Today’s winner of the Stupid of the Week award on my Newstalk1010 talk show is Canada Post. Management of the independent but publicly-owned (and politically protected) corporation and its union,
Canada Post has been a Crown Corporation since 1981 – an independently operated corporation that is wholly owned by the government of Canada. Further, it has a state-mandated monopoly on the distribution of “Letter Mail” in Canada – no one else may legally provide this service – and a government mandate to provide universal service for Letter Mail to all addresses whether they’re in downtown Toronto or on the barrens of the high Arctic.
As you may expect, the demand for Letter Mail has been dwindling as people have moved online, sending emails instead of letters; adopting electronic banking instead of receiving paper bills from utilities and dispatching paper cheques by mail to pay them. That said, there’s still a lot of Letter Mail being delivered: 3.4 billion pieces, in fact, last year. But, that’s down 32 per cent since 2006. The cost to mail a letter is a flat $1 for most pieces, whether it’s delivered across the street or from Vancouver to Newfoundland, six time zones away. As you may imagine, the actual cost to deliver letters to those destinations is markedly different. In fact, it’s hard to imagine making a profit on a $1 delivery charge to deliver the letter across the street. Clearly, the economics only work with massive volumes and extremely efficient operations.
To keep its Letter Mail business affordable, Canada Post introduced a controversial five-point plan in 2013 that involves: ending door-to-door mail delivery and replacing with it centralized community “super boxes;” introducing tiered-stamp pricing that encourages you to buy more stamps to get a volume discount; expanding the role of franchising; streamlining its operations and reducing labour costs. The latter is key as the cost of employee benefits increased $189 Million (17.6 per cent) in 2015 alone.
Overall, Canada Post is profitable – a fact pointed out be CUPW National President Mike Palacek when he appeared on my Newstalk1010 show on April 24, 2016. But, it’s just barely profitable. Financial statements released for 2015 show the corporation made a net profit (after tax) of $99 million. That’s a lot of money, but it represents a net profit of just 1.2 per cent of gross sales. That’s pretty slim for a business that intends to keep on operating. And, it’s less (by half) than the 2.5% profit Canada Post generated the year prior.
Parcels driving profit at Canada Post
Canada Post delivers more than just mail. It also delivers parcels and the explosion of online shopping has been a boon to the postal service. Revenue from parcel delivery in 2015 was up 9.1 per cent over the year before and is keeping the business afloat.
What happens if there’s a work disruption at Canada Post?
Whether it’s a union-driven strike or a management-initiated lock out, all work will cease. Letters will stop – which will hurt the magazine industry, small businesses (who often get paid by cheques sent through the mail) and some pensioners and others living on social benefits who don’t have direct banking, though this latter segment has grown very small in recent years. This is a segment where the post office has a government mandated monopoly – so no one will step in to replace their service, consumers will simply have to suffer through. It’s a shrinking market and will just shrink faster, further hurting Canada Post’s ability to make it sustainable.
Canada Post’s parcel deliveries – its own and those of Purolator, a national courier company which it owns – will stop. This is a big problem for the postmaster, because this is the only really profitable business Canada Post is in. And, it’s a highly competitive market at the local, national and global level. While Canada Post sits idle, courier companies ranging from Mom and Pop local services to global behemoths such as FedEx, UPS and DHL will steadily eat into Canada Post’s lucrative market share. When Canada Post reopens, it’s share of the market will be substantially smaller – and there’s no reason to think they’ll be nimble enough to earn it back.
So, if cooler heads don’t prevail, and Canada Post is plunged into a work stoppage, the corporation will essentially be slitting its own throat. Are they smart enough to understand that? Probably. Will their egos withstand the step-down required to avoid it? That’s the big question.
The pension problem
Canada Post wants newly-hired employees to receive a Defined Contribution pension plan – like the one most businesses with pensions offer their employees. It’s fully funded by the employee and employer and provides the employee with a pension based on her own contributions and the re-invested earnings in her account when she retires. Currently, Canada Post employees have an old-school Defined Benefit pension – where employers and employees contribute to a pension fund, and employees are guaranteed a pension on retirement equal to a proscribed percentage of their former income. These plans periodically require a “top up” – usually from the employer – to ensure there’s enough money in the bank account to pay all the pensions.
With thousands of baby boomers set to retire, and with Canada Post expecting to slim down its work force, there is a very real question whether there will be enough future employees paying into the pension fund to be able it to pay all the future retirees drawing pensions out of it. So much so, that pensions law requires Canada Post to make a $9.4 Billion top up to the pension account to make sure it’s fully funded. Remember, this is from a company that cleared $99 million last year. That’s well shy of $9.4 Billion!
The simple fact is there is not enough money on Earth to continue offering Defined Benefit pension plans to employees anywhere, the way government and business used to do when baby boomers were young. That’s why most solvent companies long ago discontinued them and migrated their employees to sustainable Defined Contribution plans. Trying to sweeten the deal, Canada Post is offering to continue providing the Defined Benefit plan to existing employees, but wants to move new employees to a Defined Contribution plan. CUPW says it would be unfair to have two different types of pensions for employees doing the same jobs. In any case, neither what the union wants – or what management is offering – is affordable or sustainable.
Some Facts & Figures about Canada Post
- Crown Corporation since 1981. Before that it was part of government.
- 64,000 employees in all its companies (incl. Purolator, etc.)
- 2015: Handled 9 billion pieces of mail, including 3.4 billion pieces of domestic Letter Mail – down 32% from 2006.
- 2015: Parcels revenue up 9.1% since 2014.
- 2015: Employee benefits costs up $189 MM or 17.6% since 2014.
- Net Profit: $99 MM in 2015, down from $198 MM 2014
- Gross Revenue: $8,006 MM in 2015, up from $7,982 MM in 2014.
- Net Profit: 1.2% in 2015, down from 2.5% in 2014.
- Pension solvency deficit to be funded: $9.4 Billion