News Release

BNSF CEO Matt Rose Addresses CLM

Fort Worth, TX October 4:

Thank you, Kurt), and good afternoon. I’m honored to be here today, and I would like to say thank you to all of our customers for their business.

Discussing how rail is dealing with today’s port infrastructure and planning for tomorrow is a topic that we spend a good deal of time on at BNSF.

Let me begin with a few facts about our Company, which ten days ago celebrated its seventh anniversary as BNSF. These seven years have flown by at lightning speed. As you know, combining the Burlington Northern with the Santa Fe triggered a round of mergers and consolidations. Our merger led to a huge capital investment program.

By the end of 2002, BNSF will have spent about $14 billion, or $5.5 million per day, to improve our infrastructure and expand our network, including new Intermodal centers, freight yards, double and triple track projects, and acquiring about 1,700 new locomotives and thousands of freight cars.

We had to spend this money to provide better service to meet our customers’ expectations and to compete effectively for the growth in international trade that has occurred at every port along the West Coast of America. This involved expanding facilities to handle more container or trailer lifts, such as in Los Angeles where we now have a capacity of 1.5 million lifts annually and operate the world’s largest intermodal facility. We also now operate the Oakland International Gateway, just a few miles from here. We also expanded our facilities at Portland and South Seattle. The results of these investments have produced intermodal on-time service consistently being delivered day in, day out, hitting our customers’ expectations, and providing us with significant growth.

Speaking of growth, there are some forecasts being compiled for the Office of Freight Management and Operations of FHWA that suggest the total freight tonnage growth we have seen over the past twenty years is only the foundation for the future.

Here is some very preliminary, baseline forecast data from this research:

• By 2020, total global freight tonnage will grow by 67 percent over 2000.
• Domestically, tonnage will rise 57 percent by 2020 over 2000.
• Import-export tonnage, excluding water shipments of crude petroleum, will double by 2020.

As I watch the emphasis that many U.S. manufacturing companies are placing on Asia, specifically China, I believe these numbers will probably become reality.

These types of volume increases will have tremendous impact for the supply chain represented here.

Of course, different regions of the country are growing at different rates. The growth rate in the West is forecasted at 76 percent compared with 71 percent for the South, 63 percent for the central region of the U.S. and 58 percent for the Northeast through 2020.

When we take a look at different modes, the infrastructural impacts become very challenging. For example, trucking is expected to grow by 62 percent in tons by 2020, and ton-miles would increase about 58 percent.

Rail is forecast to show a 44 percent growth in tonnage by 2020, with ton-miles increasing 47 percent. As a railroad CEO, perhaps I should be concerned that our predicted growth rates are not as strong as trucks. But I’m really encouraged because intermodal has been the fastest growing business segment for our industry and for BNSF during the past twenty years.

Today, Intermodal represents about 30 percent of our $9 billion of annual revenues and our Intermodal business with the Asian steamship companies is now more than $1 billion dollars annually.

Adding support to these forecasts is a report commissioned by our industry that projects rail intermodal to grow at an annual rate of five percent over the next several years. The report, which was co-authored by Anthony Hatch, an independent analyst, and Thomas Brown, an intermodal industry veteran, was released about 10 days ago.

In commenting on the report, the September 19 issue of The Wall Street Journal said, “…railroads may soon receive more revenue from moving container and trailers of consumer goods than from hauling coal.” That has already happened at BNSF. That results in us lifting an intermodal container or trailer about every 9 seconds. (When they are working at the ports.)

The report says that intermodal shipments could become the industry’s largest revenue source by the end of 2003, accounting for more than $9 billion of the $40 billion annual rail freight revenues.

If you don’t believe the degrees of growth and only subscribe to say half of the forecast, the question remains…how will the infrastructure of the ports, rails and trucks handle that level of growth? Does anyone believe that the current returns on the liner business, trucking industry or rail industry would allow them to reinvest to achieve this capacity expansion?

Let me talk for a minute or two about our company. Earlier, I cited our $14 billion of capital expenditures since merger. Unfortunately, our returns on that capital -- like many asset-based companies -- have lagged over the past several years. As a railroad, we are not alone. During the last half of the 1990’s, U. S. railroads’ rates of return have averaged two to three points below the industry’s cost of capital. As with your business, we will continue to invest, only if adequate returns can be realized.

To improve the returns for our industry, there are only a couple of options. One is to boost top-line growth and improve our yields, not only from Intermodal business, but also from all sectors. We have been somewhat constrained by the economy these past eighteen months.

The other option is to reduce our capital expenditures.

We’ve scrutinized our workforce levels, our planning processes, our equipment and materials procurement and distribution, our use of outsourcing, and every other area of our operation to ensure that we achieve the greatest possible efficiency without sacrificing the quality and reliability of our service or infrastructure.

At BNSF, despite a one-billion-dollar reduction in capital spending since 1998, the capital devoted to maintenance of our infrastructure has remained steady, reflecting our commitment to a safe, reliable infrastructure and consistent service for our customers.

And while the forecasted rate of international trade growth going forward is dramatic, we don’t see the other lines of our business growing at much more than the Gross Domestic Product of the United States.

What this tells me is that at today’s pricing levels, our industry and other industries are not deriving the value from consistent, reliable service and, therefore, will have difficulty justifying the future capital investments needed to meet projected growth.

So, what do we need to do?

We need to:

• Compete effectively with prices that reflect market value. We have conditioned the economy to expect year-over-year reductions in transportation expense as a percent of GDP. I am not sure that without significant modal shift, this is possible in the future.
• Offer a range of transportation solutions that extends our reach into our shippers supply chains; and
• look for targeted funding incentives to expand our infrastructure to meet the forecasted increased demand for intermodal freight and passenger mobility.

I’d like to spend a few minutes discussing each of these opportunities.

First, to compete effectively in international trade,

I strongly believe that America’s ability is tied directly to the efficiency of our entire transportation infrastructure, from the ports to the railroads to the highways. Pricing these transportation services to reflect the appropriate value we deliver will enable companies such as ours to reinvest to continue to expand the infrastructure.

With regard to our second opportunity--capturing more revenue by extending our services deeper into our customers’ supply chains--we see a growing role for 3PL’s and 4PL’s in handling total transportation solutions for shippers. We also see a growing emphasis from our customers in evaluating their total cost of transportation. These actions are causing us to look for ways to help them minimize their total cost of product or commodity distribution to their customers.

Among the solutions are:

• Identifying lanes where direct rail or transloads or intermodal will save them more money than only full truckload service.
• Establishing a network of transloads located at key junctions that can serve multiple commodities.
• Offering a suite of services -- we call it Economic Development -- that help our customers and prospects locate plants and warehouses for efficient inbound and outbound transportation. BNSF’s Logistics Park-Chicago in Joliet is a good example. Another example is close to here at Stockton. We invested $70 million in an intermodal facility there last year, and now industrial parks are springing up around it.
• Creating private fleet distribution and fleet pooling programs to help reduce the cost and the effort of operating a railcar fleet and to optimize those assets; and
• Providing visibility and pro-active monitoring of all railcars, regardless of railroad operator, across North America. To collect this information and manage traffic to provide more consistent transit times, we are pilot testing a new Web-based tool, BNSF SmartTrack, with several shippers.

And finally, in another step to expand our services for our customers and generate new revenue streams, we recently created BNSF Logistics to provide transportation execution management across railroads and other modes of transportation. This subsidiary includes the acquisition of certain assets of ClickLogistics, namely software, experienced people and a book of business representing relationships with about 100 customers and more than 1,000 carriers.

BNSF Logistics, which is headquartered in Springdale, Arkansas, and has field offices in Shrewsbury, Pennsylvania, and Birmingham, Alabama, provides transportation management across North America.

Some of the transportation services being provided include over-the-road truck brokerage for both truckload and less- than-truck-load requirements as well as some door-to-door intermodal to Mexico. A logistics product is being developed, and we expect to have it available by mid-2003. We are excited about this new business opportunity, as we believe it will meet the changing transportation management requirements of our customers.

It also fits with our vision to develop a core set of rail-centric, value-add services for our customers and to develop collaborative planning and execution.

Now, let’s talk about the third opportunity for growth.

How do we expand our infrastructure to meet the steady increasing demand for intermodal transportation, without compromising rail service for our other lines of business and also meet the growing demand by states for increasing rail passenger mobility?

Since the Eisenhower presidency, U.S. transportation spending has largely been focused on the highway. We have the finest highway system and road quality of any developed nation.

But, this surface transportation network has contributed to the huge gap between tonnage and revenue carried by truck and that moved by freight railroads. Today, the nation’s freight railroads annually move about 40 percent of the nation’s intercity freight and in 2001 earned about $40 billion in revenues. That freight volume level has grown moderately, and we have seen real freight rates reduced significantly.

By contrast, the trucking industry in 2001 had annual revenues of $500 billion.

As you know, the railroads pay for about 99 percent of their infrastructure costs, while our partners on the highway are not fully funding their infrastructure. The issues of road congestion, traffic safety, fuel emissions and other environmental considerations are now causing more communities and legislators to question whether rail isn’t a better solution.

And as The Wall Street Journal article of September 19 also pointed out, “…Congress is considering reauthorization of the federal surface transportation program, which expires in September 2003. Transportation companies are already proposing ideas to handle a projected doubling of the nation’s freight volumes in the next 20 years, including dedicated lanes…”

The article went on to say that the co-authors of the report, I cited earlier, make the case that the federal government should spend money to boost intermodal infrastructure as a way to avoid expenditures on highways. The report also said that, in addition to the economic benefits of intermodal transportation, specifically lower rates, there are environmental benefits of rail vs. truck.

In all candor, the rail industry has worked hard at seeming not to want to take government funding, when in many ways we have been financial partners with the Department of Transportation in grade-crossing and grade-separation projects for many years.

And in April of this year, Secretary Mineta and I participated in the grand opening celebration of the Alameda Corridor, probably the largest public-private partnership ever undertaken. This 20-mile rail expressway eliminated a couple of hundred grade crossings through some of east Los Angeles’ more densely populated neighborhoods because the rail is located in a below-grade trench. In addition, noise and vibration are no longer environmental factors for the people living nearby.

This was a $2.4 billion project that was funded through bonds and will be paid off through user fees. This innovative solution took twenty years to become a reality, and it has reduced transit times to about 40 minutes from three hours moving intermodal trains from the Ports of Long Beach and Los Angeles to our mainline and then onto the Midwest.

We hope railroads and communities will benefit from

TEA-3, that’s what the new surface transportation reauthorization bill is called. It recognizes the need for more public/private partnership initiatives to improve the nation’s rail infrastructure and to be responsive to public concerns about traffic congestion, safety, transportation flexibility and economic development. Intermodalism is probably the greatest example of where this would be appropriate.

I believe the rail industry needs ongoing help with its infrastructure investments to remain strong and competitive. This is a different tune from the one our industry has sung in the past. But again, this is today’s reality.

As members of CLM, we need your support, too, to ensure that the rail industry is financially healthy and can efficiently provide transportation services that will respond to both future freight demands and to the increasing need for passenger mobility solutions based on rail.

Thank you very much for your business and your time today.

BNSF Headquarters
BNSF Railway Company
2650 Lou Menk Dr. 2nd Floor
P.O. Box 961057
Fort Worth, TX 76161-0057
Phone: (817) 352-1000