Rail Mergers: Some Rail Mergers: Some lessons for the futurelessons for the future

Association for Transportation Law, Association for Transportation Law, Logistics & PolicyLogistics & Policy

Jackson Lake Lodge, WYJackson Lake Lodge, WY

June 28, 2004June 28, 2004

Jim McClellanJim McClellan

Woodside ConsultingWoodside Consulting

Agenda Agenda

The good, the bad and the The good, the bad and the uglyugly Some lessons learnedSome lessons learned What next?What next?

Mergers I have knownMergers I have known

Southern/Central of GeorgiaSouthern/Central of Georgia Penn CentralPenn Central AmtrakAmtrak ConrailConrail CSXCSX NW/SouthernNW/Southern NS/Conrail#1,2,3 and 4NS/Conrail#1,2,3 and 4

Why mergers, anyway? Why mergers, anyway?

Markets move but the tracks Markets move but the tracks don’t don’t So a railroad gets there with So a railroad gets there with connections, or with a mergerconnections, or with a merger

Why not alliances?Why not alliances?Disconnects in:Disconnects in: goalsgoals resourcesresources ability to executeability to execute

Often lead to:Often lead to: poor servicepoor service or no service whatsoeveror no service whatsoever

Some good newsSome good news Most (but not all) mergers have Most (but not all) mergers have succeededsucceeded Significant efficiencies have Significant efficiencies have been achievedbeen achieved There are no truly weak carriers There are no truly weak carriers remainingremaining

•Though some are struggling right Though some are struggling right nownow

And bad newsAnd bad news Some mergers have failed Some mergers have failed outrightoutright Many (most in recent years) Many (most in recent years) mergers have stumbled at the startmergers have stumbled at the start Improved service quality, always Improved service quality, always promised, has been elusivepromised, has been elusive

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

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

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

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

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

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

More mergers?More mergers?

SomedaySomeday First, run what we have First, run what we have

Job one: Move the freightJob one: Move the freight Continued high demandContinued high demand Freight volumes expected to Freight volumes expected to double in twenty yearsdouble in twenty years Increasingly, new highways are a Increasingly, new highways are a non-starternon-starter Railways will have a bigger roleRailways will have a bigger role

• IfIf they can do the job they can do the job

And the jury is outAnd the jury is out Virtually no redundancy left in Virtually no redundancy left in the systemthe system Segments Segments of many mainlines of many mainlines operating at capacityoperating at capacity Some issues in some terminalsSome issues in some terminals Shortage of crews and Shortage of crews and locomotives compound the problemlocomotives compound the problem Metrics tell the taleMetrics tell the tale

Traffic is up; performance Traffic is up; performance is downis 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% worseYTD train speed: 6.6% worse• best performance: KCS and NSbest performance: KCS and NS• worst performance: UP and CNworst performance: UP and CN

YTD terminal delay: 10.3% worseYTD terminal delay: 10.3% worse• best performance: KCS and NSbest performance: KCS and NS• worst performance: UP and CSXworst performance: UP and CSX

One success story: One success story: Norfolk SouthernNorfolk 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% betterYTD train speed: 0.3% better YTD terminal delay: 0.8% betterYTD terminal delay: 0.8% better Best performance by a major Best performance by a major carrierscarriers

Key to NS’s success: Key to NS’s success: 2000-20032000-2003

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 Hire and train crews ahead of ahead of the needthe need

•Hurt 2003 financial resultsHurt 2003 financial results

Getting it doneGetting it done VisionVision InvestmentInvestment

• Paid for with efficiencies and Paid for with efficiencies and freight rates; government will play freight rates; government will play a minor rolea minor role

A good planA good plan ExecutionExecution

Until the network is working Until the network is working reliably, we do not need any reliably, we do not need any

more mergersmore mergers

Thank you for your time and Thank you for your time and attentionattention

Copies: e-mail request to jimmcclellan@att.netCopies: e-mail request to jimmcclellan@att.net