Looking for ways to post a profit in a dead-letter world

Looking for ways to post a profit in a dead-letter world

January 7, 2014

Eric Johnston

While telcos, airlines and power stations are relatively easy business for governments to sell, postal services have long stayed in the too-hard basket. But last year’s successful $3.3 billion partial stockmarket listing of Britain’s Royal Mail now has many around the world considering the possibilities.

In its push to sell the near-500-year-old Royal Mail, the cash-strapped British government claimed the postal system there would have access to private capital to help it invest in technology to expand the parcels business and modernise its ageing branch network.

Postal systems are grappling with a substantial change to their business model in a digital world. Australia is no different. 

Postal systems are grappling with a substantial change to their business model in a digital world. Australia is no different.

Former banker Ahmed Fahour was recruited in 2009 with a mandate to manage Australia Post through the change, but this has not yet extended to privatisation.

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For its part, Australia Post is at the very beginning of a $2 billion four-year investment program to overhaul its systems. The funds will also be spent on expanding its digital services and parcels business that it argues is crucial to making it a viable long-term business.

Even so, there is room for a discussion about the future of Australia Post, indeed privatisation is a natural extension of the way it has been managed for the past few years. Australia Post, with investments in commercial logistics business – Startrack Express – and a fast-growing parcels delivery arm, making it public largely in name.

Fahour’s task is to maximise earnings while managing the natural decline of traditional letter delivery.

A sale of Australia Post will see Canberra forgo a future dividend stream ($244 million last year) for a single upfront payment, possibly more than $3 billion.

Even so there are difficulties. Australia Post has an obligation to ship a letter from the nation’s east cost to its remotest corners at the same cost to the consumer as to the next suburb.

Post offices are often the lifeblood of smaller country towns, offering everything from banking services to a place to swap recipes.

Here the British privatisation could provide a model. There, the post office network of 11,500 branches was not included in the sale. Rather the now-private Royal Mail focuses on delivery and a long-term distribution agreement with branches to sell stamps, envelopes and parcel products. The branch network remains in the hands of the British government.

With communications faster and a fraction of the cost of what they were when the postal service began, there can be a case for tiered mail pricing. Most mail is for commercial purposes, such as bills and bank statements, and the businesses that send them are often the biggest beneficiaries of a low-cost service.

Australia Post’s $312 million profit last year and 18.5 per cent return on equity remains enviable by global standards.

However, look a little deeper and the numbers show the true state of the business. Fahour recently warned that Australia Post had reached a turning point in which cost management and strong parcel delivery business would not be enough to compensate for the losses in traditional mail business.

Australia Post’s traditional letters business lost $218 million as volumes fell 6.4 per cent. At the same time the parcels delivery business returned a profit of $648 million, thanks in part to growth in online shopping. Remember, parcel delivery rates are being used to offset the cost of delivering letters.

Carrying the mail is increasingly a declining business. At this rate Australia Post will deliver 1 billion fewer pieces of mail in 2014 than in 2009. Falling volumes make it tough to carve out efficiencies.

Rather, the sector needs to be revitalised with competition to drive an improvement in services.

As with banking, the initial online revolution drove the closure of bank branches. Yet now, banks are revitalising their networks, using branches to market a range of services.

Similarly with postal services. It is increasingly uneconomic to have a national infrastructure to deliver a dwindling quantity of mail to all households.

Rather, postal boxes or centralised collection points sprinkled through suburbs will make much more sense given that mailed volumes will continue to contract. This idea has already been floated in Canada to stem mounting losses.

Australia Post, which has 35 per cent of the domestic parcels market share, estimates that 70 per cent of the parcels it delivers originate in Australia. However, it needs to compete harder and investment further to maintain its share of the lucrative parcel delivery market.

Since taking charge Fahour has been pushing this line, noting on several occasions that without a profitable and growing parcels business his letter delivery business would require deeper cuts or, worse still, risk becoming a dead-letter business.