In recent months, the management of An Post has prepared a strategic plan. The plan concentrates on bringing the company from its current loss-making position into a sound and competitive state over the period up to 2008.
This strategic plan was approved by the board and presented to the Minister for Communications, Marine and Natural Resources, Deputy Dermot Ahern, on 30 September last. The Minister subsequently attended the October board meeting, during the course of which the strategic plan was fully explained. The responsibility for implementing this plan and the achievement of its objectives is entirely a matter for the company and its management.
A key element of the plan concerns the implementation of a major change programme throughout the company. This programme will deliver significant cost savings and efficiencies. The scale of the changes required will inevitably have an impact on staff throughout the organisation as it involves the restructuring and rationalisation of management positions, staff number reductions and curtailment of overtime as well as non-pay cost cuts. The management team is fully committed to a process of discussions with the trade unions representing staff in an effort to achieve agreement on the change programme that is now necessary. By its nature, such a process requires sensitivity in statements made outside the process. I trust the committee will understand that I may be unable to answer some issues directly and the company team may need to be circumspect on some issues given the process that we are now engaged in with the trade unions.
The company's financial situation today is one of extreme difficulty. The forecasted out-turn for 2003 is an operating loss projected at €46.4 million. Taking account of other factors, in particular the funds flowing from property disposals, there will be a bottom line loss of €29.5 million for the year, compared to an original budget of €1 million profit. Regarding 2004, we are projecting an operating loss of €30.6 million, with a bottom line loss of approximately €16.3 million. It is important to note that this out-turn includes the anticipated savings that may arise from the implementation of the recovery plan from mid-2004.
Clearly, this financial position is unsustainable for any company. If no remedial action is taken, the company's position will continue to deteriorate. Therefore, the situation calls for a major overhaul of every aspect of the way An Post operates and its operating methods. This is the starting point of the strategic, or recovery, plan for the management group.
I have included a number of appendices with my presentation. These detail the figures for 2003 and 2004 - they are projected figures at this stage. I also indicate the quality of the service and the performance of the company in 2003. To assist the discussion, I also give some tariff comparisons between An Post and other major players in Europe.
The market environment in which the company now operates becomes more challenging every day and month. The rate of growth in letter post is slowing down significantly. This trend is very evident in every developed country. Some countries are already experiencing volume declines in the demand for postal services and Ireland is not, and will not be, immune from these trends. Electronic competition with postal services continues to be the main source of competition for postal companies.
The maintenance of the universal service obligation inevitably imposes additional costs on postal services. Parcel services are subjected to increasing competition from a wide variety of sources. Crucially, there is growing competition from operators which are not subject to the USO. Our quality of service and consumer satisfaction levels are also critical and major recurring issues.
There is a new and demanding regulatory environment in which the company has to operate. Globalisation is a daily reality for the postal service. A number of market operators are now very active on an international scale. Many of them have much larger home bases than An Post and operate within much more benign regulatory regimes which, inevitably, gives them much deeper pockets than An Post. In view of all of those factors, we see a series of internal challenges that the company must now face and meet. We must transform the company to achieve major cost reductions and implement best practice. This means that throughout the organisation, we must reduce our costs, increase efficiencies, improve our financial performance, become much more customer focused and achieve greater flexibility in our operating model and in meeting our customers' requirements. We must enhance accountability and transparency through detailed regulatory accounts and we must measure and monitor our performance throughout the business at every level. These are all company-wide challenges but there are also challenges that present themselves in each of the areas of the company's operations and I will address those in turn.
Concerning company-wide challenges, currently there is a lack of strategic focus in An Post. This must now be changed if the company is to survive. There is a need for much greater integration and effectiveness of the organisation and changes have now taken place to deliver those results. In doing that, we must deliver and develop our true capital, which is our staff. Other utilities, whether they are telecoms or energy companies, have physical networks which are their asset base. The reality of the An Post business is that the asset base is the postman or postwoman who meets every one of our customers daily. That is our network and we must invest in it if we are to improve our service.
Currently, while there are high and unsustainable costs, we also face the task of improving and raising our customer standards. Regarding letter post operations, there is an escalating and unsustainable cost base which mitigates against our ability to maximise and increase revenues. This must be changed.
Regarding post office operations, there is a need for continuing cost reductions, while at the same time ensuring that we maintain the current revenue and maximise revenue growth in that business. Concerning SDS, which is our logistics business, we need to address the question of its continuing viability. Equally, we must look more closely at our subsidiaries as there is now an inability in An Post to fund any losses in subsidiaries.
The strategic, or recovery, plan, sets out to meet a very complex series of challenges and issues. It amounts to a fundamental restructuring of every aspect of the company's operations and the way it manages them. I will give the committee a broad outline of the main features of the plan. The principal objective of the strategic plan is to minimise losses, specifically in the latter quarter of 2003 and in 2004. Our objective is to break even in 2005 and we believe that the company can return to an acceptable level of profitability in the period 2006-08. In order for this to happen, we have identified a number of actions which must be undertaken.
There must be much greater strategic focus within the company. As part of that focus, there will be no further investment in new businesses outside the core investment and there will be no further international activities. We will need to sell a number of non-core investments. We plan to postpone action on an overall strategic alliance and it is our intention to withdraw from inappropriate activities as we identify them.
The organisation must become more integrated and considerably more effective. For this to happen, we have created a new slimmed down organisational structure. We have removed the group structure as well as the business unit structure and we have rationalised our senior management team. The true asset of An Post is its human resource potential. We must now fully realise that potential. To do that, we are creating a new centralised human resources structure. We intend to introduce training and education programmes to fully maximise the capability of the staff. A critical issue is to remove the "them and us" attitudes and practices within the company. In doing that, it is our intention to develop a partnership process that delivers through business results.
We have unsustainable costs and they must be eliminated. Consequently, we must obtain significant cost reductions in every part of the business. We are reducing corporate management by 20% in 2004 and will reduce it by a further 20% in 2005. That includes rationalising the IT services within the company and involves a reduction of approximately 120 staff in the headquarters areas. There is a need to sell surplus property and other surplus assets to assist in the funding of the cost reduction programmes. Typically, we will reduce property costs by €1 million per year. In addition, we will reduce discretionary spending and non-pay costs. Our target is around €10 million per annum in those areas. Management performance bonuses will not be paid until the company meets and reaches its targets.
This is a very extensive cost saving programme. Despite the projected cost savings which can be made within the business, the reality is that those cost savings will not deliver financial stability for An Post. In addition, we need to maximise the revenue within the company. To do that, we are introducing cost reflective pricing for non-USO and international mail services. There will be a need to submit an additional price increase request for An Post in 2004. We have established a task force to ensure that we maximise and protect the revenue that is already due to An Post. We are currently working within the company to develop and implement a range of new products and revenue initiatives.
Our customer standards must be raised. To do that, we must develop a culture of customer service to compete in the market. We will need to improve our service level performance on our next day deliveries. Moreover, we need to monitor and reduce queues in the post office business which is a source of potential growth within our business. Next year, we will introduce a customer charter which will include financial penalties for An Post where there are verifiable service deficiencies.
In the area of letter post operations, we need to revise the organisational structure. Currently, we are in the process of engaging with the unions to negotiate a staffing reduction of 1,350 and parallel productivity improvements. Capital expenditure will be all but eliminated within the business for the next two years. Non-pay cost reductions of the order of €6 million per annum are targeted. It is our intention to examine the prospect of introducing a contractor model and to look at product development proposals that would refresh and re-invigorate some of the business offerings from An Post.
In the area of post office operations, we need to continue and accelerate the post office rationalisation programme. We also need to continue the reduction of headquarters overheads and to reduce the discretionary spend and non-pay spend to the order of €4 million per annum.
We are considering the reallocation of the TV licence debt collection activities. We must reverse losses in, or close, any loss-making subsidiary. We are finalising proposals to the NTMA and to the Government to accelerate revenue generations from the savings products that we currently undertake. We must vigorously defend our social welfare contract as a very important source of income to the company. It is our intention to negotiate with financial services institutions to increase revenue and footfall through the retail business of the post office. We are looking at the non-core subsidiaries with the intention of selling off a number of those businesses.
It is important for us to develop a much deeper understanding of both the current and future business models for post office operations and postal services in Ireland. An Post traditionally has been the means of communication between governmental services and the population of Ireland. This was done mainly through letter post.
We believe that the company, given its brand position, trust and positioning in over 5,000 locations throughout the country, has the means and capability to take advantage of current technology change. We hope to be part of the new forms of communication, namely, digital, electronic and broadband. As regards SDS and our subsidiary businesses, we are exiting unprofitable business in SDS. There has been a significant improvement in the cost profile of the business through the introduction of the owner-driver model. We are now prioritising full implementation of the SDS restructuring plan and we continue to evaluate options for strategic alliances within the business. We are controlling and reviewing all our subsidiary company performances. We will sell non-core subsidiary businesses.
I believe An Post is now on the knife edge. There is very little scope for any slippage or adverse market developments for the company. The strategic plan must be implemented sooner rather than later. It is vital that the board, shareholders, regulator, management and unions recognise the risks and implications implicit in not implementing the plan. If progress in implementation is slower than planned or if there are more negative market developments than anticipated, then there will be a need for adjustments to the plan. The adjustments will impact on staff and customers.
An Post is an important company in Ireland. It provides services that are vital to both the economic and social fabric of the country. It is a major employer, providing jobs throughout Ireland. It provides universal services and at uniform prices, whether the customer is in Dublin, Donegal or Kerry. The company is in deep financial difficulties and its future is at risk. The company must solve its own problems by taking the actions that are necessary to achieve financial stability. The board and management have responsibility for ensuring that these actions are now taken and the results are achieved. In doing so, we act in the interests of the company, of our owner and customers and the staff.
