2010 John Larkin

Transportation & Logistics 1

Equity Research

1Freight Transportation & Logistics Group CONFIDENTIAL

Some Seasonal Strengthening Has Occurred In The Freight

Markets; However, The Road To Recovery Will Be Gradual

2010 Food Shippers of America Conference

John Larkin, CFAStifel, Nicolaus & Company, Incorporated

(443) 224-1315

[email protected]

February 23, 2010

All relevant disclosures and certifications can be found on pages 46-47 of this report.

Images courtesy of KNX, SAIA, FDX and BNSF


Equity Research


I. The Economy Is Gradually Recovering: Sustainability Is An Issue

II. Freight Volumes Are Reflecting The Economic Recovery

III. Each Freight Transportation Sector Is Driven By Unique Factors

IV. Short Term Predictions – “Not Out Of The Woods Yet”

V. Longer Term Predictions – “The Future Will Be Bright”

Outline



Equity Research


Chart displays seasonally adjusted data

Source: St. Louis Federal Reserve Bank, Company data

Macroeconomic Indicators Remain

Relatively Soft

Real Consumer Spending “Cratered” in 2008 But Hasn‟t Improved Much

Real Retail Sales Increased 2.4% Y/Y in December; It Appears

That The Worst May Be Behind Us

140

150

160

170

180

190

Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09

Mo

nth

ly R

eta

il S

ale

s ($

bn

)

-12.0%

-10.0%

-8.0%

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

Y/Y

% C

ha

ng

e

CPI-Adjusted Retail Sales Y/Y% Change

Decline From

Peak

-9.5%


Equity Research


Monthly U.S. Personal Savings ($ in Billions)

Figures Seasonally Adjusted at Annual Rates

Jan. 2007 - Dec. 2009

(50)

50

150

250

350

450

550

650

750

850

Jan

-07

Feb

-07

Mar

-07

Ap

r-0

7

May

-07

Jun

-07

Jul-

07

Au

g-0

7

Sep

-07

Oct

-07

No

v-0

7

Dec

-07

Jan

-08

Feb

-08

Mar

-08

Ap

r-0

8

May

-08

Jun

-08

Jul-

08

Au

g-0

8

Sep

-08

Oct

-08

No

v-0

8

Dec

-08

Jan

-09

Feb

-09

Mar

-09

Ap

r-0

9

May

-09

Jun

-09

Jul-

09

Au

g-0

9

Sep

-09

Oct

-09

No

v-0

9

Dec

-09

DP

I L

ess

Perso

na

l O

utl

ay

s ($

BN

)

Monthly U.S. Personal Savings Rate (%)

Figures Seasonally Adjusted at Annual Rates

Jan. 2007 - Dec. 2009

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

Jan

-07

Feb

-07

Mar

-07

Ap

r-0

7

May

-07

Jun

-07

Jul-

07

Au

g-0

7

Sep

-07

Oct

-07

No

v-0

7

Dec

-07

Jan

-08

Feb

-08

Mar

-08

Ap

r-0

8

May

-08

Jun

-08

Jul-

08

Au

g-0

8

Sep

-08

Oct

-08

No

v-0

8D

ec-0

8

Jan

-09

Feb

-09

Mar

-09

Ap

r-0

9

May

-09

Jun

-09

Jul-

09

Au

g-0

9S

ep-0

9

Oct

-09

No

v-0

9

Dec

-09

Per

son

al S

avin

gs

/ D

isp

osa

ble

In

c. (

%)

U.S. Consumers Are Saving More to Offset

Real Estate and Investment Portfolio Losses

*DPI less Personal Outlays in May 2008 and Personal Saving as a Percentage of Personal Disposable Income in May 2008 are not comparable due to the Economic Stimulus Act of 2008, when the Government issued rebate payments of $1.9 billion in April, $48.1

billion in May, and $27.9 billion in June and $13.7 billion in July. The stimulus package effectively reduced the level of personal taxes, which are part of the calculations for Savings in dollars and percentage savings rate.

Personal savings is disposable personal income net of personal outlays

Source: Bureau of Economic Analysis

U.S. Personal Savings ($ in Billions)

1952 - 2009

0

10

20

30

40

50

60

70

80

1952 1956 1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008

DP

I L

ess

Per

son

al O

utl

ay

s -

Infl

ati

on

Ad

j. t

o 1

95

2 (

$ B

N)

Increased Savings = Reduced Consumption; Is This a Permanent Change in Behavior?U.S. Personal Savings Rate (%)

1952 - 2009

0.0%

5.0%

10.0%

15.0%

1952 1956 1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008

Per

son

al S

avin

gs

/ D

isp

osa

ble

In

c. (

%)


Equity Research


30.0

35.0

40.0

45.0

50.0

55.0

60.0

65.0

Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10

IS

M I

nd

ex

ISM Index values over 50 indicate industrial growth while ISM Index values below 50 indicate industrial contraction.

Source: Institute for Supply Management

ISM Index in January Suggested Growth in the Manufacturing Economy

For the Sixth Consecutive Time Since July ‟09; Export Growth Had Been

Masking Domestic Manufacturing Weakness For Most of „08

Jan-10

58.4

ISM Index Suggests Manufacturing Growth


Equity Research


Data in both graphs are adjusted for PPI, excluding food and energy

Source: St. Louis Federal Reserve, American Trucking Associations

Tonnage-Weighted Industrial Production Has Been Slightly Weaker Than Value-Weighted Industrial

Production Due to Steep Declines in Heavy Building/Construction Materials and Automotive Volumes

and Emphasis Given to More Concentrated/Compact Products With Smaller Packaging

U.S. Industrial Production Index

Jan. 1999- Jan. 2010

40.0

50.0

60.0

70.0

80.0

90.0

100.0

110.0

Jan

-99

Jan

-00

Jan

-01

Jan

-02

Jan

-03

Jan

-04

Jan

-05

Jan

-06

Jan

-07

Jan

-08

Jan

-09

Jan

-10

Ind

ust

rial P

rod

uct

ion

In

dex

-20.0%

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

Y/Y

% C

han

ge

Industrial Production Y/Y% Change

Tonnage-Weighted Industrial Production Index

Nov. 1998- Nov. 2009

0.0

20.0

40.0

60.0

80.0

100.0

120.0

No

v-9

8

No

v-9

9

No

v-0

0

No

v-0

1

No

v-0

2

No

v-0

3

No

v-0

4

No

v-0

5

No

v-0

6

No

v-0

7

No

v-0

8

No

v-0

9

Ton

nage-

Wei

gh

ted

IP

In

dex

-20.0%

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

Y/Y

% C

han

ge

Tonnage Weighted IP Index Y/Y % Change

Industrial Production Recovering Slowly


Equity Research


40

45

50

55

60

Feb-0

4

Jul-0

4

Dec

-04

May

-05

Oct

-05

Mar

-06

Aug-

06

Jan-

07

Jun-

07

Nov-

07

Apr-

08

Sep-0

8

Feb-0

9

Jul-0

9

Dec

-09

Co

mb

ined

Ma

nu

fact

uri

ng

an

d S

erv

ices

CM

I (S

A I

nd

ex)

CMI Index values over 50 indicate expansion while CMI Index values below 50 indicate contraction.

Source: National Association of Credit Management

Recent Credit Managers Index (CMI) Data Suggests Commercial Business Transactions Have

Expanded in Each of the Past Three Months; December ‟09 CMI Highest Since January „08

Dec-09

52.9

Credit Managers Index Somewhat

Encouraging


Equity Research


Manufacturing New Orders

Jan. 1997 - Jan. 2010

15

25

35

45

55

65

75

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

ISM

New

Ord

ers

Ind

ex

-60%

-30%

0%

30%

60%

90%

120%

150%

180%

210%

Y/Y

% C

ha

ng

e

New Orders (SA) Y/Y % Change

Source: Institute for Supply Management

Jan-10:

98.5%

New Manufacturing Orders Weakened Dramatically Through the End of 2008; 2009

Comparisons Rebounded, With July Through December Showing Increasing Y/Y Growth;

January Growth Pulled Back Slightly From December; Is This Growth Sustainable?

Manufacturing Orders Showing Growth


Equity Research


Retail Inventories

Jan. 1996- Dec. 2009

300

350

400

450

500

550

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Reta

il I

nv

en

torie

s (S

A i

n 0

00

's)

-15%

-10%

-5%

0%

5%

10%

Y/Y

% C

han

ge

Retail Inventories (SA) Y/Y % Change

Manufacturing Supplier Deliveries

Jan. 1997 - Jan. 2010

40

50

60

70

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

ISM

Su

pp

lier

Del

iver

ies

Ind

ex

-40%

-20%

0%

20%

40%

Y/Y

% C

ha

ng

e

Supplier Deliveries (SA) Y/Y % Change

Manufacturing Customers' Inventories

Jan. 1998 - Jan. 2010

30

35

40

45

50

55

60

65

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

ISM

Ma

nu

fact

uri

ng

Cu

sto

mer

s' I

nv

ento

ries

In

dex

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

Y/Y

% C

ha

ng

e

Customers' Inventories (SA) Y/Y % Change

Manufacturing Inventories

Jan. 1997 - Jan. 2010

30

40

50

60

70

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

ISM

Man

ufa

ctu

rin

g I

nven

tori

es I

nd

ex

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

Y/Y

% C

han

ge

Manufacturers' Inventories (SA) Y/Y % Change

Manufacturing Inventories Growing While

Customers’ Inventories Continue Decline

Manufacturing Data through January 2010, Retail Inventories through December 2009

Source for top two and bottom left graphs: Institute for Supply Management; Source for bottom right graph: U.S. Census Bureau

Jan. 24.0%Jan. 32.7%

Jan. -42.3% Dec. -10.9%

Was 2H09 Strength Tied to Inventory Replenishment at the Supplier and Manufacturing Levels?


Equity Research


350

400

450

500

550


Ret

ail

In

ven

tori

es (

$b

n)

1.35

1.4

1.45

1.5

1.55

1.6

1.65

1.7I/

S R

ati

o

Retail Inventories, total ($bn) Inventory/Sales Ratio

1,000

1,100

1,200

1,300

1,400

1,500

1,600


Bu

sin

ess

Inven

tori

es (

$b

n)

1.20

1.25

1.30

1.35

1.40

1.45

1.50

I/S

Rati

o

Business Inventories, total ($bn) Inventory/Sales Ratio

Inventory Levels Appear to Have Adjusted to “New Normal” Demand Levels; Did Manufacturers

Restock Too Early?

Source: U.S. Census Bureau

Dec-09 I/S Ratio:

1.26

Dec-09 I/S Ratio:

1.37

350

400

450

500

550

600


Man

ufa

ctu

rers

In

ven

tori

es (

$b

n)

1.1

1.15

1.2

1.25

1.3

1.35

1.4

1.45

1.5

I/S

Rati

o

Manufacturers Inventories, total ($bn) Inventory/Sales Ratio

250

300

350

400

450

500


Wh

ole

sale

In

ven

tori

es (

$b

n)

1.05

1.1

1.15

1.2

1.25

1.3

1.35

1.4

I/S

Ra

tio

Wholesale Inventories, total ($bn) Inventory/Sales Ratio

Dec-09 I/S Ratio:

1.29

Dec-09 I/S Ratio:

1.12

IS Ratio Spike Was Due to Dramatic

Downturn in Sales


Equity Research


Left Graph current through December 2009, Right Graph current through December 2009

Sources: U.S. Census Bureau, National Association of Realtors

Freight Tied to Residential Construction Remains Relatively Weak; Strength in Existing Home Sales

Has Generated Some Incremental Traffic

New Home Sales Remain Negative Even as Comps

Get Progressively Easier

300

600

900

1,200

1,500

5/3

1/2

005

10/3

1/2

005

3/3

1/2

006

8/3

1/2

006

1/3

1/2

007

6/3

0/2

007

11/3

0/2

007

4/3

0/2

008

9/3

0/2

008

2/2

8/2

009

7/3

0/2

009

12/3

0/2

009

New

Hom

e S

ales

(A

nnual

rat

e in

000's

)

-60.0%

-50.0%

-40.0%

-30.0%

-20.0%

-10.0%

0.0%

10.0%

20.0%

30.0%

40.0%

Y/Y

% C

han

ge

New Home Sales Y/Y% Change

Existing Home Sales Reach Highest Level Since

February 2007

4,000

4,500

5,000

5,500

6,000

6,500

7,000

7,500

5/3

1/2

005

10

/31

/20

05

3/3

1/2

006

8/3

1/2

006

1/3

1/2

007

6/3

0/2

007

11

/30

/20

07

4/3

0/2

008

9/3

0/2

008

2/2

8/2

009

7/3

0/2

009

12

/30

/20

09

Ex

istin

g H

om

e S

ales

(A

nn

ual

Rat

e in

00

0's

)

-30.0%

-20.0%

-10.0%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

Y/Y

% C

han

ge

Existing Home Sales Y/Y% Change

Existing Housing Sales Showing Nice

Rebound; New Home Sales Remain Anemic


Equity Research


Data through January 2010

Source for all graphs: U.S. Dept. of Commerce

On an Absolute Basis, January Building Permits Took a Small Step Down From December; Many

Local Markets Still Appear Overbuilt; Lack of Credit Remains a Big Issue; Extended Tax

Credit For New Home Buyers Has Been Stimulating Activity

Jan-10 Permits

621,000

Jan-10 Starts

591,000

Monthly Housing Starts Fell 17.2% Year-Over-Year

in January; A Bottom Seen?

350

600

850

1,100

1,350

1,600

1,850

2,100

2,350

Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10

New

Ho

usi

ng

Sta

rts

(Sea

son

ally

Ad

just

ed in

Th

ou

san

ds)

-60.0%

-50.0%

-40.0%

-30.0%

-20.0%

-10.0%

0.0%

10.0%

20.0%

6 M

o.

Mo

vin

g A

vg

. Y

/Y %

Ch

an

ge

Housing Starts 6 mo. Moving Avg. Y/Y% change

400

650

900

1,150

1,400

1,650

1,900

2,150

2,400

Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10

New

Bu

ild

ing

Per

mit

s (S

easo

na

lly

Ad

just

ed

in T

ho

usa

nd

s)

-60.0%

-50.0%

-40.0%

-30.0%

-20.0%

-10.0%

0.0%

10.0%

20.0%

6 M

on

th M

ov

ing

Av

g. Y

/Y %

Ch

an

ge

New Building Permits 6 Month Moving Avg. %Y/Y change

Building Permits fell 22.3% Year-Over-Year

in January

A Bottom Seen in New Home Construction?

Fall From Peak

-73.9%

Fall From Peak

-72.6%


Equity Research


Source: S&P/Case-Shiller Home Price Indices

Y/Y% Home Price Decline in 3Q09 Was Best Comparison Since 4Q07; Some Markets Have

Held Up Better than Others

3Q09 Case-

Shiller Index

Close to 3Q03

Levels

Regions with Largest

Declines from High

Las Vegas -55.5%

Phoenix -54.1%

Miami -47.9%

Detroit -42.7%

San Diego -41.9%

Los Angeles -41.2%

Regions with Most Modest

Declines from High

Dallas -3.8%

Denver -9.7%

Charlotte -10.6%

Boston -14.0%

Cleveland -14.1%

Atlanta -17.8%

Case-Shiller Index Indicates Encouraging

Recent Trend in Home Prices

Fall From Peak

-28.9%

0

50

100

150

200

2503

Q9

1

3Q

92

3Q

93

3Q

94

3Q

95

3Q

96

3Q

97

3Q

98

3Q

99

3Q

00

3Q

01

3Q

02

3Q

03

3Q

04

3Q

05

3Q

06

3Q

07

3Q

08

3Q

09

S&

P/C

ase

-Sh

ille

r U

.S.

Na

tio

na

l H

om

e P

ric

e I

nd

ex

(S

A)

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

Av

g.

Y/Y

% C

ha

ng

e

S&P/Case-Shiller U.S. National Home Price Index Y/Y % change

Home Price Index Down 28.9% from High (May 2006)


Equity Research


Auto and Light Truck Production Remains Slightly Below

Year-ago Levels

4.0

6.0

8.0

10.0

12.0

14.0


Au

to a

nd

Lig

ht

Tru

ck

Assem

blies

(An

nu

alized

in

million

s)

-60.0%

-50.0%

-40.0%

-30.0%

-20.0%

-10.0%

0.0%

10.0%

20.0%

Y/Y

% C

han

ge

Auto/Light Truck Assemblies (millions, 3 mo. moving avg.) Y/Y % Change (3 mo. moving avg.)

Auto Sales Have Shown Recent Improvement Against Easy

Comparisons

6.0

8.0

10.0

12.0

14.0

16.0


Au

to a

nd

Lig

ht

Tru

ck S

ale

s (A

nn

ua

lize

d in

millio

ns)

-50.0%

-40.0%

-30.0%

-20.0%

-10.0%

0.0%

10.0%

20.0%

Y/Y

% C

ha

ng

e

Auto/Light Truck Sales (millions, 3 mo. moving avg.) Y/Y % Change (3 mo. moving avg.)

Charts current through December 2009

Source:: Bureau of Economic Analysis, Federal Reserve Board

Domestic Auto Production and Sales Y/Y Comparisons Continue To Improve Despite Economic

Weakness Severely Impairing Demand; Cash for Clunkers, Auto Bailouts, and Subsidized Credit Seem

to be Helping, But Will Recent Positive Trend Continue or Be Short Lived?

Dec. -2.0%Dec. 7.0%

Auto Market Helped By Stimuli

Fall From Peak

-45.8%

Fall From Peak

-51.3%


Equity Research


Real GDP (Billions of Chained 2005 Dollars)

4Q97 - 4Q09

9,500

10,500

11,500

12,500

13,500

4Q97

2Q98

4Q98

2Q99

4Q99

2Q00

4Q00

2Q01

4Q01

2Q02

4Q02

2Q03

4Q03

2Q04

4Q04

2Q05

4Q05

2Q06

4Q06

2Q07

4Q07

2Q08

4Q08

2Q09

4Q09

Rea

l G

DP

(Billion

s of

Ch

ain

ed 2

005 D

ollars

)

-10%

-5%

0%

5%

10%

Y/Y

% C

han

ge

Real GDP Y/Y % Change

State and Local Gov't

10.9%Fed. Gov't

9.2%

Durable Goods

7.9%Nondurable Goods

21.5%

Personal Services

36.1%

Fixed Investment

14.4%

Data through 4Q09

*Annualized Q/Q% Change is the Sequential Quarter to Quarter % Change Annualized (or roughly multiplied by 4 quarters)

Personal-Services-Heavy U.S. GDP Now Growing, Y/Y

Sequential GDP Growth Was Positive in 4Q09 (5.7%, at an Annualized Rate*)

1Graphs indicate contribution to GDP

excluding the negative effect of net exports

1986 GDP 1Breakdown

Real GDP

(Billions of Chained 2005 Dollars)

4Q08 vs. 4Q09

4Q08

+0.1% Y/Y

13,130

13,140

13,150

13,160

Rea

l G

DP

(Bil

lio

ns

of

Ch

ain

ed

20

05

Do

lla

rs)

4Q09

Real GDP Growth Remained Negative in 3Q

Source for all graphs: Bureau of Economic Analysis

2009 GDP1

Breakdown

Federal Gov't

7.7%

State and Local

Gov't

12.1%Durable Goods

7.0% Nondurable Goods

15.0%

Personal Services

46.3%

Fixed Investment

11.8%


Equity Research


Data includes average exchange rates from the calendar years; Euro was officially introduced on January 1, 1999

Source: Oanda

The U.S. Dollar Had Recently Strengthened Against Most Major Currencies, as Europe and Asia Discovered They

Were Not Decoupled From The USA, But Now The Dollar Appears to Be Weakening Again

GBP/USD

0.40

0.45

0.50

0.55

0.60

0.65

0.70

0.75

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

2/1

9/2

01

0

GB

P

EURO/USD

0.60

0.65

0.70

0.75

0.80

0.85

0.90

0.95

1.00

1.05

1.10

1.15

1.20

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

2/1

9/2

01

0

EU

RO

JPY/USD

85

90

95

100

105

110

115

120

125

130

135

140

145

150

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

2/1

9/2

01

0

Yen

CAD/USD

0.90

1.00

1.10

1.20

1.30

1.40

1.50

1.60

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

2/1

9/2

01

0

CA

D

U.S. Dollar Weakening


Equity Research


Trade Weighted Exchange Index

Jan. 1976- Jan. 2010

0

20

40

60

80

100

120

140

Jan

-76

Jan

-78

Jan

-80

Jan

-82

Jan

-84

Jan

-86

Jan

-88

Jan

-90

Jan

-92

Jan

-94

Jan

-96

Jan

-98

Jan

-00

Jan

-02

Jan

-04

Jan

-06

Jan

-08

Jan

-10

Tra

de-

Wei

gh

ted

Exch

an

ge

Ind

ex (

1997=

100)

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

Y/Y

% C

han

ge

Trade-Weighted Exchange Index Y/Y % change

Source: Board of Governors of the Federal Reserve System

U.S. Dollar Weakening

The Dollar Appears to Be Weakening Again as Deficit Spending and Trade

Imbalances Weigh Heavily on the U.S. Dollar


Equity Research


-$654.1

-$343.4

(700)

(600)

(500)

(400)

(300)

(200)

(100)

0

2008YTD 2009YTD

Cu

rren

t A

ccou

nt

Bala

nce

2008Y

TD

vs.

2009Y

TD

($ B

n)

Current account balance defined as: exports of goods and services and income receipts net of imports plus net unilateral transfers

Source: Bureau of Economic Analysis

Trade Deficit has Reversed Course Recently With Weakness in Domestic Consumer Demand, the Weak

U.S. Dollar, and Asia‟s Need for Grain and Raw Materials Rebounding

Current Account Deficit Declined 47.5%

in 2009YTD From 2008YTD

($ in Billions, thru November)

U.S. Current Account Balance ($ in Millions)

1960 - 2008

(900,000)

(800,000)

(700,000)

(600,000)

(500,000)

(400,000)

(300,000)

(200,000)

(100,000)

0

1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008

U.S

. C

urr

ent

Acc

ou

nt

Ba

lan

ce (

Millio

ns

of

Do

lla

rs)

Current Account Surplus/(Deficit)

U.S. Trade Deficit Reversed Course Recently


Equity Research


Federal Deficit Declined to $162 Billion in FY2007, But Reported Expansion to $459 Billion

in FY2008 and $1.4 Trillion in FY2009

Source: Bureau of Economic Analysis, Congressional Budget Office

Federal Fiscal Year ends September 30 of each year, 2009 – 2019 projections are issued by the Congressional Budget Office

U.S. Federal Surplus/Deficit ($ in Billions)

1981 – 2012E

U.S. Federal Deficit Expanding

(1600)

(1400)

(1200)

(1000)

(800)

(600)

(400)

(200)

0

200

400

19811982

19831984

19851986

19871988

19891990

19911992

19931994

19951996

19971998

19992000

20012002

20032004

20052006

20072008

2009

2010E

2011E

2012E

U.S

. Fed

eral

Bud

get

Surp

lus/

Def

icit

($b

n)

2010 Expected

Deficit:

$1.35 trillion

Cumulative Budget Deficit

Expected to Reach $19

Trillion By 2019

Cumulative U.S. Federal Deficit ($ in Trillions)

2009 – 2019E

($20.0)

($19.0)

($18.0)

($17.0)

($16.0)

($15.0)

($14.0)

($13.0)

($12.0)

2009 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E

Cu

mu

lati

ve B

ud

get

Defi

cit

($

tn)


Equity Research







Outline



Equity Research


60.0

70.0

80.0

90.0

100.0

110.0

Dec-97 Dec-98 Dec-99 Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09

Dry

Van

TL

Miles

In

dex

-30.0%

-20.0%

-10.0%

0.0%

10.0%

20.0%

30.0%

Y/Y

% C

han

ge

DRY VAN MILES Y/Y % Change

Volumes Have Shown Some Recent Signs of Sequential Improvement

Source for all graphs: American Trucking Associations, Top Graph Current through December 2009, Bottom Graph Current through December 2009

70

80

90

100

110

120

130

Dec-97 Dec-98 Dec-99 Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09

AT

A T

ruck

Ton

nage

- S

easo

nally A

dju

sted

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

Y/Y

% C

han

ge

ATA Truck Tonnage Index Y/Y % Change

Dec. +6.6% Y/Y

Dec. +2.4% Y/Y

ATA Trucking Data Suggest Modest

Improvements in Freight Markets

Relative to Peak -9.9%



Equity Research


ATA Loads Index For Refrigerated Carriers

0.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0

Dec

-95

Dec

-96

Dec

-97

Dec

-98

Dec

-99

Dec

-00

Dec

-01

Dec

-02

Dec

-03

Dec

-04

Dec

-05

Dec

-06

Dec

-07

Dec

-08

Dec

-09

Ref

riger

ate

d L

oad

s In

dex

-30.0%

-20.0%

-10.0%

0.0%

10.0%

20.0%

30.0%Y

/Y %

Ch

an

ge

Refrigerated Loads Index Y/Y % Change

ATA Loads Index For Dry Van Truckload Carriers

0.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0

Dec

-95

Dec

-96

Dec

-97

Dec

-98

Dec

-99

Dec

-00

Dec

-01

Dec

-02

Dec

-03

Dec

-04

Dec

-05

Dec

-06

Dec

-07

Dec

-08

Dec

-09

Dry

Va

n T

L L

oa

ds

Ind

ex

-30.0%

-25.0%

-20.0%

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

Y/Y

% C

ha

ng

e

Dry Van TL Loads Index Y/Y % Change

ATA Loads Index For Bulk-Tank Carriers

0.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0

160.0

Dec

-95

Dec

-96

Dec

-97

Dec

-98

Dec

-99

Dec

-00

Dec

-01

Dec

-02

Dec

-03

Dec

-04

Dec

-05

Dec

-06

Dec

-07

Dec

-08

Dec

-09

Bu

lk-T

an

k L

oad

s In

dex

-40.0%

-30.0%

-20.0%

-10.0%

0.0%

10.0%

20.0%

30.0%

Y/Y

% C

han

ge

Bulk-Tank Loads Index Y/Y % Change

ATA Loads Index For Flatbed Carriers

0.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0

Dec

-95

Dec

-96

Dec

-97

Dec

-98

Dec

-99

Dec

-00

Dec

-01

Dec

-02

Dec

-03

Dec

-04

Dec

-05

Dec

-06

Dec

-07

Dec

-08

Dec

-09

Fla

tbed

Load

s In

dex

-40.0%

-30.0%

-20.0%

-10.0%

0.0%

10.0%

20.0%

30.0%

40.0%

Y/Y

% C

han

ge

Flatbed Loads Index Y/Y % Change

Source for all graphs: American Trucking Associations

Dec. +9.3% Y/Y Dec. +3.0% Y/Y

Dec. +10.4% Y/YDec. +5.5% Y/Y

Volume Comps Improved in December

Relative to Peak -19.4% Relative to Peak -31.9%

Relative to Peak -1.9%Relative to Peak -18.1%


Equity Research


ATA Mileage Index For All Truckload Carriers

60.0

65.0

70.0

75.0

80.0

85.0

90.0

95.0

100.0

105.0

110.0

Dec

-95

Dec

-96

Dec

-97

Dec

-98

Dec

-99

Dec

-00

Dec

-01

Dec

-02

Dec

-03

Dec

-04

Dec

-05

Dec

-06

Dec

-07

Dec

-08

Dec

-09

TL

Milea

ge

Ind

ex

-30.0%

-25.0%

-20.0%

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

Y/Y

% C

ha

ng

e

TL Mileage Index Y/Y % Change

Source: American Trucking Associations

Dec.

+5.8% Y/Y

TL Miles Index Witnessed Best Y/Y

Comparison Since October ’00 in December



Equity Research


40

60

80

100

120

140

Dec-9

7

Dec-9

8

Dec-9

9

Dec-0

0

Dec-0

1

Dec-0

2

Dec-0

3

Dec-0

4

Dec-0

5

Dec-0

6

Dec-0

7

Dec-0

8

Dec-0

9

Tota

l L

TL

ton

nage

ind

ex (

SA

)

-30%

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

Y/Y

% C

han

ge

Total LTL Tonnage (SA Index) Y/Y % Change

Source: American Trucking Associations

Still, LTL Comps Look Worse Than TL Comps, as Larger LTL Shipments Have

Followed Attractive Rates Back Into The TL Sector

Dec.

-14.5% Y/Y

LTL Tonnage Index Has Shown Less

Negative Comps From August to December



Equity Research


220,000

240,000

260,000

280,000

300,000

320,000

340,000

360,000

380,000

400,000

420,000

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010Tota

l C

arl

oad

s O

rigin

ate

d B

y 'B

ig 6

' N

. A

m. R

ailro

ad

s

-25.0%

-20.0%

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

3 M

o.

Mo

vin

g A

vg

. Y

/Y%

Vo

lum

e G

ro

wth

Total Carloads Originated By 'Big 6' Railroads 3 Mo. Moving Avg. Y/Y % Change

Rail Carload1 Origination Comparisons Becoming Less Negative in Recent Weeks; At What Point Has

Inventory Coal De-Stocking Run Its Course?

1Carloads exclude intermodal

Data through February 13, 2010

Source: Association of American Railroads

Rail Data Comparisons Continue to Trend

Less Negative

Fall From Peak -23.8%


Equity Research


20

25

30

35

40

2005 2006 2007 2008 2009 2010

U.S

. C

lass

I R

ailro

ad

s E

stim

ate

d T

on

-Miles

(B

illion

s)

-25.0%

-20.0%

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

6 M

o.

Mo

vin

g A

vg

. Y

/Y%

Vo

lum

e G

ro

wth

U.S. Class 1 Railroads Estimated Revenue Ton-Miles (Billions) 3 Mo. Moving Avg. Y/Y % Change



Rail Revenue Ton-Mile Comparisons have been Slightly Less Negative than Carload Comparisons due to

Growth in Longer Haul and Heavier Commodities as Well as Higher Capacity Freight Cars


Less Negative



Equity Research


Intermodal Volumes Have Been Slow to Rebound, Due Primarily to Slower Consumer Spending, All-

Water Service to East Coast Ports, and More Competitive Truck Pricing; Recent Data Suggests

Additional Weakness



0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Tota

l In

term

od

al U

nit

s O

rigin

ate

d B

y

'B

ig 6

' N

. A

m. R

ails

-25.0%

-20.0%

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

3 M

o. M

ovin

g A

vg. Y

/Y%

Volu

me

Gro

wth

Total Intermodal Loads Originated By 'Big 6' Rails 3 Mo. Moving Avg. Y/Y % Change


Less Negative



Equity Research


Source for both graphs: Gross Transportation Consulting, FTR Associates

North American Intermodal Loadings

400,000

450,000

500,000

550,000

600,000

Oct

-07

Nov

-07

Dec

-07

Jan-

08

Feb-

08

Mar

-08

Apr

-08

May

-08

Jun-

08

Jul-0

8

Aug

-08

Sep-

08

Oct

-08

Nov

-08

Dec

-08

Jan-

09

Feb-

09

Mar

-09

Apr

-09

May

-09

Jun-

09

Jul-0

9

Aug

-09

Sep-

09

Oct

-09

Nov

-09

Dec

-09

Dom

esti

c In

term

od

al R

even

ue

Movem

ents

(000's

)

-12.0%

-8.0%

-4.0%

0.0%

4.0%

8.0%

12.0%

16.0%

Y/Y

% C

han

ge

Domestic Intermodal Revenue Movements Y/Y % Change

North American Intermodal Loadings

400,000

450,000

500,000

550,000

600,000

650,000

700,000

750,000

Oct

-07

Nov

-07

Dec

-07

Jan-

08

Feb-

08

Mar

-08

Apr

-08

May

-08

Jun-

08

Jul-0

8

Aug

-08

Sep-

08

Oct

-08

Nov

-08

Dec

-08

Jan-

09

Feb-

09

Mar

-09

Apr

-09

May

-09

Jun-

09

Jul-0

9

Aug

-09

Sep-

09

Oct

-09

Nov

-09

Dec

-09

Inte

rnati

on

al In

term

od

al R

even

ue

Movem

ents

(000's

)

-30.0%

-25.0%

-20.0%

-15.0%

-10.0%

-5.0%

0.0%

5.0%

Y/Y

% C

han

ge

International Intermodal Revenue Movements Y/Y % Change

Truck/Rail Partnerships Driving Much of the Domestic Intermodal Growth

Domestic Intermodal Holding Up Far Better

Than International Intermodal


Equity Research


1Total carloads excludes intermodal

Carloads are originations 1Q-to-date

through February 13, 2010

2Total carloads excludes intermodal

Carloads are originations for 2H09


Rail Volumes Declined Less Sharply in the

2H09 But Remained Weak Vs. 1Q10 QTD

9.3

%

10

.1%

-11

.6%

-3.1

%

27

.4%

45

.8%

-6.3

%

2.6

%

1.7

%

-1.6

%

2.9

%

19

.3%

24

.3%

-3.3

%

22

.5%

50

.9%

0.9

%

2.6

%

-17

.4%

13

.0%

-30.0%

-20.0%

-10.0%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

Agricultural Chemicals Coal Forest

Products

Ores &

Metals

Motor

Vehicles

Nonmetallic

Minerals

Intermodal Other Total (1)

YT

D y

/y %

D in

car

load

s b

y co

mm

odit

y ty

pe

U.S. Railroads Canadian Railroads

1Q10

2H09

-3.7

%

-2.0

%

-13

.3%

-20

.6%

-32

.5%

-10

.6%

-18

.2%

-11

.3%

-14

.1%

-12

.8%

-0.9

%

-8.0

%

-5.8

%

-18

.3%

-20

.3%

-7.3

%

-19

.0%

-12

.3%

-16

.1% -1

1.1

%

-40.0%

-30.0%

-20.0%

-10.0%

0.0%

10.0%

Agricultural Chemicals Coal Forest

Products

Ores &

Metals

Motor

Vehicles

Nonmetallic

Minerals

Intermodal Other Total (2)

2H

09 y

/y %

D in

carl

oad

s b

y c

om

mod

ity t

yp

e

U.S. Railroads Canadian Railroads


Equity Research


Freight Expenditures (Jan. 1999 - Jan. 2010)

0.0

0.5

1.0

1.5

2.0

2.5

Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10

Fre

igh

t E

xp

end

itu

res

-40.0%

-30.0%

-20.0%

-10.0%

0.0%

10.0%

20.0%

30.0%

Y/Y

% C

ha

ng

e

Freight Expenditures Y/Y % Change in Freight Expenditures

Source: Cass Information Systems, Inc.

Cass Index for Freight Expenditures Increased 2.7% Y/Y in January While Shipment Volume Index Improved 5.6% Y/Y

Shipment Volumes (Jan. 1999 - Jan. 2010)

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

Jan-99 Jan-00 Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10

Sh

ipm

en

t V

olu

me

-30.0%

-20.0%

-10.0%

0.0%

10.0%

20.0%

30.0%

Y/Y

% C

ha

ng

e

Shipment Volume Y/Y % Change in shipment volume

Cass Freight Indices Now Both Show Positive

Y/Y Comparisons


Equity Research


Data through December 2009

Source: Bureau of Transportation Statistics

The Freight Transportation Services Index Declined 4.1% Y/Y in December; On An Absolute Basis,

December TSI Was The Lowest For December Since December 1996

Freight TSI Declined 4.1% Y/Y in December

70

75

80

85

90

95

100

105

110

115

120

Dec-91 Dec-93 Dec-95 Dec-97 Dec-99 Dec-01 Dec-03 Dec-05 Dec-07 Dec-09

TS

I (2

000=

100)

-20.0%

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

Y/Y

% C

han

ge

TSI Index Y/Y %Change

Freight TSI Hits Lowest December Level

Since 1996


Equity Research


Source: Top Two Graphs: American Association of Port

Authorities, Individual Port Data, Stifel Nicolaus Estimates,

Bottom Graph: Pacific Maritime Association

0

2,000

4,000

6,000

8,000

10,000

12,000

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09W

est

Co

ast

Im

po

rts

(L

oa

ded

TE

Us

in T

ho

usa

nd

s)

-25.0%

-20.0%

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

Y/Y

% C

ha

ng

e

Total West Coast Imports (Loaded TEU's) Y/Y% Growth

Imports to The West Coast Continued to Fall in 2009, Contracting 17.1% Y/Y

0

1,000

2,000

3,000

4,000

5,000

6,000

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

West

Co

ast

Ex

po

rts

(L

oa

ded

TE

Us

in T

ho

usa

nd

s)

-20.0%

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

Y/Y

% C

ha

ng

e

Total West Coast Exports (Loaded TEU's) Y/Y% Growth

Exports From the West Coast Had Steadily Grown Since 2002; 2009 Exports

Declined 8.5% Y/Y

15

17

19

21

23

25

27

29

31

33

35

Dec

-97

Dec

-98

Dec

-99

Dec

-00

Dec

-01

Dec

-02

Dec

-03

Dec

-04

Dec

-05

Dec

-06

Dec

-07

Dec

-08

Dec

-09

Port

Tra

ffic

(m

m t

on

s)

-25.0%

-20.0%

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

3 M

o. M

ovin

g A

vg. Y

/Y %

Ch

an

ge

Port Traffic (mm Tons) 3 Month Moving Avg. Y/Y % Change

West Coast Port Tonnage Increased 3.4% in December

Container Volumes at Western U.S. Ports

Have Been Weakening Since Mid-2006



Equity Research







Outline



Equity Research


Is recent strengthening of demand a precursor to a strong 2010? When will pricing rally?

Fleet Downsizing/Redeployment Continues: Small fleets continued downsizing, on average. Some large fleets continue downsizing as well. Many large carriers are redeploying trucks to less seasonal, less cyclical, less driver-intensive, niche markets such as dedicated and drayage markets.

Rate of Company Failures Has Slowed: Small fleets and owner-operators not exiting the market as quickly as hoped as some lenders and lessors appear unwilling to liquidate or repossess equipment given still depressed used equipment values. (note: used equipment values appeared to bounce off the bottom during 4Q09, thereby offering some encouragement that liquidation could be more palatable late in 2010)

Pricing Remains the Biggest Challenge: Shippers that have recently put business out to bid saw price reductions ranging from 5% to 10%, and in some cases more than 10%; however, bid activity seems to be slowing and pricing, for many shippers, appears to have stabilized at low, non-sustainable rates. Some shippers have been ruthless with regard to severing long-term, multi-decade relationships with carriers, have unfavorably modified fuel surcharge mechanisms, and have unfavorably modified payment terms. Carriers shifting from account to account in the midst of all the re-bidding created additional inefficiencies.

Large Carrier Diversification Puts Pressure on Smaller Fleets: Large carrier growth focused on intermodal, dedicated, regional, and truck brokerage businesses. That strategy is exerting further pressure on small carriers, which are displaced into conventional long-haul truckload markets where they are ill-equipped to prosper due to high cost positioning and reliance on truck brokerage industry to reposition equipment.

Intermodal Coming Into its Own For Some Carriers: Domestic intermodal still gaining some share, particularly in shorter-haul lanes, even as fuel prices have declined, y/y; J.B. Hunt is the clear leader, in our view; J.B. Hunt’s new Norfolk Southern deal solidifies its leadership position; but, pricing pressure now has arrived in the intermodal arena.

Truckload Sector Themes


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Pricing still difficult with lack of freight and lack of consolidation

Volumes Remain Challenging: LTL volumes started off slower than expected in 4Q09 (after a respectable September) but picked up slightly before tailing off as usual in December. Many carriers’ tonnage was boosted by market share gains from YRC Worldwide, as the company continued to struggle to hold onto its customers in the midst of a financial/liquidity crisis. Some LTL carriers saw y/y tonnage comps turn positive in 4Q09. Some large LTL shipments have found less expensive TL alternatives.

Pricing Remains Harsh: Pricing remains very competitive in the LTL sector (and should at least through 1Q10), as volumes remain depressed and capacity has not exited as rapidly, as it typically would during a downturn. Some carriers are offering unprecedented pricing to capture market share and to perhaps exert pressure on financially challenged YRC Worldwide. Fuel prices have stabilized and therefore y/y yield comps should start to appear more normal.

Capex Remains Depressed: Most LTL carriers spent little on CapEx in 2009 and may keep spending at below-depreciation levels in 2010, assuming no large capacity exits that would improve margins and industry profitability

YRC Worldwide Always Seems to Pull a Rabbit Out of its Hat: YRC Worldwide has shrunk now to only ~15% of industry capacity and most recently completed its note exchange, which essentially gave the company to its bondholders. The company’s cash burn remains high (even without normal interest or pension payments) and its future remains uncertain. Only the banks are privileged to the company’s present financial situation (how bad is it?); the rest of us will have to wait a few more weeks.

Less-Than-Truckload Sector Themes


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Asset-light companies still able to leverage excess capacity; exception was the international airfreight sector during 4Q09

Airfreight Capacity Shortage Probably Short-Lived: Retailers may have been too careful while ordering for the 4Q09 holiday season. To avoid stock outs, retailers resorted to expensive airfreight to rush highly demanded items to market. With much airfreight capacity grounded, a temporary capacity shortage was created favoring the asset operators over the forwarders.

International Margins Under Pressure: Aside from the temporary international airfreight capacity shortage, excess capacity in the air, ocean, trucking, and intermodal markets has been generally favorable for forwarder and broker yields, but airfreight and ocean freight companies have raised rates off the bottom faster than volumes are returning. Net revenue should be squeezed over the next quarter or two until the increase can be passed along to shippers. It remains to be seen how rational air and ocean carriers will be with returning parked capacity over time, as rates and volumes improve. Trucking and intermodal capacity remained generally plentiful during 4Q09, with the exception of a few pockets here and there.

Globalization Trend Over?: Trend to offshore manufacturing could slow or reverse with longer-term prospects of high energy prices, focus on sustainability, and supply chain redesign.

DHL Has Exited the U.S. Domestic Market: DHL exited the U.S. domestic parcel and express markets in January 2009; a benefit for FedEx and UPS that was essentially lost in the rounding in this weak economy.

Integrated Logistics Management is Booming: Outsourced logistics management gaining traction, as managers look to cut costs and reduce overhead in a difficult operating environment.

When Will Truck Brokerage Market Become Over-Served?: Truck brokerage operations continue to grow as asset-based carriers and privately-held brokers endeavor to replicate C.H. Robinson’s success. Intermodal and intermodal brokerage operations seem to be further consolidating around few even larger players as railroads prefer to deal with large, well-capitalized, sophisticated players.

Logistics Sector Themes


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Deals Overwhelm Weak Volume and Challenging Pricing in Many Investors‟ Eyes

Hub Group Chooses Union Pacific: Hub Group concentrated its volume in the West to Union Pacific. Previously, Hub had split its business between Union Pacific and BNSF. Hub cited Union Pacific’s service improvements and efficiencies associated with handling most Western U.S. volume on one network.

Pacer Restructures: Pacer announced it was effectively exiting it’s wholesale East-West “big-box” business and would stake its fortunes primarily on providing a door-to-door retail offering. The company appointed Dan Avramovich as CEO to implement the transition. Its future is uncertain.

J.B. Hunt Consolidates More Power in the Intermodal Arena: J.B. Hunt announced a blockbuster deal with Norfolk Southern, which has been steadily developing strategic intermodal corridors in a series of public-private partnerships. Essentially, J.B. Hunt becomes the anchor tenant of Norfolk Southern’s evolving state-of-the-art intermodal network. J.B. Hunt’s Norfolk Southern deal is potentially as significant as its never-to-be-replicated deal with BNSF.

Domestic Intermodal Gaining Market Share: Pricing differential and fuel surcharge differential vis-à-vis truck makes intermodal more economically attractive in many high density, medium-haul and long-haul markets; however, the relative advantage has subsided somewhat since 2H08 as fuel prices generally declined; while implementation of corporate environmental sustainability plans has “legs” for some shippers, others have returned to a "low price rules" philosophy.

Intermodal Sector Themes


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Deals Overwhelm Weak Volume and Challenging Pricing in Many Investors‟ Eyes

Shorter-haul Markets Attracting Attention: Push into shorter-haul markets has been successful for a few big intermodal players in recent quarters. 500 mile lanes are now thought to be suitable in some cases.

International Traffic is Soft: Transcontinental volumes remain weak and pricing likely under the most pressure in the transcon lanes. “All-water service” to East Coast ports is here to stay, but shift away from West Coast ports has, for the most part, already taken place.

Service Continues to Improve: Rail service/fluidity generally remained high in 4Q09. Recovering volumes are not expected to impinge on current service levels.

Drayage Still at the Low End of the Trucking Food Chain: Drayage companies are currently experiencing high levels of economic pain; sufficient capacity may be unavailable should volumes rapidly recover and should additional ports adopt the LA/Long Beach mentality with respect to drayage truck emissions.

Intermodal Sector Themes, Cont’d


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Volumes remain weak despite improvement from lows; contract and spot pricing remain under pressure

Overcapacity in Liquid market Likely to Morph into Undercapacity: Excess capacity exists in the liquid cargo barge market leading to contract rate reductions that will impair 2010 profitability; however, the possibility of long-term oversupply is less likely than originally believed in light of order delays, order cancellations, tight credit markets, capacity retirements, and expanded capacity driven by volume declines.

Late ’09 Harvest Influenced 4Q09 Results: The concentrated peak harvest season that often leads to high spot rates in the fall did not develop this year due to wet growing conditions.

Dry Bulk Market Should Gradually Improve: Over time, we expect a rebound in the dry bulk market, as aging bulk barges are retired; recent rail data suggests that barge volumes are off their lows and PNW/Gulf freight spreads remain relatively attractive in light of high rail rates.

Few New Barges Coming in 2010: Manufacturing capacity is plentiful yet little barge manufacturing is planned for 2010.

Price Fixing Probe Continues in Jones Act Trades: Five former executives from Sea Star and Horizon Lines are serving jail time for involvement in price fixing; blue water carriers not implicated could be significant beneficiaries and experience improved profitability when legal expenses subside.

Bunker is a Very Dirty Fuel: New emission rules could hurt blue water carriers operating old, self-propelled vessels.

Cuba Could Create Future Opportunities: Opening of trade with Cuba could provide an attractive growth opportunity for blue water carriers (e.g. Trailer Bridge).

Domestic Marine Sector Themes


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“Oracle of Omaha” blesses the sector; carload pricing still generally favorable, volume comps improving for some commodities, re-regulation threat is legitimate

BNSF About to be Acquired by Berkshire Hathaway: Warren Buffett’s blockbuster deal to buy BNSF at $100/share provided the investor attention in 4Q09 needed to deflect concerns regarding decelerating pricing and the potential for reasonably onerous re-regulation.

Comps are Getting Easier: 4Q09 Volumes Were Down 6.1%, y/y, on Average. 4Q09 Volumes 0.8% Lower Sequentially From 3Q09:

Grain shipments were strong during 4Q09 due to a large but late harvest.

Coal volumes facing double digit declines for some carriers due to high stockpiles at utilities, challenging weather

conditions (for mining and railroad operations), low natural gas prices, and reduced energy requirements as a result

of the economic slowdown. Export coal rebounded during 4Q09.

Autos, metals and chemicals received a boost from inventory restocking and a return to modest economic growth.

Construction materials and non auto-related industrial products appear to have bounced just slightly off the

bottom.

International intermodal volumes have seen little improvement due to cautious consumer spending, strict retailer

inventory management, “all-water service” to East Coast ports, and non-sustainable pricing by some truckload

carriers.

Domestic intermodal stronger than international, but advantage vis-à-vis truck has been diminished by desperate

pricing on the part of many truckers. Rising fuel prices would benefit domestic intermodal.

A Re-regulation Bill Surfaced in the Senate During 4Q09: It is unclear when the bill will advance in the Senate to a vote given other legislative priorities. But in general, the Senate bill is more onerous than many would have hoped for. The prospect of a more proactive STB that would require bottleneck pricing, eliminate paper barriers, and rigorously and proactively represent shipper interests cannot be viewed favorably by the railroads.

Railroad Sector Themes


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Outline



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Short Term Predictions

Business Reluctant to Hire or Purchase

Uncertainty Retards Growth

Surplus Capacity Will Persist

Rates in Competitive Sectors Will Remain Challenged

Chinese New Year Impact No Longer Positive

Inventory Restocking Less of a Favorable Factor

Fuel Prices = Stable

Fiscal and Monetary Stimulus Will Likely Be Gradually Withdrawn

Conclusion: A “V-Shaped” Recovery is Unlikely

“Not Out Of The Woods Yet”

Cartoon courtesy of Kevin “Kal” Kallaugher


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Outline



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Longer Term Predictions

Sustainability is “A Big Deal”

Supply Chain Redesign (Product, Packaging, GlobalContinental)

Mode Optimization

Continuous Flow Logistics

Supply and Demand Tighten Dramatically

Supply ↓•Lack of Credit

•Labor Availability ↓

•Regulations Up ↑

Demand ↑ (to “New Normal”)

•Population Growth

•Weak Dollar Promotes Manufacturing in USA and Exports

•Recovery of Housing and Automotive Sectors

•Transportation Bill: Reauthorization

Energy Prices ↑

“The Future is Bright”

Energy Prices are Destined to Rise Given the

Consumption Levels of the U.S. and China



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Longer Term Predictions, Cont’d

Security – “You Ain’t Seen Nothing Yet”

Domestic

International

Pricing Will Strongly Shift to Favor Carriers

“The Future is Bright”


Security Concerns Will Lead to More Stringent Screening Processes; But Where Will The Limit Be Drawn?


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Disclosures

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2010 John Larkin

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