Postal firm Royal Mail said it was on track to meet its cost reduction target and reported a better than expected increase in UK parcel volumes of 4% in the first nine months of its financial year. 

Prospects for Royal Mail, privatised in 2013, hinge on its ability to cut costs and modernise its operations to help win more of a parcels market buoyed by a boom in online shopping.

Royal Mail said it handled 130 million parcels in December alone, reflecting strong Christmas trading, which was up 6% from the previous year. 

"Once again, our postmen and women delivered a great Christmas - even better than last year’s strong performance," the company's chief executive Moya Greene said in a statement. 

"We remain on track to deliver at least a 1% reduction in underlying operating costs before transformation costs for the full year," she added. 

The company said quarterly group revenue was up 1%, compared to a flat outcome in the first half, and that overall trading for the nine months ended December 27 was in line with its expectations. 

Royal Mail said it had seen a strong performance in its European parcels arm GLS, with volumes up 11% and revenues climbing to 10% in the third quarter, on the back of strong demand from Poland and Italy. 

It had previously warned of challenging market conditions for the business, but said the improvement meant it was not anticipating a decline in GLS margins for the full year.

Volumes in its letter business also held up relatively well against an anticipated slowdown in the market, down 3% in the third quarter which was ahead of the company's projected range of 4-6% annual decline.