Letter From Jack Koraleski

August 11, 2004

To Our Customers:

As we move into the final weeks of the summer, our operations have shown some improvement. Train velocity remains several miles per hour below where we want it to be while record volume continues to move across our network. This letter will provide you with an update of our hiring and training program for new conductors and locomotive engineers, our network status, and will review steps we are taking to manage our volume during the historically busy fall period.

We continue to hire and train new employees at a high rate and acquire additional locomotives:

We are on plan to hire and train approximately 5000 new train service employees in 2004. July targets for hiring and training were met, and 804 trainmen will graduate in August and September.  Our supply of locomotive engineers is still tight in some areas.  We expect to graduate 136 engineers in August as part of the 266 planned for the third quarter. 

Since locomotive engineers must be qualified for the specific geographic territory in which they work, the time needed to train these people is extended by the time it takes for them to make a sufficient number of qualification trips over a particular route.  To increase our training capacity, we have purchased additional locomotive simulators to help familiarize new engineers with their particular routes. These have been placed in hubs where the need for additional engineers is the greatest to reduce somewhat the amount of time required for engineer training.

So far in 2004, we have added 142 new locomotives and nearly 350 short-term leased units. We expect 80 additional new locomotives in the third quarter and 173 in the fourth quarter of this year.

Service interruptions have slowed our recovery:

Derailments on several key corridors slowed operations in late July and early August as trains were forced to wait for track repairs or rerouting over longer routes to avoid the blocked line.  While we are usually able to return track to service in hours, some problems, particularly with bridges, can take longer to repair and delay reopening of that route.  There is no apparent common thread through these service interruptions, but we are continuing to investigate these incidents to better understand the causes. 

The Western Region remains fluid while problems persist in South Texas:

Operations in our Western Region, which includes the I-5 Corridor between Southern California and the Pacific Northwest and the Sunset Route between Los Angeles and El Paso, have maintained improved velocity for over a month.  Trains are generally departing on plan, and yard operations are mostly current. The allocation system we announced in July and a slight reduction in train starts are helping restore velocity.

Houston and South Texas remain problem areas.  Crew and spot locomotive shortages continue to slow operations.  Two weeks ago, we reduced the number of railcars in rock service in South Texas to relieve the congestion in that part of the network.  As a result, we are now moving essentially the same volume of rock with approximately 30% fewer cars. Increased velocity has reduced the number of blocked sidings and allows us to use cars and locomotives more efficiently.  We are watching this situation closely and will continue to work with these customers to maximize the volume we can move in that region.

The demand curve for “Peak Season” appears longer rather than higher:

The record volume we are carrying seems to indicate that the increased demand associated with the seasonal peak is spreading out over a longer period of time than in past years.  We are already above peak 2003 levels for international intermodal volume, and automobile volume has increased following the model year changeover.  We are continuing to work with all our customers to stay abreast of market demand at this critical time of the year.

Looking ahead:

Our planning for 2005 will be done against the backdrop of constrained capacity in some key corridors. We anticipate that we will again be hiring enough employees to replace retiring workers and to handle the surges in demand.  We will continue to acquire new locomotives as needed and increase capacity in some locations.  At the same time, we are aware of the need to balance the additional costs and investments in additional capacity with adequate financial returns to make these investments worthwhile.  The key to achieving this balance is to leverage capacity investments to improve service, which will drive profitable revenue growth, and, in turn, produce required financial returns.

We will continue to report to you through these letters and through your sales representative.

 


Executive Vice President-Marketing and Sales