AusPost's crisis inflection point

As this year has progressed, Australia Post has been raising the volume on its warnings that it is facing a looming crisis. Its chief executive, Ahmed Fahour, today essentially said that it has already arrived.

In a speech to the Australia Israel Chamber of Commerce, Fahour said Australia Post’s letters business, which lost $218 million in 2013, would lose more than $300 million in the 2014 financial year.

More to the point, in the six months to June the losses in the letters business were greater than the profits from the rest of Australia Post’s operations, which include its highly profitable parcels business. It was the first time Australia Post had incurred a loss in any six-month period since it became a government business enterprise in 1989, he said.

But that may be a foretaste of far worse things to come. Australia Post’s leadership has been talking about their fear, indeed conviction, that the losses in the letters business may soon explode – that the business is nearing a “cliff.”

Fahour provided the logic underpinning that conviction.

Until 2000 letter volumes had always tracked GDP. Between 2000 and 2008 they flat-lined before starting to fall, initially at a rate of 2 per cent or 3 per cent a year and more recently at 6 per cent. In the space of six years Australia Post has seen a quarter of its volume – 1.2 billion letters – disappear. If population growth is factored in, the real decrease is closer to a third.

As Fahour said, the experience in Australia actually isn’t as dramatic as it has been elsewhere. He relates that to the adoption of digital communication by governments. In the Nordic countries, with high-speed broadband, “eGovernment” adoption rates have been about 80 per cent – and letter volumes have halved from their peak. Only 38 per cent of Australians, he said, regularly interact with government online.

The Australia Post thesis is that, with both major political parties committed to having 80 per cent of government communications with citizens online by 2017, its letter volumes will fall off a cliff. Once government moves to digital channels of communications, business follows. With 97 per cent of its volumes originated by government or business – only 3 per cent is “social” mail – volumes will implode.

A report Malcolm Turnbull commissioned from Boston Consulting Group that was released in June estimated that letter volumes would decline by between 8-11 per cent through to 2019-20. Fahour thinks that might be too conservative.

Australia Post, of course, operates under a set of regulated community service obligations (last reviewed 16 years ago) that require it to deliver letters five days a week to 98 per cent of all addresses.

Even as it loses volumes the number of addresses is increasing by about 150,000 a year – its fixed costs are rising even as the volumes decline at an accelerating rate. And, Fahour said, its stamp prices are the second-lowest in the developed world.

Australia Post has said the letters business could soon be losing $1 billion a year and the BCG analysis found that even if the rate at which volumes fell were at the lower end of its forecasts, and Australia Post’s non-regulated businesses met its forecasts, the letters business would lose $10.9 billion over the next decade and Australia Post $4 billion overall.

In the private sector the response to Australia Post’s plight and the inevitable acceleration of the trends and losses in the business would be obvious. The letters service would be shut down as quickly as possible. Obviously that’s not going to happen.

What Australia Post has asked for and is almost certain to get (given that it involves regulation, not legislation) is the tools to reduce the scale of the losses and, in effect, to manage the decline and eventual demise of the business.

Price and the freedom to set more cost-reflective prices would clearly be one of them. Australia Post has also asked for more freedom in scheduling its deliveries. It wants to create a two-tiered and two-speed delivery offer, with “next-day” delivery the premium option. It already has that for businesses and plans, Turnbull willing, to extend that to all customers from the start of next year.

If it can’t reduce the losses to more manageable proportions, Australia Post won’t be able to fund and maintain its very successful parcels business, which operates in competitive markets, or its retail network or its growing digital presence without massive and open-ended financial support from taxpayers.

Fahour and his chairman, former Telstra chief financial officer John Stanhope, have been trying to broadcast the rapidly-growing threat to the organisation’s stability and the taxpayers’ wallets to justify the changes they want to be able to make, changes they know will create controversy and angst.

Increasing the prices and spacing out the delivery schedule for services that fewer and fewer people use is, however, a more sensible outcome than either doing nothing and letting the losses and the taxpayers’ commitment mount or allowing them to completely swamp the profitable and growing parts of the organisation and undermine Fahour’s capacity to re-position and regenerate the nation’s most ubiquitous retail network.