Royal Mail lifts profits as parcel growth unravels

Royal Mail confirmed Sarfo briefly worked for them as a postman in 2010

Consumers and businesses will benefit from a ferocious price war in parcel delivery this Christmas, as couriers continue to add capacity in an overcrowded market.

Royal Mail struck a gloomy note in its full-year results as the group confirmed that parcel deliveries were not growing as quickly as anticipated largely due to the decision by retail giant Amazon to start its own courier network.

DPD, Yodel and Hermes, have all added capacity too.

Moya Greene, Royal Mail’s chief executive, said: “Parcels is intensely competitive with lots of rivals adding capacity. Pricing is not particularly rational right now.”

City Link collapsed last Christmas and earlier this month Whistl decided to pull out of doorstep deliveries in three UK cities. But investor hopes that the removal of two competitors would allow Royal Mail to increase its prices look misplaced.

The company had expected growth of 4 per cent a year in the parcels market, largely as a result of the acceleration of online shopping, but it now sees growth of only 1 per cent to 2 per cent over the next two years.

Commenting on the decision by Whistl to stop its end-to-end deliveries in three cities, Ms Greene said: “I’m not delighted. It shows that business is hard and delivery in the UK in a declining letters market is very hard.”

Royal Mail has argued that competitors are “cherry picking” the most profitable parts of the delivery network, while Royal Mail must deliver letters and parcels anywhere in the UK at the same price.

“This shows that if you want financially viable universal services, there must be a reliable business model to support it,” Ms Greene said.

Royal Mail’s revenues were flat at £9.4bn, while pre-tax profits rose from £421m to £569m last year. Operating profit before transformation costs, the company’s preferred measure, rose by 6 per cent to £740m.

Angus Tweedie, an analyst at Bank of America Merrill Lynch, called the outlook disappointing and said he was cutting his earnings forecast on the basis of continued tough trading in the UK.

However, the results were at the upper end of expectations among most analysts, who were also cheered by the postal group’s ability to cut operating costs by 1 per cent. Its shares firmed 0.1p to 500p.

Darren Hepworth, director of global trading at TD Direct Investing, said Royal Mail faces a hard decision.

“Clearly the cost cuts have helped today, but with competitors running leaner, more efficient businesses, there may still be a tough road ahead for the Royal Mail, which will have to decide whether it pushes prices up.”

Royal Mail’s share price has risen more than 50 per cent from 330p on its first day of trading to 500p at the close, against a 10 per cent rise in the FTSE 100 during the same period.

The group’s European parcels arm, GLS, reported that revenues were up by 7 per cent, with particularly strong growth in Italy.