With 15,000 jobs cuts already announced - and more on the way - a postal service once seen as the best in the world is in deep trouble. Nick Morrison looks at what went wrong with the mail.

IN just three years, the fortunes of one of Britain's most famous names have been transformed, with experts keen to give credit to a world-class management. Unfortunately, these managers seem to have got it the wrong way round.

Three years ago, the Post Office made a profit of £608m. In the first six months of this year, the organisation which insisted on renaming itself Consignia has already managed to lose more than £100m. And it's getting worse. With losses running at £1.5m a day, next year's figures won't be a pretty sight.

And this has been achieved despite a substantial increase in sales, from just over £7bn in 1999 to more than £8bn last year, and on target to beat that this year.

"It takes a world class management - in the wrong direction - to achieve this. They're in a financial mess," says Andy Frewin, senior director of consumer group Postwatch. "Their costs are growing at a faster rate than their revenues and, unless they take action to reduce their costs, they will remain in a pretty bad shape."

Responsibility for the mess, he says, can largely be placed at the feet of the management, which has allowed costs to run out of control. Recent acquisitions of European businesses, including German parcels and Swedish city deliveries, have cost £600m but have not added to Consignia's profits.

'Some of these deals have not been very good and they have been criticised for spending too much on something which has not improved their productivity," says Mr Frewin. "It is potentially wasted investment, and that seems to have been where they started to go wrong."

Consignia has spent money setting up new sorting and delivery offices, but has failed to close the smaller offices they were meant to replace. And one of the chief criticisms has been the failure to remedy the haemorrhaging of cash from Parcelforce.

"Parcelforce has been making losses for the last ten years. If it is making losses year on year, then action should have been taken years earlier. They have been pretty complacent, probably because they're a monopoly with captive customers," says Mr Frewin.

"Their costs suddenly got out of control and they seem to have lost the customer focus. We strongly believe that the senior management has been lacking, and they need to have people with experience of managing change."

Whatever, or whoever, is to blame for Consignia's plight, it is not a reduction in the number of letters as people switch to email and text messages, he says.

"There is a perception that everyone is using email but that is not true - there are more items being posted than ever before. In America, you get twice as much post per person as you do here, and we believe there is significant room for growth in the postal market. Advertising mail, or junk mail, is the basis of the business and we consider that will continue to grow."

Consignia itself blames the price of a stamp and the fact the Government took a hefty chunk out of its profits in the past, with the Treasury creaming off £1m a day over a 20-year period.

"The result was that we were starved of the investment we should have made in our people and in becoming more efficient," says a Consignia spokesman. "If we had invested at the rate you would expect from a company run on a commercial basis, then around half of the cash we paid to the Treasury could have been ploughed back into Consignia."

Consignia also points out that it is labour intensive, with the country's biggest single workforce, and has high fixed costs through its transport and distribution network. While costs rose by four per cent last year, business grew by just 2.7 per cent.

And there are further clouds on the horizon, in the shape of opening up deliveries of bulk mail, of more than 4,000 items, to competition. This area represents about 30 per cent of Consignia's monopoly business and is also its most profitable. And if the threatened job cuts leads to industrial action by its workforce, profitability will be hit still further.

While the average cost of a first class letter is 28p, Consignia has been prevented by the post regulator from raising the price of a stamp above 27p, putting the delivery service into the red.

But, despite the £1.5m a day losses, Phil Graham, Darlington branch secretary of the Communication Workers' Union, says Britain's postal service is still among the best in the world.

"We have had a company which has had sustained and increased profitability for a number of years, and it is just in the last couple of years that things have gone wrong."

Problems on the rail network, used to transport much of the postal business, have hit profits, particularly the delays following the Hatfield crash in October 2000. Efficiency also varies widely between areas. In Darlington, the cost of collecting, processing and delivering a letter is 9.1p; in Edinburgh it is more than 18p, he says.

"The biggest problem we have is that we're efficient in terms of delivering the mail, but we're not efficient in terms of delivering parcels and packages. These areas are a bit of a drain. We have been acting as a public service for the last 350 years and we seem to have had problems with commercial freedom. I think there will always be a place for Royal Mail, but we do need to change.

"We have woken up too late to some realities of the way modern businesses have to work, but once the dust settles I believe that because of our history and professional expertise, those of us who are left will still be running one of the finest postal services in the world."