Letter From Jack Koraleski

May 13, 2005

To Our Customers:

This is the third report to our customers in 2005 and the 13th in the series we began in 2004 to provide you with information on our operations at Union Pacific.

Velocity, Terminal Dwell and Inventory trends are improving:

As we recently reported to the investment community, velocity, dwell and inventory measures have improved somewhat from their sub-par performance in 2004. We made progress every month this year, even in the face of the challenges presented by the storm in January. The rate of recovery from that disruption was faster than we originally expected, and it happened against the backdrop of increased carload volume. In fact, with the exception of January, with its negative impact on volume because of the storm, we continue to see month-over-month carload growth.

These charts show our performance on these key measures. Data from 2003 is included to provide some longer-term perspective.

View larger Velocity

View larger Terminal Dwell

View larger Freight Cars On Line

Hiring and Training programs continue:

We are continuing to add well-trained conductors and locomotive engineers to active service each month. During the first quarter of 2005, we hired 535 new employees for train service. Almost 670 people completed conductor training, while 421 employees have become locomotive engineers and an additional 522 people have begun engineer training.

Capital Spending on Equipment and Infrastructure in 2005 at very strong levels:

In 2005, the company is targeting approximately $2.8 billion in spending on infrastructure, capacity and equipment. This includes cash capital as well as leases on equipment such as new locomotives — 316 in 2005, and new rail cars — 4200 in 2005. Approximately $500 million of the total is planned for capacity expansions —  such as additional double tracking on portions of the Sunset Route, and commercial facilities —  such as new intermodal facilities in Dallas and Salt Lake City.

The First Phase of our Unified Plan has been implemented:

The plan to reduce network congestion by eliminating car handling and work events, our Unified Plan, is scheduled for implementation over the next few months, with the end result being an increase in velocity. The first phase began in April and involves the eastbound portion of our premium automotive business; the westbound flows were added this month, with four trains per day being taken out of our classification yard in North Platte, greatly reducing the workload at that important terminal.

We believe that this plan will cause some of our customers to see as much as a 20 percent improvement in transit times in some corridors. The rest of the operational changes are scheduled for completion through the middle part of the year, and we will continue to provide updated information as the implementation progresses.

We believe we have made important progress in our recovery but recognize that we have more to do to return our system to acceptable levels of service and fluidity. Doing so safely remains our top priority and we will continue to keep you apprised of our progress.