UK Mail gains business and higher costs from City Link failure

The collapse of courier company City Link boosted parcel volumes at UK Mail, the British postal business, but created a rise in operating costs that will hit profits this year.

UK Mail said on Thursday that parcel volumes grew 12 per cent in the final quarter ending 31 March 2015 as it benefited from a surge in new clients in the wake of its rival's failure on Christmas Eve. But the sudden increase forced it to rely on more expensive agency staff, short-term hires of trucks and trailers and additional facilities, which raised operating costs.

Guy Buswell, chief executive, told investors that the problems would be temporary because the group is moving to a new headquarters and automated sorting facility in Coventry next month with 350 staff, 100 of whom are former City Link employees.

But he warned that full-year and fourth quarter financial performance would come in at the lower end of analysts' expectations when UK Mail reports on May 20.

"In the short term it will be a pain but in the long term we will keep volume and get back in tune," Mr Buswell said. "We could have said no to the extra business but that would have been the wrong thing to do."

Revenues in UK Mail's courier business also declined in the fourth quarter, although it achieved growth for the full year. Group revenue in the fourth quarter was up 5 per cent, with sales for the year set to be up around 1 per cent, the company said.

Analysts at RBC Capital Markets said: "We continue to remain positive on UK Mail as we see the company being an ultimate beneficiary of the City Link bankruptcy. While we see pressure in certain parts of the market - business to consumer - this remains a small operation for UK Mail."

Analysts at Cantor have forecast full-year revenues of £495m, operating profit of £21m, on earnings per share of 32.3p.

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The trading statement came just days after a €4.4bn deal between FedEx and TNT Express - two of the biggest players in the industry - was announced. It comes as international couriers struggle to adapt to the rise of ecommerce, which has put pressure on their delivery systems.

Mr Buswell said UK Mail should benefit from the merger as there will be "one less player in the market place".

"The TNT/FedEx deal will create interesting opportunities for us," he said. "For example, TNT used to run an hanging garment delivery company for retailers but now there is no one else in that market. TNT has a same day business; we have a same day business."

Royal Mail remains the biggest player in the UK delivery market with a 35 per cent share, DPD at 7 or 8 per cent; and Yodel, Hermes and UK Mail trailing behind.

Shares in the company initially fell nearly 4 per cent to 465p but recovered a bit to reach 478.09p by mid-afternoon before closing at 471.25p.

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