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Take it as red the good mail is post service plans to parcel up its profits

THE challenge in front of Australia Post was obvious by the time David Mortimer took over as chairman of the board in 2006. Under the lengthy tenure of chief executive Graeme John, Australia Post had expanded beyond its "snail mail" roots, but the internet's shadow was lengthening, and Australia Post was locked into delivering letters five days a week to 98 per cent of Australian addresses by its community service obligation the postal equivalent of Telstra's universal service obligation.

THE challenge in front of Australia Post was obvious by the time David Mortimer took over as chairman of the board in 2006. Under the lengthy tenure of chief executive Graeme John, Australia Post had expanded beyond its "snail mail" roots, but the internet's shadow was lengthening, and Australia Post was locked into delivering letters five days a week to 98 per cent of Australian addresses by its community service obligation the postal equivalent of Telstra's universal service obligation.

Australia Post needed to rebalance the letters business, to stop it becoming a big loss-maker as Australians switched to the internet for their mail needs, pulling down letter volumes even as Australia Post's distribution network expanded to cover growing towns and cities.

It needed new growth engines, and there were some obvious choices. You can email words, but you can't email merchandise, for example, and the internet is a catalyst for greater parcel traffic, through online retailing. Australia Post's network was tailor-made for an assault on this market and its retail outlets were also expanding their product mix.

What Mortimer needed to do was locate a successor to Graeme John to roll the strategy out, and after conducting a search in 2009 he announced just before Christmas the one-time NAB CEO contender Ahmed Fahour had been given the job.

Fahour said at the time that Australia Post was in the process of reinventing itself and the result he handed down yesterday shows that the die is cast, strategically.

Mail volumes fell for the third consecutive year in the year to June 30, and are down by 12 per cent since mid-2008. Superficially the rate of decline slowed significantly: letter volumes slipped 3.7 per cent compared with 5.5 per cent in 2009-10. But Fahour and Mortimer know that's an illusion, caused mainly by the postage-paid spin that surrounded last year's federal election. Excluding the election bump, the decline was 4.6 per cent.

The reliable assumption is that letter volumes will continue to decline as the internet grows, but Fahour has already substantially rebalanced this regulated business.

In June last year he won an increase in the basic postage rate, from 55? to 60?. That and the election windfall pulled revenue in the letters division 2.6 per cent higher and Fahour also cut operating costs, with a distribution network redesign that sees Australia Post make the same deliveries more efficiently, and new automated processes and IT platforms.

The parcels business boosted revenue by 5.3 per cent, and Australia Post's total revenue rose by $136 million or 2.8 per cent to $5 billion, reversing a $114 million fall in 2009-10. Group expenditure fell by almost 2 per cent across the group, and as the cost-to-income jaws opened, pre-tax operating earnings rose by $79.1 million or 31.3 per cent to $332.23 million.

This brings Australia Post back into line with its 2009 result, and Fahour this week announced revamps to its parcels business that aim to build momentum in this area, the key growth driver. The group is extending pick-up hours at 100 locations across Australia and trialling 24-hour-access pickup lockers in Sydney, Melbourne and Brisbane.

Sixty business hubs are also planned, with 20 up and running by the end of this year, and Fahour is also striking bilateral domestic delivery agreements with overseas postal groups to replace older fixed-price agreements that the Australian dollar's rise has rendered unprofitable.

Parcels are highly competitive: everyone has worked out that internet shopping is going to pump up parcel volumes, and big multinationals including FedEx are direct competitors.

But there's top and bottom line gains on offer for Australia Post potentially, given the size and coverage of its distribution network. Telstra built the best mobile phone network with its NextG rollout, and even after cutting prices in the last year is still charging a premium for the service.

If Fahour can build on the Australia Post delivery network and position the group as the blue-chip parcel mover for convenience and reliability, he might be able to extract a similar premium.

YESTERDAY'S Australian Institute of Company Directors survey into institutional share voting and the use of proxy advice services asserts that there is dysfunctional communication between directors, proxy groups and big investors.

That makes the decision to spin the results by leaking the report a day before its release ("directors slam trial by proxy", screamed the AFR) somewhat curious, as was the AICD's decision to take out most of yesterday's briefing talking to itself, via a panel discussion it moderated, and the media watched. The report will help fine-tune the mechanics of the proxy advice industry, which is still evolving.

There's negotiating gridlock in the tight time window between the calling of a meeting and the meeting itself, for example: ways to talk earlier will be explored. Boards have also been making contact with funds too high up, and not meeting the analysts who actually help formulate voting decisions. That presumably will change.

But the big picture in the report is one we already know. Directors think proxy advisers are influential, but by and large uninformed about how companies create value. Managed funds and superannuation funds see the proxy advisers as part of a decision-making matrix, and rate them more highly. The funds are right: processes can be improved, but proxy advice is here to stay, right most times, and a force for good governance.

mmaiden@theage.com.au


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