Ian Lee is an associate professor at the Sprott School of Business, Carleton University

Open this photo in gallery Striking Canada Post workers form a picket outside a mail facility in Toronto, Ont., on Nov. 21, 2018. CARLOS OSORIO/Reuters

After spending the weekend studying back-to-work legislation, Canada’s Senate will continue the discussion Monday. Whether or not postal workers are mandated back to work, the deeper, existential structural problems facing Canada Post will not be fixed.

Since the middle of the last decade, as with other industries including financial services, retailing and entertainment, Canada Post has experienced profound digital disruption.

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Letter mail, which was the core product of Canada Post since its inception and accounted for over 75 per cent of volume historically, has fallen by 2 billion pieces annually or more than 40 per cent from its peak in 2006 – and continues to decline 5 per cent to 7 per cent annually by volume. Yet, it still accounts for almost half of revenues. The financial loss is compounded as letter mail is more profitable with margins of 47 per cent relative to the much smaller margins on parcels of 29 per cent.

The good news for Canada Post is that parcel delivery has exploded due to the phenomenal increase in e-commerce sales. Parcel revenue increased by over $400-million between 2011 and 2015 and reached the $2-billion mark last year.

However, the displacement of letters with parcels masks a deeper set of structural issues facing Canada Post and the transformation to a parcel-delivery firm. The business model that underlies parcel-and-courier delivery firms is radically different from traditional postal systems.

The traditional postal system was granted a monopoly over delivery of letters by Parliament. The corresponding responsibility – called the universal service obligation – mandated daily delivery to every residential and business address in the country at a uniform price “regardless of distance or destination.” Letter-carriers must deliver mail to every one of the 16 million addresses in Canada five days a week, 52 weeks a year.

Open this photo in gallery Striking Canada Post workers gather by a fire while picketing outside a mail processing plant in Ottawa, Ont., on Nov. 23, 2018. CHRIS WATTIE/Reuters

In contrast, the business model of parcel-delivery firms requires delivery of the parcel to the customer – if and when – there is something to deliver. This business model demands a much smaller work force that is structured, organized and compensated very differently.

Canada Post is transitioning from a postal service that delivers parcels on the side to a parcel-delivery firm that delivers letters on the side. Yet, it faces significant barriers to transformation to parcel delivery.

The largest barrier is the universal service obligation that mandates daily delivery to every address in Canada. While letter volumes are collapsing, the number of addresses grows yearly – 1.9 million more since 2006.

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Labour costs at Canada Post are much higher in comparison with private parcel firms operating in Canada. According to a 2016 report titled Canada Post In The Digital Age, inside workers are paid 44 per cent more in salary and benefits. When measured in labour rate per productive hour, that is 66 per cent higher than private competitors.

The report also found outside delivery workers are paid 11 per cent higher in salary and benefits while their labour rate per productive hour is 26 per cent higher than private competitors. Finally, benefit costs across the board are 60 per cent higher at Canada Post relative to private parcel competitors.

Related to these issues is the unfunded pension liability of Canada Post of $6.4-billion. Canada Post was granted a pension payment holiday by the previous federal government, which was renewed by the current government. Sooner or later, pension payments must recommence, which will likely drive Canada Post deeply into the red, given that it makes less than $200-million profit annually on revenues of over $8-billion.

Another cause for concern is the changing geography of where Canadians live as the country has become overwhelmingly urban and suburban. Yet there are still over 2,500 offices in rural areas of Canada (or 40 per cent of all post offices) serving only 4.4 per cent of all addresses. A 1994 moratorium on rural and suburban post office closures affecting 3,600 post offices prohibits shutting down or consolidation of most of these offices, thereby preventing restructuring to transform Canada Post.

In addition, over four million Canadians have door-to-door delivery – vastly more expensive than community mailboxes – guaranteed by the federal Liberal government, again preventing restructuring of the distribution network.

The strategic issues facing Canada Post cannot be addressed at the bargaining table but require policy decisions by the shareholder – the government of Canada – and approved by Parliament.

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If these issues are not addressed, Canada faces the real possibility of creating a Potemkin postal system with large numbers of postal workers walking the streets of Canada to deliver non-existent letter mail every day to 16 million addresses that no longer mail letters.