Rapelling gear for an AustPost precipice

Australia Post chairman John Stanhope has provided a detailed insight into the challenges facing the organisation and in the process made it apparent why the Abbott government left it off the list of government business enterprises to be privatised.

Speaking at an American Chamber of Commerce lunch in Melbourne yesterday Stanhope repeated the warnings of his chief executive Ahmed Fahour that, having lost $218 million within its regulated services last year, the letter delivery services will lose about $350 million this year and the losses will grow to over $1 billion over the next few years.

As he said, Australia Post’s profitable parcel delivery and other non-regulated services can’t absorb losses of that magnitude.

He outlined the nature of the challenge Australia Post is experiencing. Its letter delivery volumes have been declining at about 5 per cent a year over the past five years – about a billion fewer items than in 2008 – and the organisation has been modelling the impact of an expected acceleration of that rate of decline to between 8 per cent and 11 per cent a year.

Stanhope, Telstra’s former chief financial officer, expects that at some point in the not-too-distant future that decline in volume will turn into a "cliff," similar to the experience of Telstra’s Sensis business where a gradual and controlled decline in revenue turned into an implosion almost overnight.

The core of the problem is that even as the volumes within the letter service are declining the number of addresses Australia Post has to service has been expanding at a rate of about 150,000 a year – it revenues are falling but its fixed cost base is rising and the trends are irreversible.

The factors driving the falling revenues are well understood. Emails, SMS, Facebook, Skype and all the other new conduits for digital communication are killing off physical mail deliveries.

Not so well understood is that 95 per cent of Australia Post’s mail volumes are generated by business and government – the sectors working hardest to lower their costs by shifting their communications onto digital platforms.

It is quite obvious that if the losses within the regulated services do continue to mount and rise above $1 billion a year, overwhelming the profits from the non-regulated services, Australia Post won’t be privatised. While it would be possible to float off or sell the unregulated businesses no government would want to be left with activities that lose $1 billion a year and are likely to lose more in future.

The Australia Post strategy has two dimensions. The obvious one is to continue to build the earnings of the profitable operations by growing its parcel businesses and leveraging its ubiquitous retail network – it has about 3500 retail outlets -- by delivering more services and transactions.

It already has about 750 third party relationships but has made it clear it would like to take on the transaction elements of other government agencies like Centrelink and Medicare. To capitalise on the growth in online shopping, it has announced it will add Saturday parcel and express delivery services. It is spending $600 million to upgrade its parcel sorting platforms.

To address the losses in the letter service Australia Post has increased the cost of a basic stamp by 10 cents, which will raise about $100 million a year, and has suggested it could emulate Britain’s Royal Mail by introducing a two-tier letter service, reducing the frequency of standard mail deliveries to, perhaps, three days a week while charging a premium for more timely deliveries and perhaps imposing an annual fee.

That isn’t a solution to the challenge of falling volumes and rising costs in the longer term but the proposals might help to stabilise the losses at far more manageable levels and buy the organisation time.

There will inevitably be a point in future where there is no meaningful demand for the letter service and therefore no rationale for its community service obligations, which would enable Australia Post to radically remake that part of the organisation.

The Independent Commission of Audit recommended that Australia Post be privatised in the “medium term.” 

That won’t be feasible in any time frame and the organisation will become a major drain on public finances unless it is allowed more flexibility within the regulated services to respond to the dramatic and threatening changes in the landscape for those services before the “cliff” moment Stanhope knows is out there arrives.