Royal Mail Faces Price Cap on Second-Class Stamps Amid Performance Concerns

Ofcom, the regulator for Royal Mail, has decided to cap the price of a second-class stamp at its current level of 91p until March 2028. This decision comes as the postal service grapples with "unacceptable" performance issues and a "stark" financial situation.

The price cap, which has been in place since 2012, will continue to tie the increase of second-class stamp prices to the rate of inflation. This contrasts with first-class stamps, which are not subject to a cap and currently cost £1.80.

Royal Mail had argued for a price increase to offset rising costs and a significant decline in letter volumes. The company has faced scrutiny and fines totaling £37 million in recent years for failing to meet delivery targets. The union representing postal workers has also warned of potential collapse if interventions are not made, with approximately 400 workers reportedly leaving weekly.

Ofcom stated that the extension of the cap is intended to provide regulatory oversight while Royal Mail implements reforms aimed at improving its universal service obligations, which include a commitment to a "one price goes anywhere" service six days a week.

Fergal Farragher, policy director at Ofcom, explained the regulator's position: "The number of letters being sent is declining and Royal Mail's financial position is stark, which is why we reformed its universal service obligations last year. However, the company has been slow to implement this, which meant we weren't able to consult on the future of stamp prices earlier this year, as originally planned."

He added, "The company is now making some progress with its universal service reforms and improvements to its delivery performance, which has been unacceptable in recent years. However, we need a clearer picture of their impact before determining our long-term approach to stamp prices, which we'll do next year."

A Royal Mail spokesperson acknowledged Ofcom's decision but expressed frustration at the delayed decision on pricing actions needed to address the declining letter volumes. The company proposed a stamp discount scheme aimed at supporting low-income customers while securing the future of the universal service. Royal Mail stated it would work constructively with Ofcom on pricing flexibility to ensure the service remains reliable, affordable, and sustainable.

Royal Mail's parent company, International Distribution Services, was acquired last year by Czech billionaire Daniel Kretinsky. In March, Kretinsky apologized to MPs for the state of the organization.

Under recent reforms, second-class post is intended to be delivered every other weekday, while first-class letters and parcels are scheduled for delivery six days a week. Despite these changes, Royal Mail missed its delivery targets for the three months ending June 28, delivering 85% of first-class mail the next day and 91.4% of second-class items within three working days, falling short of Ofcom's targets of 90% and 95%, respectively.

However, the company reported an improvement compared to the previous year and announced plans to invest £500 million in service enhancements. The postal service is contending with a 10% drop in letter volumes, reaching 5.7 billion last year, as digital communication increases and stamp prices rise. Parent company IDS reported a significant profit decline for the UK business, falling to £96 million in the year ending March from £198 million in the prior year. This decrease was attributed in part to increased employee costs, including a 4.2% pay raise for frontline staff and a £133 million impact from National Insurance tax changes.