Michael Harrison: The Post Office still commands great respect - but for how much longer?

When Allan Leighton, the former boss of Asda, stopped selling baked beans and decided instead to pursue a "plural" career, a part-time job running Britain's postal service was probably not top of his list. Mr Leighton, who reluctantly agreed to take over last week as temporary chairman of Consignia – the organisation formerly known as the Post Office – will have encountered an in-tray bulging with problems.

In order of importance, they include: a threatened national postal strike; the loss of a third of the Royal Mail's monopoly market; mounting financial losses; and the possible end of morning deliveries to residential addresses. Mr Leighton, who is chairman of three other companies and a non-executive director at a further five, says he will devote as much time to his new postal job as necessary. If so, he must either like working long hours or have supreme confidence in his own management ability.

Consignia's decline bears out the old adage that when a company changes its name, it is a sure sign of an organisation in trouble. Nevertheless, the sheer speed with which things have turned sour for the business remains startling. Two years ago, when it was still called the Post Office and still possessed a monopoly over any item of mail costing less than £1 to deliver, the company made an operating profit of £381m. In the first half of the current year, it made a bottom-line loss of £281m.

The crisis on the railways did not help, disrupting Consignia's fleet of mail trains and affecting its reliability of service, with the result that the proportion of first-class letters delivered the next day has fallen below 90 per cent for the first time in a decade. Nor has the economic slowdown helped, reducing the volume of letters the Royal Mail was expecting to handle by about one million a day.

But Consignia has largely been the architect of its own misfortunes. Last year the postal service accounted for a third of all working days lost due to industrial action, while Consignia's plunge into heavy losses is mainly the result of a £1bn increase in its own costs.

In an attempt to stem its rising losses, the organisation has announced plans to achieve £1.2bn of efficiency savings. On the one hand, this means 30,000 job losses among the company's 200,000-strong workforce and a wage offer of 5 per cent. On the other, it means initiatives like "extended delivery windows" which, in laymen's terms, means businesses continuing to get their mail before 10am and everyone else having to wait until lunchtime or as late as 3pm. If Consignia was deliberately setting out to antagonise its employees and alienate its customers, it could scarcely have come up with a better strategy.

The postal workers' union is now threatening to test the resolve of Consignia's management to push through the cost-cutting plan by balloting its members on industrial action.

As for the Royal Mail's customers, up until now they have had little choice but to like it or lump it. But all that may be about to change. In the next couple of weeks, Britain's new postal regulator, Postcomm, is due to publish its proposals for introducing competition to the Royal Mail. Rather than reducing the level of the Royal Mail's monopoly – say to somewhere near the cost of a first class stamp – the Government has opted to allow Postcomm to license rival operators to provide any service currently offered by the Royal Mail. In theory, this means 100 per cent of its monopoly could be up for grabs. In practice, the regulator is expected to open up nearer 30 per cent of the market.

As the head of the National Audit Office, Sir John Bourn, pointed out in a report published last week, Postcomm faces a difficult balancing act. If it lets rip on competition and allows rival operators to cherry-pick the most lucrative business, such as city-centre to city-centre deliveries, then it could threaten the Royal Mail's universal service obligation – the requirement to deliver to every address in the country at a uniform price.

If, on the other hand, the regulator is too soft on the Royal Mail, then it will have little incentive to improve its service. Unlike other monopoly industries where competition has been introduced, such as gas, electricity and telecoms, the postal service remains government-owned.

Perhaps that is part of the problem. For all its manifest faults, privatisation has in the main delivered cheaper prices, better services and greater industrial harmony. The one glaring exception is the rail industry, but even there the problem remains more one of structure and organisation than of ownership.

The postal service, by contrast, is stuck with the worst of both worlds. For all the talk about giving Consignia "commercial freedom", the dead hand of government still hovers over it. The appointment, for instance, of a new permanent chairman to relieve Mr Leighton will be the responsibility of the Trade and Industry Secretary, Patricia Hewitt, and not the Consignia board.

As the last remaining state-owned industry of any size, it has also become the refuge for a militant tendency once found in the car, steel and rail industries. At the same time, Consignia is entering a new era of competition in which rival operators will need licences to operate but will not be bound by the same obligations as the Royal Mail. For all its travails, the postal service, if not the name Consignia, still commands a high level of public respect. But for how much longer?

Michael Heseltine had a vision for the Post Office, but was unable to carry his party with him, as the Tory backbenches were fearful of what privatisation would do to rural services. Peter Mandelson also had big ambitions for the Post Office, which might ultimately have resulted in privatisation. It is not clear what Patricia Hewitt's agenda is for Consignia. But with branch closures at record levels, financial losses rising and competition about to begin eating into its core business, it looks ominously like death by a thousand cuts.

m.harrison@independent.co.uk