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.