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Competitors could snatch £200m from Royal Mail

Royal Mail has warned that its revenues could be slashed by £200m unless it is allowed to operate on a level playing field with its competitors.

In a declining market for letter post the Royal Mail’s future was expected to be in the rise of online shopping. Today’s figures show that competition in the parcels business is making it tougher for the company to deliver on its expectations.

A fall in operating profits and a cut in its forecasted rate of growth in the key parcels business has once again prompted appeals for a new regulatory arrangement.

In a half-year statement this morning it says: “We believe the current regulatory framework does not fully address the problem posed by unfettered direct delivery competition. We think there is an urgent need for a new framework that will secure the sustainable provision of the Universal Service for the future.”

Royal Mail told Ofcom in June 2014, that if faced a “real and growing threat to the Universal Service from direct delivery”. Its submission asked Ofcom to accelerate its review of direct delivery competition, which is currently planned for late 2015. Royal Mail claims there is a structural cost advantage for direct delivery entrants and that the UK has a unique economic geography that enables overseas competitors to cherry-pick the services they offer, putting the Universal Service at risk.

Today’s statement adds: “Taken together, this provides an environment that could facilitate rapid growth of direct delivery competition unless the regulator takes action now.

“We estimate that the impact of Whistl’s (formerly TNT Post UK) stated plans for expansion could reduce Royal Mail’s revenue by over £200 million in 2017-18. This amounts to a potential material threat to the Universal Service.”

Royal Mail says its rate of growth in the UK parcels business will be lower than forecast for the next two years.

Shareholders who bought in to the parcels story when the group was controversially privatised last year will be concerned at the slowdown, especially as parcels account for half of turnover.

Amazon, which is a client, is also a competitor now that it has launched a delivery service

Operating profit before transformation costs for the six months to 28 September fell from £353m to £279m on group  revenue which grew 2% to £4.53 billion. Operating profit after transformation costs was £232m (H1 2013-14 £283m).

The Board announces it has declared and approved an interim dividend of 6.7p per share, which will be paid on 14 January 2015.

Shares in Royal Mail closed 8.35% lower at 430p.

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