By Neil Maidment
LONDON (Reuters) - British postal firm Royal Mail (L:RMG) reported flat quarterly revenue as an improvement in parcels trading on the back of longer opening hours and a drive to win business with retailers was wiped out by a sharp fall in letter volumes.
Royal Mail's prospects hinge on its ability to cut costs and modernise its operations in order to win more of a parcels market buoyed by a boom in online shopping.
However, last year the firm pared back parcel volume growth forecasts from 4-5 percent to 1-2 percent for at least two years as key customer Amazon (O:AMZN) delivers more of its own packages and rivals cut prices to compete for rising demand.
Royal Mail, privatised in 2013, said on Tuesday UK parcel volumes grew 3 percent in the three months to June 28, its fiscal first quarter, with revenue -- worth half of group turnover -- up 2 percent. That compared with revenue growth of 1 percent and a 3 percent volume rise for fiscal 2014-15.
Royal Mail's European parcels arm also traded ahead of expectations in the first quarter but UK letter volumes fell sharply, down 5 percent with revenues falling 4 percent.
"Our trading environment remains challenging and we are stepping up the pace of change to drive efficiency, growth and innovation, while maintaining a tight focus on costs," Royal Mail Chief Executive Moya Greene said, adding the first quarter had been broadly in line with its expectations.
Shares in Royal Mail, up 9 percent on a year ago, were flat at 511 pence in early trade.
In a further headache for the firm, British watchdog Ofcom said in June it would review the regulation of Royal Mail after the recent withdrawal of rival Whistl from the direct delivery letter market left it with no national competition.
Ofcom's review will look at how Royal Mail plans to improve efficiency in the absence of competition, whether its wholesale and retail prices are affordable and sufficient to cover the cost of its universal, six-day-a-week service, and whether price controls may need to be introduced.
The October 2013 privatisation of Royal Mail was one of Britain's biggest in decades and attracted criticism of being undersold at 330 pence a share. Last month Britain sold half of its remaining 30 percent stake at 500 pence.