Royal Mail's UK letters business continues its decline

By Esha Vaish (Reuters) - Britain's Royal Mail Plc reported a further drop in domestic revenues on Thursday as the decline in its original core business of delivering letters worsened, sending its share price down by over 6 percent. The decline, as well as concerns around Royal Mail's current negotiations with labour unions about pensions, overshadowed improvements in its domestic parcels business where it noted in a trading statement that it had a better Christmas than the previous year and reported higher nine-month revenues. The company, which last month said its finance head had decided to leave, also said it was on track to achieve its cost savings target of up to 1 percent of underlying UK operating costs for the current year ending March 2017. But the shares were down 6 percent at 421 pence by 0956 GMT. "Royal Mail shares are trading in-line with the postal sector, but only if pension cash contributions can be maintained at the current level," Jefferies analyst David Kerstens said in a client note. Morgan Stanley analyst Penelope Butcher said in a client note that weakening revenue trends coupled with the lack of changes on cost savings targets could potentially cause full-year profitability to come under pressure. She said the 6 percent decline in letter volumes for the nine months implied that volumes fell 10 percent over the third quarter. The company said in its trading statement revenue for the nine months ended Dec. 25 was flat overall, as 9 percent growth in GLS, its international division, offset a 2 percent decline in revenue at its domestic division, where it continued to face stiff competition in the parcels market and a further drop in ordinary mail. "We are seeing the impact of overall business uncertainty in the UK on letter volumes, in particular advertising and business letters," the company said. Despite a good performance over the peak Christmas period, addressed letter volumes were still down 6 percent for the first nine months of the year, which compared with a 4 percent decline reported at the end of the first half. The company did not break out revenue from its marketing mail, but said trends were broadly similar to the first half, when it reported a fall in spending by companies on sending out promotional material, generally known as "junk mail". Partly offsetting that fall, the parcels business continues to grow despite loss of some business from former customers like Amazon, which is now making its own deliveries. However, despite replacing lost Amazon volumes, competition is increasing, with Germany's Deutsche Post having just bought UK Mail Group . (Editing by Greg Mahlich)