Alarm bells ringing at Australia Post

It’s been increasingly obvious from the commentary from senior Australia Post figures in recent weeks that the organisation is concerned about a future financial crisis unless its letters service is fundamentally restructured. What wasn’t as apparent is the imminence of that crisis.

Both Australia Post’s chairman, John Stanhope, and chief executive, Ahmed Fahour, have warned publicly that the service would be losing $1 billion a year within the next few years and that the losses would overwhelm the profits from the organisation’s parcels business unless there was significant change to its community service obligations.

Today the Communications Minister, Malcolm Turnbull, released a report by Boston Consulting Group, commissioned by his department and the Department of Finance, which suggests those statements were far less alarmist than they could have been.

BCG was asked to validate data and proposals put by Australia Post to the government in making its case for changes to the letter service.

What BCG concluded is that, while its assessment of the rate of decline in Australia Post’s letter volumes is slightly more optimistic than Australia Post’s, it came to a very similar conclusion.

Without reform, it said, the escalating letters losses would quickly overwhelm parcel profits, with Australia Post incurring overall losses as early as the 2014-15 financial year.

By BCG’s estimates, letter volumes would decline by between eight and 11 per cent a year through to 2019-20, compared to Australia Post’s estimate of 11.4 per cent a year. With 80 per cent of the costs in the letters business fixed and limited opportunities for further cost savings, the cumulative losses in the letters business would reach about $12.1 billion over the next decade – and result in Australia Post as a whole losing $6.6 billion over that period.

If that were the outcome, of course, the government/taxpayer would have to fund those losses.

Australia Post has made no secret of its desire to have the community service obligations changed to reflect the impact of the digitisation of communications on its traditional letters services. It wants to scale back the frequency of its services and to create a tiered pricing structure under which customers would pay a premium for faster services.

BCG’s analysis of Australia Post’s international peers (all of whom have experienced the same trends) shows that the price and service levers are the ones most commonly pulled in response to the challenge created by the declining volumes and revenue and the high fixed cost bases of postal businesses.

In fact, even though letter volumes have fallen by about 1.1 billion since 2006-07, Australia Post’s fixed costs continue to rise, given that the number of residential and business addresses it delivers to is rising by about 150,000 new delivery points a year. It’s delivering more than a billion less letters but to an extra million delivery points.

BCG also said its analysis of survey data suggested most customers actually don’t want or value the levels of service Australia Post is required to meet. Only a third of mail receivers used their mail directly on the day they received it; half would accept three-day delivery and very few would be willing to pay to maintain five-day delivery, it said.

Even if the rate of losses of volume were at the lower end of BCG’s forecasts and Australia Post’s non-regulated businesses met its own forecasts the letters business would still lose $10.9 billion over the decade and Australia Post would still lose $4 billion overall.

With competitors starting to target its growing parcels business, of course, there is no guarantee that the non-regulated activities will generate the profits Australia Post anticipates.

While it was beyond the scope of what the departments asked BCG to look at, it did make the point that both the parcels and retail businesses faced challenges. Both operate in competitive markets and are exposed to volume and margin pressures.

BCG said Australia Post’s retail network was under pressure from declining letter volumes and falling foot traffic due to the increase in digital payment alternatives and said that its overseas experience suggested that the financial contributions from Australia Post’s proposals to extend their activities to include things like government service delivery were unlikely to be sufficient to fund the losses in the letters business.

So, Australia Post is losing more and more money providing a service to customers who are using it and valuing it less and, perhaps as early as next financial year, taxpayers will be financing those losses.

It is blindingly obvious that something has to change and the obvious starting point is to re-draft the community service obligations/performance standards to reflect the fundamental changes in consumer behaviour.

To maintain the retail network and support the economics of the overall business, the retail outlets – regarded as particularly important in rural and regional areas – should be used to deliver any and all suitable government services. Centrelink and Medicare transactions are the most obvious.

Turnbull appears to have been convinced and made it clear today that the pricing and frequency of the letters service would, along with the diversion of other agency transactions and services to the retail network, be seriously considered by the government.

He has also ruled out the rather silly notion that the government is trying to prepare Australia Post for a privatisation, or at least the privatisation of the profitable parcels business. As he said, it would make no sense to cash out the parcels business and then be left with a business that could lose more than $12 billion over the next decade.

There’s a reasonable level of urgency involved given both the potential acceleration of the losses and BCG’s estimate that each year of delay in implementing reforms to Australia Post’s services implied an incremental risk to the federal budget line of between $100 million and $200 million a year, or around $600 million over the four-year forward estimates.