Australia needs a postal service but does the government need to own it?

We will soon be paying more for next day delivery of letters. Nikki Short/AAP

The announcement by Australia Post that it will shed around 2,000 jobs over the next three years comes on top of fairly steep increases in the price of basic stamps from 60 cents to 70 cents last year.

Australia Post has said it wants to increase this to A$1.00 in the future after an ACCC review. Changes to its delivery services will also see mail delivered two days slower than the current timetable which is next day delivery for metro areas.

The changes and staff redundancies will buy Australia Post a little time but if nothing else is done we can expect more of the same. More fundamental changes are required, including a review by policymakers of Australia Post’s Community Service Obligations.

The cause of Australia Post’s problems is well understood. The rise of digital communication has led to a decline in letters being delivered with consequent financial losses in its letter business. Letters delivered have fallen by well over 1 billion since its peak in 2007/8 when it delivered around 4.6 billion letters.

Australia Post is required by law to deliver mail five days a week and retain its network of more than 4,000 post offices and outlets Australia wide. As the costs of its network don’t fall in line with the decline in letters it faces increasing losses.

Australia Post is required to seek ACCC and Ministerial approval for any increases in its basic postage stamp rate. Last year in its submission to the ACCC seeking approval for the increase in the price of stamps it forecast that losses from its letter business in 2014/15 would be around A$246 million after the price increases. But it still expected to make a profit overall.

The decline in letters this year has apparently exceeded expectations and losses are higher and expected to be around A$500 million. They are threatening to swamp profits from the parcel business and Australia Post is indicating a company wide loss for the first time in over 30 years.

Profits from the group’s successful parcel business have so far been able to offset the growing losses in the letters business. But despite Australia Post’s well-recognised brand it faces strong competition including from Japan Post, which recently acquired Toll. While it continues to be profitable it is difficult under the current structure to assess how effective it is compared to its competitors.

Australia Post is not alone in facing these challenges. Post offices around the world are looking to adjust to the rise of digital communication. Some are reporting losses or making changes to their letter delivery services whilst others are expanding in the growth areas.

Australia Post too is looking at online options and has launched its Digital Mailbox service. But this remains small and uncertain. Importantly it has to compete successfully in its parcel business. In 2014/15 revenue from parcels was expected to be over A$3.5 billion. This was around A$1.5 billion more than was expected from letters.

What can be done?

A significant proportion of letters sent are from government agencies and season greeting cards. Apart from providing a service for those groups that are not able to easily utilise electronic communication, Australia Post is a parcel and delivery business with a highly recognised brand operating in a growing but competitive market. It has a head start with its distribution network and brand, but its success or failure will depend on how well it performs against its competitors.

The question for government is does it want to own and operate a business which will be increasingly operating in a competitive market.

The best way forward for Australia Post and the Australian government on behalf of the community is to undertake a review of the existing CSOs. This would help it determine what it considers is an appropriate level of service, and how this could be delivered.

It may be that the government does not need to own a parcel and delivery business for these obligations to be met.