Royal Mail Warns of 'Period of Uncertainty' in Ofcom Probe

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Royal Mail Warns of 'Period of Uncertainty' in Ofcom Price Probe

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Royal Mail said Ofcom would create a period of uncertainty in the UK postal market because of its investigation into planned price rises.

The regulator opened the inquiry into Royal Mail after a complaint was lodged by rival TNT Post UK.

"We are concerned that Ofcom's decision to investigate under its Competition Act powers may create a period of uncertainty in the UK postal market," said Royal Mail.

"We are keen that the investigation is completed as quickly as possible."

It centres around Royal Mail's "Access" contracts to deliver mail sorted by others, such as TNT, on the last leg of its journey.

In January, Royal Mail said it would offer a discount on Access contracts of 0.25p per item for customers who provide monthly forecasts of mail volumes that allow the firm to better prepare itself for deliveries.

However, the newly privatised firm also hiked Access contract prices by as much as RPI inflation plus 1% to protect revenues as the UK postal market declines in size.

TNT lodged a complaint with Ofcom about the rises and the watchdog opened an investigation. As a result of the probe, Royal Mail suspended its planned price rises.

Royal Mail has said competition from TNT is threatening its ability to meet the Universal Service Obligation, which requires it to run a high-cost infrastructure so it can deliver mail six days a week to all parts of the country.

This is because TNT has begun to deliver and sort its own mail in Manchester and some parts of London, rather than use Royal Mail's Access service.

While Royal Mail is obliged to target loss-making areas for delivery, such as remote parts of countryside, the firm says TNT is able to "cherry pick" profitable areas, putting it at a competitive disadvantage.

Royal Mail was privatised in October 2013 in a controversial flotation onto the London Stock Exchange. The government has been accused of undervaluing the firm by as much as £750m.

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The Royal Mail has warned of a 'period of uncertainty' in the UK postal market as Ofcom investigates the company after TNT Post UK complained about price increases.

TNT Post protested that the recently privatised Royal Mail plans to raise charges on wholesale mail contracts or so-called ‘Access’ contracts. Charges include a last-mile delivery fee on items.

The average cost of delivery per item is about 0.25p. In January, Royal Mail announced it intends to raise Access charges from March 31st by an average of between inflation plus 0.3% and inflation plus 1% to mitigate the fall in the amount of parcels and letters sent.

“Royal Mail has been notified by Ofcom of the powers under which it will conduct its investigation into certain changes to Royal Mail's Access contracts, following a complaint by TNT Post UK. Royal Mail believes TNT Post UK's complaint is unfounded,” the group said in a statement.

“We are concerned that Ofcom's decision to investigate under its Competition Act powers may create a period of uncertainty in the UK postal market. We are keen that the investigation is completed as quickly as possible.”

The company added that the planned changes to Access contracts were vital in responding to changing market conditions, including growing direct delivery competition.

“We believe the changes are fair, reasonable and fully within the guidance provided by Ofcom's March 2013 document on end-to-end competition,” the postal operator added.

“The regulator highlighted the importance of this to mitigate the impact on the universal service from a competitor cherry-picking easier to serve parts of the country, while Royal Mail is required to deliver mail in higher cost areas.”

Credit Suisse believes intensifying competition in last-mile delivery could cap Royal Mail's margins at the lower end of its targeted range of between 5-10%.

The broker said challenging consensus expectations on margin progression leave “little room for error”.

It also sees limited upside risk from the potential sale of the company’s parcel delivery business General Logistics Systems or part of the London Surplus property portfolio.

“And for multiples in line with peers and a mid-range financial performance (7.8% free cash flow yield, 3.8% dividend yield fiscal year 2016 estimate), we see better opportunities elsewhere in the sector.”

Shares declined 1.05% to 520p at 14:06 on Wednesday.