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POST OFFICE BOARD
CHIEF EXECUTIVE'S REPORT: NOVEMBER 1998
(September Results)
KEY POINT SUMMARY
ROYAL MAIL
Profit in September was £51m. This was £35m above budget, but this
includes the £30m profit from the sales of Quadrant and King Edward
Building. Income was up £3m on budget due to Royal Mail National
and International, whilst expenditure was down £2m on the planned
level, despite continuing overspends on mail operations. The full year
profit forecast of £496m, has been adjusted back to £478m following
further analysis of the balance between risks and opportunities
discussed at the September Board and detailed in the October Chief
Executive’s Report.
Total letter volumes increased by 4.8% over last September, against a
budgeted increase of 4.2%. The increase achieved by Royal Mail
National was a little disappointing but Royal Mail Streamline reversed
recent trends to record a 7.9% increase and International traffic grew
14% against a budget of 7.4%.
September was a mixed month for quality of service. Both Second
Class and Priority services achieved their full year target, but First
Class performance of 91.6% was significantly down on the previous
month. Mailsort performance reflected the focus that it is now
receiving, with the 98.9% result for Mailsort 3 being 3.5% above last
year’s performance.
POST OFFICE COUNTERS LTD (POCL)
September’s profit was £9.3m compared to a budgeted figure of £0.9m.
Income was £0.4m ahead of budget, whilst expenditure was lower than
anticipated in both core and development budgets. The full year profit
forecast has been increased to £35m from £30m.
The quality of service figures for September showed that 94.9% of
customers were served within 5 minutes. This improvement is now only
0.1% below the full year target.
PARCELFORCE WORLDWIDE
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Parcelforce Worldwide recorded a loss of £5.3m in September against a
budgeted deficit of £4m. Poor International performance meant that
income was £0.3m below budget, whilst expenditure was £1m above the
planned figure. Current expenditure performance will be covered in
Richard Close’s presentation to the Board.
Volume was an encouraging 13.5% up on last year, with all major streams
except International Standard recording increases in excess of budget.
Next Day products grew by 39.4% against last year, driven largely by
new customers such as Viking Direct, Pitney Bowes and Neat Ideas.
Only 2 of the 15 streams achieved their full year quality of service
targets, although Next Day performance held up reasonably well given
the large increases in volume. At the half year, cumulative target
performance has been achieved in all 5 Express products, but Standard is
1% below the targeted level.
OTHER ISSUES
Pay
An agreement on pay in Parcelforce Worldwide has been passed
unanimously by the CWU Executive. The agreement amounts to an
increase of around 2.7% on total pay bill, with a headline increase of
3.005% on basic pay, allowances, overtime and shift premiums. The
changes will take effect from 1 September 1998, but will first be agreed
by a Special Conference in November which will recommend an
individual ballot on the proposals. Residential delivery terms and
conditions have also been agreed as part of the deal.
We have received negotiating authority from the DTI for a pay
settlement in Royal Mail, of up to 3.5% on rates, within a limit of a
3.2% increase in the static pay bill. Discussions continue with the
CWU, with the union appearing to accept our strategy of forging a link
between the discussions on pay and productivity.
The CWU pay award for POCL staff was implemented on 1 October
1998, resulting in a 3% increase in the overall pay bill.
Project Sapphire
Parcelforce Worldwide have issued a non binding letter of intent to
purchase Project Sapphire. DTI/Treasury have accepted the principle of
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an approval process which fits the timescale of the project, although
they have signalled the difficulty of finding sufficient funds from within
the PSBR in this financial year.
The competitive environment is changing rapidly, most notably with
Deutche Post’s announcement last week that they have taken a 50%
stake in the distribution business of Securicor for £223m. The joint
venture will see Securicor carrying Deutche Post’s continental parcels to
and from the UK and Ireland and will impact on around £300k of current
Parcelforce Worldwide traffic this financial year.
Horizon
The month long discussions facilitated by Graham Corbett, between
ICL, BA and ourselves, came to an end without an agreement being
reached. Stephen Byers wrote to ICL expressing his disappointment that
unlike BA and POCL, they had not shown a willingness to move their
position during the discussions.
Following some subsequent conciliatory noises from ICL, we have been
discussing the development of new structural processes/organisational
arrangements between the commercial teams of ICL and POCL which
would enable ICL to demonstrate additional commercial value in
support of their revised business case.
I will update the Board orally on the progress made in these discussions.
Office of Fair Trading Enquiry
The Office of Fair Trading (OFT) has dismissed the complaint by
Paypoint, that POCL had refused to allow potential competitors access
to the Post Office network. This was rejected on the grounds that there
are a variety of other available sites in both urban and rural areas which
would provide alternative suppliers with sufficient access to their target
markets. The OFT accepted POCL’s explanation that the second
element of Paypoint’s complaint, namely that a particular Sub-
postmaster had attempted to persuade a Common Landlord not to allow
a bill payment terminal in a nearby third party premises, was not
POCL’s policy and that this had been made clear in a circular letter to all
Sub-postmasters.
At the same time, the OFT have also dismissed a complaint made by
Scottish MPs about POCL preventing Sub-postmasters from selling
Scottish Power Cards as part of their non-Post Office business, after
POCL had lost their contract with Scottish Power to sell these items.
This was rejected on the grounds that no POCL / Sub-postmaster
agreement is registerable under the terms of the Restrictive Trade
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Practices Act and that since alternative suppliers have now been sourced
in most areas, the number of customers affected is not large enough to
warrant an investigation under other competition legislation.
Pricing
I have agreed Parcelforce Worldwide’s proposals to vary 1999 price
increases by geographical zone in order to reflect market conditions and
cost increases. The largest increases (up to 5%) will be in UK markets,
in line with the strategy of achieving an above average price point,
whilst a poor customer perception and uncertain economic conditions
dictates lower increases in international markets.
Given the desired timing of this increase and the anticipated realignment
of business boundaries, we are planning to approach the DTI on these
proposals in conjunction with the Royal Mail pricing plans agreed by
the September Board, once we have formal confirmation of the External
Financing Limit for 1999.
Lloyds/TSB
Lloyds/TSB have decided to award their internal mail distribution
contract to TNT. Parcelforce came second. Having warned the
customer that the ITT encompassed some monopoly traffic (up to £5m
p.a. of current First Class mail), we are now studying the impact of the
new arrangements, although early indications suggest that the deal may
have been structured in a way which avoids breaking the monopoly.
T
We have received Court authority to issue a Summons against TNT
Mailfast over breaches of our monopoly stemming from the delivery of
incoming international mail.
Television Licencing Contract
The Envision consortium of SSL, Bull and WPP, has been awarded the 7
year contract to collect television licences for the BBC. The new
contract runs from 1 April 1999. Winning this contract in the face of
intense competition from both EDS and Andersen Consulting is a
tremendous achievement for the SSL-led bid team.
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Crown Office Conversions
Discussions continue with both CMA and CWU, although we are no
nearer an agreement on the level of business to be transacted through the
directly owned network. We have yet to receive a response from Ian
McCartney to the letters from each party setting out our respective
positions after the first month of talks.
CONCLUSION
The Board is invited to:
- note the November Report
- agree that the following profit/loss forecasts will be
released to the DTI:
Royal Mail £478m
Parcelforce Worldwide £(12m)
POCL £35m
AJR
NOVEMBER 1998
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