A dead letter day for Australia Post's delivery service

The announcement from Australia Post this week of 900 administrative job losses will only be the first of a continuing series of responses by the organisation to the accelerating structural changes that are destroying its traditional letters services and beginning to destabilise its financial position.

Chief executive Ahmed Fahour confirmed that Australia Post would ask the federal government to relax its community service obligations to reduce the frequency of mail deliveries. Judging by the responses to the announcement, however, the organisation has a major task ahead to educate the public about the gravity of its plight. 

The announcement generated considerable hostility and a lot of venom directed at Fahour himself, centred on both his background as a senior banker and, more particularly, his remuneration. It wouldn’t matter who was in charge of Australia Post, however, they would face the same challenges and be forced to make similar responses.

Around the world, every post office business has experienced or is experiencing the same trends and pressures as the digitisation of communications erodes the volumes of their traditional mail businesses. In every major jurisdiction, the postal services are responding by seeking to reduce the frequency of deliveries and to charge prices that better reflect the cost of the service.

That’s exactly what Australia Post is asking for permission to do. It wants to scale back the frequency of its services to two or three deliveries a week and to tier its pricing structure so that there is a premium for more timely deliveries.

Until now, Australia Post’s profitable parcel delivery services have generated sufficient profits to offset the losses in the letter delivery services, which lost $218 million last year and are expected to lose about $350m this year.

Australia Post’s chairman John Stanhope and Fahour have warned that without change, the service will soon be losing more than $1 billion a year and overwhelming the profits from the parcels service, which itself is starting to come under attack from competitors like Toll Holdings.

Until now Australia Post has dominated the parcel delivery sector, but the growth rates in the business as consumers increasingly shop online are proving too attractive for its competitors to ignore.

The backlash to the announcement is curious, given the nature of the shift from physical mail to emails, texts, Skype and the like ought to be well understood.

Australia Post’s letter delivery volume has fallen by about a billion items in the past five years and that rate is accelerating, even as the organisation has been forced by its community service obligations to add about 150,000 new addresses to its delivery footprint each year.

Making the criticism even more peculiar is that 95 per cent of those mail volumes are generated by governments and business. It isn’t actually a service used that much by individuals.

Unless taxpayers want the federal government to write increasingly large cheques to fund services that fewer and fewer Australians use, Australia Post has no option but to try to keep the extent of the losses from the letter services manageable in the near term by raising prices, reducing delivery frequencies and continually reducing its costs.

The 900 jobs are almost certainly only the start of what will be a long-term shrinking of its workforce, if Australia Post is afforded the luxury of managing down its costs over time.

Stanhope has warned of the potential for the rate of volume decline to abruptly turn into an implosion in volumes, similar to what happen to Telstra’s Sensis directories business.

If that occurs -- and the reliance on governments and businesses which are continually looking for ways to improve their own efficiency means it is a real possibility -- the response would need to be far more dramatic and traumatic.

The other leg of the strategy is to use its ubiquitous retail network to deliver even more services and transactions (it wants to take on the transaction elements of other government agencies like Centrelink and Medicare) while continuing to grow its parcels business and, it hopes, its digital mailbox service.

With the job losses, Fahour also announced a reorganisation of Australia Post that will see it structured around two brands: Australia Post and StarTrack. StarTrack will contain the parcels and express services operations.

That could be seen as a way of clearly separating the loss-making regulated services from the profitable unregulated businesses to enable the latter to be privatised.

The Abbott government has ruled out any privatisation of Australia Post and it is improbable that any government would want to be left with a business losing $350m today and $1bn and rising in the near term.

The logical response from the government is to free up Australia Post to allow it to schedule and price deliveries in line with the changing demand for its services while helping it to maintain its physical presence and strengthening its economics by using its retail network to deliver whatever government services it can handle effectively and efficiently.

Physical mail services aren’t quite an anachronism yet but, particularly once the national broadband network is properly rolled out and operating, it is inevitable that they will be.

That dictates massive changes to the way Australia Post is structured and operates and the nature of the services it provides, whether its employees and (dwindling) letter services customer base appreciate it or not.