1. Finding New Revenue Sources in a Down Economy How NS short lines can enhance their customers’ competitive advantage Norfolk Southern Short line Conference, Brosnan Forest, April 2009 Roy Blanchard, The Blanchard Company Railway Age Contributing Editor TRAINS Contributor

2. March 18, 2009 www.rblanchard.com 2 Agenda Infrastructure and Equipment –Classifying NS short lines –Be careful what you ask for Trends Going Forward –“Heat and eat” –Consolidation and abandonment Markets and Competition –Creating a shortline niche –Understanding the customer perspective The Smarter Railroad –Asset productivity –Doing more with less

3. March 18, 2009 www.rblanchard.com 3 The purpose of any business is to create customers. -- Peter Drucker Customers will increasingly focus on the complete door-to- door trip. -- Dr. Joe Giglio, Mobility

4. March 18, 2009 www.rblanchard.com 4 Where the Short Lines Live: Infrastructure and Equipment Track and power good to marginal or worse Some “one-trick ponies” Over-reliance on grants or subsidies to exist –Some cut-backs already –“Stimulus” unclear Financial strength varies Handling lines and switch carriers volume-dependent Staged accident, NC, 1996 Reading & Northern Open House, Sep 2008

5. March 18, 2009 www.rblanchard.com 5 Where the Short Lines Live: Good Track Equals Competitive advantage Short Line, Virginia, 2006 NKCR, Nebraska, 2005

6. March 18, 2009 www.rblanchard.com 6 Where the Short Lines Live: Classifying NS Short lines by Ownership More than 250 names Holding companies: G&W, RA, Watco, G&O Individually owned, unaffiliated –Strong stand-alones –Marginal properties S&Ts – BOCT, IHB, TRRA, CSAO Joint ownership with another Class I: WSSB UP, Gibbon, NE, 2005

7. March 18, 2009 www.rblanchard.com 7 Where We are and What’s Coming: Ownership Trends in 2009 and beyond Strong unaffiliateds bought by holcos with economies of scale and marketing savvy Merch service in single- car lots of low-rated commodities going away Financially weak names are at risk “Heat and eat” here to stay NKCR, Nebraska, 2005

8. March 18, 2009 www.rblanchard.com 8 Where We are and What’s Coming: Service Merch carload service improving Focus on service to improve volumes, revenues, or both Customer and market segmentation Scalpel, not a meat ax Maine 2-foot gauge, 2008

9. March 18, 2009 www.rblanchard.com 9 Is the business model profitable and growing? It must be for both to prosper Customer/Railroad Yes/Yes A winning combination. Nurture and grow. No/Yes Going out of business sale? Using the RR because he can’t afford trucks? Kill Yes/No Can go either way. Why are you losing share? Can you recover margin and share? Grow or kill, depending. No/No Dead meat. Run, do not walk, to the nearest exit.

10. March 18, 2009 www.rblanchard.com 10 Cash Cow or Sacred Cow? Milk the cash cow, kill the sacred cow Revenue- cost ratio Volume HighMediumLow HighCash MediumCashDependsSacred LowCashDependsSacred

11. March 18, 2009 www.rblanchard.com 11 Markets and Competition: Creating a Shortline Niche Marcellus Shale formation in Pennsylvania 353 new drilling permits –300 tons frac sand in 100- ton PD hoppers –200 pieces casting pipe in OT gons, 150 per car Transmission pipe 24-42” diameter on TTX flats –Up to 20 sections per car –Arrives in 20-car cuts Natural gas pipe, Lycoming Valley RR, 2008

12. March 18, 2009 www.rblanchard.com 12 Markets and Competition: Creating a Shortline Niche Create a bypass –Offer a 40 mph RR to parallel the Class I’s 60 mph core route –State grants, RRIF loans Expand service offerings –Local service –Transload –Bridge traffic Western NY & Pa first run

13. March 18, 2009 www.rblanchard.com 13 Markets and Competition: Creating a Shortline Niche INRD increases unit train to 100 cars from 65 cars for utility –New aluminum cars –286 vs. 263 –New SD90 MACs –Same tonnage with 45% fewer trains –Increased available track capacity –Lowered operating expense

14. March 18, 2009 www.rblanchard.com 14 Markets and Competition: Understanding the Shipper Perspective We need our shipments on time every time; easily as bad as late We need an end to transit L&D We need an end to RR-caused demurrage problems We need to have the right car in the right place at the right time We need total shipment visibility door-to-door We need a quality product on a consistent basis Everything else is irrelevant N&W, Waverly, VA, late 1950s

15. March 18, 2009 www.rblanchard.com 15 The Smarter Railroad: Doing More with Less Use technology to produce more revenue per asset Increase throughput on existing corridors – short lines as alternate routes? Price to the market but contain costs Match service design to customer supply chain The smart and nimble will prosper. DM&E, South Dakota

16. March 18, 2009 www.rblanchard.com 16 Rule 99 in Effect. Hope you enjoyed the ride. NYC, Briarcliff Manor, NY July, 1954

17. March 18, 2009 www.rblanchard.com 17 Personal Savings Rate http://research.stlouisfed.org/fred2/series/PSAVERT