Finding New Revenue Sources in a Down Economy

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 March 18, 2009 www. rblanchard. com

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 March 18, 2009 www. rblanchard. com 2

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

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 Staged accident, NC, 1996 Reading & Northern Open House, Sep 2008 • Financial strength varies • Handling lines and switch carriers volume-dependent March 18, 2009 www. rblanchard. com 4

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

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 UP, Gibbon, NE, 2005 – Strong stand-alones – Marginal properties • S&Ts – BOCT, IHB, TRRA, CSAO • Joint ownership with another Class I: WSSB March 18, 2009 www. rblanchard. com 6

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 singlecar lots of low-rated commodities going away • Financially weak names are at risk • “Heat and eat” here to stay March 18, 2009 NKCR, Nebraska, 2005 www. rblanchard. com 7

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 March 18, 2009 www. rblanchard. com Maine 2 -foot gauge, 2008 8

Is the business model profitable and growing? It must be for both to prosper Customer/Railroad Yes/Yes A winning combination. Nurture and grow. Customer/Railroad 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. March 18, 2009 www. rblanchard. com 9

Cash Cow or Sacred Cow? Milk the cash cow, kill the sacred cow Revenuecost ratio Volume High Medium Low High Cash Medium Cash Depends Sacred Low Cash Depends Sacred March 18, 2009 www. rblanchard. com 10

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 March 18, 2009 Natural gas pipe, Lycoming Valley RR, 2008 www. rblanchard. com 11

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 Western NY & Pa first run – Local service – Transload – Bridge traffic March 18, 2009 www. rblanchard. com 12

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 SD 90 MACs Same tonnage with 45% fewer trains – Increased available track capacity – Lowered operating expense March 18, 2009 www. rblanchard. com 13

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 March 18, 2009 N&W, Waverly, VA, late 1950 s www. rblanchard. com 14

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. March 18, 2009 www. rblanchard. com DM&E, South Dakota 15

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

Personal Savings Rate http: //research. stlouisfed. org/fred 2/series/PSAVERT March 18, 2009 www. rblanchard. com 17