Emergency talks will take place with postal workers today to avert a national strike that would halt deliveries of 75 million letters and parcels daily, cost tens of millions of pounds and accelerate the loss of corporate business that imperils the Royal Mail's long-term future.

Unless a deal can be done in the next 24 hours, the Communication Workers Union (CWU) plans to call out all its 121,000 postal members at sorting and delivery offices in an escalating dispute over modernisation.

A stoppage – which would halt deliveries to 28 million homes and pile pressure on retailers in the run-up to Christmas – could take place seven days later. There was speculation yesterday it could be called for 22 October.

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In the latest of a series of local strikes following stoppages in Bristol, Essex, Birmingham, Leeds and Edinburgh, all post will be halted in London today.

A business group, the Centre for Economic and Business Research, warned that a national strike lasting five days would cost the country £1.5bn. The Government warned it posed an even sterner test – to the very future of the postal service.

The Business Secretary Lord Mandelson, who was forced to abandon part-privatisation of Royal Mail in July, said: "It would be a suicidal act – turning more hard-pressed consumers and businesses away from using mail. The Government has backed Royal Mail financially with billions of pounds so that the company can modernise, but these strikes will impede that essential process... they are not the way to safeguard the future of our postal services."

Royal Mail's finances are haemorrhaging due to the rise of the internet and increased competition, which has seen its grip on the postal system loosened by rivals such as UK Mail and Dutch-owned TNT. Some of Britain's biggest retailers, Tesco, John Lewis, Amazon and Play.com, have already announced they are considering switching to competitors in the run-up to Christmas. The Department store chain House of Fraser dropped Royal Mail last week.

Last week, CWU announced that three-quarters of its members who voted were in favour of taking strike action in a row over pay, jobs, conditions and alleged bullying and harassment. Yesterday a "peace offer" from the CWU appeared to leave the two sides further apart than ever. The union offered to halt the action if Royal Mail agreed changes to working conditions for the next three years and provided a new "benefits package" for staff carrying out modernisation.

Dave Ward, the CWU's deputy general secretary, said: "Postal workers do not want to take strike action but neither are they prepared to put up with continuing attacks from a management which is failing. We have written to Royal Mail making it clear that the CWU is ready to issue notice for a national strike as voted for by three-quarters of postal workers. We have offered what we believe is a genuine alternative to reach a lasting agreement."

In an open letter last night, Royal Mail's managing director, Mark Higson, told Mr Ward: "What you describe as the 'CWU peace offer' does seem to be the opposite – it reads like a list of fresh demands against Royal Mail. This is hardly consistent with your description of it as a way of resolving this dispute peacefully."

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At the heart of the dispute are changes designed to improve the efficiency of Royal Mail's 141,000 delivery workers, 20,000 of whom are not in the CWU. Under a deal two years ago, the union agreed to a rolling programme of changes but some have been unpopular, with staff also experiencing a pay freeze. They are being asked to work harder and in different roles, for example, delivery drivers helping out with sorting if they finish earlier than the end of their shift. Royal Mail is asking delivery postman to deliver to extra streets during the summer and to work to revised delivery routes generated by computers.

Both sides agree modernisation is necessary to secure the future of Royal Mail, founded by Charles I in 1635.

Although operating profits doubled to £321m in the year to April, this financial year it is forecasting a 10 per cent drop in post due to the recession and the rise of electronic communication, at a cost of £700m. Its pensions deficit has doubled to £6.8bn, and competition is crumbling its customer base.

Plans to sell off part of the network with the aim of driving up efficiency was halted in July, ostensibly because of the difficulty in obtaining a good price in the recession. However political commentators blamed opposition from 140 Labour backbenchers at a turbulent time for the Prime Minister.

Gordon Brown's spokesman said: "Obviously it is a difficult situation and what Pat McFadden [the Postal Affairs minister] is trying to do is keep in touch with the appropriate unions – he met the CWU yesterday – and the management of the business."

Asking for the conciliation service ACAS to be called in, Robert Hammond, post expert at Consumer Focus, said: "It's hugely disappointing to watch a great UK institution tear itself apart. A prolonged strike over Christmas could cripple the service. The bottom line is that there are no winners in this dispute. Royal Mail customers are already finding alternative ways of communicating and many will not return once the dispute is over."

The state of Royal Mail today...

Royal Mail Group is the business – 100 per cent owned by the state – which runs the Post Office network, the letter delivery service Royal Mail and the delivery/courier company Parcelforce.

Delivery

Daily collections are made from 113,000 post boxes, 14,300 post office branches and 87,000 businesses. Letters and parcels pass through 70 mail centres, eight regional distribution centres (for customer-sorted mail) and 3,000 delivery offices. There are 141,000 postal workers. To deliver the mail, they drive 30,000 red vehicles and ride 33,000 bicycles.

Performance

The industry regulator Postcomm stipulates that Royal Mail must deliver 93 per cent of first-class letters by the next day and 98.5 per cent of second-class letters within three days. In the first quarter of 2009-10, Royal Mail beat these targets, hitting 94.5 per cent and 98.9 per cent for first and second-class post respectively. 99.61 per cent of mail was delivered correctly, above the target of 99.5 per cent. There were 1,321,320 complaints about Royal Mail last year about lost, damaged or delayed post, with £13m in compensation paid.

Finances

In 2008-09, Royal Mail Group made an operating profit of £321m, twice the previous year's total of £162m. Its letters division moved from a £3m loss in 2007-08 to a £58m profit, despite a 5 per cent fall in the amount of mail delivered. Overall, the group's revenue increased by 2 per cent to £9.56bn. However, the business faces three big problems: increased competition from rivals; a pensions deficit which has doubled to £6.8bn; and a forecast 10 per cent drop in revenue this year. The increase in email use is expected to cut mail delivery revenues by £700m.

All of the group's business areas are open to competition. Rival operators collect letters and parcels from companies, sort them and take them to Royal Mail for delivery over the last mile. Royal Mail currently has a 60 per cent share of the business post collection.

... and the anatomy of the dispute

2007 Pay and Modernisation agreement

Royal Mail and the Communications Workers' Union both agree on the need for improvement to the postal service. The dispute, however, centres on the ongoing implementation of the Pay and Modernisation Agreement. Royal Mail says it has done nothing to break the spirit of the agreement, but the union maintains it has walked away from talks.

Jobs

Royal Mail argues that only one middle manager has faced compulsory redundancy in the past few years. The union maintains that the company is forcing people out by closing offices, making them commute long distances and by pressuring staff to work part time.

Pay

Royal Mail employees have been subject to a pay freeze since March. The CWU argues that its members deserve a better deal for enduring the modernisation programme and in light of group profits of £321m this year. Royal Mail says its letters division, where most work, recorded only wafer-thin profits of £58m last year.

Job security

Despite agreeing to job cuts, the CWU wants a greater degree of job security for its remaining members. The union argues Royal Mail will pressure members to go part time and force its members out by closing sites. Royal Mail says it expects those on 40-hour-week contracts to work their hours.

Pensions

Both sides agree the Royal Mail's pension deficit could soon top £10bn. The union argues Royal Mail is responsible, especially after the company took a contributions holiday between 1990 and 2003. The union says the Government should now underwrite the pension scheme, but Royal Mail claims a government offer was rejected by the union.