1. Railroads Overview of Railroads Railroad Problems Causes of Railroad Problems Solutions to Managerial Problems Resolution of Labor Problems Deregulation Government Promotion Mergers Operational Issues

2. Railroads Overview of Railroads Number of Class I RR (2010)7 Resources Miles of Road 95,700 Miles of Track 161,926 Miles of High-Density "A" Track 65,119 (20 million gross T-M/track mile/year) Locomotives in Service 23,893 Freight Cars in Service (January1, 2011) Class I397,730 Other RR101,755 Shipper & Car Companies 809,544

3. Railroads 2011 2012 Number of Railroads 7 7 Resources Miles of Road Operated Less Trackage Rights 95,514 95,391 Miles of Track Operated Less Trackage Rights 162,393 162,306 Miles of High-Density "A" Track Maintained *65,745 66,213 Locomotives in Service 24,250 24,707 Freight Cars in Service (Class I) 380,699 364,025 Other Railroads90,502 Car Companies and Shippers792,100 Employment Number of Employees 158,623 163,464 Average Wages $76,574 $78,085 Average Total Compensation Including Benefits $111,968 $112,600 * High-Density track has a freight density of at least 20 million gross ton-miles per track mile per year.

4. Railroads Overview of Railroads Traffic2009 2010 Carloads Originated (million) 26.01 29.21 Intermodal Units* (million): Containers 8.24 9.60 Trailers 1.64 1.68 Total 9.88 11.28 Tons Originated (billion) 1.668 1.851 Ton-miles (trillion) 1.532 1.691 Operating Statistics Freight Revenue Per Ton-Mile 3.011¢ 3.330¢ Average Tons Per Carload 64.1 63.4 Average Tons Per Train 3,546 3,585 Average Length of Haul (miles) 918.5 913.6

5. Railroads Traffic 2010 2011 2012 Carloads Originated (million) 29.21 30.00 28.37* Intermodal Units (million): Containers 9.60 10.19 10.73 Trailers 1.68 1.70 1.54 Total (see notes) 11.28 11.89 12.27 Tons Originated (billion) 1.851 1.885 1.760* Ton-miles (trillion) 1.691 1.729 1.713 Operating Statistics Freight Revenue Per Ton-Mile 3.330¢ 3.760¢ 3.961¢ Average Tons Per Carload 63.4 62.9 62.0 Average Tons Per Train 3,585 3,538 3,458 Average Length of Haul (miles) 913.6 917.2 973.2* Overview of Railroads

6. Railroads Financial 2010 2011 2012 Freight Revenue (billion) $56.3 $65.0 $67.8 Operating Revenue (billion) $58.4 $67.4 $70.1 Operating Expense (billion) $42.7 $49.3 $50.6 Net Income (billion) $9.2 $11.0 $12.0 Operating Ratio 73.1% 73.2% 72.1% Return on Average Equity 11.23% 11.13% 11.57% * Part of the decrease in originated tons and carloads was caused by new treatment of certain rebilled shipments, where traffic is now considered received instead of originated. The shift in traffic classification is responsible for the large increase in average length of haul. Overview of Railroads

7. Railroads Overview of Railroads Operating Statistics2009 2010 Freight Revenue Per Ton-Mile 3.011¢ 3.330¢ Average Tons Per Carload 64.1 63.4 Average Tons Per Train 3,546 3,585 Average Length of Haul (miles) 918.5 913.6 Financial Freight Revenue (billion) $46.1 $56.3 Operating Revenue (billion) $47.8 $58.4 Operating Expense (billion) $37.2 $42.7 Net Income (billion) $6.4 $9.2 Operating Ratio 77.8% 73.1% Return on Average Equity 9.79% 11.23%

8. Railroads Type of Freight Carried for Year 2010 Tons Gross Originated % of Revenue % of Commodity Group (000) Total (millions) Total Coal 814,467 44.0 $13,914 24.2 Chemicals & allied prod. 187,388 10.1 8,178 14.2 Farm products 158,705 8.6 5,281 9.2 Non-metallic minerals 122,525 6.6 1,817 3.2 Misc. mixed shipments* 109,895 5.9 7,121 12.4 Food & kindred products 109,320 5.9 4,794 8.3 Metallic ores 71,446 3.9 605 1.1 Metals & products 45,028 2.4 2,081 3.6 Waste & scrap materials 42,673 2.3 1,206 2.1 Petroleum & coke 42,369 2.3 1,771 3.1 Stone, clay & glass prod. 39,831 2.2 1,424 2.5 Pulp, paper & allied prod. 30,558 1.7 1,883 3.3 Lumber & wood products 24,616 1.3 1,252 2.2 Motor vehicles & equip. 21,353 1.2 3,402 5.9 All other commodities 30,822 1.7 2,708 4.7 Total 1,850,996 100.0% $57,438 100.0 %

9. Railroads 30.9% 42.7% 0.4% 13.1% 13.0% Trucks RRs Air (Dom) Oil PL Water U.S. Revenue Ton-Miles - 2007 Source: Bureau of Transportation Statistics

10. Railroads Railroad Problems Return on Investment Cost Recovery Index Ability to Attract Investment Bankruptcies Cost to the Public

11. Railroads Causes of Railroad Problems Historical Perspective Management Labor Regulation Promotion Changes in the Economy and Competition

12. Railroads Causes of Railroad Problems Management Labor Regulation Promotion Changes in the Economy and Competition

13. Railroads Causes of Railroad Problems Management Deferred Maintenance Payment of Large Dividends Poor Equipment Utilization Poor Customer Service Failure to Respond to Change Poor Labor Relations Poor Business Knowledge

14. Railroads Managements’ Solutions Hiring Business Graduates and MBA Less Promotion from within More Innovative Management Elimination of Holding Companies

15. Railroads Causes of Railroad Problems Management Labor Regulation Promotion Changes in the Economy Competition

16. Railroads Causes of Railroad Problems Labor Unionization Number of Unions Obsolete Work Rules

17. Railroads Causes of Railroad Problems Labor Number of Unions More than 20 Different Unions Virtually Every Craft Represented Constant Labor Issues

18. Railroads Causes of Railroad Problems Labor Obsolete Work Rules Yard Crews vs Road Crews 100 Mile Rule Crew Consists Typically 4 or 5 Person Crews Conductors, Engineers, Brakemen, Switchmen, Firemen “Lonesome Pay”

19. Railroads Resolution of Labor Problems Elimination of Cabooses Changes in Crew Consists Changes in Pay Scale

20. Railroads Resolution of Labor Problems Changes in Crew Consists 1990: Less than 10% had 2 Person Crews About Half had 3 Person Crews Remainder (40%) had 4 Person Crews Now: Mostly 2 Person Crews 8-10% 3 Person Crews Fought to Eliminate Firemen well into the 1990s

21. Railroads Resolution of Labor Problems Changes in Pay Scale 100 Mile Rule Eliminated in Late 1980s Went to 108 miles/day Then to 114 miles/day Since 1995 it has been 130 miles per day

22. Railroads Engineers$57,577$53,681$66,042$68,936$67,200$73,900 Conductors55,00250,89763,40362,21161,10067,100 Brakemen48,18645,76752,84057,30658,10058,700 Resolution of Labor Problems Average Wages 1990, 1996, 1999 199019961999 ThroughLocalThrough Local Through Local

23. Railroads Resolution of Labor Problems Average Wages 1990, 1999 (Yard Crews) 1990 1999 Engineers $41,574 $17/hr$61,400$25/hr Conductors 40,411 16/hr53,50022/hr Brakemen 35,589 14/hr40,80017/hr Hourly assumes 15% overtime.

24. Railroads Resolution of Labor Problems Average Wages February 2009 Average all25 th PercentileMedian 75th Percentile Rail Workers$35,627 $39,345 $43,083 Conductors/ Yard Masters$33,825 $41,664 $50,592 Locomotive Engineer$50,292 $60,878 $74,872 Average Compensation 2010 Average Wages $73,843 Average Total Compensation with Benefits $105,948

25. Railroads Causes of Railroad Problems Management Labor Regulation Promotion Changes in the Economy Competition

26. Railroads Causes of Railroad Problems Regulation Inflexible Pricing Abandonments Regulatory Delay Passenger Deficit

27. Railroads Solutions to Railroad Problems Deregulation 4-R Act (1976) Staggers Act (1980)

28. Railroads Solutions to Railroad Problems 4-R Act (1976) Rates Zone of Reason Market Dominance Merger Decisions (2.5 years)

29. Railroads Solutions to Railroad Problems Staggers Act (1980) Entry Exit (Abandonments) Exemptions Rates Zone of Reason Notice of Change Contract Rates No ICC Compelled Rates No Single Line Discussions San Antonio

30. Railroads Causes of Railroad Problems Management Labor Regulation Promotion Changes in the Economy Competition

31. Railroads Causes of Railroad Problems Promotion Too Little Help Too Late Unfair Promotion of Other Modes

32. Railroads Solutions to Railroad Problems Promotion Amtrak Conrail 3-R Act (1973) USRA 4-R Act (1976) Other

33. Railroads Solutions to Railroad Problems AMTRAK (Rail Passenger Corporation Act of 1970) Benefits of Joining Amtrak Relieved of Common Carrier Obligation to Serve the Public Deduct Portion of 1969 Deficit from Taxes or Accept Stock in Amtrak Cost to Join Amtrak Pay Cash Provide Equipment Provide Future Services

34. Railroads Causes of Railroad Problems Management Labor Regulation Promotion Changes in the Economy and Competition

35. Railroads Causes of Railroad Problems Changes in the Economy Shifts in Industry to Sunbelt Inflation Demand for Smaller, Faster Shipments

36. Railroads Causes of Railroad Problems Competition Intramodal Excess Capacity (Overbuilt System) Excessive Use of Differential Pricing Intermodal Motor Carriers Pipelines Barge Operators Passenger Services (Private Auto/Airlines)

37. Railroads Solutions to Railroad Problems Attempts to Recapture High Value Traffic Intermodal Double Stacking Dedicated Trains Improved Performance Return of the Boxcar

38. Railroads Solutions to Railroad Problems Mergers Economics of Mergers Side-by-Side End-to-End Economies of Scale Economies of Density Economies of Distance Recent Mergers

39. Railroads Solutions to Railroad Problems Recent Mergers Penn Central (Conrail) BN-Frisco (BN) UP-MP-WP (UP) Chessie-Seaboard (CSX) NW-Southern (NS) SF-SP (Proposed - Not Approved) BN-SF (BNSF) UP-SP (UP) Conrail Carve-Up (Parts to CSX and NS) BNSF – CN (Withdrawn)

40. Railroads Solutions to Railroad Problems Conrail Created by Merging Bankrupt Railroads in the Northeast Penn Central Lehigh Valley, Lehigh and Hudson River Reading Central of New Jersey Erie Lackawanna Boston and Maine

41. Railroads Other Solutions to Railroad Problems Total Nationalization of the Rail Industry Nationalization of Roadbeds Open Access

42. Railroads Nationalization of Railroads Advantages Greater Source of Capital Works on Public Need Rather than Profit Better Planning and Coordination Elimination of Duplicate Facilities May Lead to Lower Rates for Shippers May Lead to Improved Service

43. Railroads Nationalization of Railroads Disadvantages Lack of Profit Incentive Leads to Inefficiency Political Decisions are not Always Rational Loss of Tax Revenue May Lead to Discrimination Toward Other Modes May Lead to Over Employment Retain too Much Unneeded Track