Australia Post sees red. A lot of it.
After posting a razor-sharp profit of $23.6 million in the last six months of 2022, it is set to post a loss for the full 2022-23 financial year – just the second time since it was incorporated in 1989.
The last loss was in 2014-15, following a $190 million investment in “transformational reform” of Australia Post’s letter business. At the time, it expressed confidence in them efficiency improvements would allow it “to maintain a supply five days a week”. Now that’s pessimistic. With the ongoing collapse in demand for letter delivery, we only see more losses to come.
That’s a big problem, because Australia Post has two main obligations, enshrined in federal legislation. It is required to operate on commercial principles – that is, the federal government wants it to pay dividends – while meeting strict community service obligation.
These obligations – established in 1989 and last reviewed in 2019 – require letters to be delivered to 98% of all Australian addresses five days a week, and in more remote areas to 99.7% of addresses at least twice a week, usually within two days of posting.
Morrison’s government temporarily relaxed these obligations between May 2020 and June 2021 so that Australia Post could divert resources to its parcel delivery services as online commerce boomed during the pandemic. Now the organization wants the community service obligations to be lowered permanently.
Read more: COVID gives Australia Post the option to end daily delivery
Cost of service commitments
Meeting the obligations cost $348.5 million in 2021-2022, says a federal government discussion paper on “modernization of postal services” was published this month. It says they are “no longer financially sustainable and not well aligned with the needs of Australians due to changes brought about by the digitization of the economy”.
It’s hard to disagree. The numbers are undeniable. The hundreds of millions of dollars a year lost to mail delivery will only get bigger. People just don’t need a daily mail service like they used to.
In the red, and dying
In the 2021-22 financial year, Australia Post made a small profit of $55 million on revenue of $8.97 billion. That’s a profit margin of 0.6%, well below the average of 8.5% within transport services.
The surplus was only due to its parcel delivery business, which grew by around 12% in 2021-2022 after four years of growth of more than 20%. Letters now account for less than 20% of Australia Post’s revenue.
The discussion paper states that letter volumes in Australia are now less than half of what they were in 2008. This is not as serious as countries such as New Zealand or Denmark, but worse than Germany, Japan, the US and the UK.
Reduce letter volumes for postal organizations
Government agencies and businesses now account for 97% of mail sent. Overall volume will decrease as they move to cheaper, more efficient online methods. Even major postal events such as election campaigns are likely to disappear, replaced by postal voting digital technology.
What can be done?
The discussion paper flags a range of possible responses.
One is to charge higher prices. Great Britain’s Royal Mail, for example, has raised postage prices by 64% in the last five years.
Australia Post raised the standard letter delivery price from A$1.10 to A$1.20 in January, which the discussion paper notes is significantly lower than the average of $2.08 for OECD countries.
Higher prices may increase profits for a year or two, but in the longer term will only accelerate the shift to non-postal methods.
Another option is to invest in more efficient sorting technology, especially automation. The French and German postal services do this. But Australia Post has already made huge investments in efficiencies, and doing more will cost the federal government money – something it doesn’t want to do given the state of the budget.
What about local post offices?
Another option is to reduce Australia Post’s network of post offices, of which there are more than 4,300. This number is tied to another community service obligation: that no one lives more than 2.5 km from a post office in a metropolitan area, or 7.5 km in a non-metropolitan area.
In the discussion paper it is stated that Australia has more post offices than supermarkets. They cost $1.3 billion to run in 2021-22.
These provide posting, collection, banking, transaction and retail services. But their needs decrease when everything is gradually digitized. It could be argued that some, at least in metropolitan areas, could be replaced with smart parcel collection lockers.
But it is likely to be politically contentious, with less financial gain, than the most obvious choice – scrapping the public service obligation to deliver mail five days a week.
New Zealand Post did this in 2013, moving to every other day delivery. Sweden did it in 2020 as a trial, with the intention of making it permanent.
Some will miss the daily service. But most of us won’t. As the relaxation to every other day deliveries showed during the covid period, it is likely that most people will not even notice.
Author: Paul Alexander – Adjunct Associate Professor of Supply Chain Management, Curtin University