May 12, 2009

Service Update from Jack Koraleski - Executive Vice President, Marketing & Sales

To our Customers:

As we move into the second quarter of 2009, I wanted to take the opportunity to give you an update on our railroad. Along with companies and consumers worldwide, we’ve felt the impact of the severe downturn in the economy. While it’s difficult to predict when we might see recovery, there is good news to share.

Service Performance at Record Levels
Service performance across our railroad has continued to improve, with velocity averaging a best-ever 27.2 miles per hour for the First Quarter - up five miles per hour over the same period last year. We’ve also greatly improved the reliability of our service. Our Service Delivery Index – a composite measure of our customer commitments – reached a record level at 92 for the first three months and we’ve reduced variability by 10%. We're pleased that customers are noticing the improved service, with customer satisfaction scores at their highest levels since we started our satisfaction measurement process over 20 years ago. We're not resting on our laurels - we know there's opportunity for more improvement, and we'll continue to target those opportunities as we move forward.

Aligning Resources with Demand, While Maintaining Ability to Respond to Economic Recovery
Since our plans for 2009 were first put together, external forecasts for the year have steadily worsened - with IHS Global Insight currently forecasting GDP to shrink almost four percent this year. Our volume fell off significantly late last year and, so far, has remained at historically low levels in 2009. As our customers have sought to align production and inventories with weak demand, our volumes are running 21% below this time last year.

As a result, we find ourselves faced with the challenge of excess resources – train crews, locomotives and rail cars - that were put in place to handle the volumes originally anticipated for 2009. Having learned from the economic rebound in 2003, we are working to find the balance that allows us to right-size resources to match demand without compromising our ability to quickly respond to an economic recovery and the agility to help our customers take advantage of market opportunities when they are available.

Currently, we have close to 5,000 employees furloughed, a little over 30 percent of which are on our Auxiliary Work and Training Status program - an approach we put in place to help maintain volume variability in our workforce. This program allows us to provide those employees a minimum number of workdays rather than face unemployment during a tough economy, and allows us the flexibility to bring those trained and ready resources back on the railroad when carloading volume strengthens. We’ve got 2,800 of our engineers currently working as conductors, who remain ready-trained to return as engineers when the economy rebounds. In addition to our furloughed employees, we've also got nearly 2,000 locomotives and over 65,000 freight cars stored - representing over $7 billion in idled assets that remain a part of our cost base.

In the months ahead, we’ll continue to gauge the path of this economy through our discussions with you and by keeping a watchful eye on economic indicators.

Union Pacific Defends Position at Border Crossings
In closing, I want to make a few comments regarding lawsuits filed between Union Pacific and the Department of Homeland Security over drug-related issues at the border with Mexico. I’ve had customers ask if recent issues between Customs and Border Protection (CBP) and Union Pacific will affect the ease of using UP for their shipments to/from Mexico. The answer is "no" - all gateways are open and traffic is flowing routinely across the border. Here’s some background. In an ongoing issue, the CBP has sought to impose fines on Union Pacific when it finds drugs hidden in rail cars entering the United States from Mexico - despite the fact that Union Pacific has no control over what occurs in Mexico and we are not allowed to approach or inspect the trains crossing the border, except under CBP direction.

In order to protect our rights as an American company, Union Pacific initiated a lawsuit (PDF File) against the Department of Homeland Security (DHS) last summer, because the company believes CBP has unlawfully applied the Tariff Act of 1930 in connection with the smuggling of these illegal narcotics. In response, the Department of Justice last month filed multiple lawsuits against Union Pacific for allegedly failing to prevent the smuggling of narcotics in rail cars at the border.

For years, Union Pacific has been a strong supporter of CBP. We have provided millions of dollars in annual financial support and other assistance to CBP's efforts to prevent the smuggling of illegal drugs into the country, however, Union Pacific continues to vigorously defend our position - that rail cars at border crossings are in government control. We believe that DHS has exceeded its legal obligations and we will defend against these lawsuits. We are in active negotiations with CBP to resolve this matter, and believe it is in the best interest of the U.S. government and Union Pacific to continue cooperative efforts to ensure fluid operations at the border for our customers. If you’re interested in additional information on this issue, please refer to our press release or contact your Union Pacific sales representative.

We appreciate your business as we all look forward to a stronger economic environment in the future.

Union Pacific
Executive Vice President, Marketing & Sales