Royal Mail on track to deliver cost cuts after strong Christmas

* Aims to reduce operating costs by 1 percent

* Strong Christmas trade, helped by UK and European parcels growth

* Shares (Berlin: DI6.BE - news) up by more than 5 percent (Writes through, adds share price reaction, analyst comment)

LONDON, Jan 21 (Reuters) - Royal Mail (LSE: RMG.L - news) said it was on track to meet its cost reduction target and delivered more parcels than expected in Britain, easing concerns over the intense competition facing the former monopoly.

Royal Mail said on Thursday it handled 130 million parcels in December alone, reflecting strong Christmas trading, which was up 6 percent from the previous year, a bigger volume increase than those recorded by any of its competitors.

Technology changes mean the number of letters being sent is in decline but this is balanced by a growing parcel market driven by online sales.

"We remain on track to deliver at least a 1 percent reduction in underlying operating costs before transformation costs ... for the full year," said Moya Greene, the company's Canadian chief executive.

Royal Mail has become more focused on cost controls and efficiency improvements to help underpin profits after the loss of key customer Amazon which began delivering parcels through its own network.

Others competitors like UK Mail (LSE: UKM.L - news) , which had added extra capacity to meet rising online retail demand, also threaten Royal Mail's dominance in the British postal market.

The company has previously warned of overcapacity in the market, which it said would put pressure on its pricing for the next few years.

Royal Mail has managed to fend off competition in letter delivery from firms such as City Link and Whistl, owned by Dutch-based PostNL (Swiss: PN6.SW - news) , which have both pulled out of that part of the market.

Shares in the company traded 3.7 percent higher by 1100 GMT, making it one of the biggest gainers on the FTSE index.

"With (Other OTC: WWTH - news) operating performance remaining relatively buoyant and with the potential to begin stemming market share losses in parcels, we believe Royal Mail offers significant ... upside," said BAML analysts in a note, who raised their 2016 forecast.

Analysts from Barclays (LSE: BARC.L - news) also made small changes to their forecasts, with Davy Research upgrading its rating to 'Neutral' from 'Sell'.

But Royal Mail's shares are a long way off their post-privatisation peak in January last year, having dropped by about 46 percent.

The company said group revenue for the nine months ended Dec. 27 was up 1 percent, compared to a flat outcome in the first half, and that overall trading 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 percent and revenues climbing to 10 percent in the third quarter, on the back of strong demand from Poland and Italy.

It (Other OTC: ITGL - news) 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. (Reporting by Li-mei Hoang; Editing by David Clarke and Keith Weir)