TNT reported a worse-than-expected performance in its mail unit, adding to the woes in its global express division, in what are set to be its last earnings before it splits the units into two companies.

Europe's second-largest mail and delivery group after Deutsche Post had already issued a profit warning on April 8 after a poor first quarter.

TNT, which will split into two listed units at the end of May subject to a shareholder vote, has failed to capitalise on a recovery in world trade. The World Trade Organization expects global commerce to grow 6.5 percent this year as emerging markets such as China continue to outpace developed economies.

TNT's express division, which delivers to more than 200 countries using a fleet of 50 aircraft and 30,000 trucks and vans, has so far struggled to implement price hikes to offset higher fuel costs.

This is in contrast to rivals such as UPS, which last week said there was little resistance from its customers to higher rates brought on by higher fuel costs, allowing it to beat quarterly earnings estimates.

The fortunes of TNT's express unit, which makes 63 percent of its operating revenues in Europe, the Middle East and Africa, have also been out of kilter with continental rival Deutsche Post, whose DHL unit has benefited more from the global economic recovery.

TNT Chief Financial Officer Bernard Bot told reporters on a conference call there was a lag of about two months in express in passing on fuel costs and that customers were switching from air transit to cheaper ground transport, weighing on profits.

"The prices in international (services) are up, there is some pressure on domestic ... and our yield is down mainly because of the product and customer mix. On an individual basis the price increases are sticking," Bot said.

TNT has announced annualized savings targets of about 40 million to 50 million euros in express to improve profitability.

Ever Shrinking
TNT's mail unit, whose main focus is sustaining its cash flow in the face of an ever-shrinking postal market in the Netherlands, reported a 33.3 percent year-on-year decline in first-quarter underlying operating income to 120 million euros ($177.7 million).

This was a steeper drop than the 18.2 percent fall seen in the fourth quarter, and was caused by an 8.6 percent drop in addressed mail volumes as well as higher pension charges and restructuring costs.

The express unit, which has problems integrating acquired businesses in Brazil, reported a 31 percent slump in first-quarter underlying operating income to 49 million euros.

Analysts in a Reuters poll expected underlying operating income of 45.7 million euros for express and 143 million euros for mail.

"Management is committed to address the serious integration issues in Brazil, with a deadline of realising a turnaround no later than by the second half of 2012," Chief Executive Peter Bakker, who is set to step down this month, said in a statement.

TNT bought Brazilian firm Expresso Mercurio in 2007 and its delivery partner Expresso Aracatuba in 2009 and has struggled with integrating the businesses since. It booked a first-quarter non-cash impairment on Brazil of 120 million euros.

Revenues in express in the first quarter came in at 1.796 billion euros and in mail at 1.112 billion euros. Analysts in a Reuters poll were expecting revenues in express of 1.754 billion euros and in mail of 1.058 billion euros.

TNT says the separation of its mail and express units is needed because the businesses have different profiles. The mail unit, which will be called PostNL, is focused on survival in the age of electronic communications, while the cyclical TNT Express needs to focus on growth in the world's major trading economies. (Reuters)