An Post requires radical restructuring, new work practices and greater volumes of mail rather than higher prices, writes Seán Murphy
With full market liberalisation around the corner, An Post is undoubtedly under pressure and the pending strike by the Communications Workers Union (CWU) is adding significantly to its woes. The union's refusal to implement the Labour Court's recommendations is indicative of the problems that the company faces. Its survival depends on both unions and management adapting to the new competitive environment that looms.
The payroll bills at An Post account for 64 per cent of its operating costs and inefficient work practices are damaging the company's competitiveness.
Irresponsible actions by the CWU not only hamper the company's attempts to increase productivity but also serve to speed up the haemorrhaging of customers away from An Post to more reliable service providers.
An Post must remain firm in its resolve to restructure the company and tackle the deep-seated issues of staffing and work practices that currently pervade the company.
Workers, for their part, must realise that in a liberalised market, the company faces stiff competition and has to improve its productivity to survive. This will require changes in work practices, without which An Post will find it very difficult to compete.
However, this is not the only area which An Post must address in order to survive. It must also improve its profitability and generate new business to secure its viability in a tougher, open market. An Post is continuously failing to meet next day delivery targets set by the regulator, mail volumes are falling, previous price increases have failed to yield adequate revenue returns and the European postal market liberalisation is well under way and due to intensify.
As the universal service provider, An Post's fixed-cost prices will be far greater than those of any new entrants to the market as it is required to ensure a pick-up from every post box and a delivery to every home each weekday.
Furthermore, any new entrants are most likely to be private companies with leaner, meaner and more productive operations.
An Post must address its costs and productivity levels if it is to have a fighting chance in a tougher, open market.
To date, An Post has focused on boosting its revenue through price increases. In 2004 the company had the benefit of the 16 per cent increase in postal prices approved in August 2003. Yet an analysis of its annual report shows that turnover from its mail business only increased by 3 per cent. This suggests that price increases have already had a negative impact on volumes and are no longer the easy option for sustaining revenue. Even An Post has acknowledged that the proposed increases will lead to a decline in mail volumes (10 per cent within two years).
An Post is legally bound to provide a postal service "at affordable prices for all users" and the company has argued that the effect of its tariff proposals on individual consumers would be negligible. It fails to recognise however, that the increases would have a significant impact on small and medium enterprises (SMEs). Last year the average business in Ireland sent 363 pieces of mail per week. An increase of 25 per cent on the headline price of letters would seriously affect an SME's ability to remain competitive and for many would no longer be an affordable option.
If the company is to remain a leading player in the market, then it must reform its vision and wean itself away from demands for price increases in favour of driving increased demand for its service.
Studies show that the postal market can sustain growth through direct marketing, internet purchase fulfilment and natural growth through innovation. The domestic letter post volume in the EU rose 4.9 per cent between 1998 and 2003.
However, Ireland's mail per capita ratio is well below those of countries with a comparable GDP, and a recent report on developments in the European postal sector found that Ireland's growth in post volumes had "fallen behind to a degree that seems surprising".
With this unrealised potential, the Irish market poses an attractive prospect for new competitors. Correspondence weighing over 100g is currently deregulated but as of January 2006, the market will be further liberalised when, according to An Post, 40 per cent of its mail volumes will be exposed to competition. Complete liberalisation is due by 2009.
As most people agree, the future of the company lies in its ability to increase its mail volumes - a fact that has also been recognised by the An Post unions in its 2005 document An Post - A New Vision. By concentrating on volume growth, the company could sufficiently reduce its unit costs.
The company currently operates with the policy that mail is an expensive product and that there is little potential for growth in the area.
This argument needs to be turned on its head. By applying the Ryanair model (as applied to Aer Lingus when it was struggling) and making mail a low-cost product, An Post can achieve the desired critical growth in mail volumes.
It must also recognise the potential for increasing its volumes from the commercial sector. In order to tap into this, An Post must significantly raise the sophistication of its service offering to businesses.
Part of this strategy must include the introduction of a second-class postal system, which though slower, will be cheaper. The growing number of companies using direct mail services as a result of the introduction of postal codes will not require next-day delivery of their mail but will demand a cheaper service. Providing a second-class post system would open up a huge potential market for An Post.
Furthermore, at just 363 pieces of mail per week, the average business is disqualified from An Post's bulk discounts that require the sending of a minimum of 500 pieces per week. This level is set far too high for most SMEs. The required volumes must be lowered and resources should be committed to informing businesses of these discount systems. It follows that an increase in volumes through the promotion of discounted services among SMEs, will lead to a decrease in An Post's unit costs.
The way forward for An Post is clear. Once it accepts the inevitability of competition it can begin to prepare itself for the challenges ahead. It must completely rethink its postal strategy and commit itself to quality, value and increased productivity. Likewise, its workforce needs to face the new reality, in which the company simply will not survive in its current form.
By exploiting our underdeveloped mail market, particularly in the commercial sector, and setting volume targets in line with countries of similar GDP, An Post can ensure that it maintains its pole position as Ireland's preferred mail carrier. Its workers too, must realise that without change and more efficient productivity, there may no longer be a company for which to work.
Seán Murphy is head of research at the Chambers of Commerce of Ireland