles as one would expect with
the road/air option compared to the road/rail/air option but a
large reduction compared to the current network. There will however,
be fewer lorry movements with the road/air network compared to
both the current network and road/rail/air option, as we make
better use of larger vehicles on longer journeys and avoid the
need for short runs between our regional distribution centres
and rail hubs.
While the use of rail would have resulted in a small improvement
in road mileage compared to the road/air option (just one million
less road miles per year) there is also the fact that rail is
not a zero emission option. Diesel locomotives generate emissions
and electric trains require power stations to produce electricity.
Royal Mail's load factors for rail are lower than industries like
coal or aggregates and this should also be taken into account.
The use of rail also creates vehicle movements to and from
stations which are often vehicles that are less than fully loaded
(we can only put mail for a limited number of Mail Centres on
the trainthe ones it connects with). With a lorry going
to a road hub there are more connections that can be made so there
is greater opportunity to fill the vehicle up.
There seems to be a perspective that rail is a totally environmentally
friendly, pollution free mode of transportit is not so.
It can be more environmentally friendly than road in the right
The 153 jobs affected in our smaller rail hubs and at passenger
stations were all included in the 2,500 jobs to be impacted by
the Transport Review announced in March 2002. As a responsible
employer, we will seek redeployment opportunities for staff and
to achieve any job losses through natural turnover. We note EWS'
contention that 500 of their jobs (8.1% of their 6,200 total staff)
are threatened as a result of Royal Mail ending 49 services per
day (3.1% of their weekly 8,000 services).
On the issue of VAT, Royal Mail is currently VAT exempt on
postal charges. This means it cannot recover VAT paid to suppliers
for services provided in the course of its mails business. As
a Government Minister recently stated: "Postal services provided
by the universal service provider, Royal Mail, are currently exempt
from VAT, and the Government believe that the vital social role
played by the universal postal service should continue to be reflected
in the tax system. The Government are therefore opposed to VAT
on stamps" (John Healey MP, Economic Secretary to the Treasury,
Hansard, 12.6.03). The result is that Royal Mail has to add 17.5%
to any prices quoted by EWS to arrive at the full cost. The suggestion
however, that our road costs are free of VAT is not true. Royal
Mail incurs VAT on fuel, lease costs and other bought in services
for road vehicles.
8. GOVERNMENT POLICY
As we understand the Government's transport policy, it is
to make rail freight attractive for business to use via grants
and other means. It is not Government policy that Royal Mail Group
should subsidise the railways or a privately owned rail operator.
We have regular meetings with Ministers at the Department for
Trade and Industry as our shareholder and these have included
discussions on the progress of our Transport Review. We believe
the Government's position can be summed up as regretting the loss
of business for rail freight but standing by its policy that Royal
Mail Group must have the freedom it needs to operate commercially.
It has therefore regarded the discussions and negotiations between
Royal Mail Group and EWS as a commercial matter for the companies
Royal Mail Group has repeatedly explained that its decision
to move to a new integrated road and air transport network and
withdraw from the use of rail is a commercial rather than a policy
decision. It remains true that, ideally, we would like to retain
a rail element in our transport mix and therefore have not ruled
out a return to rail in the future for some elements of our operations
provided the price and quality of service are appropriate.
Managing Dirctor Logistics
Royal Mail Group plc