Illustration: Rocco Fazzari.

Illustration: Rocco Fazzari.

Australia Post chief executive Ahmed Fahour argued ahead of the budget that the Abbott government should plug a profit and cash-flow leakage at Australia Post by employing the group's retail network as a new government processing hub.

He didn't get what he wanted in May, but any thoughts that the government isn't focusing on Australia Post's looming financial squeeze were dispelled by Communication Minister Malcolm Turnbull on Tuesday.

Turnbull told CEDA's national annual conference in Canberra that reform was disruptive. It was always likely to be resisted by those affected adversely by it, and therefore needed to be carefully and methodically prepared.

It was a several step process, he said, involving ''telling the truth'' to make the problem explicit, providing ''authoritative third party verification'', arguing the case for reform until political and community consensus emerged, and finally, producing a ''consistent and coherent'' solution.

Turnbull then ticked off the first two boxes for Australia Post. The group was headed for ''a sea of red ink, and ultimately ruin'', he said, before going on to outline the problem with the help of a government-commissioned report on the group's regulated letters business by Boston Consulting.

The report estimates that on the current settings, losses in Australia Post's letters business will overwhelm parcel post and delivery profits as early as next year, as declining letter delivery volumes erode postage and letter revenue, and costs that are 80 per cent fixed remain high.

Cumulative losses in the next decade could be $12.1 billion in the letters business and $6.6 billion for the group, the report calculates.

Turnbull elaborated on Finance Minister Mathias Cormann's earlier statement in an estimates committee hearing that the government's search for deficit reducing cash doesn't extend at this time to a privatisation of Australia Post.

The group has paid a dividend to the government every year since its corporatisation in 1989, and paid dividends totalling $966 million in the past five years.

On the current regulatory settings it is poised to move onto losses and stay there, however, and Turnbull says it must be turned around before privatisation can be contemplated.

The parcels business is profitable in its own right, and a potential partial privatisation sale candidate. Fahour (who also spoke at the conference) has spent $600 million to expand it, and has doubled its earnings in 3 years.

Turnbull noted however that growth in online retailing that pumps up parcel volumes has slowed, from 26 per cent in 2012 to 14 per cent last year. Competitors have also been crowding in to get a piece of the internet retailing boom. After growing by about 9 per cent last year, Australia Post's parcels business would only grow by about 1.5 per cent this year, Turnbull said.

More importantly, selling the parcels business on its own or with the letters business included, but covered by some form of government subsidy, would, on the current policy settings, leave the government exposed to the part of the business that was in trouble. ''Who is left to pick up the tab for the retail network and the declining letters business?'' Turnbull asked, adding: ''Getting a privatisation cheque in one hand and a continuing and growing claim on government subsidies in the other is not very appealing.''

Doing nothing was another option in theory, he said, but one that would be considered, because subsidising growing losses was a bad use of taxpayer money.

The Boston Consulting report discusses remedies including postage price rises, three day-a-week deliveries, and premium pricing for five-day delivery. In his speech, Turnbull also mentioned Fahour's pre-budget pitch, for Australia Post to have an expanded role as a government super-teller, processing payments to agencies that issue licences, for example, and distributing payments to the public from agencies such as Centrelink and Medicare.

Getting agreement about the nature of the problem and remedies is Turnbull's first priority, however.

He noted that there is already bipartisan political support for change. Labor is unlikely to stand in the way of reform that gives Australia Post a future.

There is less public agreement about remedies.

In an Australia Post survey, an average of only 5 per cent said they were willing to pay $25 a year to retain current service levels. Older customers are the least likely to pay for the current five-day-a-week delivery service, and the most strongly opposed to a reduction in delivery frequency.

Boston Consulting concluded that the survey results were evidence of over-service. Willingness to pay was a reasonable proxy for the true level of customer need, it believed.

Turnbull wants general agreement that reform is needed and a consensus on remedies before he acts.

That's the right course, but it probably means Australia Post will be on losses before it gets fixed, and that a privatisation sale is years away.

mmaiden@fairfaxmedia.com.au