The economic downturn has exposed weakness at the heart of An Post, writes Arthur Beesley

An Post's problems refuse to go away. The State company's failure to implement crucial savings agreed with staff in 2000 will contribute to losses of about €30 million (£23.6 million) forecast this year.

This is in addition to an operating deficit in 2001, believed to have reached about €7.2 million.

While An Post has cash reserves of about €203 million, there is every reason to be alarmed by its deteriorating performance. Yes, its managers have entered innovative deals with the commercial banks to boost what is an ailing business. But difficulties elsewhere are mounting.

The crisis is no longer confined to rural and urban post offices, which are forecast to lose €100 million by 2005. With the economic downturn now well under way, weakness at the heart of the organisation has been exposed.

Conscious of its increasingly fraught financial situation, the company sought a 30 per cent increase in international mail tariffs last April. Yet no direction on prices has yet been made by the telecoms regulator, Ms Etain Doyle, who has monitored the postal business since last year. When An Post made its submission, it also signalled that it wanted an increase in domestic postal tariffs. This would be sought only after a decision was received on the international tariffs, it said.

None was forthcoming. Ms Doyle was believed to be reluctant to assess international tariffs in isolation from domestic prices. Thus, An Post's application last month for a seven-cent increase in domestic tariffs to 45 cents, from 38 cents, could be seen as something of an about-turn. Ms Doyle's spokeswoman yesterday said proposals to increase prices for "some" services would be published shortly.

Only then will it be possible to make comprehensive projections for An Post's business this year.

But there are other problems. The company returned an operating profit of €13.8 million in 1999, with profit margins of 2.5 per cent. Such margins were described by An Post's chief executive, Mr John Hynes, as "completely inadequate".

To address the problem, the company agreed an employee share option plan in April 2000. Workers were to be granted 14.9 per cent of the company in return for work practice changes. These were designed to deliver an increase of 7 or 8 per cent in operating profit margins - and €34.28 million in savings by 2003.

Yet operating profit margins actually fell in 2000 to 1.7 per cent, when a day-to-day profit of €9.8 million was reported.

According to one informed figure, "virtually none" of the transformation plan was delivered. Thus operating profit margins disappeared altogether last year. It is understood that provisional accounts for the year show an operating deficit of about €7.2 million for 2001.

No surprise then that the company wants "accelerated" cost savings this year. Yet cutting the overtime bill will cost money. It is understood that the €30 million deficit includes a significant allocation to pay for work practice changes not delivered since 2000.

To be fair to An Post, not all of the crisis can be put down to internal failures. While postal volumes increased during the boom, the slowdown last year bit into revenues. While year-on-year volumes were rising by 7 per cent in the first half of 2001, the rate of increase diminished to 3 per cent in the second half.

The boom also delivered pay rises for workers in the Programme for Prosperity and Fairness. An informed figure said the company was unlikely to cancel the increases, but it was obliged to cough up at a bad time. Chief among the company's immediate difficulties is its strained relationship with the telecoms regulator, Ms Doyle. An Post is challenging in the High Court a €2.5 million regulatory levy imposed by Ms Doyle. The regulator is expected to defend the action.

In the meantime, the company has entered talks on a severance deal for postmasters represented by the Irish Postmasters Union. This process follows the Government's refusal last year to subsidise the network. The deal under discussion would see salaried postmasters paid a severance lump sum. If agreement is reached, many smaller post offices are expected to close in the medium term. This is unlikely, however, to reverse the fundamental problems facing the business.