1. Rail Mergers: Some lessons for the future Association for Transportation Law, Logistics & Policy Jackson Lake Lodge, WY June 28, 2004 Jim McClellan Jim McClellan Woodside Consulting Woodside Consulting

2. Agenda The good, the bad and the ugly The good, the bad and the ugly Some lessons learned Some lessons learned What next? What next?

3. Mergers I have known Southern/Central of Georgia Southern/Central of Georgia Penn Central Penn Central Amtrak Amtrak Conrail Conrail CSX CSX NW/Southern NW/Southern NS/Conrail#1,2,3 and 4 NS/Conrail#1,2,3 and 4

4. Why mergers, anyway? Markets move but the tracks don’t Markets move but the tracks don’t So a railroad gets there with connections, or with a merger So a railroad gets there with connections, or with a merger

5. Why not alliances? Disconnects in: goals goals resources resources ability to execute ability to execute Often lead to: poor service poor service or no service whatsoever or no service whatsoever

6. Some good news Most (but not all) mergers have succeeded Most (but not all) mergers have succeeded Significant efficiencies have been achieved Significant efficiencies have been achieved There are no truly weak carriers remaining There are no truly weak carriers remaining Though some are struggling right nowThough some are struggling right now

7. And bad news Some mergers have failed outright Some mergers have failed outright Many (most in recent years) mergers have stumbled at the start Many (most in recent years) mergers have stumbled at the start Improved service quality, always promised, has been elusive Improved service quality, always promised, has been elusive

8. Root causes Two wrongs don’t make a right Two wrongs don’t make a right Investor and regulatory pressure Investor and regulatory pressure Political, community, customer and environmental “gauntlet” Political, community, customer and environmental “gauntlet” Disconnects/arrogance/culture clashes Disconnects/arrogance/culture clashes Show me the money Show me the money

9. Root causes Two wrongs don’t make a right Two wrongs don’t make a right Investor and regulatory pressure Investor and regulatory pressure Political, community, customer and environmental “gauntlet” Political, community, customer and environmental “gauntlet” Disconnects/arrogance/culture clashes Disconnects/arrogance/culture clashes Show me the money Show me the money

10. Root causes Two wrongs don’t make a right Two wrongs don’t make a right Investor and regulatory pressure Investor and regulatory pressure Political, community, customer and environmental “gauntlet” Political, community, customer and environmental “gauntlet” Disconnects/arrogance/culture clashes Disconnects/arrogance/culture clashes Show me the money Show me the money

11. Root causes Two wrongs don’t make a right Two wrongs don’t make a right Investor and regulatory pressure Investor and regulatory pressure Political, community, customer and environmental “gauntlet” Political, community, customer and environmental “gauntlet” Disconnects/arrogance/culture clashes Disconnects/arrogance/culture clashes Show me the money Show me the money

12. Root causes Two wrongs don’t make a right Two wrongs don’t make a right Investor and regulatory pressure Investor and regulatory pressure Political, community, customer and environmental “gauntlet” Political, community, customer and environmental “gauntlet” Disconnects/arrogance/culture clashes Disconnects/arrogance/culture clashes Show me the money Show me the money

13. Root causes Two wrongs don’t make a right Two wrongs don’t make a right Investor and regulatory pressure Investor and regulatory pressure Political, community, customer and environmental “gauntlet” Political, community, customer and environmental “gauntlet” Disconnects/arrogance/culture clashes Disconnects/arrogance/culture clashes Show me the money Show me the money

14. More mergers? Someday Someday First, run what we have First, run what we have

15. Job one: Move the freight Continued high demand Continued high demand Freight volumes expected to double in twenty years Freight volumes expected to double in twenty years Increasingly, new highways are a non-starter Increasingly, new highways are a non-starter Railways will have a bigger role Railways will have a bigger role If they can do the job If they can do the job

16. And the jury is out Virtually no redundancy left in the system Virtually no redundancy left in the system Segments of many mainlines operating at capacity Segments of many mainlines operating at capacity Some issues in some terminals Some issues in some terminals Shortage of crews and locomotives compound the problem Shortage of crews and locomotives compound the problem Metrics tell the tale Metrics tell the tale

17. Traffic is up; performance is down YTD volume: up 5.5% YTD volume: up 5.5% Intermodal: up 8.4% Intermodal: up 8.4% Trailers: up 13.5% Trailers: up 13.5% YTD train speed: 6.6% worse YTD train speed: 6.6% worse best performance: KCS and NS best performance: KCS and NS worst performance: UP and CN worst performance: UP and CN YTD terminal delay: 10.3% worse YTD terminal delay: 10.3% worse best performance: KCS and NS best performance: KCS and NS worst performance: UP and CSX worst performance: UP and CSX

18. One success story: Norfolk Southern YTD volume: up 6.1% YTD volume: up 6.1% Intermodal: up 12.7% Intermodal: up 12.7% Trailers: up 20 plus % Trailers: up 20 plus % YTD train speed: 0.3% better YTD train speed: 0.3% better YTD terminal delay: 0.8% better YTD terminal delay: 0.8% better Best performance by a major carriers Best performance by a major carriers

19. Key to NS’s success: 2000-2003 Build terminals ($150 mil) Build terminals ($150 mil) Remove choke points ($150 mil) Remove choke points ($150 mil) New operating plan (TOP) New operating plan (TOP) Hire and train crews ahead of the need Hire and train crews ahead of the need Hurt 2003 financial resultsHurt 2003 financial results

20. Getting it done Vision Vision Investment Investment Paid for with efficiencies and freight rates; government will play a minor role Paid for with efficiencies and freight rates; government will play a minor role A good plan A good plan Execution Execution

21. Until the network is working reliably, we do not need any more mergers Thank you for your time and attention Copies: e-mail request to jimmcclellan@att.net