July 2009 Transportation Market Outlook Noël Perry Principal Transport Fundamentals 1

Freight recessions last a long time. The big issue is cumulative damage. We are in our 15 th quarter of freight recession. 2Transport Fundamentals Sources: FTR Associates, Transport Fundamentals Truck Recession

Small guys have always been hurt disproportionately in recessions. Source: RLPolk, Mack, Transport Fundamentals Small fleets are the swing carriers. 3

1982 – 20.3% x 14Q Sources: Transport Fundamentals Length In Quarters Depth Peak To Trough % % x 4Q It is not, however, the worst freight recession. The heavy industrial involvement in 1982 had a bigger transport multiplier % x 12Q 2009 – 15% x 13Q

It follows that capacity utilization is very low, well below the levels of the last two recessions. It is below the ‘82 number because of the 2006 overbuy. 5Transport Fundamentals Sources: FTR Associates 1982

What happens to margins? We are approaching the temporary minimum now. Sources: Transport Fundamentals Transport Fundamentals 6

This sentiment is reflected in purchasing. Sources: FTR Associates Replacement Transport Fundamentals7 This is the first time that sales have been below scrappage since 1982.

Are we in the next phase yet? If so, how long will it last? 8Transport Fundamentals Sources: Transport Fundamentals

9 We have credible signs of a bottom in the majority of indicators. Source: Transport Fundamentals To have a recovery you must reach bottom first. Retail Sales Auto Sales Single Family Starts PMI Inventories IS Ratio Unemployment Gasoline Prices Credit Conditions Stock Market Industrial Production Export Containers China Consumer confidence Now 3 Months Ago

10 How long do bottoms last? Source: Transport Fundamentals Results jump around during bottoms.

When will the recovery start and how strong will it be? The recovery is when freight really accelerates. 11Transport Fundamentals Sources: FTR Associates, Transport Fundamentals

Transport Fundamentals12 This recession has been consistent with the banking failure data. Source: IMP, FTR Associates, Transport Fundamentals The latest FTR forecast has the same recovery lengths but somewhat higher growth. In the second year that counts.

Transport Fundamentals13 The banking failure scenario leaves the trucking sector weak through Source: IMF, FTR Associates, Transport Fundamentals The pain will continue for a full year longer than the current FTR forecast.

Transport Fundamentals14 The upside case - markets do recover!. Source: FTR Asssociates,Transport Fundamentals The deeper the trough the quicker and higher the recovery.

Transport Fundamentals15 The comparison is closer when considering high risk borrowers. Sources: FTR Associates, Transport Fundamentals Such borrowers are the swing factor in recessions.

Profit levels are higher this time. This should help with capital investment.

The stimulus is slightly bigger this time. The Reagan economic miracle had fiscal stimulus at its core.

Transport Fundamentals18 The 1982 scenario would get us back to equilibrium in a year. Sources: FTR Associates, Transport Fundamentals At that point capacity utilization would be 300 BP higher than the banking failure case. The surplus of active units would be 190,000 lower.

However a 1982-Like rapid recovery case would still be below 2006:1 well into 2013 (26 quarters). The 82 event did not return to its previous peak for 49 quarters!!! Sources: FTR Associates, Transport Fundamentals, 19 Transport Fundamentals

Note that the upside case still has a major oversupply of used trucks well into Source: FTR Associates Transport Fundamentals Equipment supply is more cyclical than carrier economics. 20

Driver availability is a still serious long term issue. Sources: Transport Fundamentals Productivity Historically productivity gains offset the inadequate labor pool. 21

Now falling productivity makes the problem worse Contemporary Deficit Productivity Sources: Transport Fundamentals, 22 The problem is most acute in the long- haul sector.

23 Demographics don’t help either. There is also a serious issue of diversity. Change In Demographic Statistics Source: Transport Fundamentals; US Census

Are the railroads getting anything from trucking? Fact Base: Rail line-haul operations have a significant fuel advantage over truck. The difference between bulk and dry van fuel economy is principally the number of empty miles. Sources: AAR, BNSF, Schneider National Inc. Transport Fundamentals LLC 24

But you must factor in full door-to-door costs and inventory effects to understand the real comparison. When transport problems cause product waste the entire energy content of the product is charged to transport. Sources: Transport Fundamentals 25

Because the Federal Government permits much higher NOx emissions for rail than truck, rail currently produces much more NOx per equivalent mile than truck. The 2015 rail standards are still contingent on technology. Sources: EPA, Transport Fundamentals LLC 26

The fuel price information suggests some intermodal gain – but only when fuel prices spike. Sources: Gross Consulting 27 It also shows a dramatic share loss late in 2008.