Royal Mail has warned that postal deliveries to rural areas are under threat because rivals are being allowed to cherry pick easy and profitable deliveries in towns and cities without having to run services to isolated homes such as on Scottish islands.
After the furore over its sell-off last year, which sparked accusations the soaring share price at the float had effectively lost the taxpayer £750m in a day, the company issued its warning on Thursday over the universal service obligation as it reported a 12% rise in operating profits to £671m.
Moya Greene, Royal Mail's chief executive, said rival TNT Post UK's ability to pick off profitable routes in big cities was "striking at the economics of the universal service obligation" – its statutory duty to deliver to every address in the country, six days a week, at the same price.
TNT Post UK has launched "final mile" delivery services in London, Manchester and Liverpool, and plans to deliver to up to 42% of addresses by 2017.
Greene said Royal Mail subsidised expensive deliveries to rural areas from the profits it made from services in big cities, and any increased threat from rivals could cost it £200m in revenues by 2017.
"TNT Post UK can cherry pick easy-to-serve urban areas, delivering easy-to-handle post to homes less frequently than Royal Mail and to no defined quality standard," she said. "Royal Mail is required to deliver six days a week, overnight, throughout the whole country, to stringent quality standards and at a uniform, affordable tariff.
"Everyone should really sit up and take notice of what effect this cherry picking will have."
Greene called for "timely regulatory action" from the regulator Ofcom to prevent undercutting from rivals threatening the universal service.
The boss of TNT Post UK, Nick Wells, said Royal Mail should stop "whingeing". He insisted his firm's competition posed "absolutely no threat to the universal service".
"We are delivering choice for our customers, and that is good for the market overall, as well as creating jobs," he said. "The regulator has repeatedly said there is no threat to the universal service. Royal Mail should stop this sabre-rattling. We have a small market share, there is absolutely no threat to the universal service."
An Ofcom spokesman said: "We do not believe that there is presently a threat to the financial sustainability of the universal postal service.
"We would expect Royal Mail to take appropriate steps to respond to the challenge posed by competition, including improving efficiency."
The regulator said it had a "duty to secure" the universal service and "powers to step in to protect it" if it came under threat.
Ofcom is to review the universal service next year but is unlikely to recommend any changes.
Royal Mail is committed to maintaining the universal service until at least 2021, and any change beforehand would have to be put to a vote in parliament.
Canada Post, where Greene was chief executive until she joined Royal Mail in 2010, earlier this year announced plans to phase out some door-to-door deliveries.
Royal Mail's strong profits – £671m before transformation costs on revenue up 2% to £9.46bn – reignited anger over the government's controversial flotation of the 500-year-old postal operator last October.
The shares, which floated at 330p, spiked 38% on their debut on the stock market on 11 October. It was the biggest one-day rise in a privatisation since British Airways in 1987 and the shares went on to reach 618p. On Thursday they dropped 10% to 519p after the warning over the threat from competition.
Responding to the profit figures, Chuka Umunna, the shadow business secretary, said: "Ministers' case for their Royal Mail fire sale has now been completely demolished. We know Royal Mail was profitable in the public sector, but David Cameron's government privatised Royal Mail's profits after making the taxpayer pick up the tab for its historic debts.
"Taxpayers have been left short-changed by hundreds of millions of pounds at a time when families are being hit by a cost-of-living crisis, while the City investors the Tory-led government prioritised giving Royal Mail shares have been laughing all the way to the bank."
Brian Scott of the Unite union, which represents 7,000 Royal Mail managers, said the strong financial results showed taxpayers had been "fleeced".
"Instead of these profits flowing into the Treasury's coffers to pay for schools and nurses, it's flowing into the pockets of shareholders, some of which enjoyed 'mates rates' when Royal Mail was sold off on the cheap," he said.
Royal Mail's revenue from letters dropped 2% to £4.63bn last year, but parcels increased 7% and now make up 51% of overall earnings due to the continued rise of internet shopping.
However, Greene warned that Amazon's creation of its own delivery service was knocking sales. She said Amazon's delivery arm was capable of delivering 60m-70m parcels a day, compared with the 75m for Royal Mail's ParcelForce arm.
Royal Mail hopes to counter intense competition by making the company more customer friendly. It is opening 100 of its delivery offices on Sundays and will pilot Sunday deliveries within the M25 over the summer. It is also making it easier for customers to track parcels returned to the seller.
