The future of the UK Mail Market Stephen Agar Director Regulatory Affairs & Wholesale

1. The future of the UK Mail Market Stephen Agar Director Regulatory Affairs & Wholesale

2. Market Position – 1 January • Current market size 25.1bn items • Currently 15 licensed operators • There are already a number of key national players in the market, providing effective competition through real choice and gaining noticeable market share gains in key business mail markets • DPAG/DHL: 5 mail centres • TPG/TNT: 9 mail centres • UK Mail: 6 mail centres • DX: 4 main sites • Communisis: Supercentre for HSBC • Other key European markets not open to full competition until 2009 (if then)

3. Current Royal Mail position – the positives • Completed biggest turnaround in recent UK corporate history • Royal Mail currently delivering the best quality of service in a decade (94.2% in Q2 2005-06) • Lost mail almost halved - 99.92% arrives safely • £218m given back to our people - £1,074 each • Pay for Postmen and women up almost 25% since March 2002 • 5-day week introduced for everyone • More of our people enjoy working here and bullying and harassment issues being tackled robustly • From loss to profit

4. What is the future for customers • Social – The basic USO, one price anywhere service will be maintained, customers will have limited choice in price and provider • SME – more choice in provider, services and price as new entrants gain critical mass in volumes and start to seek wider customer base through consolidating STL • Business – real choice, innovation and effective competition, though some parts of the market will be increasingly commoditised, dominated by price • E-substitution will continue to increase, offering all customers more choice in delivering statement, invoicing and marketing information

5. What is the future for Industry Entrants • National – continued expansion of existing mail or parcel operations, utilising existing scale and network synergy’s. Marginal pricing and lower cost bases will allow them to quickly gain critical mass in volumes – but building national delivery networks is difficult • Local – we expect to see the expansion of existing unaddressed networks and local couriers, targeting utilities, councils and high streets to gain volumes and offering services to SME and possibly providing posting boxes for social customers • Consolidators and Business Process Outsourcers – increasing pressure on the upstream value chain will drive existing printers and mailing houses to investigate ways to increase customer value by investing in sortation and remote distribution technology

6. What is the future for volumes? Millions of items TOTAL BYPASS RM DELIVERED VOLUME DOWNSTREAM ACCESS ROYAL MAIL END-TO-END VOLUME 0 03/04 04/05 05/06 06/07 07/08 08/09 09/10 10/11

7. What is the future for Access • Volumes • Current 1 billion this year to forecasted c.3 billion next year • Customers • 13 Contract Holders to 30 customers to next year • Postcomm Regulation • Increased role of Postcomm within Access • Quality of Service measure for Access Services • RM to provide terms for new access services within 3 months of request – Inevitable increase in number of services via Access • Systems • Improved way of working for RP using handheld devices • Future systems development to support forecasting & RP

8. What is the future for Access • Access is the least worst option for RM • Delivery competition is the real threat - RM receive no revenue for mail as opposed to c.13p an item for Access • Although market has grown 10-12% since Postcomm was set up 5 years ago volumes going to Access are now approx. c5 –6% • Compliance • Need to ensure that Mail Centres don’t discriminate and follow agreed processes • Realignment of duties • Increased RP activity on early shift at Mail Centres • Increased inward sortation on late shift at Mail Centres • RDC resource needs to be realigned due to RDC volume decreases

9. What is the future for Delivery Competition • Postcomm project that new entrants will be delivering more than ½ billion items end to end by 2009/10 • Up to now we have assumed that new entrants are more likely to enter the market by identifying market niches rather than by heavy investment in in-house technologies – but is this true? • Entrants are likely to build up a business incrementally and flexibly using subcontractors, low cost labour and a very focused service offering. • Significant opportunities for both local and national operators to cream skim profitable city centre and cross town mail through operating on a lower cost base and making less deliveries per week

10. Future for Royal Mail • The core of Royal Mail’s strategy is to strengthen our market position by introducing better products, more cost-reflective pricing and rebuilding our brand attributes of trust, reliability and reach • Cost-reflective pricing and discounting to incentivise machineability over sortation • Creation of a new business product portfolio focused on meeting key customer applications • Making us easy to do business with • To deliver competitive products consistently, Royal Mail will modernise our network through a phased investment programme that further automates our pipeline and introduces uniform best practice processes • Letters and flats automation • Walk sequencing and new delivery model

11. Future for Royal Mail • Royal Mail will only succeed with a transformation of the scale envisaged if we bring our people with us by engaging them in and rewarding them for business success • Teamworking and greater flexibility (e.g., sick absence cover) • Employees to share in the success of the business • A new relationship with our trade unions

12. Regulatory and political impacts • There remains some key regulatory issues • Competition is a driver of efficiency and is good for all stakeholders including the incumbent • Given the USO, Royal Mail believes that an effective monopoly in delivery will be the most efficient industry model, although that’s not the way liberalisation has gone • Royal Mail’s open approach to access is creating a vibrant upstream market, while protecting our delivery network • Geographic pricing of delivery for bulk products is necessary to prevent “cream skimming” and to protect the USO • The regulator may be good for stimulating innovation in the market, but it is important they do not create an unlevel playing field by constraining the incumbent's commercial freedoms and so encourage inefficient outcomes and eventually threaten universal service

13. Regulatory and political impacts • Funding of our investment programme remains a problem • The market needs a viable and financially secure Royal Mail to deliver the USO and provide customer confidence in the mail industry • The government is short of cash, but we need £2bn of investment • We have a pension deficit of over £4bn and getting bigger • We will continue to negotiate with all stakeholders and have not ruled out going to the Competition Commission over the current Price Control. Decision will be made in the next 4 weeks.

14. Conclusions • The future of the UK Mail market is unclear, with ongoing concerns over volumes and regulatory certainty • Competition will inevitably drive efficiency within the industry and if Royal Mail does not become more efficient it will lose more volume • Large customers will benefit from increased choice and price reductions, though at the expense of social customers • Royal Mail’s position as a stable and financially viable USO provider remains at risk without sufficient investment and commercial freedom to respond to competition