AN Post has delivered the profits, but now it must deliver a competitive cost base. In less than three years, the market will be liberalised and An Post could face intense competition from leaner, fitter European operators vying for a slice of the lucrative business market.

Liberalisation will bring a range of changes, including compelling post offices to provide a universal service of a specified quality at affordable prices to all.

An Post's spiralling cost base with operating costs rising by over 7 per cent to £308 million - clearly underscores the gravity of its situation. A previous attempt to reduce staffing levels, currently at 8,000, by around 1,500 employees met fierce resistance from the unions and was abandoned.

An Post's chief executive, Mr John Hynes, argued yesterday that the postal business is a people business, hinting that the previous bruising encounters between management and workers were not the way to proceed now.

Last year, EU liberalisation plans were deferred for a year, plans which Mr Hynes said could have opened up around 35 per cent of the market.

Already European operators are gearing up for competition. Mr Hynes pointed to the now privatised Dutch post office (which was bought by KPN, the Dutch national telecoms company). It has bought the worldwide TNT business. "This is sending a shiver down the spine of all European postal companies," he said.

The reason is that the Dutch company is a private, very efficient operation with access to world markets and financing, combining a postal service with a firmly established international courier service. It gives the company a powerful presence in a liberalised market.

Competitors would be most likely to target the big towns and cities. The issue of what approach should be taken to providing rural services, which are very expensive, would also have to be resolved.

An Post is vulnerable and still has problems convincing the public that its service is adequate - especially in Dublin. Independent research confirmed that 92 per cent of all letters were delivered the next day last year. An Post would like to attain 95 per cent.

It wants all business post delivered by 9.30 a.m., with residential deliveries by lunchtime.

Mr Hynes argues that in most European countries businesses collect their own post and the post men do not leave the sorting offices on deliveries before 9.30 a.m. "In a small country it is feasible to have next day deliveries," he says.

He also believes the pricing structure for postal services is wrong. The company has no plans to increase the cost of letters, because they are still quite high compared to Britain, for example. The company admits that a reduction in revenue could have disastrous effects on its bottom line, because margins are so tight.

An Post has begun to implement changes, especially in the management structure, as recommended by a Price Waterhouse report, and has continued to invest in new technology. To its credit, it has realised that the electronic path is the one to follow and has bought Ireland's biggest Internet provider.

However, Mr Hynes discounts the notion of a strategic alliance, not in the medium to long term".

It could be that events will overtake An Post and it will have no choice in the matter.