FOUR days ago, an e-mail flashed up on Lancashire small businessman Paul Farquhar’s computer screen. It was the news he had been dreading. Vital blood tests sent to a laboratory in Glasgow had been ruined because of delays in the post.

Like tens of thousands of enterprises across Britain, Farquhar’s company, Healthy and Essential, a supplier of food supplements and other medical services, has been plunged into crisis by the worst postal strike in 20 years.

Farquhar believes he can ride out the storm, but others may be less fortunate. A series of strikes by the Communication Workers Union (CWU) has crippled the postal system, leaving a backlog of about 100m letters and parcels.

At stake is the future of Royal Mail as it struggles to transform itself from a Victorian relic – and its long-held role as an arm of the nanny state – into a modern delivery company.

Royal Mail has seen commercial rivals eat into its market since it lost its monopoly over postal services at the start of 2006. Courier firms gained a licence to collect and distribute letters, handing them over to Royal Mail for delivery on the last – and most costly – leg of the journey to the letterbox.

Some rivals such as UK Mail, owned by Business Post, which collect mail but use the Royal Mail’s postmen and postwomen to deliver letters and packages the “final mile” to customers, have been hurt by the strikes. But companies offering “end-to-end” deliveries of packages have cleaned up.

So can Royal Mail modernise and survive? According to one insider, this great British institution, which handles an average of 84m letters and parcels each day, has reached a “tipping point”. “This is the key battle which was always going to happen. This is it. It is crucial that people understand this.”

The dispute has been over pay, pensions, job cuts and – most importantly – working practices. Royal Mail’s management, led by chief executive Adam Crozier and chairman Allan Leighton, have been desperately trying to modernise the business and stamp out so-called “Spanish practices” (see panel). But their plans have met stiff opposition from the CWU and its combative deputy general secretary Dave Ward, who allege that 40,000 jobs could be axed.

This is a battle that Royal Mail cannot afford to lose. Crozier argues that it simply “wants our people to work the hours [37 hours and 20 minutes a week] they are already paid to do”.

Though he and Leighton have managed to pull the business out of a £938m crippling loss in 2002 to an operating profit of about £100m, Royal Mail desperately needs to modernise to compete. Rivals such as TNT, the Dutch postal group, and Deut-sche Post, are 40% more efficient and pay their workers around 25% less.

Royal Mail has secured a £1.2 billion loan from the government to invest in new systems, but for this to be implemented effectively it will need to introduce the more flexible working practices that the union has been resisting.

Last week the dispute intensified after Ward accused Royal Mail of “slavery” – a claim Crozier dismissed as “cobblers”.

On Friday, Royal Mail won an emergency injunction to block official strikes tomorrow and Tuesday after a judge agreed that they were illegal. Then came better news: hours of talks between the two sides ended with a joint statement saying the CWU will meet tomorrow to discuss “the agreed terms in all the issues in the dispute”.

A deal looks to have been reached, but the postal giant’s reputation has been severely damaged by the strike. “Every day the dispute continues, it harms Royal Mail, harms the workforce and harms its customers. There are no winners,” said Howard Webber, chief executive of customer group Postwatch.

Some observers estimate that Royal Mail has already lost up to £260m in revenues. Confidence in it is ebbing away.

For some customers, especially smaller businesses, there is no choice but to use Royal Mail. The £15 cost of using a courier service to deliver a letter or small package is too expensive compared with a 35p first-class stamp. But courier firms are rubbing their hands. Business Post’s parcel volumes jumped 10% on October 4, the first day of the strike. DX has seen a 25% rise in business, adding more than £10m in revenues.

The Department for Work and Pensions used a courier firm to send out 400,000 pension cheques normally sent by post. Many believe Royal Mail will struggle to recover lost business.

“Anyone who can move to an alternative, will. This strike has thrown the direct-marketing industry into crisis. If Royal Mail thinks it can win back customers it is making a very, very big assumption,” said Robert Keitch, a spokesman for the Direct Marketing Association.

Even before the strike, Royal Mail was being squeezed. Since 2006, it has lost 40% of the lucrative bulk-mail business as well as key contracts with Amazon, HSBC and Abbey. Its direct-mar-keting business has slipped to 88% of the level it was at three years ago. In unaddressed junk mail, rivals have left Royal Mail with just 25% of market share.

Though Royal Mail has a stran-glehold over addressed letters, delivering 99% of the volume of the UK postal market, its obligation to provide a universal service throughout the country is a burden. Under its complex access agreement with rivals, it loses around 5p-6p per item it delivers.

Price regulations do not help. Under one measure, Royal Mail must keep a fixed margin between the retail price it charges a customer and the wholesale cost paid by rivals to access its network. If it cuts the retail price, rivals competing for a contract also benefit. In effect, it subsidises competitors.

Big rivals could now decide to compete with Royal Mail on a larger scale. Spurred on by the strike chaos, TNT is considering launching its own end-to-end service, bypassing Royal Mail.

The strike could also accelerate a structural shift in the market. Mail deliveries are shrinking by 2.5% a year and this trend could increase if more companies and consumers turn to electronic alternatives.

Last week alone, 20,000 British Gas customers signed up to receive their bills electronically.

The company wants 25% of its customers to do so by 2010.

“In the medium to long term, Royal Mail’s position looks increasingly precarious,” said David Stubbs, a postal systems expert at consultants Europe Economics. “When a comprehensive electronic e-mail database emerges there is little they can do – the post can be bypassed.”

Other former state-owned public services have successfully reinvented themselves commercially. The Royal Mail is in danger of simply withering away.

UNION STAMP

THE origins of the term ‘Spanish practices’ are murky. Some argue it emerged after the Spanish inquisition, others say it is based on an age-old British delight in abusing the Spanish.

Whatever the true origins, Royal Mail claims Spanish practices are rife and include: Workers signing in and out of a shift on arrival, leaving no record of actual hours worked; Workers claiming additional ‘meal and grace breaks’; Staff getting paid for two to three hours’ overtime even if only 30 minutes is worked; Overtime payments at Christmas even if no extra hours are worked; No flexibility in the sorting office; No ‘cross-functional working’ – workers unloading trucks are barred from moving mail round sorting centres.

Times Recommends

• Lies and cover-up at MG Rover exposed by report
• High oil prices push manufacturing costs up
• Primark founder steps down as chief executive