I thank the Chairman and members of the joint committee for giving us the opportunity to attend these proceedings. I express the gratitude of the company for the committee's support and interest in recent years during which An Post has had to deal with a number of difficult financial and business issues. It has taken a great deal of work and commitment to create this proposition and bring a financial institution of the calibre of Fortis to Ireland to develop it. I pay tribute, in particular, to our commercial director, Mr. Derek Kickham, and his team for the enormous effort they have put into the project.
There has been some comment in recent times, to say the least, about the financial performance of An Post. It would be helpful to bring the committee through each stage of the journey involved in bringing the financial crisis under control. The financial difficulties did not start in 2003; they began to emerge over two years earlier in 2001 when the company recorded an operating loss of €6.7 million. In 2002 the losses deepened to €17.4 million. At the end of that year An Post set a budget for an operating loss of €15.3 million and a group profit of €1 million in 2003. This budget was based on optimistic assumptions in regard to mails volume growth, the performance of the parcels business, cost reductions arising from change agreements and the implementation of price increases. By the early months of 2003, however, it became clear that the financial position was deteriorating and by mid-year that it was reaching crisis proportions.
When I took over as chief executive in July that year, with the agreement of the shareholder, I carried out an in-depth analysis to establish the company's financial position. This exercise was completed over a four week period and the results showed that the financial circumstances were worse than thought and that the company was in full-blown crisis and heading for an operating loss of €50 million. The committee will be aware that, in the light of this financial position, the Minister sought a recovery plan to be submitted to him within four weeks — by end of September 2003. It was submitted on 28 September, following its approval by the board. Its essence was that the company would be brought back to modest profitability by 2005, through a comprehensive, detailed programme based on the achievement of cost reductions, revenue growth, including price increases, and asset disposals. The committee will also recall that by late 2003 An Post's cash resources had been completely exhausted and that a key priority was to generate a sufficient cash resource to enable it to meet its needs in terms of the voluntary severance-early retirement programme to which it had committed, capital expenditure requirements which were necessary and ongoing working capital.
In the immediate aftermath of the finalisation of the recovery plan the priorities were to minimise losses in 2003 and engage in discussions with the trade unions, with the objective of delivering agreement on programmes for change and cost reduction. The immediate cost reduction measures were successful in reducing the level of operating losses to nearly €42.9 million for the year, a catastrophic loss but, nevertheless, an improvement on the situation in the middle of the year.
Unfortunately, despite much effort in terms of engagement with the CWU, including intensive month long talks starting in mid-November, the union broke off the talks just before Christmas and, despite efforts to re-engage early in the new year, refused to return to the table. It then commenced industrial action through a series of disruptive disputes. In the absence of agreement on the implementation of major change and cost reduction programmes management was then required to implement measures to reduce costs significantly. While these were wide-ranging, they centred on reducing staff numbers by way of restrictions on recruitment of new and replacement staff; curtailment of overtime; absolute minimisation of non-pay expenditure and the elimination of non-essential capital expenditure. The measures also involved the company pleading inability to pay the terms of Sustaining Progress on the basis that its ability to fund the pay terms of the agreement was inextricably linked to the cost reductions required arising from major change agreements with the unions.
As 2004 progressed and the months passed in the Labour Relations Commission with little or no progress on reaching agreement with the CWU, it was clear that further decisive actions were necessary to reduce costs substantially. As a consequence, the board approved the closure of the SDS parcels operation following detailed examination and recommendation by management in July that year. The net result of the cost cutting decisions and actions, combined with the revenue effect of the price increase approved in autumn 2003, was that the company returned a small operating profit of €1.7 million and a group profit of €7 million in 2004. It should be noted that if the terms of Sustaining Progress had been paid, the result for the year would have been an operating loss of in excess of €18 million. The cash position had also improved significantly as a result of management's actions and the company ended the year with cash reserves of €90 million.
The committee will be aware that through 2005 the industrial relations machinery of the State expended significant effort in an attempt to move the CWU to a position where it could deal with the realities of the financial and business circumstances of the company. As I advised the Chairman in June that year, the assessors appointed by the Labour Relations Commission completed what they described as a painstaking examination of the An Post accounts and reported that "securing finalisation on rationalisation and restructuring requirement was essential to enable the company to achieve a position where it could pay the terms of Sustaining Progress".
The Labour Court appointed an expert group to examine in detail the company's proposals for change in the collection and delivery operation and issue a report. By mid-July the court issued its recommendations on the Sustaining Progress and collection and delivery change programme issues. These recommendations were accepted by the company but, unfortunately, rejected by the CWU. In the circumstances the company had no option but to continue with its cost cutting programme throughout 2005. The board and management would have preferred to have been operating on the basis of a change programme that was structured and planned having been agreed with the CWU.
By mid-2005, the closure of the SDS operation was completed and the parcels operation fully integrated into the standard mails activities, yielding significant cost reductions throughout the remainder of the year. Together with other cost-cutting actions, this enabled the company to achieve an operating profit of €16 million for the year ending 31 December 2005, even with the pay increases under Sustaining Progress. The group performance for the year was significantly enhanced by the proceeds from the sale of two companies — the An Post E top-up companies in the UK and Spain — which yielded once-off profits in excess of €60 million. The successful conclusion of those transactions, on favourable terms, also boosted the company's cash reserves.
While the journey from the financial crisis of 2003 to a position of relative stability at the end of 2005 has been an arduous one, nevertheless, it demonstrates what can be achieved by people in the company when they work together in the interests of that company — particularly a company which provides them with their living.
I was recently asked to summarise the factors which enabled the company to transform the crisis of 2003, with operating losses of nearly €43 million to the modest operating profit of €16 million in 2005. My answer was simple — we cut annual costs by €54 million in little over two years. At the same time, we achieved a modest 5% price increase of the order of €30 million. Staff costs were reduced by €31 million and non-pay costs were reduced by €23 million. Therein lies the answer to the question.
As the committee is aware, I will be finishing my term as chief executive on 13 July, having completed my contract. As I take my leave, there are a number of thoughts which I would like to share with the committee concerning the future of An Post. First, I repeat what I said at the outset — An Post now has a breathing space and it is essential that the opportunity it creates is utilised to have a debate of real substance between all stakeholders, so that the road map for the future will be set and all parties know what they have to do to fulfil their responsibilities both to the company and the services it provides.
An Post now has major change agreements signed with all the trade unions in the company. I cannot overemphasise to the committee the importance of delivering these agreements. Without delivery, particularly from the CWU, An Post will suffer major financial and business damage which will inevitably drag it back, at least, to the dark days of 2001 to 2003.
The financial services joint venture with Fortis, if successfully completed, has the potential to create a vibrant future for post offices around the country and to bring a real dynamism to An Post as it embarks on a new and exciting venture. I urge committee members to consider the importance of this development, not only for An Post but also for society in general, and to lend their full support to it.
I wish to thank the Chairman and members of the committee for their attention. I will be happy to answer any questions they may have.
