Britain’s postal service Royal Mail on track after strong Christmas

Britain’s postal service, the Royal Mail yesterday said it was on track to meet its cost reduction target and delivered more parcels than expected in the UK over the Christmas period, easing concerns over the intense competition facing the former monopoly.

In a trading update, Royal Mail said it handled 130m parcels in December alone, reflecting strong Christmas trading, up 6% from the previous year, a bigger volume increase than recorded by any of its competitors.

Technology changes mean the number of letters being sent is in decline but this is balanced by a growing parcel market driven by online sales.

“We remain on track to deliver at least a 1% reduction in underlying operating costs before transformation costs ... for the full year,” said Moya Greene, the company’s Canadian chief executive.

Royal Mail has become more focused on cost controls and efficiency improvements to help underpin profits after the loss of key customer Amazon which began delivering parcels through its own network.

Others competitors like UK Mail, which had added extra capacity to meet rising online retail demand, also threaten Royal Mail’s dominance in the British postal market.

The company has previously warned of over-capacity in the market, which it said would put pressure on its pricing for the next few years.

Royal Mail has managed to fend off competition in letter delivery from firms such as City Link and Whistl, owned by Dutch-based PostNL, which have both pulled out of that part of the market.

“With operating performance remaining relatively buoyant and with the potential to begin stemming market share losses in parcels, we believe Royal Mail offers significant ... upside,” said BAML analysts in a note, who raised their 2016 forecast.

Analysts from Barclays also made small changes to their forecasts, with Davy Research upgrading its rating to ‘Neutral’ from ‘Sell’. But Royal Mail’s shares are a long way off their post- privatisation peak in January last year, having dropped by about 46%.

The company said group revenue for the nine months ended December 27 was up 1% compared to a flat outcome in the first half, and overall trading was in line with its expectations.

Royal Mail said it had seen a strong performance in its European parcels arm GLS, with volumes up 11% and revenues climbing to 10% in the third quarter, on the back of strong demand from Poland and Italy.

It had previously warned of challenging market conditions but said the improvement meant it was not anticipating a decline in GLS margins for the full year.


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