The Supply-Chain Indicator

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Equity Research

MAY 2007

The Supply-Chain Indicator First-Quarter 2007 Shipper Survey Results Airfreight and Surface Transportation

NEAR-TERM EXPECTATION FOR MOVEMENT FROM RAIL TO TRUCK. Our shipper respondents continue to see tight rail capacity and the most available truckload (TL) and less-than-truckload (LTL) capacity in the first quarter since we began asking questions about truck capacity in 1999. Not all that surprisingly then, shippers expect to move slightly more freight from rail to truck and less from truck to rail during 2007 than we have seen for several years. Pricing, not service, is cited generally for this change, which bucks the longer-term secular shift toward railroads.

FREIGHT DIVERSION FOR LTL AND UPS LIKELY TO BEGIN SHORTLY. A small minority of shippers expect to begin diverting freight 12 months in front of the expiration of the respective LTL and UPS Teamster contracts, which expire on March 31 and July 31, 2008. For the unionized LTL providers, this amount is more significant, with 14% of shippers polled expected to begin diverting an average of 20% of their freight beginning in second-quarter 2007. For UPS, it’s a much smaller amount, which could potentially begin in third-quarter 2007.

LESS SHIPPING EXPECTED IN SECOND QUARTER DUE TO INVENTORY BUILD. Our respondents indicated modestly rising but generally balanced inventories during the first quarter. However, a substantially greater amount of shippers this quarter versus a year ago (24% versus 7%) expect less shipping activity in the second quarter as a result of inventory build-up. This likely is not a good sign for already depressed freight volumes.

Research Analysts Edward M. Wolfe Robert D. Farley Scott H. Group Timothy J. Denoyer Michael T. Beer (212) 272-7048 (212) 272-9738 (212) 272-0692 (212) 272-2138 (212) 272-5938 [email protected] [email protected] [email protected] [email protected] [email protected]

Page 2 THE SUPPLY-CHAIN INDICATOR

BEAR, STEARNS & CO. INC. Page 3

Table of Contents Page

Executive Summary....................................................................................................................................................7

Summary of Findings...........................................................................................................................................7

Investment Conclusion .............................................................................................................................................13

Background ..............................................................................................................................................................16

Railroad Topics ........................................................................................................................................................18

Rail Service Levels ............................................................................................................................................18

Market Share Shifts Versus Truck .....................................................................................................................22

Rail Pricing ........................................................................................................................................................25

Trucking Topics .......................................................................................................................................................30

Trucking Capacity..............................................................................................................................................30

Truck Pricing .....................................................................................................................................................36

Fuel Surcharge and Base Rates..........................................................................................................................39

Teamsters Labor Negotiations ...........................................................................................................................42

Parcel Topics ............................................................................................................................................................44

Ground Market...................................................................................................................................................50

Teamsters Labor Negotiations ...........................................................................................................................52

Inventory Levels.......................................................................................................................................................53

Import and Export Demand ......................................................................................................................................57

Airfreight Trends ...............................................................................................................................................57

Ocean Freight Trends.........................................................................................................................................58

Universe Tables ........................................................................................................................................................65

All pricing is as of the market close on April 27, 2007, unless otherwise indicated.

Special thanks to Chris N. Stathoulopoulos and Courtney Reardon for their contributions to this report.


List of Exhibits Page

Exhibit 1. Bear Stearns Transportation Stock Performance by Subsector ...............................................................13 Exhibit 2. Historical Forward P/E Valuation............................................................................................................14 Exhibit 3. Bear Stearns Seasonally Adjusted Truck Bankruptcy Index (January 2000 = 100) ................................15 Exhibit 4. What Is Your Company’s Total Annual Transportation Budget? ...........................................................16 Exhibit 5. Describe the Industry in Which Your Company Participates ..................................................................16 Exhibit 6. What Do You Expect to Be the Year-over-Year Change in Your Total Freight Transportation Budget (Including Fuel Surcharge) in 2007? ...........................................................................................................17 Exhibit 7. What Percentage of Your Truckload Shipments Is a Viable Alternative to Rail?...................................18 Exhibit 8. Year-over-Year Change in Average Train Speeds, Class I Rails ............................................................19 Exhibit 9. Year-over-Year Change in System-Wide Dwell Time, Class I Rails......................................................20 Exhibit 10. Have Service Levels Improved or Declined for the Following Rail Carriers During First-Quarter 2007 in Comparison to First Quarters in Recent Previous Years? ...........................................................................21 Exhibit 11. Total Class I Year-over-Year Carload and Intermodal Volume Growth, 2003-07 ...............................22 Exhibit 12. Have You Shifted a Significant Percentage of Your Shipping from TL to Railroad or Vice Versa over the Past Six Months? ........................................................................................................................................23 Exhibit 13. Do You Plan to Shift a Significant Percentage of Your Shipping from TL to Railroad or Vice Versa over the Next Six Months? ....................................................................................................................23 Exhibit 14. If You Have Diverted Freight from Railroad to TL, What Are the Main Reasons (over the Past Six Months)? ............................................................................................................................................................24 Exhibit 15. If You Have Diverted Freight from TL to Railroad, What Are the Main Reasons (over the Past Six Months)? ............................................................................................................................................................24 Exhibit 16. How Much Cheaper Are Your Railroad Transportation Costs, on Average, Compared to Comparable Truckload Movements?........................................................................................................................25 Exhibit 17. What Increases (Decreases) in Railroad Rates Do You Expect to Pay During 2007 Compared to 2006? ....................................................................................................................................................................26 Exhibit 18. Which of the Following Rail Carriers Have Been Most Aggressive in Pursuing Rate Increases?........27 Exhibit 19. What Percent of Your Contracts Have Been Re-priced Since 2004? ....................................................28 Exhibit 20. What Are Your Expectations Following the Surface Transportation Board’s Recent Decision on Railroad Fuel Surcharges?........................................................................................................................................28 Exhibit 21. Class I Weekly Rail Carloading Data, 2006-07 (Year-over-Year Growth)...........................................29 Exhibit 22. How Did You Perceive TL and LTL Capacity During First-Quarter 2007 Compared with Recent First Quarters? ..............................................................................................................................................31 Exhibit 23. Monthly Class 8 Heavy-Duty Builds Versus Net Orders ......................................................................32 Exhibit 24. What Do You Expect Regarding the Direction of TL/LTL Capacity over the Next 12 Months? .........33 Exhibit 25. Are You Generally Seeing More or Less Small to Medium-Size Fleet (i.e., Fewer than 500 Trucks) TL Capacity?...............................................................................................................................................34 Exhibit 26. Bear Stearns Seasonally Adjusted Truck Bankruptcy Index (January 2000 = 100) ..............................35 Exhibit 27. Are You Generally Seeing More or Less Large Fleet (i.e., Greater than 2,000 Trucks) TL Capacity? ............................................................................................................................................................35 Exhibit 28. Our Public TL Carriers’ Historical Reported Fleet Growth (year over year) ........................................36 Exhibit 29. Reported TL Volumes (Loaded Miles) and Yields (Revenue/Mile) .....................................................37 Exhibit 30. Reported LTL Tonnage and Yields (Revenue/Hundredweight Gross of Fuel) .....................................38


Exhibit 31. What Increases (Decreases) in TL/LTL Rates Do You Expect to Pay During 2007 Versus 2006?......39 Exhibit 32. Are You Currently Paying All or Some Percentage of the Fuel Surcharge Billed to You by Your TL Providers? ...........................................................................................................................................................40 Exhibit 33. Are You Currently Paying a Higher Percentage of Fuel Surcharges to Your Smaller or Larger TL Providers?.................................................................................................................................................................40 Exhibit 34. Are You Currently Paying Higher Base Rates to Your Smaller or Larger TL Providers? ....................41 Exhibit 35. Are You Currently Paying All or Some Percentage of the Fuel Surcharge Billed to You by Your LTL Providers?.........................................................................................................................................................42 Exhibit 36. How Do You Expect to Change Your Shipping Patterns Ahead of the Upcoming March 31, 2008, Teamsters’ LTL Trucking Labor Negotiations, if at All? ........................................................................................43 Exhibit 37. Express Carriers’ Rate Increases Versus Reported Yield Increases ......................................................45 Exhibit 38. If You Have a Contract with UPS and/or FedEx, to What Extent Does Your Contract Protect You from Annual List Rate Increases? ............................................................................................................................46 Exhibit 39. Anticipated Compliance with Recent FedEx and UPS List Price Increases..........................................47 Exhibit 40. Percentage of Expected Year-over-Year Compliance with UPS and FedEx Rate Increases and Average Forward-Year Base Rate Increase Expectations from Our Past Surveys...................................................48 Exhibit 41. Reported and Fuel-Adjusted Yields for FedEx and UPS.......................................................................49 Exhibit 42. Do You Anticipate Moving Parcel Products from Air to Ground to Take Advantage of the Relatively Lower Ground Rates if the Economy Slows Down in the Next 12 Months? .........................................50 Exhibit 43. If You Use UPS, FDX, or DHL for Ground Parcel Shipments, What Percentage of Your Total Volumes Are Considered Oversized According to the Rules of Each Carrier? .......................................................50 Exhibit 44. If You Use UPS Ground, What Percentage Impact Do You Think the New Oversize Pricing Mechanism, Beginning in 2007, Will Have on Your Overall UPS Ground Shipping Rates?..................................51 Exhibit 45. If You Use UPS Ground, What Percentage Impact Do You Think the New Oversize Pricing Mechanism, Beginning in 2007, Will Have on Your Overall UPS Ground Shipping Volumes? ............................51 Exhibit 46. How Do You Expect to Change Your Shipping Patterns Ahead of the Upcoming July 31, 2008, Teamsters’ UPS Parcel Labor Negotiations, if at All? .............................................................................................52 Exhibit 47. Compare the Inventory Level of Your Company During First-Quarter 2007 to Historical First Quarters ....................................................................................................................................................................53 Exhibit 48. How Do Your Safety Stock Levels Compare to a Year Ago?...............................................................54 Exhibit 49. Indicate Your Expectations for Inventory Levels in Second-Quarter 2007 Compared to Past Second Quarters........................................................................................................................................................54 Exhibit 50. Did You Ship Less Freight than Normal During First-Quarter 2007 Compared to First Quarters in Recent Previous Years Because of Inventory Buildup?.......................................................................................55 Exhibit 51. Do You Expect to Ship Less Freight than Normal During Second-Quarter 2007 Compared to Second Quarters in Previous Years Because of Inventory Buildup?........................................................................56 Exhibit 52. On Average, Do You Expect to Pay More, Less, or Roughly the Same (Excluding Fuel Surcharge) for International Heavy Airfreight Shipments During 2007 Versus 2006? ...........................................57 Exhibit 53. ATA Domestic and International Cargo Traffic Statistics (revenue ton-miles) ....................................58 Exhibit 54. On Average, Do You Expect to Pay More, Less, or Roughly the Same (Excluding Fuel Surcharge) for Ocean Containership Capacity During 2007 Versus 2006? .............................................................59 Exhibit 55. Expeditors International, EGL, and UTi Worldwide Reported Gross Yield Improvement...................60 Exhibit 56. Year-over-Year Change in Ocean Import and Export Volumes at the Three Largest West Coast Ports (Los Angeles, Long Beach, and Oakland) ......................................................................................................61 Exhibit 57. Container Statistics for Major Western, Eastern, and Gulf Ports of the U.S. (Year-over-Year Percentage Change in Loaded TEUs).......................................................................................................................63


Exhibit 58. Do You Intend to Shift Any Freight Away from the West Coast Ports Prior to the July 1, 2008, Longshoreman's Contract Expiration? .....................................................................................................................64 Exhibit 59. Bear Stearns Airfreight Universe — EPS and Book Value Multiples, 2004-08E.................................66 Exhibit 60. Bear Stearns Airfreight Universe — Comparative Financial Returns, 2004-08E .................................67 Exhibit 61. Bear Stearns Ground Transport Rail Universe — EPS and Book Value Multiples, 2004-08E.............68 Exhibit 62. Bear Stearns Ground Transport Rail Universe — Comparative Financial Returns, 2004-08E.............69 Exhibit 63. Bear Stearns Ground Transport Truck Universe — EPS and Book Value Multiples, 2004-08E..........70 Exhibit 64. Bear Stearns Ground Transport Truck Universe — Comparative Financial Returns, 2004-08E..........71


Executive Summary

A summary of key takeaways from our first-quarter 2007 shipper survey appears below. This is followed by our outlook and investment conclusion for our universe of covered stocks in light of the trends indicated by the survey.

Transportation Budget Increases Easing Year over Year. On average, our respondents’ answers imply an expected year-over-year transportation budget increase (gross of fuel) of 3.4% in 2007, in line with the 3.3% that had been expected in the coming year in fourth-quarter 2006 and decelerated materially from 4.8% expected in the year-ago quarter. If we assume that participants in our survey, on average, grow volumes in line with anticipated economic growth of 2.0%-2.5%, it implies that shippers are expecting about 1.0%-1.5% pricing increases averaged across modes in 2007, compared to 1.5%-2.0% expected a year ago (see pages 16-17).

Average Rail Service Levels Improve. Our survey results indicate that rail service levels generally deteriorated sequentially, but were improved year over year. We asked shippers to rank the improvement or deterioration in service for each of the Class I rails. The average score of 3.0 in a 5.0 scale (with No. 1 indicating a strong decline in service and No. 5 indicating a strong improvement) for the group in first-quarter 2007 deteriorated slightly versus the fourth quarter but improved by about 9% versus a 2.7 rating in the year-ago period despite a more difficult weather comparison. This is the third consecutive quarter that our average service rating has been at least 3.0, which is the midpoint of potential scores, and likely indicates stable to improving service levels. We believe this speaks to generally improved consistency from the individual rails and the broader rail network (see pages 20-21).

Improved Perception of Rail Service Is Evident for All Major Rails. Compared with our first-quarter 2006 results, six of the seven carriers registered year-over-year improvements in service-level ratings in our survey. Three of the four major U.S. railroads exhibited solid double-digit increases based on our survey, led by Union Pacific (up 24%), CSX (up 19%), and Burlington Northern Santa Fe (up 18%). Norfolk Southern on the other hand was up a more modest 3% off the toughest year-ago comparison. Both of the Canadian rails registered solid single-digit increases in year-over-year survey ratings, including a 9% improvement at Canadian National and a 6% improvement from Canadian Pacific. Kansas City Southern’s rating was down 11% into a tough comparison (see pages 20-21).

Shippers Indicate More Volumes Shifted to Truck. Our survey indicated that shippers shifted 6.5% of their volumes from rail to truck during the first quarter, which is down versus a 8.1% shift last quarter, although up versus a 5.1% shift in the year-ago period. Our survey also indicated that the movement of volumes from TL to rail was up 3.0% in first-quarter 2007, mostly flat versus a shift of 2.9% in fourth-quarter 2006 and up modestly versus 2.6% in the year-ago period. For the next six to 12 months, our survey indicates that shippers plan to move about 6.5% of volumes from the rails to TL, up versus both 3.7% in the fourth

SUMMARY OF FINDINGS


quarter and 2.4% in the year-ago period. This also compares to 3.2% of shippers who plan to move volumes from TL to rail during the next six to 12 months, down versus 4.4% last quarter and 3.3% in the year-ago period (see pages 22-23).

Increasing Rail Prices Driving Conversion to TL. For the third consecutive quarter, increasing rail prices were cited as the most significant factor driving their diversion of freight to TL. This compares with all of our previous surveys, which cited poor rail service as the most important factor. Poor rail service has dropped to the second most important factor driving conversions away from rail, which we believe speaks to improving or at least more consistent rail service (see pages 23-24).

Rail Rates Remain Cheaper than Truck. For the first time in the history of our survey, we asked our shippers how much cheaper their railroad transportation rates are compared with comparable truckload movements. At the high end, nearly 43% of our shippers indicated that truckload rates were more than 10% more expensive than rail rates, while another 30% believed TL rates are currently more than 20% more expensive and 24% believe truck rates are less than 10% more expensive than rail. None of our respondents indicated that rail and TL rates were equal, while the remaining 3% believed that railroad rates were currently more expensive than TL. On average, this equates to TL rates being approximately 15% more expensive than current railroad rates (see pages 24-25).

Strong Rail Rate Increases Expected to Continue. Rail shippers anticipate an average 4.0% rate increase, up from 3.5% suggested by our fourth-quarter 2006 survey and above 3.7% in the year-ago period. We believe that survey data support the story of sustained momentum in rail rate increases throughout 2007, driven by ongoing tight rail capacity and expectations for continued strong rail freight demand. We note that within the group of shippers expecting to pay greater than a 5%-6% rate increase, shippers are expecting a weighted average increase greater than 11%, which is the second-highest expected rate increase from this group in the history of our survey (see pages 25-26).

Little Impact Expected from Rail Fuel Surcharge Change. For the first time, we inquired about rail shippers’ expectations for costs related to the Surface Transportation Board’s recent mandate that railroads change their fuel surcharge methods for non-contractual, non-exempt volumes from revenue-based tariffs to some other form of fuel surcharge (most have adopted mileage-based tariffs). Not surprisingly, the vast majority of shippers expect no major change in costs as a result of the change in fuel surcharge calculation, while the remainder are somewhat split over the impact (see page 28).

Continued Record Market Perception of TL Overcapacity. Respondents showed a strong and growing bias again toward perceptions of “overcapacity” in the TL market during the first quarter. Nearly 80% of shippers believe there was overcapacity during first-quarter 2007, the second consecutive quarter of greater than 75% indicating TL overcapacity. In the last TL downturn, our surveys between first-quarter 2001 and first-quarter 2002 indicated that only 51%-61% of shippers believed there was TL overcapacity (see pages 30-31).


Shippers Also See Overcapacity in the LTL Market. Sixty-nine percent of our LTL shippers surveyed reported overcapacity, with 57% indicating “modest overcapacity,” and another 12% indicating “extreme overcapacity.” Only 1% indicated “tight” LTL capacity and none indicated “extremely tight” capacity during the first quarter. During the last downturn, between first-quarter 2001 and first-quarter 2002, 50%-69% of shippers believed there was LTL overcapacity (see pages 30-31).

Mixed Shipper Expectations About TL Capacity in the Coming Year. Shippers leaned toward expectations for modestly tighter TL capacity over the next 12 months, with 29% expecting more TL capacity versus 34% who expect tighter capacity from the current overcapacity environment in the next 12 months. This is a swing from last quarter’s survey when 51% expected more TL capacity and only 16% expected tighter TL capacity. But removing seasonality and comparing to a year ago, shippers still expect a greater amount of TL capacity in the coming year than they did a year ago at this time (see pages 32-33).

LTL Shippers Expect Further Overcapacity. Shippers indicated expectations for slightly more LTL capacity during the next 12 months, with 23% expecting greater LTL capacity, including 5% who expect “significantly more capacity,” and 22% expecting tighter LTL capacity. This compares to first-quarter 2006 when 16% expected more LTL capacity and 19% expected tighter LTL capacity (see pages 32-33).

Shippers’ Expectations for TL Pricing Remain Low and Steady. According to our survey, shippers expect, on average, an effective 2007 base rate increase of approximately 1.3% from their TL carriers, prior to fuel surcharges and accessorial costs. This is significantly lower than forward expectations of 3.0% during the year-ago quarter, but ten basis points (bps) higher than expectations last quarter for 1.2% year-over-year TL base rate increases off a difficult hurricane-impacted comparison last quarter (see pages 38-39).

LTL Pricing Expectations Remain at Their Lowest Level Since 2002. On average, our respondents expect 2007 LTL rate increases of 1.5% year over year, similar to expectations last quarter of 1.5% year-over-year growth, but well below expectations of 2.5% list rate increases in first-quarter 2006. One-and-a-half percent represents the lowest expected LTL rate increase shippers expect to pay since second-quarter 2002, when pricing expectations were for 1.3% year-over-year increases (see pages 38-39).

Little Indication of Smaller Truckers Leaving the Market . . . Yet. Forty-three percent of our respondents see more capacity from small to medium TL carriers, with 2% reporting “materially more” small-fleet TL capacity, compared to first-quarter 2006, when 35% reported greater capacity from smaller carriers. This indicates to us that despite the difficult operating environment of the past two to three quarters, there still is little evidence of smaller carriers exiting the market (see pages 33-34).


Shippers Also Report More Available Large-Fleet TL Capacity. We also saw an almost identical increase in the number of shippers reporting more TL capacity from large fleets. Forty-four percent of respondents saw more large-fleet TL capacity available in first-quarter 2007, compared to 30% in first-quarter 2006. We believe that this perceived expansion by larger TL providers is due to the easier availability of trucks currently, which may be why smaller carriers appear to be growing as well (see page 35).

Trucker Bankruptcies Drop in March. Our Bear Stearns trucking bankruptcy index improved to 35 in March, following a level of 60 in February and 43 in January (indexed to 100 in January 2002). This was somewhat surprising to us as we had expected the number of bankruptcies to begin increasing the longer the TL market remains weak. The index reached a peak of just over 300 back in the summer of 2002, and reached a low of 25 in November 2005 following the change in bankruptcy law. We believe that when the index reaches about 150 again that it is a signal that we are likely a few quarters away from a re-tightening in truckload pricing (see pages 34-35).

Shippers Remain Compliant with TL Fuel Surcharges. Sixty-seven percent of respondents comply fully with the assigned TL fuel surcharge, up from 57% in first-quarter 2006, and 96% report paying at least 50% of the standard TL fuel surcharge requested, compared to 92% in the year-ago quarter. We suspect the higher acceptance of fuel surcharges likely has to do with the lower year-over-year cost of diesel in first-quarter 2007 (see pages 39-40).

Majority of Shippers Continue to Pay Similar Fuel Surcharges to Large and Small TL Carriers. Once again this quarter, the overwhelming response from shippers was that they are compliant with fuel surcharges for both small and large TL carriers. Eighty-two percent of shippers responded that there was no difference in their payment of fuel surcharges between large and small TL carriers, in line with our first-quarter 2005 survey. During first-quarter 2007, about 14% of shippers indicated they were paying somewhat higher fuel surcharges to larger providers, while 4% indicated paying a somewhat higher fuel surcharge to smaller TL carriers (see page 40).

Lower LTL Fuel Surcharge Compliance than TL. Although the majority of our shippers pay most of their LTL fuel surcharge, compliance is substantially lower than that of the TL shippers. Fifty-five percent of our shippers polled pay 100% of their LTL fuel surcharge bill, up from 52% in fourth-quarter 2006. Fourteen percent of our respondents indicated paying less than half of their LTL fuel surcharge bill (see pages 41-42).

Freight Diversion Ahead of Teamster LTL Labor Contract to Begin in the Second Quarter. We asked shippers about their plans for LTL freight prior to the March 2008 expiration of the LTL Teamsters contract. Fourteen percent said they will divert a portion of their LTL freight away from union carriers, some as much as a year before the contract expires. And 36% will divert some of their LTL freight, but only if specific problems arise, such as a work slowdown or a potential labor strike. Fifty percent indicated they expected no change to their LTL shipping patterns due to the upcoming labor negotiations (see pages 42-43).


Higher Compliance with Modest Rate Increases Is Expected for FedEx Customers. On average, 77% of respondents expect to comply with part of the announced 2007 list increase by FedEx, paying on average a 1.1% list rate increase during 2007. This compares to 75% of respondents in the year-ago period, who, at that time, expected to pay an average 2006 list increase of 0.8%. Last quarter, 74% of our respondents expected to pay a 1.2% list rate increase in 2007 (see pages 44-47).

Fewer UPS Customers Anticipate Paying Increases. Overall, 73% of respondents to our survey expect to comply with part of the UPS list rate increase, paying on average a 1.0% list rate increase during 2007, compared to 81% who expected to pay an average 2006 list increase of 1.0% in our survey a year ago and 73% from our fourth-quarter survey in which respondents expected to pay a 1.3% 2007 list rate increase (see pages 44-47).

Potential Mode Shift into Slowing Economy. Thirty-nine percent of respondents said that in a slowing economy, they will ship materially more or modestly more of their volumes by ground than air, while 59% will not likely alter their shipping patterns, and 2% will in fact increase their use of air. In fourth-quarter 2006, 50% indicated they would move from air to ground parcels, while 46% expected no change in their shipping patterns (see pages 49-50).

Dimensional Weight Pricing to Affect Some Shippers. While UPS’s management has claimed that its transition to dimensional weight pricing for ground shipments (effective January) would be revenue-neutral, 54% of our survey respondents (including those expecting no change) anticipated a weighted-average increase of 1.5%. The new system to increase ground rates was proposed by UPS and subsequently matched by FedEx and DHL. The effect on UPS and FedEx revenues is difficult to determine since the change will likely cause a modest reduction in those volumes affected, offsetting part of the increased yield. In fourth-quarter 2006, respondents had a slightly less negative assessment of dim-weight pricing, as 50% believed their rates would increase by an average 1.3% (see pages 50-51).

Freight Diversion Ahead of Teamster UPS Labor Contract. Ten percent of our respondents plan to divert about 3% of their UPS freight about 12 months prior to the July 31, 2008, contract expiration, equaling less than 1% of UPS’s total volumes. That same minority of 10% of UPS’s shippers plan to divert about 3% of UPS’s total volumes if no contract is signed six months prior to July 31, 2008. This is up from fourth-quarter 2006 when only 3% of shippers indicated they planned to divert freight from UPS in advance of the contract expiration (see page 52).

Domestic Air Cargo Volume Growth Increased Marginally in January and February 2007. Total ATA domestic (point-to-point within the U.S.) airfreight revenue ton-miles (RTMs) for the first-quarter to date (through February) increased 0.7%, compared to a year-over-year decline of 1.8% in the fourth quarter and 1.7% growth in full-year 2006 (see pages 57-58).


International Air Cargo Volume Growth Continues to Moderate. ATA international RTMs grew 1.9% year over year during first-quarter 2007 to date (through February), compared to 2.5% last quarter, and 6.4% in full-year 2006. The Atlantic, Pacific, and Latin trade lanes posted year-over-year RTM growth of 5.9%, -3.0%, and 9.8% year to date, respectively (see page 58).

Shippers Expect Modest Increases in Ocean Containership Pricing. First-quarter 2007 shipper expectations for year-over-year pricing increased in contrast to prior-period declines. Our first-quarter results suggest an average implied year-over-year rate increase of 1.2%, up from expected declines of 0.4% last quarter, and 0.5% a year ago. Approximately 28% of respondents expect some ocean containership rate decrease, compared to 33% last quarter. On the flip side, nearly 47% of shippers expect some form of ocean containership rate increase, up from 30% from the fourth quarter and 36% a year ago. Our sense is that solid rate increases by the railroads for inland moved ocean containers is forcing the container carriers to remain disciplined in ocean pricing in order to maintain overall profitability (see pages 58-59).

Inventories Slightly Higher than Normal. Our shippers reported modestly higher but generally balanced inventories throughout first-quarter 2007, with about 43% of respondents characterizing inventories as higher than seasonally normal and 28% calling inventories lower than seasonally normal. Thirty percent reported having flat inventory levels in the first quarter compared to other first quarters (see page 53).

Safety Stock Levels in Line with Year-Ago Quarter. We asked shippers how their safety stock levels compared to last year and, apparently, were roughly similar to a year ago and remain balanced. Approximately 31% indicated that their safety stock levels were 5%-10% higher than the comparable historical period, which is less than the 21% from the year-ago quarter. About 28% of shippers indicated that their safety stocks were below historical levels, compared to 24% in the year-ago quarter (see pages 53-54).

Shippers Expect Second-Quarter 2007 Inventories to Increase . . . A large percentage of shippers indicated that they expect to see inventories increase going forward. About 45% indicated they expect second-quarter 2007 inventory levels to be higher relative to historical second quarters, compared to about 30% in first-quarter 2006. About 22% of shippers expect inventory levels to be lower than previous first quarters, compared to 30% in the year-ago quarter (see page 54).

. . . But, Shippers Expect a Moderately Decreased Level of Shipping in Second-Quarter 2007. Even though they expect inventories to increase in the second quarter, our shippers’ expectations are for a continued modestly decreased level of shipping during second-quarter 2007 relative to the year-ago period. More than 24% of our respondents expect to ship less in second-quarter 2007 due to inventory buildup, with 6% expecting to ship substantially less, compared to our survey a year ago when only 7% of our respondents expected to ship less due to inventory buildup, and none of our shippers expected to ship substantially less. About 23% expect more shipping activity in the next quarter, up slightly from 22% who expected more shipping activity in the year-ago quarter (see pages 55-56).


Investment Conclusion

Transport stocks on average easily outperformed the market during first-quarter 2007, after underperforming in fourth-quarter 2006. Once again, in the first quarter the railroads on average performed the best of the transport sector, while the truckers roared back from a disappointing fourth-quarter performance and the Airfreight & Logistics stocks, while more mixed, on average still beat the market. Our average Airfreight & Logistics, Rail, and Truck indexes were up 2.9%, 8.8%, and 6.8%, respectively, compared to the S&P 500, up a modest 0.2%. In the month of April, the transport sector has outperformed even further, while the S&P 500 has picked up and, as a result, year to date our Airfreight & Logistics, Rail, and Truck indexes are up 6.7%, 19.9%, and 16.0%, respectively, compared to the S&P 500 up 5.3% (see Exhibit 1).

Exhibit 1. Bear Stearns Transportation Stock Performance by Subsector Absolute

Return C07 YearAbsolute

Return C07 YearCompany C00-C06 4Q06 1Q07 to date (1) C00-C06 4Q06 1Q07 to date (1)Airfreight (Asset-Based) Less-than-TruckloadFedEx Corp. (FDX) 165.3% -0.1% -1.1% -1.3% Arkansas Best (ABFS) 200.0% -16.3% -1.2% 9.8%TPG NV (TP) 50.5% 13.3% 6.9% 4.5% Con-Way Inc. (CNW) 27.7% -1.7% 13.2% 26.8%United Parcel Service (UPS) 8.7% 4.2% -6.5% -4.6% Old Dominion Freight (ODFL) 655.7% -19.8% 19.7% 27.1%Group Average 74.8% 5.8% -0.2% -0.5% Saia, Inc. (SAIA) (7) 16.1% -28.8% 2.3% 26.6%

YRC Worldwide, Inc. (YRCW) 124.4% 1.9% 6.6% 10.7%Non-Asset Based Service Providers Group Average 204.8% -13.0% 8.1% 20.2%C.H. Robinson (CHRW) 311.5% -8.3% 17.5% 35.0%Expeditors Int'l (EXPD) 269.8% -9.2% 2.0% 5.6% Trucking Average (5) 202.9% -7.5% 6.8% 16.0%Group Average 290.6% -8.7% 9.8% 20.3%

Railroads (Class I)Asset-Light Based Forwarders Burlington Northern (BNI) 204.4% 0.5% 9.0% 20.4%Forward Air (FWRD) 50.1% -12.6% 13.7% 7.2% Canadian National (CNI) 387.1% 2.6% 2.6% 20.2%Hub Group (HUBG) 451.0% 20.9% 5.2% 32.2% Canadian Pacific (CP) (8) 241.5% 6.1% 7.0% 22.4%Landstar (LSTR) 613.4% -10.6% 20.1% 30.7% CSX Corporation (CSX) 119.5% 4.9% 16.3% 27.0%Pacer Int'l (PACR) (3) 86.6% 7.2% -9.5% -9.4% Norfolk Southern (NSC) 145.3% 14.2% 0.6% 6.6%Universal Truckload (4) 5.6% -8.5% 1.9% -6.1% Union Pacific (UNP) 110.6% 4.6% 10.4% 25.9%UTi Worldwide (UTIW) (2) 441.6% 6.9% -17.8% -20.4% Group Average 201.4% 5.5% 7.6% 20.4%Group Average 274.7% 0.6% 2.3% 5.7%

Railroads (Regional)Airfreight & Logistics Average 223.1% 0.3% 2.9% 6.7% Genesee & Wyoming (GWR) 931.8% 13.0% 1.4% 3.8%

Kansas City Southern (KSU) (6) 337.4% 6.1% 22.8% 33.2%Truckload Group Average 634.6% 9.6% 12.1% 18.5%Covenant Transport (CVTI) -34.4% -6.6% -3.3% -5.4%Heartland Express (HTLD) 275.9% -4.2% 5.7% 16.1% Railroad Average 309.7% 6.5% 8.8% 19.9%J.B. Hunt (JBHT) 500.1% 0.0% 26.3% 33.2%Knight Transportation (KNX) 404.0% 0.6% 4.5% 15.9% Other TruckSwift Transportation (SWFT) (5) 49.0% 10.8% 18.6% 19.0% Ryder System (R) 108.9% -1.2% -3.4% 5.4%Werner Enterprises (WERN) 107.2% -6.6% 3.9% 9.6%Group Average (5) 217.0% -3.4% 7.4% 13.9% S&P 500 -3.5% 6.2% 0.2% 5.3% (1) To date reflects pricing through 4/27/07. (2) UTIW began trading in November 2000. Absolute return represents growth rate from the end of November through 12/31/06. (3) PACR began trading on 6/13/02. Absolute return represents growth rate from that date through 12/31/06. (4) UACL began trading on 2/11/05. Absolute return represents growth rate from that date through 12/31/06. (5) SWFT removed from 4Q06, 1Q07, and YTD averages. (6) KSU spun off Stilwell Financial in July 2000. Calendar 2000-06 performance reflects performance from after that spin-off. (7) SAIA began trading on 9/11/02. Absolute return represents growth rate from that date through 12/31/06. (8) CP spun off from CP Limited in October 2001. Calendar 2000-06 performance reflects performance from after that spin-off. Source: Bear, Stearns & Co. Inc.

The transports (and most industrials) rallied quite strongly during the first four months of 2007, despite generally weak fourth-quarter reports and management guidance. We believe major drivers of the current move include:

An increasing sense by investors that the economy has bottomed and, therefore, some investors are seeking early cyclicals with operating leverage to increased volumes during second-half 2007, particularly those stocks that underperformed in 2005 and 2006.


Heavily shorted stocks, such as those of trucking companies, have experienced lots of covering into improved economic data and quick returns on shorts.

An increasing expectation that private equity and weakened results will lead to increased consolidation in the transport sector, generally.

A belief, especially for railroads, that pricing is holding up, despite recently weakened volumes.

A developing notion that the transport sector has become less cyclical because of global demand for trade and, therefore, that all transport stocks should trade at higher multiples over time through cycles.

We view this quick move up in the stocks thus far in 2007 into generally weak transport reports as not fundamental and likely not sustainable. Further, we do not see many strategic buyers out there, and we believe that financial returns and management and regulatory resistance generally do not warrant taking truckers or rails private.

Generally, we remain favorably disposed to the fundamentals for railroads and pure non-asset based forwarding stocks, and unfavorably disposed toward truckers and asset-light providers with operating leverage. However, valuations for all of the transports other than the parcel providers — which were arguably artificially inflated by the UPS IPO and incorrect initial valuation in 1999 — are currently generally above their one-, three-, and five-year averages at a time when revenue and earnings growth are slowing and for many transports now down year over year. However, full-year 2007 and 2008 estimates remain back-ended and optimistic, so we don’t sense that valuations are expanded on depressed earnings but rather on mid-cycle type earnings, which may prove optimistic for 2007 and 2008. We are cautious about transport stocks generally at current prices and valuations, and we recommend that investors await pullbacks to become more aggressive in owning the group (see Exhibit 2).

Exhibit 2. Historical Forward P/E Valuation

Historical Forward

P/E Ranges

Current Group Average

Forward P/E

% Above/Below

5-Year Average 1-yr Avg P/E 3-yr Avg P/E 5-yr Avg P/E 10-yr Avg P/E

TL (1) 10x-22x 18.1x 3% 15.9x 16.8x 17.6x 16.8x

LTL (2) 7x-23x 14.4x 15% 11.6x 12.2x 12.5x 11.4x

Rails (3) 9x-16x 15.4x 14% 13.7x 14.1x 13.6x 13.4x

Express/Parcel (4) 10x-27x 16.1x -18% 16.6x 18.3x 19.8x 19.9x

Pure Non-Asset Based (5) 14x-36x 30.3x 5% 31.5x 30.5x 28.9x 27.1x (1) TL index includes CVTI, HTLD, JBHT, KNX, SWFT, WERN, XPRSA. (2) LTL index includes ABFS, CNW, ODFL, ROAD, SAIA, USFC, YRCW. (3) Rail index includes BNI, CNI, CP, CSX, NSC, UNP. (4) Express/Parcel Index includes FDX & UPS. (5) Pure Non-Asset-Based index includes EXPD & CHRW. Source: FactSet Research Systems Inc.; Bear, Stearns & Co. Inc.


Our negative thesis on the truckload and LTL sectors is that pricing is just beginning to weaken materially and that pricing will decelerate for at least 2007 and into 2008 regardless of the economy. Our shipper respondents for the second consecutive quarter noted the most available TL and LTL capacity in the market in the eight years we have been tracking this sentiment in our survey, including the 2001 recession. We expect weakened demand and over-supply will likely continue to lead to overcapacity in the truckload sector until either freight demand (the economy) improves for a sustained period of three to four quarters or enough small players exit the industry that consolidation leads to tighter capacity. To that end we continue to check in with truck brokers and consultants to get a sense for whether smaller truckers are exiting the industry. We also track our proprietary Bear Stearns Truck Bankruptcy Index, which our colleague, Peter Nesvold, has created. That index peaked at about 300 back in 2002 into record small truck carrier bankruptcies. It bottomed around October 2006 at 25, and in our last reading in March was at 40. Our sense is that we are likely at least three to four quarters away from that index approaching the 150 range, a point where we believe we are getting closer (one to two quarters away) likely from improved pricing.

Exhibit 3. Bear Stearns Seasonally Adjusted Truck Bankruptcy Index (January 2000 = 100)

0

50

100

150

200

250

300

350

Jan-

00

Apr-0

0

Jul-0

0

Oct-0

0

Jan-

01

Apr-0

1

Jul-0

1

Oct-0

1

Jan-

02

Apr-0

2

Jul-0

2

Oct-0

2

Jan-

03

Apr-0

3

Jul-0

3

Oct-0

3

Jan-

04

Apr-0

4

Jul-0

4

Oct-0

4

Jan-

05

Apr-0

5

Jul-0

5

Oct-0

5

Jan-

06

Apr-0

6

Jul-0

6

Oct-0

6

Jan-

07

Seas

onall

y Adj

uste

d Ba

nkru

ptcy

Inde

x '

Source: Federal bankruptcy filings; Bear, Stearns & Co. Inc. transportation equipment analyst Peter Nesvold.


Background

Our first-quarter 2007 survey questionnaire was sent to more than 1,000 supply-chain managers from a diverse sample pool of various-sized companies spanning many verticals. We collected more than 100 completed questionnaires from shippers, representing an estimated aggregate transportation budget of about $12 billion. The group of first-quarter respondents remains dominated by shippers with transportation budgets in excess of $25 million, as approximately 77% of our respondents fall into this category. Our pool of respondents classified themselves similarly to last quarter, with “wholesale/retail” participants representing 14% of total shippers and with “manufacturing” participants representing 41% of total shippers (see Exhibit 4 and Exhibit 5). The percentage of respondents with annual transportation budgets of more than $50 million declined modestly, to 63% during first-quarter 2007.

Exhibit 4. What Is Your Company’s Total Annual Transportation Budget?

0% 10% 20% 30% 40% 50% 60% 70% 80%

<$1million

$1-$10 million

$10-$25 million

$26-$50 million

>$50 million

1Q07

4Q06

1Q06

Source: Bear, Stearns & Co. Inc.

Exhibit 5. Describe the Industry in Which Your Company Participates

Wholesale/ Retail14%

Manufacturing40%

Other8%

Food/Grocery10%

Paper/ Chemicals/ Petroleum

14%

Pharmaceutical6%

Automotive4%

Technology/ Software1%

Technology/ Hardware

3%


We asked shippers what they expected to spend for their 2007 transportation budgets compared to 2006, including fuel surcharge. About 90% expect to spend more on their transportation budgets in 2007 than in 2006 and about 32% of the shippers surveyed expect to spend more than 4% more this year than last, up from 29% last


quarter and down from 49% in our first-quarter 2006 survey. At the high end, 9% of our shippers expect to spend in excess of 8% more this year, compared to 8% that expected 8%-plus budget increases during our fourth-quarter survey, and 19% expecting 8% or higher budget increases in the year-ago quarter. On average, our respondents’ answers imply an expected year-over-year transportation budget increase gross of fuel surcharge of 3.4% in 2007, in line with 3.3% expected in the coming year back in the fourth quarter and decelerated materially from 4.8% expected in the year-ago quarter. If we assume that our survey participants, on average, grow volumes in line with economic growth in the 2.0%-2.5% range, it implies that shippers on average are expecting about 1.0%-1.5% pricing increases averaged across modes in 2007, compared to 1.5%-2.0% expected a year ago.

Exhibit 6. What Do You Expect to Be the Year-over-Year Change in Your Total Freight Transportation Budget (Including Fuel Surcharge) in 2007?

0%

5%

10%

15%

20%

25%

30%

35%

40%

<0% 0% -2% 2% -4% 4% -6% 6%-8% 8% -10% >10%

1Q06 4Q06 1Q07

Average implied budget increase1Q06 4.8%4Q06 3.3%1Q07 3.4%



Railroad Topics

The railroad portion of our first-quarter survey focuses on recent rail service, competition with truckers, and rail pricing issues. Due to the service levels and economics of the rails, we believe that railroads generally compete with trucks for market share on freight movements of more than 750 miles. Overall, we estimate that about 50% of rail business is potentially truck-competitive (but more like 30% practically), or about 15% excluding intermodal business. For example, we estimate that 90%-95% of intermodal container traffic is potentially truck-competitive, as certain very long-haul, low-priced freight cannot economically be moved by truck. That said, we believe international intermodal business through the ports lends itself much more practically to rail moves.

We asked shippers this quarter what percentage of their business they believe is truck-competitive (see Exhibit 7, which shows the rolling average from the past four quarters). At the high end, nearly 49% of our respondents suggested that 0%-25% of their book of business is truck-competitive. About 16% believe that 25%-50% of their business can be converted from rail to truckload, another 14% estimate that 75%-100% of their business is truck-competitive, and 9% estimate that 50%-75% of their business can be moved by truck. Another 12% do not view truck as an alternative to rail transportation. On average, this equates to just over 30% of rail traffic that our respondents believe is currently truck-competitive.

Exhibit 7. What Percentage of Your Truckload Shipments Is a Viable Alternative to Rail?

0%

10%

20%

30%

40%

50%

60%

0% 0% -25% 25% -50% 50% -75% 75% -100%

Weighted average 30%


Before discussing the rest of our actual survey results for the quarter, we first present the trends in average train speeds and system-wide dwell times for the major Class I rails as reported by the Association of American Railroads (AAR) each Wednesday. During first-quarter 2007, dwell times improved for three of the six major Class I rails and velocity increased for four of the six. While results were generally solid for the U.S. rails, we would have expected even greater service performance given the sharp slowdown in volumes from +3% in the third quarter, to flat in the fourth quarter to -3% in the first quarter. Instead, the pace of year-over-year improvements decelerated for each of the rails relative to fourth-quarter 2006 into tough winter

RAIL SERVICE LEVELS


weather comparisons. The Canadian rails both reported deteriorated year-over-year dwell times and train speeds as a result of tough year-ago comparisons, brutal weather conditions and the UTU conductor strike against Canadian National which had a carryover impact to Canadian Pacific as well. Exhibit 8 and Exhibit 9 display the year-over-year trends in average velocity and system-wide dwell time for the Class I rails in the first quarter, as well as the fourth and third quarter from last year. As shown below, Union Pacific reported the greatest year-over-year improvement in dwell times during the first quarter while Burlington Northern Santa Fe reported the strongest improvement in train speeds. For the U.S. rails, Burlington Northern led the group with a 3.4% increase in train speeds, followed by Union Pacific with a 1.9% increase and CSX with a modest 0.8% improvement. Norfolk Southern’s train speeds declined 0.5% year over year in the first quarter. The Canadian railroads faired the worst, with Canadian National reporting a 7.0% decline and Canadian Pacific reporting an 8.3% decrease in train speeds. In terms of dwell times, this metric improved year over year for each of the U.S. rails, led by a 12.8% reduction at Union Pacific. Again, both of the Canadian rails reported deteriorated year-over-year dwell times in the 13% area. We note that Kansas City Southern changed its calculation methodology on April 1, 2006, so the year-over-year comparisons are not apples to apples.

Exhibit 8. Year-over-Year Change in Average Train Speeds, Class I Rails

-10%

-5%

0%

5%

10%

15%

20%

BNI CNI CP CSX KSU NSC UNP

3Q06 4Q06 1Q07

Improved

Source: Association of American Railroads; Bear, Stearns & Co. Inc.


Exhibit 9. Year-over-Year Change in System-Wide Dwell Time, Class I Rails

-20%

-15%

-10%

-5%

0%

5%

10%

15%

BNI CNI CP CSX KSU NSC UNP

3Q06 4Q06 1Q07

Improved

Source: Association of American Railroads; Bear, Stearns & Co. Inc.

First-quarter shipper sentiment was mostly consistent with the service metrics previously discussed. Our survey results indicate that rail service levels generally deteriorated sequentially but were improved year over year. We asked shippers to rank the improvement or deterioration in service for each of the Class I rails. The average score of 3.0 in a 5.0 scale (with No. 1 indicating a strong decline in service and No. 5 indicating a strong improvement) for the group in first-quarter 2007 deteriorated slightly versus the fourth quarter, but improved by about 9% versus a 2.7 rating in the year-ago period. This is the third consecutive quarter our average service rating has been at least 3.0, which is the midpoint of potential scores and likely indicates stable to improving service levels. We believe this speaks to generally improved consistency from the individual rails and the broader rail network. The shippers we speak with seem mostly pleased with recent service levels from the railroads and now appear much more focused on price than service, unlike the past several years, when service was the main shipper concern.

Compared with our first-quarter 2006 results, six of the seven carriers registered year-over-year improvements in service-level ratings in our survey. Three of the four major U.S. railroads exhibited solid double-digit increases based on our survey, led by Union Pacific (up 24%), CSX (up 19%), and Burlington Northern Santa Fe (up 18%). Norfolk Southern on the other hand was up a more modest 3% off the toughest year-ago comparison. Both of the Canadian rails registered solid single-digit increases in year-over-year survey ratings, including a 9% improvement at Canadian National and a 6% improvement from Canadian Pacific. Kansas City Southern’s rating was down 11% into a tough comparison (see Exhibit 10). Consistent with recent shipper conversations and the train speed and dwell time metrics previously discussed, we believe our survey ratings corroborate that Union Pacific and CSX are the two most improved railroads from a service perspective, albeit each from a much lower base versus their better performing U.S. competitors.


We expect shippers to continue to rate Union Pacific as the most improved service railroad this year as service improvements and consistency gains at CSX appeared to have leveled off somewhat. We believe CSX’s long-haul service initiatives have largely been achieved but sense that local service levels are still suffering and will be harder to resolve. Similarly, we believe long-haul service improvements are first under way at Union Pacific. This makes sense, in our view, as Union Pacific implemented its operating turnaround plan about a year after CSX. Separately, in terms of the Canadian rails, we believe the modest increase in survey results also make sense, given very tough weather conditions in Canada during the first quarter and very strong service results last year, which combined made for difficult comparisons.

Exhibit 10. Have Service Levels Improved or Declined for the Following Rail Carriers During First-Quarter 2007 in Comparison to First Quarters in Recent Previous Years?

1 2 3 4 5

BNI

UNP

CSX

NSC

CNI

CP

KSU 1Q074Q061Q06

1 = Strong Decline 5 = Strong Improvement3 = No Change


Going forward into a continued weak volume environment, we would expect service trends for all of the rails to re-accelerate into more normal year-over-year weather comparisons. Recall that the rails have a natural offset to volumes, so asset turns and service fluidity should improve as volumes decline and congestion moderates. Overall, we believe better network operations are likely to manifest in strong cost performance going forward for the group although the impact is always difficult to quantify. In general, better network operations tend to result in lower labor costs from increased worker productivity and fewer re-crews and overtime shifts. Faster train speeds and shorter dwell times also result in shorter asset cycle times, which in turn drive lower equipment rents. Fuel and purchased services costs can also benefit from improved network operations although we sense this impact is likely more modest. However, if the economy were to reaccelerate faster than expected, our sense is that rail service could suffer over the remainder of 2007, including lower speeds and longer asset turns. Exhibit 11 displays Class I intermodal and carload volume growth since 2003. Volume growth for the major Class I rails declined in the first quarter (the first quarterly decline since the beginning of 2002) driven largely by


sharp declines in the automotive and paper/lumber segments, along with negative intermodal, coal, and grain volumes. We also witnessed weakness in the metals and minerals and stone segments, as the housing and auto slowdowns continued to have a derivative effect on the broader industrial economy.

As evidenced by the service disruptions in the first quarter, another factor that we believe will drive service levels for the rails is the extent of weather-related network outages. We note that 2006 weather was particularly benign, including a generally mild winter and no major hurricanes. This compares with first-quarter 2007, which was plagued by harsh weather conditions, particularly in Canada, and most recently weather-induced shutdowns in the Powder River Basin. In other words, the rails are set up with difficult year-over-year comparisons throughout 2007. That said, our sense is that the rails are likely somewhat better equipped to handle operating and weather disruptions today as compared with several years ago. We believe the relatively quick turnaround from several minor weather issues in 2006 illustrates the ability of the rail network to recover from service disruptions and temporary network closures.

Exhibit 11. Total Class I Year-over-Year Carload and Intermodal Volume Growth, 2003-07 2003 2004 2005 2006 1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07

Intermodal 6.3% 8.3% 5.4% 4.4% 6.9% 3.9% 5.1% 5.8% 4.6% 6.8% 5.3% 1.1% -0.5%Automotive -3.1% -1.7% -2.9% -3.8% -5.0% -4.5% -2.1% 0.2% 0.9% 0.5% -7.7% -9.4% -9.9%Coal -1.3% 2.7% 2.2% 4.1% 6.1% 1.3% 1.4% 0.1% 1.2% 5.8% 3.8% 5.8% -1.9%Grain 2.3% 2.1% 0.1% 4.7% -0.9% -1.8% 3.1% 0.2% 2.4% 5.1% 6.9% 4.8% -4.9%Chemicals 1.5% 5.0% -1.5% -0.8% 2.5% -1.2% -2.4% -5.0% -5.3% -2.1% 2.7% 2.3% 5.6%Paper/Lumber 0.5% 5.8% -1.3% -7.7% 2.5% 0.0% -4.1% -2.7% -2.9% -6.5% -7.8% -13.6% -16.0%Metals 3.8% 7.7% -1.8% 4.6% -1.0% -2.6% -4.5% 1.1% 5.0% 8.2% 9.0% -3.6% -5.0%Minerals/Stone 2.8% 4.9% 1.7% -2.0% 2.3% 3.0% 3.2% -1.9% -0.8% -1.6% -3.0% -4.5% -9.5%Total 2.7% 5.2% 3.1% 2.8% 4.7% 2.2% 2.9% 2.7% 2.0% 4.1% 3.1% 0.5% -2.8%

Real GDP 2.7% 3.9% 3.2% 3.4% 3.8% 3.3% 4.1% 1.7% 5.6% 2.6% 1.6% 3.5% 1.30%OR Improvement -80 100 190 230 280 290 140 250 350 210 370 150 -70 Source: Association of American Railroads; Bear, Stearns & Co. Inc.

We also polled shippers on their expectations for modal shifts among different transport types. Exhibit 12 and Exhibit 13 summarize first-quarter 2007 survey data about the shift in volumes from rail to truck and vice versa. We estimate that approximately 50% of rail business is potentially truck competitive, or about 15% excluding intermodal business. However, probably closer to 30% is a more practical number that can compete without some major event changing pricing in a material manner. We believe that 90%-95% of intermodal container traffic is potentially truck competitive (but only about half of it, as a practical matter), as certain very long-haul, low-priced freight cannot economically be moved by truck. Our sense is that rail rate inflation and increasing truckload capacity are likely factors in shippers’ movement of volumes from the rails to TL carriers. We also believe that relatively lower costs for rail transport versus truck (particularly in periods of high fuel prices as the truck carriers typically have higher fuel surcharge assessment rates) and improving rail service consistency are likely factors in the conversion of truck business to the railroads.

Approximately 9.5% of our first-quarter survey respondents indicated they had shifted volumes either from rail to truck or vice versa. These shippers indicated they had shifted 6.5% of their volumes from rail to truck, down versus an 8.1% shift last quarter although up versus a 5.1% shift in the year-ago period. Our survey also

MARKET SHARE SHIFTS VERSUS TRUCK


indicated that the movement of volumes from TL to rail was up 3.0% in first-quarter 2007, mostly flat versus a shift of 2.9% in fourth-quarter 2006 and up modestly versus 2.6% in the year-ago period. For the next six to 12 months, our survey indicates that shippers plan to move about 6.5% of volumes from the rails to TL, up versus both 3.7% in the fourth-quarter and 2.4% in the year-ago period. This also compares to 3.2% of shippers who plan to move volumes from TL to rail during the next six to 12 months, down versus 4.4% last quarter and 3.3% in the year-ago period.

Exhibit 12. Have You Shifted a Significant Percentage of Your Shipping from TL to Railroad or Vice Versa over the Past Six Months?

0%

3%

6%

9%

12%

15%

% shifted from Rail to TL % shifted from TL to Rail

1Q064Q061Q07


Exhibit 13. Do You Plan to Shift a Significant Percentage of Your Shipping from TL to Railroad or Vice Versa over the Next Six Months?

0%

3%

6%

9%

12%

15%

% shifted from Rail to TL % shifted from TL to Rail

1Q064Q061Q07


Exhibit 14 and Exhibit 15 provide the reasons behind shippers’ decisions to switch from rail transport to truckload and vice versa. For the third consecutive quarter, increasing rail prices were cited as the most significant factor driving their diversion of freight to TL. This compares with all of our previous surveys, which cited poor rail service as the most important factor. Poor rail service has dropped to the second most important factor driving conversions away from rail, which we believe speaks to improving or at least more consistent rail service, as well as rising rail prices relative to truck pricing.


Exhibit 14. If You Have Diverted Freight from Railroad to TL, What Are the Main Reasons (over the Past Six Months)?

0 1 2 3 4 5

Other

Increasing rail prices

Decreasing truck prices

Change in corporate policy to fasterinventory turns

Poor rail service or coverage1Q064Q061Q07

1 = Least Significant 5= Most Significant


Exhibit 15. If You Have Diverted Freight from TL to Railroad, What Are the Main Reasons (over the Past Six Months)?

0 1 2 3 4 5 6

Lower cost or rising TL rates

Increased disparity between Rail andTL fuel surcharges

Lack of TL capacity

Better service

Change in corporate policy to slowerinventory replenishment

Other 1Q064Q061Q07

1 = Least Significant 6= Most Significant


Also, for the first time in our survey, we asked our shippers how much cheaper their railroad transportation rates are compared with comparable truckload movements. We believe this question is more directional than anything because every lane will be different, but should give a sense of how much room their still might be for the rails to increase rates. Tracking this question over time should also help us to gauge if the gap between rail and truckload pricing is widening or tightening, as we suspect it is currently. At the high end during the first quarter, nearly 43% of our shippers indicated that truckload rates were more than 10% more expensive than rail rates, while another 30% believed TL rates are currently more than 20% more expensive and 24% believe truck rates are less than 10% more expensive than rail. None of our respondents indicated that rail and TL rates were equal, while the remaining 3% believed that railroad rates were currently more expensive than TL. On average, this equates to TL rates being approximately 15% more expensive than current railroad rates.


Exhibit 16. How Much Cheaper Are Your Railroad Transportation Costs, on Average, Compared to Comparable Truckload Movements?

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

0% more than 0% more than 10% more than 20% more expensive thantruck

Weighted average price difference 15%


Our survey also attempted to assess rail shippers’ expectations for price increases during 2007, compared to 2006. The anticipated average rate increase indicated in first-quarter 2007 by rail shippers was 4.0%, up from 3.5% suggested by our fourth-quarter 2006 survey and above 3.7% in the year-ago period. We believe that our survey data support the story of sustained momentum in rail rate increases throughout 2007, driven by ongoing tight rail capacity and expectations for continued strong rail freight demand. We also believe the average rate increases noted in our survey are generally lower than reported rate increases of about 6% because our survey tends to: 1) involve a disproportionate mix of large mega-shippers with better buying power; and 2) our numbers do not always capture the re-pricing of long-term contracts, which, in some instances, are going up more than 50% or more as they come due.

In our first-quarter 2007 survey, 36% of respondents indicated that they expect to pay a greater than 5%-6% increase, up versus 32% in our fourth-quarter 2006 survey and 26% in the year-ago period. About 89% anticipate a rate increase of 2% or more, up versus 81% who expected to pay the same increase in fourth-quarter 2006. This is also the second-highest percentage in our survey’s history and includes 13% who expect to pay 2%-3% more than the prior year, 19% who expected to pay 3%-4% more, and 21% who expect a 4%-5% rate increase year over year. About 6% expect to pay a rate increase of less than 2%. Another 5% expect a modest year-over-year decline in rail rates (see Exhibit 17), down materially from 12% of survey respondents expecting a year-over-year decline in our last survey. Also, within the group expecting to pay greater than 5%-6%, shippers are expecting a weighted average rate increase greater than 11%, which is the second-highest expected rate increase from this group in the history of our survey.

RAIL PRICING


Exhibit 17. What Increases (Decreases) in Railroad Rates Do You Expect to Pay During 2007 Compared to 2006?

0%

5%

10%

15%

20%

25%

30%

35%

40%

<0% 0% -1% 1% -2% 2% -3% 3% -4% 4% -5% 5% -6%

1Q064Q061Q07


To obtain more specifics on future rates, we asked our respondents which of the major rail carriers has been the most aggressive in pursuing rate increases. For the seventh consecutive quarter, the western rails were identified as the most price-disciplined, followed by the eastern carriers and then the Canadian rails. On a scale of one to seven, with seven the most price-disciplined, Union Pacific received a 5.5 rating in our first-quarter survey, flat versus the fourth quarter and year-ago period. This is the fifth consecutive quarter (sixth in the last seven), that shippers have rated Union Pacific as the strictest on pricing. Burlington Northern Santa Fe, Norfolk Southern, and CSX each received ratings of 5.0 in our survey, representing sequential improvements for all three and year-over-year improvements for both eastern rails. At the low end of the spectrum, our survey again suggests that Canadian Pacific and Kansas City Southern have been the least aggressive in pursuing rate increases. Kansas City Southern received an average score of 3.5 in our first-quarter survey, the lowest among railroads. We note that since Kansas City Southern is the smallest of the railroads, even a very aggressive rate increase may only have a small impact on some of our shippers’ total transportation budgets, particularly because they are getting a lot of their pricing in Mexico or cross border pricing. Our sense is Kansas City Southern has been price disciplined similar to other railroads in 2006 and 2007 and in the first quarter it reported the highest year-over-year yield improvement in the group.


Exhibit 18. Which of the Following Rail Carriers Have Been Most Aggressive in Pursuing Rate Increases?

1

2

3

4

5

6

7

UNP BNI CSX NSC CNI CP KSU

1Q064Q061Q07

Least Aggressive

Most Aggressive


One factor that should support rail pricing in the next several years is the extent of longer-term legacy contracts that the rails can still reprice. The rails earned material pricing power in about mid-2004 as freight demand continued to grow while rail capacity shrunk during the prior 20 years since deregulation. However, certain contracts tend to be longer term (three to ten-plus years) and the rails have not re-priced all of them to market rates since the pricing renaissance began. For the second time, we polled our shippers as to what percentage of their contracts had not been re-priced since 2004. According to our survey, shippers have re-priced approximately 66% of their book of business in the past three years, implying 34% of contracts that remain for re-pricing. We estimate about two-thirds of total rail book of business moves by contract, implying overall that about 20%-25% of the rails’ total revenue has yet to reprice since 2004. Based on conversations with the railroads and shippers, we note that coal, automotive, and international intermodal contracts with ocean containership carriers tend to have the longest duration. We believe that Union Pacific and BNSF still have the greatest percentage of contracts left to reprice, followed by CSX and Norfolk Southern. We see less upside from legacy contract renewals for the Canadian rails, which we estimate have only about 5% of contracts that remain untouched.


Exhibit 19. What Percent of Your Contracts Have Been Re-priced Since 2004?

Re-priced Since 04; 66%

Not Re-priced Since 04; 34%


We asked for the first time rail shippers’ expectations for costs related to the Surface Transportation Board’s recent mandate that railroads change their fuel surcharge methods for non-contractual, non-exempt volumes from revenue-based tariffs to some other form of fuel surcharge (most have adopted mileage-based tariffs). Not surprisingly, the vast majority of shippers expect no major change in costs as a result of the change in fuel surcharge calculation, while the remainder are somewhat split over the impact.

Exhibit 20. What Are Your Expectations Following the Surface Transportation Board’s Recent Decision on Railroad Fuel Surcharges?

16%

73%

8%3%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

Expect a reduction in total railtransportation costs

Expect no material change in total railtransportation costs

Expect an increase Other


Exhibit 21 provides Class I data for the last 12 months (Week 14, 2006-Week 13, 2007) from the AAR weekly rail carloading reports. Rail carloadings are sorted by their respective commodity classes (19), intermodal (trailer and container), and total carloadings. We present year-over-year growth rates on a weekly basis.


Exhibit 21. Class I Weekly Rail Carloading Data, 2006-07 (Year-over-Year Growth)

Week GrainFarm

Products Metallic Ores Coal

Crushed Stone, Sand

& GravelNonmetallic

MineralsGrain Mill Products

Food & Kindred

Products

Primary Forest

Products

Lumber & Wood

Products

Pulp, Paper & Allied

Products ChemicalsF06 Week 14 9.1% 26.6% 43.1% -0.3% 6.5% -21.4% -5.3% 2.3% -8.2% 4.1% -10.4% -3.5%F06 Week 15 3.0% 7.4% 46.5% -0.9% -0.6% -20.2% 2.0% 4.6% -17.4% -6.6% -13.7% -5.0%F06 Week 16 -2.2% 32.4% 51.9% 7.6% -0.8% -21.7% -1.1% 0.3% -17.1% 0.8% -5.3% 1.0%F06 Week 17 4.0% 20.1% 14.3% -3.6% 4.1% -16.2% -4.1% 0.3% -13.3% 2.4% -6.3% -1.7%F06 Week 18 4.8% 23.0% 32.6% 3.5% 5.8% -12.7% 0.1% 4.0% -8.6% 2.6% -2.3% -2.9%F06 Week 19 4.1% 17.0% 34.7% 9.6% 3.8% -5.0% 0.0% 5.2% -8.7% 2.1% -8.3% -4.4%F06 Week 20 -1.0% 10.5% 27.1% 26.5% 5.7% -7.2% 1.9% 3.8% -13.5% -5.0% -8.9% -1.5%F06 Week 21 4.3% 25.6% 27.1% 5.5% 7.6% -4.7% 2.8% 3.4% -17.6% -7.7% -9.3% -2.3%F06 Week 22 8.6% 38.8% 45.0% 5.9% 11.2% -6.1% -2.1% 7.5% -20.7% -7.5% -7.2% -1.4%F06 Week 23 16.8% 16.7% 35.0% 7.7% 12.7% -0.6% 1.9% 5.4% -12.2% -9.8% -10.1% -2.0%F06 Week 24 12.2% 15.7% 32.4% 8.6% 4.7% -20.2% 1.0% 6.3% -18.2% -5.7% -7.3% -0.1%F06 Week 25 17.9% 12.8% 34.6% 4.6% 5.4% -34.3% -0.5% 6.9% -16.7% -2.1% -7.5% -2.9%F06 Week 26 16.7% 12.7% 29.9% 4.8% -2.3% -7.1% 1.2% 3.9% -12.9% -2.0% -4.6% -1.9%F06 Week 27 18.5% 3.1% 44.3% 8.0% 2.0% -10.4% -0.1% 6.4% -22.2% -10.7% -3.8% 0.6%F06 Week 28 15.7% 24.2% 54.5% 3.4% 1.6% -11.8% -1.0% 5.2% -11.4% -10.0% -3.8% -1.2%F06 Week 29 7.3% 18.8% 22.0% 4.7% 2.1% -4.4% -2.5% 5.0% -12.0% -10.5% -5.4% -0.2%F06 Week 30 11.9% -2.7% 37.6% 1.8% -4.6% 0.3% -6.3% 2.9% -15.5% -7.6% -4.9% -0.5%F06 Week 31 0.4% 32.3% 46.7% 4.1% 3.5% -15.3% -0.3% 4.0% -15.8% -3.2% -9.6% 8.0%F06 Week 32 5.7% 17.1% 26.1% 5.0% -1.7% -10.7% 2.7% 13.2% -28.4% -9.6% -4.9% 3.1%F06 Week 33 14.4% 33.4% 7.6% 4.1% -6.2% -5.0% -0.3% 5.1% -13.5% -7.7% -3.1% 5.7%F06 Week 34 4.3% 27.1% 33.8% 4.5% -1.8% -12.8% -1.0% 6.5% -18.6% -4.8% -5.7% 0.1%F06 Week 35 7.5% 35.8% 32.4% 7.5% -6.7% 0.1% 0.9% 11.1% -15.1% -3.3% -1.3% 7.8%F06 Week 36 18.5% 19.5% 46.9% 3.4% -3.9% -15.4% 1.9% 3.5% -18.2% -7.0% -5.9% 1.0%F06 Week 37 5.2% -2.7% 44.8% 3.6% 0.4% -8.1% -3.3% 6.3% -21.1% -8.8% -9.9% -1.8%F06 Week 38 9.2% -3.5% 45.3% -0.4% 3.7% -8.7% 6.7% 2.2% -22.5% -8.9% -4.5% 3.6%F06 Week 39 7.2% -6.3% 38.1% 0.1% 8.7% -11.5% 5.3% 3.4% -15.1% -9.5% -4.5% 9.5%F06 Week 40 14.3% -12.8% 49.2% 7.8% 5.3% -5.8% 0.5% 6.8% -14.5% -16.6% -7.0% 1.2%F06 Week 41 11.7% 6.6% 13.1% 13.2% 0.4% -2.9% -5.1% 3.7% -17.2% -12.5% -8.3% 1.3%F06 Week 42 3.2% -2.3% -10.6% 5.8% -3.5% -4.0% -8.3% 0.8% -19.7% -17.7% -9.9% 0.2%F06 Week 43 7.5% -14.9% -0.2% 3.1% 1.5% 17.7% -2.9% 5.2% -17.8% -21.3% -7.4% 0.7%F06 Week 44 5.4% -16.4% -4.2% 2.4% 1.4% 0.0% -4.8% 1.8% -20.1% -23.4% -2.8% 2.5%F06 Week 45 11.9% 5.0% 3.9% 1.2% 1.8% -17.3% -3.2% 3.5% -17.6% -23.2% -6.9% 0.5%F06 Week 46 2.5% -16.9% 3.9% 4.8% -2.7% -0.9% -3.1% 4.3% -9.3% -23.1% -5.9% 0.6%F06 Week 47 -0.6% 0.0% -0.9% 3.4% -2.2% -4.0% -2.2% 1.8% -19.0% -19.7% -5.5% 3.8%F06 Week 48 1.3% -14.6% 6.4% 8.1% -9.7% -21.5% -5.3% 0.6% -13.9% -29.2% -7.5% 2.2%F06 Week 49 10.6% -0.9% -3.4% 11.3% -2.1% -14.9% 1.7% 8.5% -15.6% -25.4% -8.1% 3.7%F06 Week 50 10.6% 7.4% 8.5% 7.2% 7.5% -10.9% 0.7% 5.2% -13.4% -20.2% -9.0% 2.2%F06 Week 51 18.3% -10.4% -4.7% 9.3% 11.1% 2.8% 0.5% 10.7% -7.2% -15.3% -9.0% 9.5%F06 Week 52 1.5% 15.7% 9.8% -1.7% -16.1% -16.5% -3.0% 6.3% -16.0% -28.4% -6.8% 1.8%F07 Week 1 3.0% -8.3% -16.7% -5.1% 4.9% -18.4% -11.3% -0.8% -24.0% -32.7% -3.0% 6.4%F07 Week 2 -4.2% -13.3% -20.9% 0.4% -17.1% -11.9% -6.8% -1.5% -22.8% -28.8% -7.7% 3.1%F07 Week 3 -5.8% -11.3% -1.4% -3.7% -29.3% -22.5% -7.9% -1.3% -19.2% -25.1% -8.4% 3.6%F07 Week 4 -6.5% 6.6% 15.5% -1.2% -14.6% -13.6% -6.8% 0.5% -16.2% -19.7% -7.7% 4.0%F07 Week 5 -4.5% -18.0% -5.7% -3.7% -25.4% -13.1% -2.1% 2.2% -19.0% -23.3% -9.5% 8.1%F07 Week 6 -12.0% -10.2% 4.4% -4.8% -10.8% -11.2% -7.9% -3.0% -17.2% -22.7% -8.4% 5.0%F07 Week 7 -5.8% -15.3% -7.2% -1.3% -12.4% -4.4% -6.4% -2.0% -21.6% -36.1% -13.7% 0.8%F07 Week 8 -6.1% -25.9% 7.5% 3.3% -2.3% 9.7% -11.6% 0.0% -28.3% -31.8% -8.3% 3.6%F07 Week 9 -11.6% -21.5% 5.2% -0.5% -11.1% 9.0% -6.4% -9.7% -22.2% -23.6% -10.9% 7.2%F07 Week 10 2.4% 4.3% -27.3% 2.1% -2.1% 10.9% -0.3% -1.8% -16.4% -18.7% -4.2% 6.8%F07 Week 11 0.5% -28.9% 17.8% 4.5% -10.6% 4.8% -4.9% -3.5% -14.7% -21.0% -5.8% 7.0%F07 Week 12 -3.4% -20.7% 12.6% 0.1% 2.2% -2.1% 1.6% -4.3% -19.8% -19.5% -7.9% 8.3%F07 Week 13 -5.8% -2.4% -10.8% -14.5% -2.8% 1.5% -3.5% -4.4% -15.9% -17.5% -5.0% 8.8%

WeekPetroleum Products

Stone, Clay & Glass

Products CokeMetals & Products

Motor Vehicles & Equipment

Waste & Scrap Metals

All Other Carloads Total Trailers Containers Intermodal

Total Carloads

F06 Week 14 0.5% -1.3% -3.3% 6.5% -0.2% 1.3% 14.5% 1.1% 4.5% 9.7% 8.6% 3.9%F06 Week 15 -1.1% -2.9% 1.6% 3.7% -3.3% -3.3% -12.9% -1.3% -1.5% 6.0% 4.5% 0.9%F06 Week 16 -0.5% 3.6% -8.8% 10.1% -10.6% -2.0% 8.3% 2.5% -3.7% 7.7% 5.3% 3.6%F06 Week 17 2.4% -1.7% 5.2% 6.5% 0.8% -4.0% 2.5% -0.8% 0.5% 9.4% 7.6% 2.4%F06 Week 18 -2.0% 1.4% 1.9% 8.0% 0.2% 5.8% 23.1% 3.1% -1.0% 7.7% 5.9% 4.2%F06 Week 19 7.2% -0.8% 3.1% 12.9% 0.6% 5.3% -1.1% 4.6% -0.6% 9.4% 7.4% 5.7%F06 Week 20 3.1% -4.4% -7.1% 10.6% -2.1% 2.6% -5.0% 7.9% 1.7% 7.8% 6.6% 7.4%F06 Week 21 3.0% 1.2% -18.3% 16.9% 3.4% -2.4% 4.1% 3.2% -0.6% 8.2% 6.4% 4.4%F06 Week 22 5.4% -1.9% -4.4% 21.4% 0.8% 4.6% 2.8% 4.6% 2.0% 7.7% 6.6% 5.3%F06 Week 23 4.2% 1.0% -5.6% 13.1% 2.4% 4.9% 18.2% 5.5% 2.5% 10.4% 8.8% 6.8%F06 Week 24 -0.2% 1.4% -2.5% 15.9% 4.0% 13.9% 7.0% 5.3% 1.7% 9.4% 7.8% 6.3%F06 Week 25 1.8% -0.1% -16.3% 8.6% 3.6% 11.3% 24.2% 3.6% 2.9% 9.0% 7.8% 5.2%F06 Week 26 2.0% -0.4% -6.4% 15.2% 7.1% 13.3% 21.2% 4.7% 0.3% 5.4% 4.3% 4.6%F06 Week 27 7.9% -0.1% -5.2% 27.7% -1.5% 11.9% 0.8% 6.0% -0.1% 4.4% 3.6% 5.1%F06 Week 28 1.0% 2.1% -6.4% 20.0% -6.5% 11.0% 12.8% 4.1% 2.4% 8.5% 7.4% 5.4%F06 Week 29 4.0% 1.1% -11.1% 20.4% -2.3% 8.5% 7.0% 3.2% 0.2% 7.0% 5.7% 4.2%F06 Week 30 0.2% -1.8% -24.5% 7.5% -3.5% 9.8% 9.6% 1.5% 1.2% 7.2% 6.0% 3.3%F06 Week 31 -1.6% -0.5% -24.4% 13.4% -9.7% 9.3% 14.1% 2.9% -0.8% 6.6% 5.1% 3.7%F06 Week 32 5.8% -0.9% -21.1% 13.7% -10.0% -0.2% -12.0% 1.8% -0.6% 5.6% 4.3% 2.8%F06 Week 33 3.1% 2.7% -26.3% 14.5% -5.6% -4.3% 0.8% 2.2% -0.6% 6.8% 5.3% 3.5%F06 Week 34 0.3% -1.0% -19.5% 12.8% -5.9% -2.3% 2.7% 1.7% -4.3% 7.3% 5.0% 3.0%F06 Week 35 0.7% -2.3% -22.1% 13.6% -2.4% -1.6% 23.0% 5.1% -3.6% 10.9% 7.9% 6.2%F06 Week 36 1.1% -5.4% -17.7% 10.2% -10.6% -2.6% 23.5% 2.3% -5.3% 7.1% 4.6% 3.2%F06 Week 37 -1.9% -6.8% -4.6% 5.8% -15.7% -3.9% -0.1% -0.1% -6.2% 7.1% 4.4% 1.6%F06 Week 38 7.8% -7.2% 20.4% 13.1% -14.1% -3.7% 5.3% 0.9% -5.2% 7.9% 5.2% 2.6%F06 Week 39 21.2% -1.9% -4.0% 11.4% -6.6% 0.7% 10.1% 2.6% -6.8% 7.2% 4.2% 3.2%F06 Week 40 2.1% -3.9% -2.1% 12.0% -10.2% -3.7% -6.9% 3.4% -9.3% 6.4% 3.0% 3.2%F06 Week 41 8.4% -10.1% 17.8% 7.0% -12.8% -2.0% -6.1% 3.4% -11.4% 4.6% 1.2% 2.5%F06 Week 42 -0.7% -9.0% 7.8% 4.7% -11.5% -6.4% -8.4% -1.3% -10.9% 3.8% 0.7% -0.5%F06 Week 43 -1.0% -11.5% -12.7% -1.8% -10.7% -4.1% 3.6% -1.1% -11.2% 5.5% 1.9% 0.1%F06 Week 44 1.5% -12.6% 9.3% -0.4% -11.3% -7.8% -6.0% -1.6% -11.9% 4.2% 0.7% -0.7%F06 Week 45 5.0% -10.9% -1.1% -3.3% -13.6% -9.2% -8.8% -2.1% -13.4% 3.2% -0.4% -1.4%F06 Week 46 5.7% -9.1% 6.2% -4.1% -14.5% -7.0% -5.7% -1.3% -12.0% 4.4% 0.8% -0.5%F06 Week 47 5.0% -8.4% 16.6% -6.8% -11.4% -11.3% -7.3% -1.4% -10.8% 5.0% 1.7% -0.2%F06 Week 48 -1.0% -14.3% -4.7% -3.0% -14.5% -9.8% -2.1% -1.9% -14.0% 0.4% -2.8% -2.3%F06 Week 49 0.5% -4.7% 28.6% -2.0% 1.0% -12.3% -14.1% 2.9% -9.3% 5.9% 2.5% 2.7%F06 Week 50 1.5% -1.7% 6.2% -0.7% 1.8% -1.4% -9.2% 2.8% -11.4% 8.9% 4.1% 3.3%F06 Week 51 14.1% 0.8% 4.6% 0.7% 3.4% -2.9% -8.7% 5.5% -8.2% 7.1% 3.8% 4.9%F06 Week 52 -6.8% -18.3% 12.3% -15.2% -20.1% -19.5% -15.2% -5.3% -18.1% -0.6% -4.3% -4.9%F07 Week 1 2.7% -16.8% 5.3% -10.3% -27.5% -10.1% -7.4% -6.7% -15.9% -3.0% -5.5% -6.3%F07 Week 2 2.6% -13.4% 4.6% -10.2% -25.1% -4.7% 4.3% -6.5% -12.5% 0.7% -1.9% -4.7%F07 Week 3 4.9% -15.9% -21.0% -12.1% -22.4% -3.9% 7.9% -7.8% -11.5% 0.5% -1.9% -5.5%F07 Week 4 5.5% -11.3% -7.5% -2.0% -9.0% -4.4% 5.9% -3.2% -12.4% 2.6% -0.4% -2.2%F07 Week 5 5.6% -16.1% -15.5% -10.6% -4.1% -4.2% -5.8% -5.3% -11.2% 0.5% -1.9% -4.0%F07 Week 6 11.3% -17.0% 1.0% -5.8% -3.0% -7.1% 0.6% -5.1% -13.3% 2.4% -0.7% -3.4%F07 Week 7 -5.8% -14.1% 2.3% -11.5% -15.8% -6.0% 0.3% -6.7% -11.3% -0.8% -2.9% -5.2%F07 Week 8 4.9% -10.4% -20.8% -11.5% -8.0% -5.1% 1.2% -2.9% -8.6% 8.2% 4.7% 0.0%F07 Week 9 -1.6% -5.8% -28.4% -4.4% -9.2% -5.7% -10.0% -4.5% -9.9% 12.2% 7.4% -0.1%F07 Week 10 11.1% -5.6% -20.0% 3.5% -1.7% -3.8% -17.5% -1.2% -6.7% 10.3% 6.8% 1.8%F07 Week 11 5.2% -4.3% -13.0% -3.3% -5.3% -1.0% 13.9% 0.2% -11.2% -2.0% -3.9% -1.4%F07 Week 12 7.4% -3.1% -17.5% -1.1% -2.5% 3.8% -1.8% -0.6% -12.9% -1.7% -4.0% -1.9%F07 Week 13 0.3% -5.0% -10.4% -1.6% -2.1% 9.9% -2.5% -6.2% -14.9% 1.8% -1.7% -4.5% Source: Association of American Railroads; Bear, Stearns & Co. Inc.


Trucking Topics

Our first-quarter shipper survey also covered four key topics in current trucking trends:

current and forward 12-month TL and LTL capacity and capacity trends at different size TL fleets;

current and forward 12-month TL and LTL pricing trends;

shippers’ reactions to TL and LTL fuel surcharges for large and smaller carriers; and

potential freight diversion ahead of the upcoming Teamsters’ LTL labor negotiations.

Before we look at the results, we note that for the LTL carriers, a capacity constraint is more likely to develop as a result of congestion at the terminal level, where they consolidate and sort shipments, than at the truck level. By contrast, a capacity constraint for a TL carrier usually relates to a shortage of drivers and/or, to a lesser extent, trucks.

Respondents showed a strong and growing bias again toward perceptions of “overcapacity” in the TL market during the first quarter. Nearly 80% of shippers believe there was overcapacity during the first quarter, compared to 77% in fourth-quarter 2006 and 39% in first-quarter 2006. Seventeen percent indicated they believe there was “extreme overcapacity” in the TL market, compared to none in the year-ago quarter. Only 4% believed TL capacity was “tight” and none replied that TL capacity was “extremely tight,” compared to 26% in fourth-quarter 2005 who indicated “tight” and 1% “extremely tight” capacity. This represents the strongest sentiment of TL capacity availability by shippers in the seven years we have asked this question. During the last TL downturn, our surveys (between first-quarter 2001 and first-quarter 2002) indicated that only between 51% and 61% of our shippers believed there was TL overcapacity. Anecdotally, we have heard from shippers and carriers that there were a record number of Requests for Proposals (RFP) in the market during the first quarter, as we believe shippers are trying to take advantage of the soft environment to lock in flat to down rates in both TL and LTL. J.B. Hunt indicated in its first-quarter earnings release that RFPs were three times higher than normal for a first-quarter.

LTL capacity perceptions also continued shifting materially toward more respondents reporting overcapacity, as 69% indicated there was LTL overcapacity in the market, with 57% indicating “modest overcapacity,” and another 12% indicating “extreme overcapacity.” Only 1% indicated “tight” LTL capacity and none indicated “extremely tight” capacity during first quarter. During first-quarter 2006, 43% of respondents reported modest overcapacity and 3% reported “extreme overcapacity” versus 9% who reported “tight” to “extremely tight” capacity. Thirty percent of respondents still indicated a balanced LTL capacity in first-quarter 2007, down from 46% in first-quarter 2007. This shift in perception toward more LTL capacity

TRUCKING CAPACITY


indicates to us that the LTL group could see downward yield pressure throughout 2007, particularly if the manufacturing economy were to remain weak (see Exhibit 22).

Exhibit 22. How Did You Perceive TL and LTL Capacity During First-Quarter 2007 Compared with Recent First Quarters?

Truckload (TL) Capacity

0%

10%

20%

30%

40%

50%

60%

70%

Extremely tight Tight Balanced Modest over-capacity Extreme over-capacity

1Q06

4Q06

1Q07

Less-than-Truckload (LTL) Capacity

0%

10%

20%

30%

40%

50%

60%

70%

Extremely tight Tight Balanced Modest over-capacity Extreme over-capacity

1Q06

4Q06

1Q07


Exhibit 23 tracks monthly heavy-duty Class 8 tractor builds and net orders from ACT Research versus our Bear Stearns Truckload stock index. ACT Research reported a record 331,454 Heavy Duty Class 8 truck builds during 2006, the second consecutive year with more than 300,000 builds, and compared to a last ten-year average-build rate of 236,000 tractors per year. Only in one other year (1999) did the truck manufacturers build more than 300,000 heavy duty tractors. Net order numbers dropped significantly beginning April 2006, after the majority of the 2006 production slots available for pre-2007 engines were filled.

These large tractor build numbers continued through first-quarter 2007, as the truck manufacturers drew down their remaining engine inventories of pre-2007 engines and delivered pre-2007 grandfathered tractors, which were delayed from 2006 into 2007 delivering schedules. While many of our large public TL carriers are not adding new capacity (and most have shrunk their fleets and miles driven), we see ample reason to believe that these large TL providers’ “replacement” vehicles have fueled capacity growth for smaller and midsize fleets, evidenced by a strong used-truck market and expanding gross yields at truck brokers such as C.H. Robinson, Landstar, and Hub Group. We believe that as of the end of first-quarter 2007, most of the pre-2007 tractors have now been built, but deliveries of those tractors could be made as late as this summer or fall as several dealers have also stockpiled tractors.


Exhibit 23. Monthly Class 8 Heavy-Duty Builds Versus Net Orders

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

50,000

Jan-

90Ju

l-90

Jan-

91Ju

l-91

Jan-

92Ju

l-92

Jan-

93Ju

l-93

Jan-

94Ju

l-94

Jan-

95Ju

l-95

Jan-

96Ju

l-96

Jan-

97Ju

l-97

Jan-

98Ju

l-98

Jan-

99Ju

l-99

Jan-

00Ju

l-00

Jan-

01Ju

l-01

Jan-

02Ju

l-02

Jan-

03Ju

l-03

Jan-

04Ju

l-04

Jan-

05Ju

l-05

Jan-

06Ju

l-06

Jan-

07

Num

ber o

f Tra

ctor

s

0

100

200

300

400

500

600

700

800

Bear

Ste

arns

' TL

Inde

x (19

90 =

100)

BuildsNet OrdersBear Stearns' Truckload Index

Note: TL stock index includes CVTI, HTLD, JBHT, KNX, MSCA, SWFT, WERN, and XPRSA. Source: ACT Research; Bear, Stearns & Co. Inc. estimates.

LTL capacity has not tightened as much as TL capacity in the past four to five years and most of the public LTL carriers do not have material driver retention and hiring issues. Two issues may have limited LTL pricing in the past few years relative to TL yield growth: 1) the LTL industry has seen consistently solid 3%-4% annual pricing growth since 1997, while TL pricing was mostly nonexistent prior to 2002; and 2) LTLs include networks that are built for peak shipping in the fall and generally have available capacity the remainder of the year. Going forward, we see increasingly competitive signs developing in the LTL market between parcel providers, regional and long-haul providers, and union versus non-union providers.

Shipper expectations about TL capacity in the coming year show signs of some uncertainty. As is typical during the seasonally slower first quarter, shippers leaned toward expectations for modestly tighter TL capacity over the next 12 months, with 29% expecting more TL capacity versus 34% who expect tighter capacity in the next 12 months. This is compared to last quarter’s survey when 51% expected more TL capacity and only 16% expected tighter TL capacity. But compared to first-quarter 2006 when only 9% expected more TL capacity and 49% expected tighter TL capacity, the current environment still appears to expect a greater amount of TL capacity in the coming year than it did a year ago (see Exhibit 24).

Shippers in first-quarter 2007 indicated expectations for slightly more LTL capacity during the next 12 months, with 23% expecting greater LTL capacity, including 5% who expect “significantly more capacity,” and 22% expecting tighter LTL capacity. This compares to first-quarter 2006 when 16% expected more LTL capacity and 19% expected tighter LTL capacity. We believe that as 1) the parcel carriers become more competitive after their recent acquisitions (UPS Freight buying Overnite and FedEx Freight buying Watkins); 2) the long-haul carriers expand their regional product


lines; and 3) the manufacturing economy remains soft, LTL capacity will feel significantly more available than years past (see Exhibit 24).

Exhibit 24. What Do You Expect Regarding the Direction of TL/LTL Capacity over the Next 12 Months?

Truckload (TL) Capacity

0%5%

10%15%20%25%30%35%40%45%50%

Significantly tighter capacity Somewhat tighter capacity Same capacity Somewhat more capacity Significantly more capacity

1Q064Q061Q07

Less-than-Truckload (LTL) Capacity

0%

10%

20%

30%

40%

50%

60%

70%

Significantly tighter capacity Somewhat tighter capacity Same capacity Somewhat more capacity Significantly more capacity

1Q064Q061Q07


Exhibit 22 and Exhibit 24 above detail how shippers perceived capacity in the first quarter and what they expect for the coming 12 months. We also asked them to gauge whether TL capacity shifts are occurring differently in smaller TL fleets (500 trucks or less) versus larger TL fleets (see Exhibit 25 and Exhibit 27). Our respondents sense an increasing change in the capacity mix compared to last year. Forty-three percent see more capacity from small-to-medium TL carriers, with 2% reporting materially more small-fleet TL capacity, compared to first-quarter 2006, when 35% reported greater capacity from smaller carriers. Twenty-one percent of respondents see less small-fleet TL capacity, compared to 14% in the year-ago quarter. In first-quarter 2007, 36% of respondents saw no change in their small-fleet capacity, compared to 51% who indicated no change in first-quarter 2006. This indicates to us that despite the difficult operating environment of the past two to three quarters, there still is little evidence of smaller carriers exiting the market, which is consistent with the Bear Stearns monthly trucking bankruptcy index published by auto and truck equipment analyst Peter Nesvold (see Exhibit 26).


Exhibit 25. Are You Generally Seeing More or Less Small to Medium-Size Fleet (i.e., Fewer than 500 Trucks) TL Capacity? First-Quarter 2007 First-Quarter 2006

No change

36%

Materially more small to

medium TL fleet capacity

2%

Somewhat more small to medium TL fleet capacity

41%

Materially less small to

medium fleet capacity

1%Somewhat less

small to medium TL fleet capacity

20%

Somewhat more small to medium TL fleet capacity

32%

No change51%

Materially more small to


3%

Materially less small to

medium fleet capacity

3%

Somewhat less small to


11%


Our Bear Stearns trucking bankruptcy index became more volatile in fourth-quarter 2006, but ultimately remained at very low levels at year end, implying that smaller carriers, generally, do not appear to be going out of business. Peter Nesvold published a seasonally adjusted bankruptcy index for trucking companies (see Exhibit 26) through March (for details, see Mr. Nesvold’s April 9, 2007 report, OEM INSIDER: Seasonally Adjusted Trucker Bankruptcies: Mixed Results in February and March).

The most recent data for March 2007 indicate that the index improved to 35 in March, following a level of 60 in February and 43 in January. This was somewhat surprising to us as we had expected the number of bankruptcies to begin increasing the longer the TL market remains weak. All else being equal, the index suggests freight may have improved modestly in March above normal seasonal trends. Anecdotally, we’ve heard others comment that it does not appear that smaller truckers are exiting the industry yet, even though fuel costs spiked at the end of the quarter. The index is seasonally adjusted so that January 2000 is 100. It reached a peak of just over 300 back in the summer of 2002, and reached a low of 25 in November 2005 following the change in bankruptcy law. We believe that when the index reaches about 150 again that it is a signal that we are likely a few quarters away from a re-tightening in truckload pricing.


Exhibit 26. Bear Stearns Seasonally Adjusted Truck Bankruptcy Index (January 2000 = 100)

0

50

100

150

200

250

300

350

Jan-

00

Apr-0

0

Jul-0

0

Oct-0

0

Jan-

01

Apr-0

1

Jul-0

1

Oct-0

1

Jan-

02

Apr-0

2

Jul-0

2

Oct-0

2

Jan-

03

Apr-0

3

Jul-0

3

Oct-0

3

Jan-

04

Apr-0

4

Jul-0

4

Oct-0

4

Jan-

05

Apr-0

5

Jul-0

5

Oct-0

5

Jan-

06

Apr-0

6

Jul-0

6

Oct-0

6

Jan-

07

Seas

onall

y Adj

uste

d Ba

nkru

ptcy

Inde

x '

Source: Federal bankruptcy filings; Bear, Stearns & Co. Inc. transportation equipment analyst Peter Nesvold.

We also saw an almost identical increase in the number of shippers reporting more TL capacity from large fleets as opposed to small and medium fleets. Forty-four percent of respondents saw more large-fleet TL capacity available in first-quarter 2007, compared to 30% in first-quarter 2006. Eighteen percent reported “somewhat” to “materially” less large-fleet TL capacity, down from 19% in first-quarter 2006 (see Exhibit 27). We believe that this perceived expansion by larger TL providers is due to the easier availability of trucks currently.

Exhibit 27. Are You Generally Seeing More or Less Large Fleet (i.e., Greater than 2,000 Trucks) TL Capacity? First-Quarter 2007 First-Quarter 2006

No change38%

Somewhat more large TL

fleet capacity40%

Somewhat less large TL fleet

capacity17%

Materially less large fleet capacity

1%

Materially more large TL fleet

capacity4%

Somewhat less large TL fleet

capacity19%

No change51%

Somewhat more large TL

fleet capacity28%

Materially more large TL fleet

capacity2%


Exhibit 28 shows that most large public TL providers’ fleet sizes, in fact, are not currently growing materially. On average, our TL coverage fleets have grown 3.7% year over year in their latest first-quarter 2007 reports. If we remove Knight Transportation (up 11.8% year over year as the company grows into new


geographical regions) and Covenant Transport (up 7.6% year over year due to an acquisition), then the public TL fleets that we cover shrank their fleets 0.4% year over year, after a 1.1% year-over-year decline in fourth-quarter 2006.

Exhibit 28. Our Public TL Carriers’ Historical Reported Fleet Growth (year over year) Tractor count (y-o-y change) 1Q06 2Q06 3Q06 4Q06 1Q07Covenant Transportation -1.4% -4.5% -3.1% 10.4% 7.6%Heartland Express (1) NA NA NA NA NAJ.B. Hunt Transportation (2) 2.0% -1.8% -2.0% -4.2% -5.7%Knight Transportation 16.3% 14.7% 12.5% 13.8% 11.8%Swift Transportation -7.4% -8.0% -4.6% -0.7% 1.5%Werner Enterprises 0.0% -1.5% 0.4% 1.7% 3.1%Average 1.9% -0.2% 0.6% 4.2% 3.7%Average, Net Knight & Covenant -1.8% -3.8% -2.1% -1.1% -0.4%

(1) Heartland does not provide operating statistics. (2) J.B. Hunt is its TL division only. Source: Bear, Stearns & Co. Inc.

As reported in first-quarter earnings releases, year-over-year TL yield increases (revenue/mile, net of fuel) for the public TL carriers decelerated relative to fourth-quarter 2006, fleet sizes remained relatively flat to down year over year, and utilization (loaded miles per tractor) declined significantly, leading to 4% fewer loaded miles year over year. TL yields, net of fuel, for our public TL pricing index were up 1.8%, on average, in the first quarter versus 2.6% in fourth-quarter 2006 and 3.6% in first-quarter 2006. We believe yields will remain difficult to grow year over year in 2007 and expect the TL carriers to continue to trade some utilization and deadhead through shorter lengths of haul to remain disciplined on yields, which is evident in the 4% year-over-year decline in loaded TL miles reported by the public carriers in the first quarter (see Exhibit 29).

Going forward, unless the economy suddenly reaccelerates, we expect TL carriers to struggle to hold yields more or less flat sequentially, leading to yield increases of 0%-2% year over year in 2007. Our sense is that Exhibit 29 reflects material weakness in loaded miles and utilization for the TL sector since second-quarter 2006, resulting from an increased supply of trucks into weaker demand. Accordingly, we believe the spot market for TL pricing remains down double-digits year over year, while contractual rates are flattish to modestly down.

TRUCK PRICING


Exhibit 29. Reported TL Volumes (Loaded Miles) and Yields (Revenue/Mile)

5.3%5.7%

7.1%

8.4%

5.0%

5.7%

5.0%

2.6%

1.8%

5.4%

7.2%

5.8%

3.6%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

1Q01

2Q01

3Q01

4Q01

1Q02

2Q02

3Q02

4Q02

1Q03

2Q03

3Q03

4Q03

1Q04

2Q04

3Q04

4Q04

1Q05

2Q05

3Q05

4Q05

1Q06

2Q06

3Q06

4Q06

1Q07

Year

-ove

r-Yea

r gro

wth

Loaded milesRev/ Loaded mile, net fuel surcharge

1Q06 2Q06 3Q06 4Q06 1Q07% Chg in Yields (Rev/Loaded mile, net of fuel surcharge; y-o-y) 3.6% 5.7% 5.0% 2.6% 1.8%% Chg in Utilization (Rev Miles/Tractor) -1.3% -3.1% -5.5% -8.5% -6.4%Tractor count (y-o-y change) (including KNX) 1.9% -0.2% 0.6% 4.2% 3.7%Tractor count (y-o-y change) (excluding KNX) -1.7% -4.0% -2.3% 1.8% 1.6%Deadhead (empty mileage %) Improvement (y-o-y) (6bp) (10bp) (26bp) (118bp) (96bp)

Note: Average includes KNX, JBHT, SWFT, and WERN. HTLD is not included as it does not provide operating statistics, and CVTI

is not included due to mix shifts. Source: Company reports; Bear, Stearns & Co. Inc.

The public LTL providers in our pricing index reported yields (revenue per hundredweight, gross of fuel) up 1.8%, on average, in first-quarter 2007 compared to 2.5% in fourth-quarter 2006. On average, LTL yields have risen much less than TL yields (revenue per loaded mile) in recent years, but we expect increasing competition and flattish fuel prices to exert substantial downward pressure on LTL yields going forward. Tonnage per day year over year for the public LTL carriers we track was little changed in first quarter, expanding 0.1% (negative 1.6% excluding Saia), with Saia’s acquisition growth helping the average recover from a 0.4% decline in fourth-quarter 2006 (see Exhibit 30).


Exhibit 30. Reported LTL Tonnage and Yields (Revenue/Hundredweight Gross of Fuel)

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

1Q99

2Q99

3Q99

4Q99

1Q00

2Q00

3Q00

4Q00

1Q01

2Q01

3Q01

4Q01

1Q02

2Q02

3Q02

4Q02

1Q03

2Q03

3Q03

4Q03

1Q04

2Q04

3Q04

4Q04

1Q05

2Q05

3Q05

4Q05

1Q06

2Q06

3Q06

4Q06

1Q07

Year

-ove

r-Yea

r Gro

wth

Tonnage/day Growth

Rev/cwt. Growth (gross offuel surcharge)

Note: Tonnage growth index and yield (rev/ cwt. gross of fuel) index include Arkansas Best, Con-way, FedEx Freight, Old

Dominion, Roadway Express, Saia, Yellow Transportation, and YRC Regional. Source: Company reports; Bear, Stearns & Co. Inc.

TL carriers generally seek rate increases on an account-by-account basis, getting or giving rate as the market bears; LTL carriers typically announce annual general rate increases (GRI) in the first or second quarter that apply to non-contractual customers and negotiate a discount from that tariff with contractual customers throughout the year as contracts expire. According to our survey, shippers expect, on average, an effective 2007 base rate increase of approximately 1.3% from their TL carriers, prior to fuel surcharges and accessorial costs. This is significantly lower than forward expectations of 3.0% during the year-ago quarter, but ten bps improved from expectations last quarter for 1.2% year-over-year TL base rate increases, off a difficult Katrina-relief comparison quarter in fourth-quarter 2005.

LTL pricing has been more stable during the past three years than TL pricing, without the large spikes of 2004 and 2005 from the TL market, but pricing expectations for LTL have also dropped considerably over the past two quarters. On average, our respondents expect 2007 LTL rate increases of 1.5% year over year, following expectations for 1.5% year-over-year growth in fourth-quarter 2006, which was the lowest expectation since 2002 (see Exhibit 31). These rate expectations agree with our shippers’ views on increasing overcapacity in both the TL and LTL markets in the next 12 months.


Exhibit 31. What Increases (Decreases) in TL/LTL Rates Do You Expect to Pay During 2007 Versus 2006?

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

1Q03 2Q03 3Q03 4Q03 1Q04 2Q04 3Q04 4Q04 1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07

Aver

age e

xpec

ted

rate

incr

ease

LTL TL


We included a series of questions in our survey about fuel surcharges and their effect on base rates (net of fuel surcharges) in the trucking industry. Although large corporations with annual transportation spending budgets of more than $25 million dominate our survey, the vast majority of our respondents receive little or no break from truckers on fuel surcharges. In fact, despite the weaker pricing environment generally, we saw an increase in the number of shippers reporting 100% compliance with their TL fuel surcharges. Sixty-seven percent of respondents comply fully with the assigned TL fuel surcharge, up from 57% in first-quarter 2006, and 96% report paying at least 50% of the standard TL fuel surcharge requested, compared to 92% in the year-ago quarter. One percent of shippers responded that they did not pay any fuel surcharge, compared to none in first-quarter 2006. We suspect the higher acceptance of fuel surcharges likely has to do with the lower year-over-year cost of diesel in first-quarter 2007, as well as greater acceptance of the higher cost of fuel generally.

As in past quarters, the anecdotal evidence suggests that shippers who are paying some modestly discounted fuel surcharge are achieving the discount by paying their own fuel surcharge schedule or mechanism (sometimes an absolute cap, sometimes a slower-to-increase sliding scale [see Exhibit 32]).

FUEL SURCHARGE AND BASE RATES


Exhibit 32. Are You Currently Paying All or Some Percentage of the Fuel Surcharge Billed to You by Your TL Providers? First-Quarter 2007 First-Quarter 2006

Paying 100%67%

Paying <50%3%Paying 50% -

<75%7%

Paying 75% -<100%

22%

Paying none1%

Paying 100%57%

Paying <50%8%

Paying 50% -<75%11%

Paying 75% -<100%

24%


Once again this quarter, the overwhelming response from shippers was that they are compliant with fuel surcharges for both small and large TL carriers. Eighty-two percent of shippers responded that there was no difference in their payment of fuel surcharges between large and small TL carriers, in line with our first-quarter 2005 survey. During first-quarter 2007, about 14% of shippers indicated they were paying somewhat higher fuel surcharges to larger providers, falling from first-quarter 2006 when 12% indicated they were paying somewhat higher fuel surcharges to larger TL providers and another 6% indicated they were paying materially more to larger TL providers. In addition, in first-quarter 2007, 4% indicated paying a somewhat higher fuel surcharge to smaller TL carriers, compared to none in our year-ago survey (see Exhibit 33).

Exhibit 33. Are You Currently Paying a Higher Percentage of Fuel Surcharges to Your Smaller or Larger TL Providers? First-Quarter 2007 First-Quarter 2006

No difference, 82%

Somewhat higher to large TL providers,

14%

Somewhat higher to

smaller TL providers, 4%

No difference82%

Somewhat higher to large TL providers

12%

Materially higher to large TL providers

6%


To get a more complete picture of the relative difference in total cost of different-size TL service providers, we asked how base rates (net of fuel surcharge) at the larger TL service providers compared versus smaller TL service providers (see Exhibit 34). Similar to past quarters, the vast majority of our shippers (nearly three-quarters) report paying the same base rates to smaller and larger TL carriers, and 16% report


paying higher rates to larger TL carriers, down from 27% of shippers paying higher base rates to larger TL carriers in our first-quarter 2006 survey. Eight percent of respondents indicated paying somewhat higher base rates to smaller TL providers, up from 3% who paid higher base rates to smaller TL carriers in the year-ago quarter. These shifts suggest a relative loss (though modest) of pricing power by the large truckload carriers. Our sense from conversations with shippers remains that shippers still pay more accessorial charges for items such as detention and trailer drops to large carriers than smaller ones.

Exhibit 34. Are You Currently Paying Higher Base Rates to Your Smaller or Larger TL Providers? First-Quarter 2007 First-Quarter 2006

No difference76%


16%

Somewhat higher to smaller

TL providers8%

No difference70%


27%

Somewhat higher to smaller

TL providers3%


For the fourth time, we asked about fuel surcharge compliance specifically for our LTL shippers, and found that although the majority of our shippers pay most of their LTL fuel surcharge, compliance is substantially lower than that of the TL shippers. Fifty-five percent of our shippers polled pay 100% of their LTL fuel surcharge bill, up from 52% in fourth-quarter 2006. Fourteen percent of our respondents indicated paying less than half of their LTL fuel surcharge bill, in line with our respondents’ answers in our fourth-quarter 2006 survey, while those paying none of their LTL fuel surcharge decreased from 1% in fourth-quarter 2006 to none in our first-quarter 2007 survey. Anecdotally, we have heard shippers comment about the benefit that LTL carriers get from percentage-based fuel surcharges when diesel prices are high. We suspect that with declining diesel fuel prices the LTL carriers’ benefit from high fuel surcharge collection will diminish, creating headwinds for their future financial reports if diesel prices remain low; however, with lower diesel fuel prices they may get higher compliance rates from shippers. In our opinion, lower diesel fuel prices would create a headwind for LTL carriers as we believe it would lead to lower overall fuel surcharge income.


Exhibit 35. Are You Currently Paying All or Some Percentage of the Fuel Surcharge Billed to You by Your LTL Providers? First-Quarter 2007 Fourth-Quarter 2006

Paying 100% of billed surcharge

55%

Paying 75% -100% of billed

surcharge14%


surcharge17%

Paying less than 50% of billed

surcharge14%

Paying 100% of billed surcharge

52%


surcharge19%

Paying 50%-75% of billed

surcharge14%

Paying less than 50% of billed

surcharge14%

Paying none1%


During Teamster contract renegotiations, shippers who use union carriers are likely to make strike contingency plans and as a precaution they divert freight to alternative carriers. During the period prior to the 1998 contract, non-union LTL providers grew tonnage at significantly faster rates than union carriers. In 1997, after a bitter strike in 1994, the average tonnage growth of non-union carriers American Freightways (now part of FedEx Freight), Con-way, and US Freightways (now YRC Regional) outgrew the average tonnage growth of Arkansas Best, Consolidated Freightways, Yellow, and Roadway by about seven percentage points. During first-half 1998, that difference doubled to about 14 percentage points, despite the contract being signed seven weeks early. This trend did not hold in the period prior to the 2003 contract because of the bankruptcy of Consolidated Freightways in September 2002. Its tonnage primarily shifted to the other long-haul networks. This time, we expect a return to freight diversion as we do not see another imminent long-haul carrier bankruptcy and we see more carriers with nationwide network capabilities: Old Dominion, Saia, Vitran, FedEx National LTL (Watkins), UPS Freight (Overnite), and Estes. Moreover, as manufacturers continue shifting toward leaner inventory management, their reliance on consistent shipments increases as does the risk of production line shutdowns due to lack of supply. Thus, we believe shippers’ sensitivity to potential strikes is currently higher than during prior renegotiations.

With the latest LTL Teamsters contract set to expire March 31, 2008 (now within ten to 11 months), we asked shippers about their plans for LTL freight in this period prior to the contract expiration to get a sense for how much share the non-union carriers may gain in the coming year. Fifty percent of respondents indicated they expected no change in their LTL shipping patterns; 14% said they will divert some portion of their LTL freight, and 36% will divert some freight, but only if they lose confidence in the negotiation process or if specific problems arise, such as a potential strike or work slowdown. We suspect this latter group is not likely to divert any freight much before three to six months prior to the March 31, 2008, deadline, if at all (see Exhibit 36).

TEAMSTERS LABOR NEGOTIATIONS


Exhibit 36. How Do You Expect to Change Your Shipping Patterns Ahead of the Upcoming March 31, 2008, Teamsters’ LTL Trucking Labor Negotiations, if at All?

No change50%

Planning to divert LTL only if problems arise

36%

Planning to divert some LTL14%



Parcel Topics

We continue to believe that express parcel carriers, including the private carriers as well as the United States Postal Service (USPS), are competing first on a service level basis, though it could be that we are beginning to see a shift toward a more price-competitive environment. According to this quarter’s survey, shippers again expect to pay on average only modest base rate increases (net of fuel surcharges) to both UPS and FedEx during the next 12 months. The anticipated base rate percentage increase is somewhat greater for FedEx than for UPS, a reversion to a more normal trend that had been in place throughout most of 2005 and 2006. Shippers’ expectations for compliance with rate increases have declined somewhat versus the year-ago period for UPS but increased for FedEx.

In last quarter’s Supply-Chain Indicator (published in February and based on a survey conducted in January), we noted that respondents were expecting to pay lower effective rate increases to both FedEx and UPS than the prior quarter, but higher average rate increases than they expected to pay the prior year. In part, we view the higher anticipated compliance and list rate increase in the fourth quarter as a seasonal/timing response to the then recently announced annual list rate increase by FedEx and UPS. According to our results this quarter, shippers’ average anticipated rate increase from FedEx in 2007 is expected to be marginally higher (1.1% versus 1.0%) than UPS’s in absolute terms. In eight of the last ten quarters, respondents have stated their expectation for lower average effective rate increases at UPS versus FedEx. Of our respondents, 77% said they would comply with some or all of FedEx’s proposed increase, up from 75% a year ago. For UPS, 73% of respondents planned to pay the modest effective average rate increase, while in the year-ago period, 81% of respondents responded similarly regarding their 2006 expectations. Overall, pricing remains competitive but does not appear to be deteriorating.

It is important to note that notwithstanding the larger announced list price increased at FedEx (5.3% on average for Ground, Domestic Air, and International Priority) relative to UPS (4.9% on average for Ground Domestic Air and Export) a larger percentage of our respondents expect to pay some portion of the FedEx increase than UPS’s. Historically, there has been little correlation between the list rates proposed by the express carriers and the yield growth the companies have actually realized, so we continue to believe the direction of the economy (and the resulting impact on negotiations between shippers and carriers) will be the key factor determining how much yield improvement we see. Exhibit 37 shows that in the past, the list rate increases set forth by FedEx and UPS have generally been much higher than the actual yields recognized by the companies in a given year. On average, since 1998, FedEx Domestic Express’s reported gross yield increases have lagged annual list rate increases by about 60 bps per year, while UPS Domestic Express’s reported gross yields have lagged list rates by 210 bps per year.


Exhibit 37. Express Carriers’ Rate Increases Versus Reported Yield Increases

Announced Domestic Express Increase

Reported Domestic Express Increase Variance (bp)

Announced International Express

IncreaseReported International

Express Increase (2) Variance (bp)2007E 5.5% 0.5% 500 5.5% -0.2% 5702006 5.5% 5.8% (30) 5.5% 4.9% (60)2005 4.6% 4.8% (20) 4.6% 6.4% 1802004 2.5% 4.6% (210) 2.5% 8.7% 6202003 3.5% 1.6% 190 3.5% 9.1% 5602002 3.5% -0.5% 400 3.5% 1.6% (190)2001 4.9% 1.2% 370 2.9% -0.6% (350)2000 0.0% 3.3% (330) 0.0% 4.9% 4901999 2.8% 1.7% 110 0.0% 2.0% 2001998 3.5% 2.9% 60 0.0% 0.7% 70Average 3.4% 2.8% (60) 2.5% 4.2% 170

Announced Domestic Express Increase

Reported Domestic Express Increase Variance (bp)

Announced International Express

IncreaseReported International

Express Increase (2) Variance (bp)2007E 4.9% -0.7% 560 4.9% -0.4% 5302006 5.5% 2.2% (330) 5.5% 0.5% 5002005 2.9% 0.6% (230) 2.9% 3.0% (10)2004 2.9% 6.6% 370 2.9% 8.8% (590)2003 3.2% -0.7% (390) 2.9% 12.4% (950)2002 3.9% -0.1% (400) 3.0% 3.0% 02001 3.5% -1.0% (450) 2.9% -4.2% 7102000 3.5% 0.3% (320) 2.9% -6.6% 9501999 2.5% 0.9% (160) None -3.7% NA1998 3.2% 3.6% 40 None -3.5% NAAverage 3.5% 1.4% (210) 3.3% 1.1% 220

FDX (1)

UPS

(1) FedEx’s figures presented on a calendar basis. (2) Reported international export year-over-year gross yield growth. Source: Company reports; Bear, Stearns & Co. Inc. estimates.

The reason the announced list rates do not always translate to higher yields is that larger and/or more valued shippers can often renegotiate contracts with carriers as they expire, or, in many cases, renegotiate the terms of contracts in advance of expiration. The ability of shippers to protect themselves from list rate increases seems to vary significantly, depending on the shipper’s budget size, growth potential, and type of freight and shipping patterns. We asked survey participants about the extent of which their contracts protected them from list rate increases (see Exhibit 38). About three fourths of this quarter’s respondents expect some contractual insulation from full list price increases of which 58% said they could negotiate somewhat or significantly lower rates than would be implied by announced rate increases, while 18% said that list rates had no direct impact on them. The balance (24%) said they were fully exposed to list rate hikes, up from 19% last quarter.


Exhibit 38. If You Have a Contract with UPS and/or FedEx, to What Extent Does Your Contract Protect You from Annual List Rate Increases?

Fully exposed to annual list rate increases

24%

List increases have no direct impact on our rates

18%

Able to negotiate somewhat lower increases

39%

Able to negotiate significantly lower

increases19%


Over the last nine-plus years, we have asked shippers to comment on their expectations about parcel pricing over the next eight quarters, quantifying what they expect to pay in list rate increases. We tabulate the results each quarter, comparing the results for compliance expectations (what percentage of respondents plan to pay any increase at all), and also quantifying how much more on average shippers expect to pay as their contracts renew in the next year or two. We typically analyze changes in respondents’ answers by looking at year-over-year comparisons to remove the effects of seasonality, but we present the sequential changes as well. Exhibit 39 shows our fourth-quarter survey results along with the prior and year-ago quarter results for comparison.


Exhibit 39. Anticipated Compliance with Recent FedEx and UPS List Price Increases First-Quarter 2007 Survey Results

% of respondents that will pay some part of rate increase Anticipated effective rate increase to be received (average)

Initially by 4/07 by 7/07 by 1/08 by 1/09 Avg. by 1/09 Initially by 4/07 by 7/07 by 1/08 C07 Avg. by 1/09 Avg. by

1/09FedEx (2)

Ground 4.9% 33% 44% 64% 83% 86% 62% 0.3% 0.6% 1.2% 2.1% 1.0% 2.1% 1.2%Domestic Air 5.5% 38% 48% 65% 78% 85% 63% 0.3% 0.5% 0.9% 1.3% 0.8% 1.5% 0.9%International Priority 5.5% 46% 50% 65% 73% 85% 64% 0.4% 0.4% 0.7% 1.0% 0.6% 1.3% 0.8%Average 5.3% 39% 47% 65% 78% 85% 63% 0.3% 0.5% 1.0% 1.5% 0.8% 1.7% 1.0%

UPS (2)

Ground 4.9% 32% 39% 61% 77% 82% 58% 0.3% 0.4% 1.0% 1.7% 0.9% 1.8% 1.1%Domestic Air 4.9% 30% 35% 57% 70% 78% 54% 0.3% 0.3% 0.7% 1.2% 0.6% 1.4% 0.8%Export 4.9% 38% 42% 46% 58% 67% 50% 0.4% 0.6% 0.6% 1.2% 0.7% 1.3% 0.8%Average 4.9% 33% 38% 55% 69% 76% 54% 0.3% 0.4% 0.8% 1.4% 0.7% 1.5% 0.9%

Service List Price Increase (1)

First-Quarter 2006 Survey Results % of respondents that will pay some part of rate increase Anticipated effective rate increase to be received (average)


1/08FedEx (2)


UPS (2)



Fourth-Quarter 2006 Survey Results % of respondents that will pay some part of rate increase Anticipated effective rate increase to be received (average)


1/09FedEx (2)


UPS (2)



(1) Rates in 1Q07 survey were announced November 2006, and took effect January 2007. Rates in 1Q06 and 4Q06 surveys were announced November 2005, and took effect January 2006.

(2) UPS’s 2007 rates included a 4.9% express increase offset by a 2.0% fuel surcharge decrease, with a 4.9% ground increase. FedEx’s 2007 rates included a 5.5% express increase offset by a 2.0% surcharge decrease, with a 4.9% ground increase. Both carriers’ 2006 rates included 5.5% list rate increase and 2.0% fuel surcharge decrease.

Methodology: The raw data collected from shippers included the percentage of respondents who intended to pay some or all of the respective rate increases by the time periods highlighted above. In addition, for those who indicated an intention to comply, we asked how much of the respective rate increase they intended to pay (as a percentage of the total rate increase). Our estimates of the effective rate increases that FedEx and UPS can collect over time for various products are based on multiplying the anticipated participation rate (percentage intending to pay part or all of a rate increase) by the percentage of a given rate increase that shippers intend to pay. We then multiply this value by the announced nominal rate increase to yield an estimate of what may actually be collected. Source: Bear, Stearns & Co. Inc.

Based on the above data, we believe that the express carriers may again find it difficult to implement their full annual list rate increases in 2007. Similarly, during 2006, UPS struggled to increase yields, reporting flattish results net of fuel in the first three quarters of the year, followed by modest growth last quarter (see Exhibit 40 and Exhibit 41). Meanwhile, we believe FedEx’s yields net of fuel increased by low-single-digit percentages every quarter. Examining the last eight quarters’ trends in both our survey responses and the express carriers’ actual reported yields net of fuel surcharge, pricing has clearly remained more competitive for UPS and FedEx domestically than we have seen for many years, with UPS generally being more price-competitive than FedEx. Although both carriers announced high-end list rate increases for 2007, which potentially suggests a shift in focus toward yield growth


rather than volumes, FedEx recently reported decelerated third-quarter (ended February) fiscal 2007 yields, possibly signifying increased rather than decreased market share aspirations.

In first-quarter 2007 UPS reported U.S. package yields improved 1.4% year over year, including core U.S. ground yield up 3.0% year over year, slightly above the 1.1% growth estimate in our model and 1.0% growth in fourth quarter 2006. Based on Exhibit 40, we believe about half of UPS’s yield improvement resulted from its change in dimensional weighting, as opposed to directly from its higher list rate schedule. During the conference call, management noted the modest negative mix impact associated with air yields as they continue to focus on growth within the afternoon delivery business which maintains a lower revenue per piece.

Exhibit 40. Percentage of Expected Year-over-Year Compliance with UPS and FedEx Rate Increases and Average Forward-Year Base Rate Increase Expectations from Our Past Surveys

% of respondents that will pay some part of rate increase by following year

50%

55%

60%

65%

70%

75%

80%

85%

90%

4Q04 1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07

FedExUPS

Anticipated effective rate increase to be received after one year (average)

0.0%

0.2%

0.4%

0.6%

0.8%

1.0%

1.2%

1.4%

1.6%

1.8%

4Q04 1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07

FedExUPS



Exhibit 41. Reported and Fuel-Adjusted Yields for FedEx and UPS UPS 1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07REPORTED YIELD GROWTH (GROSS OF FUEL)Y-o-Y Yield Growth Next Day Air 3.4% 3.1% 1.4% 0.4% 2.7% 3.8% 5.5% 1.5% -1.3% Deferred 2.9% -1.2% -3.0% -4.9% -1.9% -0.4% 3.0% 0.8% -1.7%Total U.S. Air Express 3.4% 1.3% -0.1% -1.8% 1.0% 2.1% 4.4% 1.1% -1.3%Ground 3.3% 3.4% 3.6% 4.6% 2.5% 2.7% 3.5% 2.0% 3.0%Total U.S. Package 2.7% 2.5% 2.7% 2.5% 2.6% 2.6% 3.5% 1.0% 1.4%Total International Package 10.8% 9.4% 3.1% -5.1% -9.0% -4.3% 0.0% 3.7% 6.0%Total Global Package 4.4% 4.8% 3.5% 2.6% 2.0% 2.2% 4.3% 2.0% 3.0%

ESTIMATED YIELD GROWTH (NET OF FUEL) (1)

Y-o-Y Yield Growth Next Day Air -0.8% -0.6% -0.4% -0.9% -0.3% -0.4% -1.4% 0.5% 1.7% Deferred -1.3% -4.9% -4.9% -6.2% -4.9% -4.6% -3.9% -0.2% 1.3%Total U.S. Air Express -0.8% -2.4% -1.9% -3.1% -2.0% -2.1% -2.4% 0.1% 1.7%Ground 1.4% 0.9% 0.8% 0.1% 0.9% 1.3% 1.5% 2.0% 2.9%Total U.S. Package 1.0% 0.4% 0.4% -0.4% 0.4% 0.8% 0.9% 1.0% 2.7%International Package 6.6% 5.7% 1.3% -6.4% -12.0% -8.5% -6.9% 2.7% 9.0%Total Global Package 1.6% 1.0% 0.5% -1.1% -1.0% -0.3% 0.0% 1.1% 3.3%

Average Fuel Surcharge Air Express 9.5% 9.5% 9.5% 12.5% 12.5% 13.7% 16.3% 13.5% 9.5% y-o-y change 4.2% 3.7% 1.8% 1.3% 3.0% 4.2% 6.8% 1.0% -3.0%Ground 1.9% 2.4% 2.8% 4.4% 3.5% 3.8% 4.8% 4.4% 3.7% y-o-y change 1.9% 2.4% 2.8% 4.4% 1.6% 1.3% 2.0% 0.0% 0.2%

FedEx (2) 1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07

REPORTED YIELD GROWTH (GROSS OF FUEL)Y-o-Y Yield Growth U.S. Overnight 6.1% 3.9% 4.0% 5.5% 5.4% 5.8% 7.0% 3.4% 0.8% U.S. Deferred 3.8% 0.2% 1.8% 9.1% 11.3% 11.1% 7.7% 1.1% -1.3%Total Domestic Express 5.1% 2.7% 3.5% 7.1% 8.1% 7.9% 7.4% 2.6% 0.1%Ground 4.1% 4.9% 5.8% 6.5% 4.6% 3.2% 3.0% 2.0% 2.3%Total U.S. Package (3) 3.2% 2.1% 3.9% 6.2% 4.5% 3.9% 3.1% -0.4% -1.2%International Priority -2.0% -3.5% 6.5% 4.7% 0.5% 5.9% 7.9% 4.2% 3.8%Total Global Package (4) 1.7% 0.4% 4.9% 6.9% 4.6% 4.9% 4.5% 0.7% 0.0%Yield

ESTIMATED YIELD GROWTH (NET OF FUEL) (1)

Y-o-Y Yield Growth U.S. Overnight 0.8% 0.4% -0.3% 3.2% 2.1% 2.5% 2.6% 3.4% 3.0% U.S. Deferred -1.5% -3.3% -2.5% 6.8% 8.0% 7.8% 3.4% 1.1% 0.8%Total Domestic Express -0.2% -0.8% -0.9% 4.8% 4.8% 4.6% 3.1% 2.6% 2.2%Ground 3.3% 2.8% 3.1% 2.1% 2.9% 1.9% 1.0% 2.0% 2.2%Total U.S. Package 1.5% 0.9% 1.0% 3.4% 3.8% 3.2% 2.0% 2.3% 2.2%International Priority -5.8% -8.2% 2.2% 2.3% -2.8% 2.5% 3.6% 4.2% 5.9%Total Global Package 0.9% 0.2% 1.1% 3.3% 3.3% 3.1% 2.1% 2.5% 2.5%

Average Fuel Surcharge Express 8.3% 10.5% 12.0% 13.5% 11.7% 13.8% 16.3% 13.5% 9.5% y-o-y change 3.8% 4.7% 4.3% 2.3% 3.3% 3.3% 4.3% 0.0% -2.2%Ground 1.9% 2.4% 2.8% 4.4% 3.6% 3.8% 4.8% 4.4% 3.7% y-o-y change 0.8% 2.4% 2.8% 4.4% 1.7% 1.3% 2.0% 0.0% 0.1%

(1) Yield growth net of fuel surcharge calculated as reported yield growth minus the year-over-year change in average surcharge rate. (2) FDX quarters are calendarized. (3) Estimated. FDX does not report U.S. results inclusive of both Domestic Express and Ground operations. (4) Estimated. FDX does not report results inclusive of Total Express (Domestic and International) and Ground operations. Source: Company reports; Bear, Stearns & Co. Inc. estimates.

In addition, we have asked shippers if they intend to shift a portion of their parcel volumes from air to ground to take advantage of the lower relative ground rates should the economy continue to moderate over the next 12 months. While 59% of respondents this quarter said that they do not intend to alter their mix of air and ground volumes (should the economy continue to slow), we note this proportion has increased notably from 46% last quarter, possibly suggesting that this shift has already taken place to some extent with fewer respondents left to take similar action. Complementing this, roughly 39% of respondents said that they would ship modestly


more or materially more of their volumes on the ground rather than in the air, down from 50% last quarter. In our view, this could result in a positive for FedEx, particularly because it has not been aggressively growing air volume over the past five years, rather it has reduced air infrastructure, while trading up for higher-quality and less-cyclical air business. That said, the company will take delivery of approximately 90 wide-body 757s between 2008 and 2016, which are 20% larger than the 727s they will replace — capacity that will need to be utilized.

Exhibit 42. Do You Anticipate Moving Parcel Products from Air to Ground to Take Advantage of the Relatively Lower Ground Rates if the Economy Slows Down in the Next 12 Months?

28.3%

21.7%

45.7%

2.2% 2.2%

25.0%

14.3%

58.9%

0.0% 1.8%0%

10%

20%

30%

40%

50%

60%

70%

Yes, Materially more byground than air

Yes, Modestly more by groundthan air

No, little change No, Modestly less by groundthan air

No, Materially less by groundthan air

4Q061Q07


Earlier this year UPS, FedEx, and DHL effectively implemented dimensional weight pricing for parcels beyond a certain size. New dimensional rates are determined as the greater of the parcel’s actual weight or its dimensional weight (its estimated weight based on its dimensions). The result of this rate change is that shippers of large, lightweight packages will see a potentially significant increase in their rates. While dimensional weight pricing has been common for air shipments for some time, thus far none of the major express carriers have used it for ground shipments. To gauge the impact of the new system on shippers, we asked shippers what proportion of their shipments would be considered oversized according to the standards of different carriers.

Exhibit 43. If You Use UPS, FDX, or DHL for Ground Parcel Shipments, What Percentage of Your Total Volumes Are Considered Oversized According to the Rules of Each Carrier?

80%76%

41%

9% 10%

2%0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

UPS FedEx DHL

% of respondents% of volumes


GROUND MARKET


As shown above, shippers estimate that 9% and 10% of their volumes fall into the oversized categories for UPS and FedEx, respectively, compared to 7% and 11% last quarter, while 2% are oversized by DHL’s standards (down from 11% last quarter). It is possible that the proportion of parcels in the oversized categories have declined as shippers have adopted more streamlined packaging; an outcome anticipated when the new pricing metrics were introduced. Because UPS made the transition to dim-weight pricing January 1 versus February for the other carriers, and because UPS announced the change several months before the other carriers, shippers have a somewhat better picture of how oversized parcel costs are rising than they do with FedEx and DHL. To get a better idea of the effects of dim-weight pricing, therefore, we asked shippers how they think the new system will affect their UPS rates and volumes going forward. On average, our shippers that use oversized shipments expect their overall yields to increase rates about 1.5%, with UPS up from the 1.3% expectation last quarter (see Exhibit 44).

Exhibit 44. If You Use UPS Ground, What Percentage Impact Do You Think the New Oversize Pricing Mechanism, Beginning in 2007, Will Have on Your Overall UPS Ground Shipping Rates?

2.3%

47.7%

31.8%

11.4%

4.5%2.3%3.8%

42.3%

32.7%

13.5%

3.8% 3.8%

0%

10%

20%

30%

40%

50%

60%

Reduce rates No change to rates Increase total UPS ratesby 0% -2%

Increase total UPS ratesby 2% -5%

Increase total UPS ratesby 5% -10%

Increase total UPS ratesby >10%

4Q061Q07

Weighted average price increase 1.5%


Exhibit 45. If You Use UPS Ground, What Percentage Impact Do You Think the New Oversize Pricing Mechanism, Beginning in 2007, Will Have on Your Overall UPS Ground Shipping Volumes?

0.0%

80.5%

7.3% 7.3% 4.9%0.0%0.0%

88.5%

1.9%5.8% 3.8%

0.0%0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Increase volumes despiteincreased pricing

No change to volumes Reduce total UPSvolumes by 0% -2%

Reduce total UPSvolumes by 2% -5%

Reduce total UPSvolumes by 5% -10%

Reduce total UPSvolumes by >10%

4Q061Q07

Weighted average volume change 0.5%


In Exhibit 45, we indicate that, on average, shippers who move overweight shipments expect to reduce volumes by approximately 0.5% with UPS. Taken together (Exhibit


44 and Exhibit 45), these two questions suggest that UPS’s revenues may increase slightly as a result of dimensional-weight pricing, since the 1.5% increase in rates should more than offset the 0.5% decline in volumes as shippers divert their business to other carriers. Furthermore, our respondents seemingly anticipate a slightly larger total transportation budget impact than was previously the case, as the weighted average estimated impact on pricing was 1.3% last quarter while anticipated volume diversion was 0.7%. That said, we found that 0.8% of our respondent’s volumes had already been diverted to other modes as a result of the new pricing mechanism, suggesting that the high-end list rate hikes announced by UPS in December (4.9% net in express and ground) have led shippers to believe they have more power to negotiate exemptions from dim-weight pricing. Dimensional-weight pricing has a disproportionate impact on shippers who ship a lot of large, lightweight items versus those who do not. Of our respondents, 42% said that they anticipate no changes at all to rates resulting from dimensional-weight pricing, down from 48% last quarter, while nearly 4% said that they would increase their overall rates by more than 10% (up from 2% last quarter). We don’t anticipate a major revenue windfall for UPS or FedEx resulting from the change, given the relatively small size of the expected impact. UPS’s management has noted repeatedly since the introduction of the dimensional pricing that it anticipated the change to be revenue neutral once certain of its shippers begin tailoring their packaging dimensions accordingly.

Ten percent of our respondents plan to divert about 3% of their UPS freight approximately 12 months prior to the July 31, 2008 contract expiration, equaling less than 1% of UPS’s total volumes. That same minority of 10% of UPS’s shippers plan to divert about 3% of UPS’s total volumes if no contract is signed six months prior to July 31, 2008. This is up from fourth-quarter 2006 when only 3% of shippers indicated they planned to divert freight from UPS in advance of the contract expiration (see Exhibit 46).

Exhibit 46. How Do You Expect to Change Your Shipping Patterns Ahead of the Upcoming July 31, 2008, Teamsters’ UPS Parcel Labor Negotiations, if at All? First-Quarter 2007 Fourth-Quarter 2006

No change49%

Planning to divert UPS

only if problems arise

41%

Planning to divert some

UPS10%

No change46%

Planning to divert UPS

only if problems arise

51%

Planning to divert some

UPS3%


TEAMSTERS LABOR NEGOTIATIONS


Inventory Levels

As we have in the past, we asked our shippers to characterize their inventory levels during first-quarter 2007 compared to a year ago and to forecast inventories in the next quarter relative to historical periods. Relative to the last survey, inventory levels appear to be modestly higher but have stayed generally balanced in the first quarter of 2007 for the majority of our respondents. Removing seasonality, shippers indicated that inventories were modestly higher than the year-ago period. Also, respondents indicated relatively flat safety stocks in the first quarter relative to the same period a year ago. Shippers indicated that they expect an increasing trend toward higher inventory levels in the next quarter compared to historical first quarters, due to inventory buildup, however, they expect to continuing shipping less than normal.

Our shippers reported modestly higher but generally balanced inventories throughout first-quarter 2007, with about 43% of respondents characterizing inventories as higher than seasonally normal and 28% calling inventories lower than seasonally normal. Thirty percent reported having flat inventory levels in the first quarter compared to other first quarters (see Exhibit 47). Six percent indicated that inventories were more than 10% lower than normal, down from 8% in first-quarter 2006.

Exhibit 47. Compare the Inventory Level of Your Company During First-Quarter 2007 to Historical First Quarters

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

Higher by 10% or morethan usual

Higher by less than 10% Flat Lower by less than 10% Lower by more than 10%

1Q061Q07


We asked shippers how their safety stock levels compared to last year and they were roughly similar to a year ago and remain balanced. Approximately 31% indicated that their safety stock levels were 5%-10% higher than the comparable historical period, which is less than the 21% from the year-ago quarter (see Exhibit 48). About 28% of shippers indicated that their safety stocks were below historical levels, compared to 24% in the year-ago quarter. Forty-one percent had flat safety stock levels in first-quarter 2007.


Exhibit 48. How Do Your Safety Stock Levels Compare to a Year Ago?

0%

10%

20%

30%

40%

50%

60%

10% above thecomparable period

5% above thecomparable period

Flat 5% below thecomparable period

10% below thecomparable period

1Q061Q07


We also questioned our shippers as to what their expectations were for inventory levels in second-quarter 2007 compared with historical second-quarters. A large percentage of shippers indicated that they expect to see inventories increase going forward. About 45% indicated they expect second-quarter 2007 inventory levels to be higher relative to historical second quarters (see Exhibit 49), compared to 30% in first-quarter 2006. About 22% of shippers expect inventory levels to be lower than previous first quarters, compared to 30% in the year-ago quarter. Thirty-three percent of our shippers expect inventory levels in second-quarter 2007 to be flat compared to historical first quarters, down from 40% a year ago.

Exhibit 49. Indicate Your Expectations for Inventory Levels in Second-Quarter 2007 Compared to Past Second Quarters

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

Higher by 10% or morethan usual

Higher by less than 10% Flat Lower by less than 10% Lower by more than 10%

1Q061Q07


We asked our shippers if they shipped less freight than normal during first-quarter 2007 due to inventory buildup. Approximately 36% indicated they shipped somewhat less or substantially less freight due to inventory buildup, which we believe is due to inventory build up, and is up materially from 16% of shippers in the


year-ago quarter (see Exhibit 50). The percentage of shippers who saw flat shipping activity in comparison to historical periods was about 43%, down from 48% in the year-ago quarter. About 21% of shippers indicated that their shipping activity was higher than historical levels because of inventory buildup during first-quarter 2007, substantially less than the 36% in first-quarter 2006.

Exhibit 50. Did You Ship Less Freight than Normal During First-Quarter 2007 Compared to First Quarters in Recent Previous Years Because of Inventory Buildup?

0%

10%

20%

30%

40%

50%

60%

Yes, substantially less shippingactivity

Yes, somewhat less shippingactivity

No, about the same level ofshipping activity

No, more shipping activity

1Q061Q07


We asked our shippers what their expectations were for shipping activity in the second quarter of 2007 compared to recent second quarters, and if they would ship less freight than normal because of inventory buildup. Most of our shippers indicated that they expect their overall inventory levels to increase in the second quarter, but that they continue to expect a modestly decreased level of shipping during second-quarter 2007 relative to the year-ago period. More than 24% of our respondents expect to ship less in second-quarter 2007 due to inventory buildup, with 6% expecting to ship substantially less, compared to our survey a year ago when only 7% of our respondents expected to ship less due to inventory buildup, and none of our shippers expected to ship substantially less. About 23% expect more shipping activity in the next quarter, up slightly from 22% who expected more shipping activity in the year-ago quarter (see Exhibit 51).


Exhibit 51. Do You Expect to Ship Less Freight than Normal During Second-Quarter 2007 Compared to Second Quarters in Previous Years Because of Inventory Buildup?

0%

10%

20%

30%

40%

50%

60%

70%

80%

Yes, substantially less shippingactivity

Yes, somewhat less shippingactivity

No, about the same level ofshipping activity

No, more shipping activity

1Q061Q07



Import and Export Demand

As part of our ongoing effort to track U.S. import and export trends, we regularly examine three sets of data:

monthly reports assembled by the Air Transport Association (ATA), an industry group that reports airfreight revenue-ton-mile data both domestically and internationally;

monthly reports on volumes flowing into and out of every major U.S. ocean port, tracked by the Port Import Export Reporting Service (PIERS, www.piers.com); and

volume statistics for a special sample of the U.S. ports, the three largest West Coast ports by volume (Los Angeles, Long Beach, and Oakland), which usually release their data up to 30 days before other ports do.

The following is a closer look at the trends reflected in the ATA and PIERS data, and some of the potential implications for our stock coverage universe. Overall, we believe that the global economic environment is sturdy and that international trade will continue to grow at 1.5x-2.0x the rate of the U.S. economy.

To determine shippers’ views of spending on international heavy airfreight (net of fuel) in 2007, relative to their spending in 2006, we asked shippers whether they expected to pay more, less, or about the same for international heavy airfreight shipments in 2007 versus 2006. We generally saw flattish to modest rate increase expectations for heavyweight airfreight throughout 2006 (see Exhibit 52). Of survey participants, about 40% expect to pay more for international heavy airfreight shipments. Thirteen percent of our respondents expect to pay less, with 6% expecting decreases of less than 5%.

Exhibit 52. On Average, Do You Expect to Pay More, Less, or Roughly the Same (Excluding Fuel Surcharge) for International Heavy Airfreight Shipments During 2007 Versus 2006?

0%

10%

20%

30%

40%

50%

Expectdecrease by

>20%

Expectdecrease by

10-20%

Expectdecrease by

5% -10%

Expectdecrease by

<5%

No change Expectincrease by

<5%

Expectincrease by

5% -10%

Expectincrease by 10-

20%

Expectincrease by

>20%

3Q064Q061Q07

Average Implied Rate Increase3Q06 0.6%4Q06 0.8%1Q07 0.9%


Total ATA domestic cargo airfreight (point-to-point within the U.S.) revenue-ton-miles (RTMs), which includes both freight and mail, quarter to date through February increased a modest 0.7%. Correspondingly, during 2006, cargo RTMs increased

AIRFREIGHT TRENDS


1.7% year over year driven by a relatively healthy economy, easy year-over-year comparisons, and a weak dollar, versus a decline of 1.2% in 2005 (see Exhibit 53). In addition, during periods of high fuel costs and/or a more tempered outlook, shippers tend to shift a portion of higher-priced airfreight shipments to lower-cost ground products due to relatively higher fuel surcharges on air products, including heavyweight freight. Though fuel has declined recently and the consensus outlook for the freight economy has fallen off in recent months, we would expect this secular trend of diversion to ground to continue, which likely will drive airfreight to slower, less-expensive ground alternatives.

International cargo RTMs, also compiled by the ATA, for which either the origin or destination lies outside the U.S. (imports/exports), grew 1.9% quarter to date (through February) compared to 2.5% last quarter and 6.4% year over year in 2006. Despite the deceleration in international cargo RTMs, the international moves have remained relatively stronger than domestic since 2003 as global cross-border trade continues to grow more than twice that of world GDP. The Atlantic and Pacific trade lanes posted year-over-year RTM growth of 5.9% and a decline of 3.0% compared to 7.4% and 5.8% in 2006, respectively. Latin RTMs increased 9.8% year over year through February 2007, better than the 4.7% year-over-year decline in 2006 (see Exhibit 53).

Exhibit 53. ATA Domestic and International Cargo Traffic Statistics (revenue ton-miles) Domestic RTM's

Month Total y-o-y Month Atlantic y-o-y Pacific y-o-y Latin y-o-y Total y-o-y

Jan-06 955,547 -0.5% Jan-06 414,062 7.1% 511,492 -0.5% 93,069 2.9% 1,018,623 2.8%Feb-06 919,870 -0.5% Feb-06 428,043 4.5% 481,203 6.3% 94,468 -2.5% 1,003,714 4.6%Mar-06 1,109,072 2.1% Mar-06 502,687 9.4% 631,411 10.7% 113,821 5.4% 1,247,919 9.7%Apr-06 1,014,218 2.7% Apr-06 456,237 4.3% 590,113 11.8% 103,539 3.9% 1,149,889 8.0%May-06 1,021,600 7.5% May-06 471,557 11.7% 592,815 13.1% 105,379 9.1% 1,169,751 12.1%Jun-06 1,064,883 4.5% Jun-06 487,279 11.9% 596,857 6.1% 101,462 1.9% 1,185,598 8.0%Jul-06 975,371 1.3% Jul-06 473,075 7.6% 590,440 7.5% 103,781 9.1% 1,167,296 7.7%Aug-06 1,094,098 9.1% Aug-06 463,040 10.5% 601,339 9.8% 105,188 10.5% 1,169,566 10.1%Sep-06 1,038,783 0.7% Sep-06 494,412 9.5% 616,036 4.7% 105,371 4.7% 1,215,820 6.6%Oct-06 1,055,701 -0.4% Oct-06 513,009 4.5% 609,780 -1.2% 115,556 6.3% 1,238,346 1.8%Nov-06 1,060,804 0.3% Nov-06 496,841 6.6% 620,975 4.2% 115,932 3.6% 1,233,748 5.1%Dec-06 1,071,285 -5.2% Dec-06 483,538 2.4% 574,072 -1.2% 108,725 1.4% 1,166,335 0.5%

Total-06 12,381,233 1.7% Total-06 5,683,781 7.4% 7,016,533 5.8% 1,266,292 4.7% 13,966,606 6.4%

Jan-07 974,599 2.0% Jan-07 439,187 6.1% 497,465 -2.7% 103,571 11.3% 1,040,223 2.1%Feb-07 914,092 -0.6% Feb-07 452,997 5.8% 465,780 -3.2% 102,279 8.3% 1,021,056 1.7%

1Q:06 2,984,489 0.4% 1Q:06 1,344,792 7.1% 1,624,107 5.6% 301,358 2.1% 3,270,257 5.9%2Q:06 3,100,701 4.8% 2Q:06 1,415,073 9.2% 1,779,785 10.2% 310,381 4.9% 3,505,239 9.3%3Q:06 3,108,252 3.7% 3Q:06 1,430,527 9.2% 1,807,814 7.3% 314,340 8.0% 3,552,682 8.1%4Q:06 3,187,790 -1.8% 4Q:06 1,493,389 4.5% 1,804,827 0.6% 340,213 3.8% 3,638,429 2.5%2006 12,381,233 1.7% 2006 5,683,781 7.4% 7,016,533 5.8% 1,266,292 4.7% 13,966,606 6.4%

1Q:07QTD 1,888,691 0.7% 1Q:07 892,184 5.9% 963,246 -3.0% 205,850 9.8% 2,061,279 1.9%

International RTM's

\ Note: Air cargo includes both fright and mail which are no longer reported separately by the ATA as of February 2007. Domestic Air cargo transported by U.S. carriers with both takeoff and landing in the U.S. includes U.S. passenger airlines and includes such carriers as UPS and FDX, whereas International air cargo corresponds to those carriers origination or destined for a location outside the United States. Source: Air Transport Association.

We asked our shippers to offer insights regarding containership pricing, specifically whether they expect to pay more, less, or about the same for ocean containership capacity, net of fuel, in 2007 relative to 2006. In first-quarter 2007, shipper expectations for year-over-year pricing increased in contrast with prior-period expectations. Our first-quarter results suggest an average implied year-over-year rate

OCEAN FREIGHT TRENDS


increase of 1.2%, up from an expected 0.4% decline last quarter and a 0.5% decline in ocean container ship pricing from first-quarter 2006. Approximately 28% of our shipper respondents expect some sort of ocean containership rate decrease, decelerated compared with 33% of shippers who expected a decrease in rates from last quarter. On the flip side, 46% of shippers expect some form of increase in the ocean containership rate, up from 30% in the fourth quarter (see Exhibit 54). Of the respondents expecting an increase, 75% expect an increase of <5%, while nearly 20% anticipate an increase of 5%-10% (the balance of which 7% anticipate rate increases above 10% in 2007). Of the respondents expecting a decrease, a majority also expect a decrease of <5%, with 90% of respondents falling into this category. Respondents expecting no change declined to 25% in the first quarter from 38% in the fourth quarter.

Exhibit 54. On Average, Do You Expect to Pay More, Less, or Roughly the Same (Excluding Fuel Surcharge) for Ocean Containership Capacity During 2007 Versus 2006?

0%

10%

20%

30%

40%

Expectdecrease by

>20%

Expectdecrease by

10-20%

Expectdecrease by

5% -10%

Expectdecrease by

<5%

No change Expectincrease by

<5%

Expectincrease by

5% -10%

Expectincrease by

10-20%

Expectincrease by

>20%

1Q064Q061Q07

Average Implied Rate Increase1Q06 -0.5%4Q06 -0.4%1Q07 1.2%


According to Clarkson Research Services, the first-quarter Ocean Containership Pricing Index — which measures aggregate containership market rates — registered 99 in the first quarter, a modest increase from the 95 reported in the fourth quarter, although still down 8.2% from 108 reported in first-quarter 2006. This compares to year-over-year Index declines of 19.6% in the fourth quarter and 30.4% for full-year 2006. The March sequential increase marked the third sequential improvement following sustained sequential declines since March 2005 (when the index peaked this cycle at 172). Our sense is the containerships thus far are remaining firm on pricing despite weakening demand, more so than in past cycles, driven primarily by higher inland intermodal costs in the U.S. for those ocean carriers maintaining rail arrangements. That said, our sense is that the increased rates the ocean carriers are passing along to their customers will be offset by the continued 12%-13% per year ocean container capacity expected to enter the market over the next two to three years. Historically, international freight forwarder absolute ocean gross yields have shared an inverse correlation with the year-over-year growth in Clarkson’s containership pricing index. In time, we would expect the forwarders to gradually pass this improved pricing to their end-shipper customers. However, just as the international forwarders had seen their ocean gross yields shrink materially from mid-2002 through mid-2005 — as they were not able to pass through their own higher costs in the face of quickly escalating base rates and accessorial charges for fuel, security, and peak-season rushes — we expect forwarders to continue to benefit


in the next few years as new ocean container capacity outstrips incremental demand and the forwarders receive a bigger benefit than they initially pass on to their customers. Below, we show the trend in Air, Ocean, and Customer brokerage gross yields for UTi Worldwide, Expeditors International, and EGL Inc. (see Exhibit 55).

Exhibit 55. Expeditors International, EGL, and UTi Worldwide Reported Gross Yield Improvement UTIW (1) F1Q06 F2Q06 F3Q06 F4Q06 F1Q07 F2Q07 F3Q07 F4Q07 F1Q08E FY06 FY07 FY08E FY09EAir 45bp (117bp) (163bp) (117bp) (100bp) (6bp) 16bp 38bp 85bp (92bp) (11bp) 93bp 71bpOcean (178bp) (114bp) 30bp 71bp 156bp 99bp 222bp 48bp 23bp (37bp) 131bp 39bp 68bpCustoms brokerage (7bp) (100bp) 40bp (1bp) 41bp 172bp (7bp) (52bp) (54bp) (18bp) 40bp (29bp) (7bp)Total Forwarding (116bp) (158bp) (131bp) (79bp) (32bp) 24bp 86bp 31bp 44bp (118bp) 29bp 53bp 59bp

EXPD (1) 1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q:06 1Q:07 C05 C06 C07E C08EAir (35bp) (198bp) (137bp) (29bp) (123bp) (45bp) 19bp (28bp) 218bp (101bp) (33bp) 206bp 90bpOcean (194bp) 20bp 212bp 300bp 351bp 319bp 93bp 9bp (107bp) 105bp 183bp (41bp) 83bpCustoms Brokerage (313bp) (151bp) (98bp) 91bp 187bp (61bp) 41bp (179bp) (219bp) (106bp) (1bp) (78bp) 44bpTotal Forwarding (153bp) (81bp) 15bp 109bp 95bp 76bp 65bp (2bp) 82bp (16bp) 61bp 95bp 79bp

EAGL (2) 1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07E C05 C06 C07E C08EAir (260bp) (245bp) (75bp) 172bp (1bp) 35bp (129bp) (260bp) N/A (79bp) (94bp) N/A N/AOcean (229bp) 19bp 191bp 260bp 326bp 450bp 90bp 251bp N/A 83bp 277bp N/A N/ACustoms Brokerage (831bp) (390bp) 153bp 49bp 463bp 617bp 481bp 443bp N/A (242bp) 510bp N/A N/ATotal Forwarding (388bp) (253bp) 28bp 144bp 107bp 210bp 20bp (12bp) N/A (93bp) 78bp N/A N/A (1) UTIW reports on a January 31 fiscal year end, which is assumed to approximate December 31 of the prior calendar year; EXPD and EAGL report on a calendar basis. (2) We do not maintain coverage of EAGL and therefore cannot provide forward gross yield estimates. Source: Company reports; Bear, Stearns & Co. Inc. estimates.

In addition, we also look at select West Coast ports’ year-over-year import and export volume growth and assess their performance to gauge general ocean freight shipment strength and market trends, as these ports represent a disproportionately larger percentage of total imports and exports. For first-quarter 2007, combined West Coast port imports were up 6.7% year over year, a deceleration from the 10.0% growth in the fourth quarter and the 11.7% growth recorded during 2006, which we view as a response to the slowing U.S. economy, a trend we anticipate to continue into the second quarter. Due to the change in timing of the Chinese New Year (February 18 versus January 29 last year), there were strong month-to-month fluctuations during the first quarter, and we believe the full-quarter’s decelerated import volume is a better proxy than any of the monthly comparisons in the quarter. First-quarter 2007 exports improved year over year, up 7.0%, but also decelerated from the 11.9% year-over-year growth rate in fourth-quarter 2006 and the 9.7% year-over-year growth rate during 2006 (see Exhibit 56).


Exhibit 56. Year-over-Year Change in Ocean Import and Export Volumes at the Three Largest West Coast Ports (Los Angeles, Long Beach, and Oakland)

Inbound Outbound

Los Angeles Long Beach Oakland Total Los Angeles Long Beach Oakland Total

Jan-05 -12.5% 25.4% 32.4% 4.1% -14.3% 11.8% 9.0% 0.2%Feb-05 19.1% 62.5% 62.1% 38.3% -8.5% 18.1% 19.0% 7.4%Mar-05 -23.7% -10.8% 20.3% -15.3% -6.6% 10.2% 0.9% 1.0%Apr-05 -3.2% 19.3% 21.9% 7.2% 4.4% 34.8% 5.4% 14.4%May-05 -13.4% 18.6% 28.5% 1.9% 4.3% 25.5% 13.8% 13.9%Jun-05 -1.7% 12.8% 22.9% 6.2% 7.7% 23.3% 1.3% 11.4%Jul-05 -2.5% 2.7% 20.7% 1.5% 1.7% 29.7% 5.6% 12.1%Aug-05 1.1% 11.4% 15.5% 6.6% 9.7% 39.6% 0.3% 16.9%Sep-05 10.1% 22.6% 19.0% 16.0% 22.2% 27.3% 7.1% 19.5%Oct-05 6.1% 3.7% 12.1% 5.7% 7.3% 20.5% -2.8% 8.9%Nov-05 -3.2% 3.2% 5.6% 0.3% 8.8% 7.8% -3.7% 4.9%Dec-05 16.0% -1.2% 10.5% 7.8% 15.3% 11.6% -1.7% 9.0%C05 -1.5% 12.0% 20.7% 5.8% 3.7% 21.2% 4.0% 9.7%Jan-06 7.8% 16.2% 12.1% 11.7% 20.6% 22.3% -4.0% 14.0%Feb-06 -14.4% 0.9% -3.8% -7.0% 10.5% 21.0% 1.2% 11.7%Mar-06 33.4% 34.4% 24.8% 32.9% 19.3% 13.6% 2.6% 12.9%Apr-06 11.0% 18.5% 15.6% 14.5% 5.9% 3.9% -6.7% 2.0%May-06 15.8% 14.0% 2.3% 13.6% 13.0% 8.6% 2.9% 8.8%Jun-06 13.7% 8.7% 12.0% 11.4% 19.2% 0.4% 4.3% 8.3%Jul-06 14.8% 5.4% 4.1% 9.9% 27.3% -5.7% -7.5% 5.5%Aug-06 18.2% 13.6% 5.3% 14.9% 25.4% -5.0% 4.1% 7.8%Sep-06 21.3% 1.3% 3.5% 11.0% 33.6% 1.7% -6.9% 10.8%Oct-06 11.9% 12.2% -1.3% 10.7% 33.8% 5.7% 6.0% 15.9%Nov-06 17.6% 9.1% -1.7% 11.9% 24.8% 0.6% -1.2% 8.7%Dec-06 11.7% 6.1% -8.9% 7.2% 26.6% 7.3% -4.5% 11.3%C06 13.6% 11.2% 4.9% 11.7% 21.5% 5.7% -0.8% 9.7%Jan-07 12.0% 3.2% -4.5% 6.5% 23.9% 8.6% 13.1% 15.5%Feb-07 42.5% 12.8% 10.0% 25.7% 23.3% -1.6% -12.2% 4.4%Mar-07 -6.6% -10.4% -9.0% -8.4% -0.2% 5.7% 0.9% 2.2%

C05 -1.5% 12.0% 20.7% 5.8% 3.7% 21.2% 4.0% 9.7%1Q06 7.9% 16.2% 10.9% 11.6% 17.0% 18.6% 0.0% 12.9%2Q06 13.5% 13.6% 9.7% 13.1% 12.5% 4.4% 0.1% 6.3%3Q06 18.1% 6.8% 4.3% 12.0% 28.7% -3.1% -3.4% 8.0%4Q06 13.7% 9.3% -4.0% 10.0% 28.4% 4.5% 0.1% 11.9%C06 13.6% 11.2% 4.9% 11.7% 21.5% 5.7% -0.8% 9.7%1Q07 13.3% 1.5% -1.9% 6.7% 14.2% 4.1% 0.3% 7.0% Note: Data available directly from ports may differ from that available from PIERS for the following reasons: 1) port container counts include domestic TEUS, while PIERS do not; 2) conversion ratios for ports differ from those used by PIERS for container sizes of more than 40 feet; and 3) ports count TEUs upon departure while PIERS counts TEUs upon delivery; the difference is usually several days. Source: Ports of Los Angeles, Long Beach, and Oakland.

Similarly, in Exhibit 57 below we provide details surrounding national ocean freight trends for nearly 100 U.S. ports (segmented by region); the most recent data point (February 2007) reflects impressive import growth largely attributable to the timing of Chinese New Year (western port volume growth rose by 21.2% year over year in February versus 0.6% in February the prior year). Total import volume growth of 4.0% in the first quarter to date (through February) is roughly in line with the 3.7% growth reported in fourth-quarter 2006 though decelerated from the 8.1% and 14.8%


growth the prior two quarters. Export volume growth of 7.2% in the first quarter to date represents a modest deceleration from 7.7% growth last quarter but is notably accelerated from 4.6% and 3.4% growth the prior two quarters.

The international freight forwarders, including Expeditors International of Washington and UTi Worldwide (with an estimated 33% and 27%, respectively, of ocean freight as a percentage of total gross revenue), have the most exposure to ocean freight movements within our stock coverage universe. We believe the weakness in total ocean freight volume trends, notwithstanding the February lunar new year blip, may prove to be a slight drag depending on March’s results and the ability for Expeditors and UTi Worldwide to tailor the cost structure into the waning ocean freight activity. Judging from the March West Coast port data (Exhibit 56), we anticipate a similar western port import volume trend from the more comprehensive PIERS data.


Exhibit 57. Container Statistics for Major Western, Eastern, and Gulf Ports of the U.S. (Year-over-Year Percentage Change in Loaded TEUs)

Exports ImportsPeriod Western Eastern Gulf Total Western Eastern Gulf Total

Jan-05 -2.6% 9.9% 12.0% 4.8% 8.9% 18.3% 21.6% 12.8%Feb-05 8.6% 3.5% -0.6% 5.2% 33.2% 5.5% 15.7% 20.2%Mar-05 2.2% 2.6% 6.8% 2.9% -13.0% 10.0% 10.4% -3.2%Apr-05 9.0% 11.2% 6.3% 9.7% 6.3% 10.7% 10.5% 8.1%May-05 13.5% 4.9% 10.0% 8.8% 0.1% 10.0% 9.2% 4.2%Jun-05 7.3% 9.9% 25.6% 10.4% 10.4% 6.1% 13.5% 9.0%Jul-05 15.4% 15.7% 24.5% 16.5% 19.1% 13.4% 15.0% 16.8%Aug-05 21.0% 6.2% -0.2% 11.3% 8.5% 2.6% 11.9% 6.4%Sep-05 15.3% 15.3% -36.7% 9.4% 21.2% 10.5% -21.6% 15.0%Oct-05 7.5% 2.0% -14.5% 2.4% 24.8% 12.9% 16.6% 19.9%Nov-05 7.9% 9.5% -17.2% 5.9% 2.1% 12.5% 13.8% 6.3%Dec-05 8.0% 1.2% -9.1% 3.0% 20.6% 0.6% 5.2% 11.7%

C05 9.2% 7.4% 0.0% 7.4% 11.3% 9.3% 9.7% 10.4%Jan-06 16.1% 5.7% -1.2% 9.1% 10.0% 9.8% 16.6% 10.2%Feb-06 6.0% 3.8% -6.3% 3.7% 0.6% 4.5% 8.6% 2.5%Mar-06 8.7% 9.0% -8.3% 7.1% 28.2% 0.8% 4.9% 15.2%Apr-06 -3.0% 0.4% -13.4% -2.5% 20.6% 11.5% 9.5% 16.6%May-06 6.1% 5.1% -0.9% 4.9% 23.8% 7.3% 10.8% 16.6%Jun-06 9.9% 9.3% -3.5% 8.1% 15.5% 6.2% -1.4% 11.3%Jul-06 0.4% 1.7% -4.0% 0.5% 3.7% 5.4% 8.8% 4.5%Aug-06 2.5% 6.6% -3.8% 3.7% 20.1% 7.2% 2.9% 14.4%Sep-06 7.6% 5.7% 56.4% 9.8% 5.5% 2.4% 33.4% 5.4%Oct-06 11.1% 10.8% 7.3% 10.6% 4.0% 2.8% -3.6% 3.1%Nov-06 3.6% 6.8% 38.7% 8.2% 8.3% -0.9% 6.9% 4.7%Dec-06 0.6% 5.6% 14.0% 4.2% 4.9% 2.9% -9.6% 3.4%

C06 5.6% 5.9% 3.7% 5.5% 11.6% 4.9% 6.4% 8.9%Jan-07 6.6% 5.8% 22.8% 7.8% -0.5% -6.1% -2.0% -2.7%Feb-07 4.8% 6.3% 17.7% 6.7% 21.2% -0.1% -5.5% 11.5%

1Q06 10.0% 6.2% -5.4% 6.6% 12.2% 5.0% 9.8% 9.3%2Q06 4.1% 4.9% -5.9% 3.4% 19.9% 8.3% 6.2% 14.8%3Q06 3.4% 4.6% 9.5% 4.6% 9.5% 5.0% 13.0% 8.1%4Q06 5.1% 7.7% 19.7% 7.7% 5.6% 1.6% -2.3% 3.7%C06 5.6% 5.9% 3.7% 5.5% 11.6% 4.9% 6.4% 8.9%

1Q07QTD 5.7% 6.1% 20.4% 7.2% 9.4% -3.2% -3.7% 4.0% Note: Data available directly from ports may differ from that available from PIERS for the following reasons: 1) port container counts include domestic TEUS, while PIERS do not; 2) conversion ratios for ports differ from those used by PIERS for container sizes of more than 40 feet; and 3) ports count TEUs upon departure while PIERS counts TEUs upon delivery, the difference between which is usually several days. PIERS data based on compiled data for approximately 100 U.S. ports. Source: Port Import Export Reporting Service, used with permission; (800) 952-3839 x7051. www.piers.com.

In addition, we asked our shippers whether they intend to shift any freight away from the West Coast ports prior to the July 1, 2008 longshoreman’s contract expiration (see Exhibit 58). While a majority (63%) of our respondents foresee no change in their shipping patterns, 13% do intend on diverting some freight volume and 24% of shippers polled would do so only if problems arise. Of those shippers intending on diverting some of their freight volume at the West Coast ports, approximately 41% and 26% stated that they would likely begin the shift some three and six months ahead of the July 1 expiration, respectively.


Exhibit 58. Do You Intend to Shift Any Freight Away from the West Coast Ports Prior to the July 1, 2008, Longshoreman's Contract Expiration?

No change63%

Planning to divert West Coast freight only if

problems arise24%

Planning to divert some West Coast port ocean

freight13%



Universe Tables


Exhibit 59. Bear Stearns Airfreight Universe — EPS and Book Value Multiples, 2004-08E Share Market BSC Rating Year-End First Call Dividend

SECTOR RATING: Price ($) 52 week range Count Cap Stock Since Tgt Price Avg. Rating / YieldMarket Weight 4/27/2007 High Low (MM) (5) (MM) Rating (U/D) (6) (10,11) # Analysts (14) (%) Asset-Based IntegratorsFedEx Corp. (FDX) $107.22 $121.42 $97.79 311.0 $33,345 Peer Perform 7/27/06 (D) - 2.0 / 21 firms 0.3%TNT N.V. (TNT) (1) $45.00 $47.00 $33.42 410.0 18,449 Outperform 1/16/02 (U) $50 2.0 / 3 firms 1.5%United Parcel Service (UPS) $71.50 $83.99 $65.50 1,075.0 76,863 Peer Perform 4/22/05 (D) - 2.3 / 20 firms 2.3%

Non-Asset-Based ForwardersC.H. Robinson (CHRW) $55.21 $58.19 $39.44 174.9 9,656 Outperform 1/3/2007 (U) $57 2.2 / 18 firms 1.3%Expeditors International (EXPD) $42.75 $58.32 $37.36 221.1 9,454 Outperform 5/06/04 (U) $47 2.5 / 15 firms 0.5%

Asset-Light ForwardersEGL Inc. (EAGL) (2) $39.90 $53.80 $28.57 40.9 1,632 NR 9/20/01 (S) - 2.8 / 10 firms -Forward Air (FWRD) $31.00 $43.67 $28.86 30.7 951 Underperform 2/8/07 (D) $27 2.5 / 13 firms 0.9%Hub Group (HUBG) $36.42 $37.20 $19.76 39.8 1,448 Outperform 12/16/2004 (U) $37 2.0 / 8 firms -Landstar System (LSTR) $49.91 $51.70 $37.75 56.5 2,818 Peer Perform 11/2/2006 (D) - 1.9 / 13 firms 0.2%Pacer International (PACR) $26.97 $35.41 $25.00 37.5 1,011 Underperform 2/8/2007 (D) $25 2.2 / 11 firms 2.2%Universal Truckload (UACL) $22.29 $37.57 $20.72 16.1 360 Peer Perform 11/2/2006 (D) - 2.0 / 4 firms -UTi Worldwide (UTIW) $23.81 $35.92 $21.35 100.2 2,387 Outperform 6/2/2006 (U) $28 2.1 / 13 firms 0.3%

S&P 500 (4) $1,494.07 $1,498.02 $1,219.29 - - - - $1,553 - 1.7%

EPS Estimates (12) Absolute P/E Multiples (9) 12 MonthAbsolute Estimates 2005 2006 2007E 2008E Rolling

Check FDX Footnote 2004-2008E 2004 2005 2006 2007E 2008E Range Range Forward (13)

F07 - $6.76 - linked Asset-Based IntegratorsF08 - $7.40 - linked FedEx Corp. (FDX) (3) $4.47 $5.38 $6.61 $7.07 $8.19 13.7x-20.2x 13.4x-19.2x 15.2x 13.1x 14.4xF07 - $6.76 - hard code TNT N.V. (TNT) (1) 1.78 2.11 2.46 2.92 3.44 9.4x-13.8x 11.8x-14.8x 15.4x 13.1x 14.5xF08 - $7.40 - hard code United Parcel Service (UPS) 2.85 3.47 3.86 3.95 4.15 17.9x-24.1x 16.0x-20.1x 18.1x 17.2x 17.8x

Group Average - - - - - 13.7x-19.4x 13.7x-18.0x 16.2x 14.5x 15.6x

Non-Asset-Based ForwardersC.H. Robinson (CHRW) 0.79 1.15 1.53 1.79 2.10 24.5x-32.0x 22.9x-36.1x 30.8x 26.3x 29.2xExpeditors International (EXPD) 0.71 0.77 1.06 1.26 1.55 26.6x-35.5x 31.0x-45.3x 33.9x 27.5x 31.4xGroup Average - - - - - 25.6x-33.8x 27.0x-40.7x 32.4x 26.9x 30.3x

Asset-Light ForwardersEGL Inc. (EAGL) (2) 1.05 1.25 1.38 1.67 1.93 12.8x-24.1x 15.4x-31.6x 24.0x 20.6x 22.7xForward Air (FWRD) 1.05 1.39 1.56 1.57 1.80 17.8x-24.6x 16.1x-23.7x 19.8x 17.2x 18.9xHub Group (HUBG) 0.57 0.70 1.17 1.45 1.70 13.0x-23.5x 17.1x-24.2x 25.1x 21.5x 23.8xLandstar (LSTR) 1.24 1.93 1.93 2.06 2.35 17.4x-26.5x 17.6x-23.6x 24.2x 21.2x 23.1xPacer International (PACR) 1.24 1.54 1.80 1.72 1.90 13.9x-18.1x 13.5x-19.1x 15.7x 14.2x 15.1xUniversal Truckload (UACL) 1.11 1.12 1.30 1.10 1.30 13.0x-20.5x 14.3x-24.0x 20.3x 17.2x 19.1xUTi Worldwide (UTIW) (7) 0.71 0.90 0.94 1.11 1.35 23.3x-34.3x 18.6x-36.8x 21.5x 17.7x 20.1xGroup Average - - - - - 15.9x-24.5x 16.1x-26.1x 21.5x 18.5x 20.4xUniverse Average - - - - - 17.3x-25.2x 17.3x-26.5x 22.0x 18.9x 20.9x

S&P 500 (4) 66.11 74.87 85.60 92.33 98.22 16.8x-19.5x 15.5x-18.3x 16.2x 15.2x 15.8x

ENTERPRISE VALUE / EBITDA (8) 12 Month Price / Book Value 12 Month2005 2006 2007E 2008E Rolling 2005 2006 2007E 2008E Rolling

2004-2008E Range Range Forward (13) Range Range Forward

Asset-Based IntegratorsFedEx Corp. (FDX) (3) 7.8x-10.3x 2.2x-2.2x 6.9x 6.3x 6.7x 2.6x-3.3x 2.6x-3.3x 2.9x 2.4x 2.7xTNT N.V. (TNT) (1) 5.8x-7.8x 7.3x-9.9x 9.0x 8.3x 8.8x 2.6x-3.5x 5.1x-7.1x 5.8x 5.0x 5.5xUnited Parcel Service (UPS) 9.4-12.5x 8.6x-11.0x 9.0x 8.7x 8.9x 4.5x-5.5x 4.6x-5.9x 4.8x 4.6x 4.7xGroup Average 7.7x-10.2x 6.0x-7.7x 8.3x 7.8x 8.1x 3.2x-4.1x 4.1x-5.4x 4.5x 4.0x 4.3x

Non-Asset-Based ForwardersC.H. Robinson (CHRW) 13.7x-18.3x 13.0x-20.8x 17.9x 15.6x 17.1x 5.3x-9.3x 6.6x-10.2x 8.7x 7.3x 8.2xExpeditors International (EXPD) 15.1x-20.9x 16.5x-30.3x 19.0x 15.5x 17.8x 5.8x-8.8x 6.8x-12.1x 8.1x 7.0x 7.7xGroup Average 14.4x-19.6x 14.8x-25.5x 18.4x 15.5x 17.5x 5.6x-9.1x 6.7x-11.2x 8.4x 7.2x 7.9x

Asset-Light ForwardersEGL Inc. (EAGL) (2) 8.2x-13.1x 5.6x-13.5x NA NA NA 2.6x-5.7x 3.1x-5.8x NA NA NAForward Air (FWRD) 10.6x-14.8x 9.6x-14.9x 10.8x 9.8x 10.5x 4.2x-7.2x 4.9x-7.4x 4.2x 3.4x 3.9xHub Group (HUBG) 6.6x-11.8x 7.7x-13.8x 14.5x 12.8x 13.9x 2.1x-3.5x 2.7x-4.7x 4.6x 3.7x 4.3xLandstar (LSTR) 10.5x-15.4x 10.8x-14.0x 13.2x 11.7x 12.7x 6.5x-10.3x 9.6x-12.5x 12.6x 10.3x 11.7xPacer International (PACR) 10.6x-12.8x 7.9x-11.5x 9.2x 8.6x 9.0x 2.4x-3.4x 2.8x-4.1x 3.2x 3.0x 3.2xUniversal Truckload (UACL) 6.5x-11.3x 8.3x-15.1x 9.7x 8.5x 9.3x 1.7x-3.5x 2.5x-4.5x 2.4x 2.1x 2.3xUTi Worldwide (UTIW) 13.5x-21.1x 10.6x-18.4x 10.6x 8.6x 9.9x 4.3x-6.8x 3.3x-5.7x 3.1x 2.5x 2.9xGroup Average 9.5x-14.3x 8.6x-14.5x 11.3x 10.0x 10.9x 3.4x-5.8x 4.1x-6.4x 5.0x 4.2x 4.7xUniverse Average 9.6x-13.6x 9.0x-14.6x 11.8x 10.4x 11.3x 3.7x-5.9x 4.6x-6.9x 5.5x 4.7x 5.2x

S&P 500 - - - - - 2.5x-2.8x 2.4x-2.8x 2.4x 2.0x -

Footnotes:(1) TNT price and EPS based on NYSE ADR (USD).(2) EGL forward estimates are based on First Call consensus.(3) FedEx Corp earnings model numbers are calendarized. Estimates for F07 and F08 are $6.76 and $7.40 ending May 31, 2007 and 2008, respectively.(4) Based on First Call consensus.(5) Most recently reported (quarterly basis) fully diluted share count.(6) Date of last rating change with direction of change. U=upgrade, D=downgrade, S=suspended coverage, I=Initiated.(7) UTIW fiscal year ends January 31. F07 and F08 end Jan. 31, 2008 and 2009, respectively.(8) Enterprise value defined as market cap plus debt minus cash and cash equivalents. Excludes OBD. (9) Historical P/E multiples represent blended forward P/E estimates.(10) Valuation methodology for all stocks (w/ price targets) is based on a forward rolling target P/E multiple applied to our forward-year EPS estimate.(11) Risks to our price targets: weaker-than-anticipated economy leading to reduced demand and/or weaker pricing; multiple contraction into improving earnings; increased regulation by government.(12) Our BSC EPS estimates include the impact of expensing stock options under FAS 123(R) for fiscal years beginning after June 15, 2005.(13) Blended 12-Month Rolling Forward P/E and EV/EBITDA consist of 12-month forward estimates from current date.(14) "First Call average rating" -- 1 = "Buy", "3"=Hold, "5" = Sell, all of which as defined by First Call. '#Analysts" -- number of sell-side analysts covering the stock.

Source: Company reports; Bear, Stearns & Co. Inc. estimates; FactSet Research Systems Inc.; First Call.


Exhibit 60. Bear Stearns Airfreight Universe — Comparative Financial Returns, 2004-08E

Gross Revenue EBIT EPS 2005 2006 2007E 2008E

NET OPERATING RATIO (5)Asset-Based Integrators Asset-Based IntegratorsFedEx Corp. (FDX) (4) 11.3% 25.4% 22.6% FedEx Corp. (FDX) (4) 91.0% 90.1% 90.2% 89.4%TNT N.V. (TNT) (12) 11.4% 12.3% 20.6% TNT N.V. (TNT) (12) 87.8% 87.4% 87.6% 87.7%United Parcel Service (UPS) 8.3% 9.7% 11.3% United Parcel Service (UPS) 85.6% 85.9% 86.1% 85.8%Group Average 10.3% 15.8% 18.1% Group Average 88.1% 87.8% 88.0% 87.7%

Non-Asset-Based Forwarders Non-Asset-Based Forwarders (9)C.H. Robinson (CHRW) 18.0% 26.3% 27.5% C.H. Robinson (CHRW) 63.2% 61.4% 60.1% 59.5%Expeditors International (EXPD) 17.6% 24.1% 23.1% Expeditors International (EXPD) 74.4% 70.8% 70.4% 69.1%Group Average 17.8% 25.2% 25.3% Group Average 68.8% 66.1% 65.3% 64.3%

Asset-Light Forwarders Asset-Light ForwardersEGL Inc. (EAGL) (10) NA NA NA EGL Inc. (EAGL) (10) 89.3% NA NA NAForward Air (FWRD) 10.5% 15.4% 17.8% Forward Air (FWRD) 78.6% 78.6% 80.5% 79.4%Hub Group (HUBG) 5.5% 34.3% 42.0% Hub Group (HUBG) 72.5% 64.6% 62.4% 59.8%Landstar System (LSTR) 12.0% 19.5% 23.3% Landstar System (LSTR) 92.3% 92.4% 92.5% 92.4%Pacer International (PACR) 3.6% 7.1% 13.0% Pacer International (PACR) 75.4% 73.2% 74.9% 74.4%Universal Truckload (UACL) 22.2% 19.3% 8.3% Universal Truckload (UACL) 94.8% 94.8% 95.8% 95.5%UTi Worldwide (UTIW) (8) 25.1% 28.4% 24.0% UTi Worldwide (UTIW) (8) 86.3% 88.1% 87.6% 87.2%Group Average 13.2% 20.7% 21.4% Group Average 84.2% 82.0% 82.3% 81.4%Universe Average 13.2% 20.2% 21.2% Universe Average 82.6% 80.7% 80.7% 80.0%

2004 2005 2006 2007E 2008E 2005 2006 2007E 2008EAsset-Based Integrators Asset-Based IntegratorsFedEx Corp. (FDX) (4) 5.6% 7.2% 8.5% 9.6% 10.3% FedEx Corp. (FDX) (4) 10.9% 12.6% 5.5% 8.1%TNT N.V. (TNT) (12) 11.0% 13.3% 19.4% 20.1% 21.6% TNT N.V. (TNT) (12) 10.0% 10.3% 13.0% 12.2%United Parcel Service (UPS) 14.0% 15.6% 17.4% 17.3% 16.6% United Parcel Service (UPS) 11.9% 4.8% 8.5% 7.4%Group Average 10.2% 12.0% 15.1% 15.7% 16.2% Group Average 11.0% 9.2% 9.0% 9.2%

Non-Asset-Based Forwarders Non-Asset-Based ForwardersC.H. Robinson (CHRW) 21.6% 25.9% 27.7% 27.3% 26.9% C.H. Robinson (CHRW) 27.2% 32.2% 25.8% 28.1%Expeditors International (EXPD) 19.4% 17.8% 22.0% 22.9% 25.6% Expeditors International (EXPD) 19.8% 18.0% 22.4% 26.5%Group Average 20.5% 21.9% 24.8% 25.1% 26.3% Group Average 23.5% 25.1% 24.1% 27.3%

Asset-Light Forwarders Asset-Light ForwardersEGL Inc. (EAGL) (10) 6.3% 7.1% NA NA NA EGL Inc. (EAGL) (10) 12.7% NA NA NAForward Air (FWRD) 17.9% 21.3% 23.1% 20.5% 19.4% Forward Air (FWRD) 15.1% 16.9% 3.1% 19.9%Hub Group (HUBG) 9.6% 9.8% 15.2% 15.5% 15.3% Hub Group (HUBG) 13.3% 13.0% 11.2% 11.8%Landstar System (LSTR) 23.1% 27.0% 24.5% 28.1% 31.3% Landstar System (LSTR) 1.4% 65.3% 24.9% 30.8%Pacer International (PACR) 5.8% 7.5% 8.8% 7.7% 7.6% Pacer International (PACR) 13.4% 8.2% 5.5% 4.8%Universal Truckload (UACL) NM 14.9% 16.2% 11.9% 12.5% Universal Truckload (UACL) 1.2% 10.5% -9.9% 12.0%UTi Worldwide (UTIW) (8) 10.7% 11.6% 10.5% 10.0% 11.1% UTi Worldwide (UTIW) (8) 14.8% 10.8% 10.5% 13.4%Group Average 12.2% 14.2% 16.4% 15.6% 16.2% Group Average 10.3% 20.8% 7.5% 15.5%Universe Average 13.2% 14.9% 17.6% 17.4% 18.0% Universe Average 12.6% 18.4% 10.9% 15.9%

2004 2005 2006 2007E 2008E 2005 2006 2007E 2008EAsset-Based Integrators Asset-Based IntegratorsFedEx Corp. (FDX) (4) 60.2% 52.9% 44.3% 44.2% 38.9% FedEx Corp. (FDX) (4) 2.3% 2.8% 0.4% 1.2%TNT N.V. (TNT) (7,12) 41.1% 34.8% 51.0% 37.6% 33.4% TNT N.V. (TNT) (12) 7.2% 4.6% 5.4% 5.4%United Parcel Service (UPS) 2.5% 12.6% 15.5% 21.0% 25.7% United Parcel Service (UPS) 3.9% 2.8% 3.8% 3.9%Group Average 34.6% 33.5% 36.9% 34.3% 32.7% Group Average 4.5% 3.4% 3.2% 3.5%

Non-Asset-Based Forwarders (13) Non-Asset-Based ForwardersC.H. Robinson (CHRW) 0.0% 0.0% 0.0% 0.0% 0.0% C.H. Robinson (CHRW) 3.8% 3.3% 3.1% 3.9%Expeditors International (EXPD) 0.0% 0.0% 0.0% 0.0% 0.0% Expeditors International (EXPD) 3.0% 2.1% 2.9% 3.9%Group Average 0.0% 0.0% 0.0% 0.0% 0.0% Group Average 3.4% 2.7% 3.0% 3.9%

Asset-Light Forwarders (13) Asset-Light ForwardersEGL Inc. (EAGL) (10) 23.9% 56.1% NA NA NA EGL Inc. (EAGL) (10) 6.1% NA NA NAForward Air (FWRD) 0.0% 0.0% 0.0% 0.0% 0.0% Forward Air (FWRD) 3.3% 3.8% 0.8% 5.8%Hub Group (HUBG) 2.4% 7.5% 3.6% 0.0% 0.0% Hub Group (HUBG) 5.7% 2.8% 2.8% 3.5%Landstar System (LSTR) 23.6% 40.7% 22.0% 31.2% 21.3% Landstar System (LSTR) 0.3% 10.1% 3.4% 4.2%Pacer International (PACR) 62.7% 58.5% 54.1% 61.0% 61.5% Pacer International (PACR) 7.3% 4.3% 2.9% 2.7%Universal Truckload (UACL) NM 0.0% 0.0% 0.0% 0.0% Universal Truckload (UACL) 0.5% 3.7% -4.1% 5.6%UTi Worldwide (UTIW) (8) 17.1% 13.0% 27.9% 16.0% 0.6% UTi Worldwide (UTIW) (8) 4.2% 4.3% 5.0% 6.8%Group Average 21.6% 25.1% 17.9% 18.0% 13.9% Group Average 3.9% 4.8% 1.8% 4.8%Universe Average 21.2% 23.0% 19.9% 19.2% 16.5% Universe Average 4.0% 4.1% 2.4% 4.3%

NET DEBT RATIO (2) FREE CASH FLOW YIELD (11)

RETURN ON AVERAGE TOTAL CAPITAL (1,6)

COMPOUND ANNUAL GROWTH RATES 2003-2008E OPERATING RATIOS

FREE CASH FLOW RETURN ON AVG. TOTAL CAPITAL (3,6)Footnotes:(1) Total Capital defined as total debt plus total equity, return on average total capital defined as net income + tax-affected interest / total debt + total leases + total equity.(2) Net Debt ratio defined as total debt (including OBD) - cash / total debt (including OBD)- cash + equity.(3) Gross Cash Flow - dividend payouts -maintenance Cap.Ex. / total capital.(4) Balance Sheet and Cash Flow figures for FedEx are FYE numbers.(5) Total operating costs including purchased transportation / Net revenue.(6) Includes off-balance-sheet debt in total capital formulation.(7) TPG debt includes provisions and off-balance-sheet debt.(8) Fiscal year ending January data for UTi (e.g. 2004 data based on fiscal 2005 results).(9) Non-Asset-Based Operating Ratios are Net Operating Ratio (Operating Expenses divided by Net Revenue [Gross Rev less Purchased Trans]).(10) EAGL is not Bear Stearns rated. Forward estimates are based on First Call consensus.(11) Free cash flow (operating cash flow minus net capex prior to dividends, acquisitions, and share repurchases) divided by Enterprise Value. Market capitalization-2005 figure represents an average between high/low market capitalization range.(12) TNT price and EPS based on NYSE ADRs in US dollars. TNT's CAGRs can be overstated because results prior to 06 have not been restated to exclude Logistics and Freight Forwarding businesses. (13) Our Non-Asset Based and many of our Asset-Light companies carry large Net Cash positions, resulting in the 0% Net Debt Ratios displayed.



Exhibit 61. Bear Stearns Ground Transport Rail Universe — EPS and Book Value Multiples, 2004-08E Share Market Rating Year End First Call Dividend

SECTOR RATING: Price ($) 52 week range Count Cap BSC Since Target (3,4,6) Avg. Rating / YieldMarket Weight 4/27/2007 High Low (MM)(1) (MM) Rating (U/D)(2) C07 # Analysts (12) (%) Large-Cap RailroadsBurlington Northern Santa Fe (BNI) $88.87 $95.47 $63.80 363.7 $32,322 Peer Perform (D) 4/25/2007 - 2.4 / 16 firms 1.1%Canadian National (CNI) $51.71 $51.75 $39.36 517.8 $26,775 Outperform (U) 1/12/2007 $51 1.8 / 14 firms 1.4%Canadian Pacific (CP) $64.59 $65.70 $44.84 157.4 $10,166 Peer Perform (D) 12/08/2005 - 2.2 / 13 firms 1.2%CSX Corp. (CSX) $43.74 $46.23 $28.60 463.1 $20,256 Peer Perform (D) 12/13/2006 - 2.8 / 15 firms 0.9%Norfolk Southern Corp. (NSC) $53.62 $57.71 $39.10 402.3 $21,571 Outperform (U) 3/23/2004 $59 2.3 / 15 firms 1.6%Union Pacific (UNP) $115.84 $119.22 $78.65 272.8 $31,601 Peer Perform (U) 4/21/2006 - 2.6 / 16 firms 1.2%

Small-Cap RailroadsGenesee and Wyoming (GWR) $27.23 $36.75 $21.00 42.2 $1,150 Peer Perform (D) 2/15/06 - 2.0 / 6 firms -Kansas City Southern (KSU) $38.59 $39.50 $22.71 99.9 $3,857 Peer Perform (I) 10/16/2002 - 2.5 / 4 firms -

S&P 500 (10) $1,494.07 $1,498.02 $1,219.29 - - - - $1,553 - 1.7%

Earnings / Share (9) Book Value / ShareAbsolute Estimates2004-2008E 2004 2005 2006 2007E 2008E 2004 2005 2006 2007E 2008E

Large-Cap RailroadsBurlington Northern Santa Fe (BNI) $2.92 $4.09 $4.99 $5.57 $6.37 $24.72 $24.90 $28.11 $30.56 $33.57Canadian National (CNI) $1.67 $2.29 $2.98 $3.15 $3.90 $12.33 $13.59 $16.16 $16.29 $17.64Canadian Pacific (CP) $1.74 $2.72 $3.49 $3.84 $4.36 $19.25 $22.59 $27.03 $24.95 $30.87CSX Corp. (CSX) $1.07 $1.67 $2.21 $2.45 $2.90 $15.64 $17.44 $19.19 $19.69 $20.65Norfolk Southern Corp. (NSC) $2.18 $2.82 $3.57 $3.85 $4.58 $20.01 $22.50 $23.19 $25.46 $29.75Union Pacific (UNP) $2.88 $3.41 $5.91 $6.83 $7.90 $48.26 $51.44 $56.31 $59.56 $67.46

Small-Cap RailroadsGenesee and Wyoming (GWR) $0.96 $1.17 $1.38 $1.45 $1.60 $8.31 $9.54 $12.26 $13.77 $15.37Kansas City Southern (KSU) $0.09 $0.22 $1.08 $1.35 $1.65 $12.55 $16.59 $19.36 $20.40 $20.91

S&P 500 (10) 66.11 74.87 85.60 92.33 98.22 414.75 453.06 504.40 621.61 744.72

PRICE / EARNINGS (ABSOLUTE) (5) Rolling Price / Book Value (Absolute)2004 2005 2006 2007E 2008E 12 Month 2005 2006 2007E 2008E

2004-2008E Range Range Range Forward (11) Range Range

Large-Cap RailroadsBurlington Northern Santa Fe (BNI) 12.4x-14.7x 11.6x-15.6x 12.0x-17.0x 16.0x 14.0x 15.2x 1.8x-2.9x 2.3x-3.1x 2.9x 2.6x Canadian National (CNI) 12.2x-15.6x 13.2x-15.5x 12.6x-17.2x 16.4x 13.2x 15.2x 2.0x-3.0x 2.4x-3.2x 3.2x 2.9x Canadian Pacific (CP) 10.8x-15.3x 11.5x-16.0x 12.5x-16.1x 16.8x 14.8x 16.1x 1.4x-2.0x 1.4x-2.1x 2.6x 2.1x CSX Corp. (CSX) 12.2x-15.6x 12.3x-15.9x 12.1x-16.1x 17.9x 15.1x 16.8x 1.1x-1.5x 1.3x-2.0x 2.2x 2.1x Norfolk Southern Corp. (NSC) 12.5x-15.5x 11.3x-14.6x 11.2x-16.1x 13.9x 11.7x 13.1x 1.3x-2.0x 1.7x-2.5x 2.1x 1.8x Union Pacific (UNP) 11.7x-17.3x 15.0x-19.3x 12.5x-17.9x 17.0x 14.7x 16.1x 1.1x-1.6x 1.4x-1.7x 1.9x 1.7x Group Average 12.0x-15.7x 12.5x-16.1x 12.2x-16.7x 16.3x 13.9x 15.4x 1.5x-2.2x 1.7x-2.4x 2.5x 2.2x

Small-Cap RailroadsGenesee and Wyoming (GWR) 13.5x-17.7x 12.9x-17.7x 14.1x-23.0x 18.8x 17.0x 18.2x 1.6x-2.6x 1.7x-3.0x 2.0x 1.8x Kansas City Southern (KSU) 19.4x-29.5x 19.9x-36.0x 19.1x-37.2x 28.6x 23.3x 26.6x 1.0x-1.5x 1.1x-1.6x 1.9x 1.8x Group Average 16.5x-23.6x 16.4x-26.9x 16.6x-30.1x 23.7x 20.2x 22.4x 1.3x-2.1x 1.4x-2.3x 1.9x 1.8x

Railroad Average 13.1x-17.7x 13.4x-18.8x 13.3x-20.1x 18.2x 15.5x 17.2x 1.4x-2.2x 1.7x-2.4x 2.4x 2.1x

S&P 500 17.0x-21.7x 16.8x-19.5x 15.5x-18.3x 16.2x 15.2x 15.8x 2.5x-2.8x 2.4x-2.8x 2.4x 2.0x

ENTERPRISE VALUE / EBITDAR (7) Rolling ENTERPRISE VALUE / EBITDA (8)2004 2005 2006 2007E 2008E 12 Month 2005 2006 2007E 2008E

2004-2008E Range Range Range Forward (11) Range Range

Large-Cap RailroadsBurlington Northern Santa Fe (BNI) 5.5x-7.5x 6.0x-8.2x 6.4x-8.1x 7.4x 6.8x 7.2x 6.0x-8.5x 6.6x-8.6x 7.8x 7.1xCanadian National (CNI) 6.3x-9.4x 7.1x-9.7x 7.6x-9.6x 9.2x 8.1x 8.8x 7.3x-10.2x 7.8x-9.9x 9.5x 8.3xCanadian Pacific (CP) 6.0x-8.1x 6.0x-7.7x 6.0x-7.9x 8.0x 7.4x 7.8x 6.2x-8.1x 6.2x-8.3x 8.5x 7.8xCSX Corp. (CSX) 5.6x-6.6x 5.0x-6.2x 5.0x-7.0x 7.1x 6.5x 6.9x 5.8x-7.3x 5.8x-8.1x 8.2x 7.5xNorfolk Southern Corp. (NSC) 6.3x-8.9x 6.3x-8.4x 6.4x-8.6x 7.6x 6.8x 7.3x 6.6x-9.0x 6.8x-9.1x 8.0x 7.2xUnion Pacific (UNP) 7.1x-8.2x 6.8x-8.4x 6.2x-7.3x 7.5x 6.7x 7.2x 7.5x-9.5x 6.6x-7.9x 8.1x 7.3xGroup Average 6.1x-8.1x 6.2x-8.1x 6.3x-8.1x 7.8x 7.1x 7.6x 6.6x-8.8x 6.6x-8.6x 8.3x 7.5x

Small-Cap RailroadsGenesee and Wyoming (GWR) 5.7x-7.6x 6.4x-9.0x 6.8x-11.2x 8.5x 7.8x 8.3x 6.9x-9.9x 7.6x-12.7x 9.7x 8.8xKansas City Southern (KSU) NM 10.5x-13.1x 8.5x-10.2x 11.4x 10.3x 11.0x 9.7x-12.3x 7.9x-9.6x 10.8x 9.8xGroup Average 5.7x-7.6x 8.4x-11.0x 7.7x-10.7x 9.9x 9.0x 9.6x 8.3x-11.1x 7.8x-11.2x 10.3x 9.3x

Railroad Average 6.1x-8.1x 6.7x-8.8x 6.6x-8.7x 8.3x 7.5x 8.1x 7.0x-9.3x 6.9x-9.3x 8.8x 8.0x

Footnotes:(1) Most recently reported (quarterly basis) fully diluted share count.(2) Date of last rating change along with direction of change (U=upgrade, D=downgrade, I=Initiation).(3) Valuation methodology for all stocks (w/ price targets) is based on a forward rolling target P/E multiple to derive our year-end 2007 price targets.(4) Risks to our target prices: Weaker-than-anticipated economy leading to reduced demand and/or pricing; Rising fuel prices; Increased regulation by government.(5) Historical P/E multiples represent blended forward P/E estimates.(6) NSC target price assumes a 13x forward P/E applied on a tax-adjusted year-end 2008 EPS estimate of $4.50. We have normalized to NSC's statutory tax rate of 37.5%. (7) Railroad debt includes off-balance-sheet debt in EV/EBITDAR calculation. EBITDAR adds back rental expense on off-balance-sheet debt for all rails other than KSU.(8) Railroad debt excludes off-balance-sheet debt in EV/EBITDA calculation. EBITDA does not add back rental expense on off-balance-sheet debt.(9) Our Bear Stearns EPS estimates include the effect of stock option expensing under FAS 123(R) for fiscal years beginning after June 15, 2005.(10) S&P 500 EPS and Target Price estimates are based on consensus. (11) Blended 12-Month Rolling Forward P/E and EV/EBITDA consist of 12-month forward estimates from current date.(12) "First Call average rating" -- 1 = "Buy", "3"=Hold, "5" = Sell, all of which as defined by First Call. '#Analysts" -- number of sell-side analysts covering the stock.



Exhibit 62. Bear Stearns Ground Transport Rail Universe — Comparative Financial Returns, 2004-08E COMPOUND ANNUAL GROWTH RATES 2003-2008E(1) OPERATING RATIOS (2)

Gross Revenue Op. Inc. EPS 2004 2005 2006 2007E 2008E

Large-Cap Railroads Large-Cap RailroadsBurlington Northern Santa Fe (BNI) 12.5% 20.0% 25.0% Burlington Northern Santa Fe (BNI) 80.1% 77.1% 76.7% 76.3% 75.6%Canadian National (CNI) 8.8% 15.4% 25.5% Canadian National (CNI) 67.1% 64.8% 61.8% 62.0% 59.3%Canadian Pacific (CP) 6.7% 12.9% 23.8% Canadian Pacific (CP) 79.8% 77.2% 75.4% 74.4% 73.5%CSX Corp. (CSX) 6.3% 19.8% 24.9% CSX Corp. (CSX) 86.7% 82.2% 79.5% 78.4% 77.2%Norfolk Southern Corp. (NSC) 9.7% 21.2% 27.5% Norfolk Southern Corp. (NSC) 76.7% 75.5% 72.8% 72.0% 70.1%Union Pacific (UNP) 7.3% 11.6% 13.6% Union Pacific (UNP) 87.1% 86.8% 81.5% 79.6% 78.5%Group Average 8.5% 16.8% 23.4% Group Average 79.6% 77.2% 74.6% 73.8% 72.4%

Small-Cap Railroads Small-Cap RailroadsGenesee and Wyoming (GWR) (10) 17.6% 23.6% 18.0% Genesee and Wyoming (GWR) 83.5% 82.4% 83.0% 81.8% 80.7%Kansas City Southern (KSU) (8) 7.9% 20.4% 38.9% Kansas City Southern (KSU) (9) 85.6% 88.3% 81.7% 80.7% 79.4%Group Average 12.7% 22.0% 28.5% Group Average 84.5% 85.4% 82.3% 81.3% 80.0%

Railroad Average 9.6% 18.1% 24.7% Railroad Average 80.8% 79.3% 76.5% 75.7% 74.3%

RETURN ON AVERAGE EQUITY PRETAX RETURN ON ASSETS2004 2005 2006 2007E 2008E 2004 2005 2006 2007E 2008E

Large-Cap Railroads Large-Cap RailroadsBurlington Northern Santa Fe (BNI) 12.3% 16.6% 18.5% 18.7% 19.6% Burlington Northern Santa Fe (BNI) 7.8% 10.0% 11.3% 11.8% 12.5%Canadian National (CNI) 14.2% 16.8% 19.0% 19.1% 22.1% Canadian National (CNI) 10.4% 11.8% 13.1% 13.0% 14.4%Canadian Pacific (CP) 9.4% 12.6% 13.6% 14.5% 15.0% Canadian Pacific (CP) 7.7% 9.4% 10.1% 10.5% 10.5%CSX Corp. (CSX) 7.0% 10.3% 12.2% 12.4% 14.1% CSX Corp. (CSX) 4.8% 6.3% 8.0% 8.5% 9.4%Norfolk Southern Corp. (NSC) 11.6% 13.4% 15.7% 15.5% 16.4% Norfolk Southern Corp. (NSC) 7.5% 8.2% 9.9% 10.3% 11.5%Union Pacific (UNP) 6.0% 6.9% 11.1% 11.8% 12.3% Union Pacific (UNP) 4.6% 5.1% 8.0% 9.0% 9.7%Group Average 10.1% 12.8% 15.0% 15.4% 16.6% Group Average 7.1% 8.5% 10.1% 10.5% 11.4%

Small-Cap Railroads Small-Cap RailroadsGenesee and Wyoming (GWR) 13.0% 13.2% 12.7% 11.1% 11.0% Genesee and Wyoming (GWR) (10) 11.4% 10.1% 8.2% 8.0% 8.4%Kansas City Southern (KSU) (8) 1.6% 2.1% 7.2% 8.4% 10.1% Kansas City Southern (KSU) (8) 8.6% 5.2% 6.7% 7.5% 8.6%Group Average 7.3% 7.7% 10.0% 9.7% 10.5% Group Average 10.0% 7.7% 7.5% 7.8% 8.5%

Railroad Average 9.4% 11.5% 13.7% 13.9% 15.1% Railroad Average 7.8% 8.3% 9.4% 9.8% 10.6%

RETURN ON AVERAGE TOTAL CAPITAL (3) FREE CASH FLOW RETURN ON AVG. TOTAL CAPITAL (3,6)2004 2005 2006 2007E 2008E 2004 2005 2006 2007E 2008E


Small-Cap Railroads Small-Cap RailroadsGenesee and Wyoming (GWR) 9.3% 9.1% 7.9% 7.5% 7.7% Genesee and Wyoming (GWR) 5.7% 5.5% 2.5% -4.1% 4.2%Kansas City Southern (KSU) (8) 6.7% 4.4% 6.0% 6.7% 7.6% Kansas City Southern (KSU) (8) 1.7% -3.4% 1.6% 1.2% 2.2%Group Average 8.0% 6.7% 6.9% 7.1% 7.6% Group Average 3.7% 1.1% 2.1% -1.5% 3.2%


NET DEBT RATIO (4)(5) FREE CASH FLOW YIELD (6,7)2004 2005 2006 2007E 2008E 2004 2005 2006 2007E 2008E


Small-Cap Railroads Small-Cap RailroadsGenesee and Wyoming (GWR) 32.6% 48.2% 21.6% 14.0% 11.2% Genesee and Wyoming (GWR) 3.2% 3.0% 1.6% -3.0% 3.4%Kansas City Southern (KSU) (8) 46.2% 58.5% 54.4% 53.1% 51.9% Kansas City Southern (KSU) (8) 1.4% -2.4% 1.3% 0.7% 1.4%Group Average 39.4% 53.3% 38.0% 33.6% 31.5% Group Average 2.3% 0.3% 1.4% -1.1% 2.4%


Footnotes:(1) Reported revenue and operating expenses include fuel surcharge revenue and gross fuel expense, respectively.(2) Total operating expenses as a percentage of total revenue.(3) Total Capital defined as total debt + total equity. Return on Average Total Capital defined as net income + tax-affected interest / total debt + total capital leases + total equity.(4) Net Debt Ratio defined as total debt less cash / total debt + equity (%).(5) Debt Ratio for Railroads includes off-balance-sheet debt.(6) Free Cash Flow defined as Cash from Operating activities - Net Capex and before dividends, acquisitions, and share repurchases. (7) Free Cash Flow Yield defined as Free Cash Flow divided by Enterprise Value (EV). Market capitalization calculated as a part of EV in 2004-2005 is based on the average stock price in each year. (8) KSU pro forma results from 2003-2005 to include for Mexican operations.(9) Represents Operating Ratio for consolidated company including U.S. and Mexico.(10) Revenue and Operating Income shown for consolidated businesses (i.e., excludes ARG).



Exhibit 63. Bear Stearns Ground Transport Truck Universe — EPS and Book Value Multiples, 2004-08E Share Market Rating Year End First Call Dividend

SECTOR RATING: Price ($) 52 week range Count Cap BSC Since Target (3,4) Avg. Rating / YieldMarket Underweight 4/27/2007 High Low (MM)(1) (MM) Rating (U/D)(2) C07 # Analysts (5) (%)

Truckload (TL)Covenant Transportation (CVTI) $10.78 $15.64 $10.62 14.0 $151 Peer Perform (U) 10/24/2005 - 3.0 / 6 firms -Heartland Express (HTLD) $17.44 $19.13 $14.10 98.3 $1,714 Underperform (D) 6/8/2005 $14.50 2.6 / 12 firms 0.5%J.B. Hunt Transport (JBHT) $27.67 $29.39 $18.77 146.5 $4,053 Peer Perform (D) 4/13/2007 - 2.2 / 19 firms 1.3%Knight Transportation (KNX) $19.76 $21.40 $15.60 87.2 $1,722 Underperform (D) 6/8/2005 $16 2.5 / 15 firms 0.4%Swift Transportation (SWFT) $31.27 $33.66 $22.21 75.9 $2,374 Peer Perform (U) 11/6/2006 - 3.1 / 13 firms -Werner Enterprises (WERN) $19.16 $20.92 $17.16 76.2 $1,460 Underperform (D) 6/8/2005 $15 3.3 / 14 firms 0.9%U.S. Xpress (XPRSA) (11) $14.56 $28.00 $14.55 15.3 $222 NR (S) 7/15/2004 - 2.6 / 7 firms -

Less-than-Truckload (LTL)Arkansas Best Corp. (ABFS) $39.53 $50.67 $34.90 25.2 $995 Underperform (D) 7/27/2006 $29 3.6 / 9 firms 1.5%Con-way Inc. (CNW) $55.86 $61.87 $42.09 49.1 $2,745 Underperform (D) 7/27/2006 $41 2.5 / 15 firms 0.7%Old Dominion (ODFL) $30.59 $39.50 $24.04 37.3 $1,141 Peer Perform (U) 1/3/2007 - 1.8 / 10 firms -Saia, Inc. (SAIA) $29.39 $36.17 $22.80 14.5 $426 Peer Perform (I) 5/2/2007 - 2.4 / 8 firms -YRC Worldwide Inc. (YRCW) (12) $41.77 $47.09 $35.27 58.6 $2,448 Underperform (D) 7/27/2006 $32 3.0 / 13 firms -

Other TruckRyder System Inc. (R) $53.82 $59.93 $47.38 61.7 $3,321 Underperform (D) 7/27/2006 $43 2.4 / 9 firms 1.6%

S&P 500 (10) $1,494.07 $1,498.02 $1,219.29 - - - - $1,553 - 1.7%

EPS Estimates (6) Absolute P/E Multiples (7) RollingAbsolute Estimates 2005 2006 2007E 2008E 12 Month 2004-2008E 2004 2005 2006 2007E 2008E Range Range Forward (8)

Truckload (TL)Covenant Transportation (CVTI) $1.07 $0.40 ($0.05) ($0.02) $0.27 11.8x-15.5x 11.8x-15.5x NM NM NMHeartland Express (HTLD) 0.62 0.73 0.79 0.90 1.00 18.5x-21.5x 16.1x-22.8x 19.3x 17.4x 18.6xJ.B. Hunt Transport (JBHT) 1.08 1.36 1.47 1.53 1.76 12.5x-18.3x 12.2x-16.2x 18.0x 15.7x 17.2xKnight Transportation (KNX) 0.55 0.71 0.83 0.88 1.12 18.7x-26.5x 17.4x-24.7x 22.5x 17.7x 20.6xSwift Transportation (SWFT) (13) 1.28 1.47 1.89 1.47 1.79 11.0x-16.7x 10.3x-15.7x 21.2x 17.4x 19.8xWerner Enterprises (WERN) 1.08 1.22 1.25 1.12 1.33 12.3x-16.3x 12.0x-15.9x 17.0x 14.4x 16.1xU.S. Xpress (XPRSA) (11) 1.16 0.68 1.29 0.82 1.34 10.5x-20.0x 10.3x-19.2x 17.8x 10.9x 14.7xGroup Average (11,13) - - - - - 14.8x-19.6x 13.9x-19.0x 19.2x 16.3x 18.1x

Less-than-Truckload (LTL)Arkansas Best Corp. (ABFS) 3.02 3.64 3.45 2.50 2.95 8.7x-12.5x 9.7x-13.3x 15.8x 13.4x 14.9xCon-way Inc. (CNW) 2.58 3.80 3.32 3.62 3.54 11.3x-14.8x 9.6x-13.5x 15.4x 15.8x 15.6xOld Dominion (ODFL) 1.09 1.45 1.91 2.08 2.45 11.9x-17.2x 11.8x-18.3x 14.7x 12.5x 13.9xSaia, Inc. (SAIA) 0.95 1.38 1.92 2.07 2.20 8.2x-12.8x 11.1x-15.2x 14.2x 13.4x 13.9xYRC Worldwide Inc. (YRCW) (12) 4.27 5.11 5.03 3.03 3.50 7.0x-11.6x 6.1x-8.4x 13.8x 11.9x 13.1xGroup Average - - - - - 9.4x-13.8x 9.7x-13.7x 14.8x 13.4x 14.3x

Other TruckRyder System Inc. (R) 2.94 3.39 3.96 4.25 4.60 9.0x-13.9x 10.9x-14.2x 12.7x 11.7x 12.3x

Trucking Average (11,13) - - - - - 11.8x-16.4x 11.7x-16.2x 16.3x 14.4x 15.6x

S&P 500 (10) 66.11 74.87 85.60 92.33 98.22 16.8x-19.5x 15.5x-18.3x 16.2x 15.2x 15.8x

Enterprise Value / EBITDA (9) Rolling Price / Book Value (Absolute) Rolling2005 2006 2007E 2008E 12 Month 2005 2006 2007E 2008E 12 Month

2004-2008E Range Range Forward (8) Range Range Forward (8)

Truckload (TL)Covenant Transportation (CVTI) 3.9x-6.9x 6.1x-7.7x 5.2x 4.2x 4.8x 0.7x-1.6x 0.8x-1.2x 0.8x 0.8x 0.8xHeartland Express (HTLD) 7.2x-10.1x 6.8x-10.2x 7.8x 7.3x 7.7x 3.0x-4.0x 2.8x-3.9x 2.9x 2.5x 2.8xJ.B. Hunt Transport (JBHT) 5.5x-7.9x 5.7x-7.6x 7.6x 6.9x 7.4x 3.5x-5.0x 3.8x-5.2x 4.1x 3.2x 3.7xKnight Transportation (KNX) 7.7x-12.6x 7.5x-10.6x 8.7x 7.1x 8.2x 3.4x-5.5x 3.2x-4.5x 3.4x 2.9x 3.5xSwift Transportation (SWFT) (13) 4.4x-6.3x 3.7x-5.8x 6.3x 5.6x 6.0x 1.4x-2.2x 1.5x-2.5x 2.1x 1.8x 1.9xWerner Enterprises (WERN) 4.0x-5.8x 4.3x-5.4x 4.9x 4.3x 4.7x 1.5x-2.2x 1.6x-2.0x 1.5x 1.4x 1.5xU.S. Xpress (XPRSA) (11) 4.0x-9.3x 4.9x-6.5x NA NA NA 0.6x-2.4x 0.9x-1.7x NA NA NAGroup Average (11,13) 5.7x-8.6x 6.1x-8.3x 6.8x 6.0x 6.5x 2.4x-3.7x 2.4x-3.4x 2.6x 2.1x 2.4x

Less-than-Truckload (LTL)Arkansas Best Corp. (ABFS) 4.4x-7.1x 4.6x-6.8x 6.7x 5.8x 6.4x 1.4x-2.1x 1.6x-2.2x 1.6x 1.5x 1.6xCon-way Inc. (CNW) 4.4x-6.5x 4.7x-6.9x 6.7x 6.5x 6.6x 2.5x-3.7x 3.0x-4.4x 3.5x 3.2x 3.4xOld Dominion (ODFL) 5.1x-7.7x 5.9x-8.9x 6.5x 5.5x 6.1x 1.9x-3.1x 2.1x-3.5x 2.3x 1.9x 2.2xSaia, Inc. (SAIA) 4.4x-6.3x 4.8x-7.3x 5.7x 5.4x 5.6x 1.0x-1.6x 1.6x-2.6x 1.8x 1.6x 1.8xYRC Worldwide Inc. (YRCW) (12) 4.6x-6.4x 3.9x-5.1x 5.5x 5.3x 5.4x 1.2x-2.0x 0.9x-1.4x 1.1x 1.1x 1.1xGroup Average 4.6x-6.8x 4.8x-7.0x 6.2x 5.7x 6.0x 1.6x-2.5x 1.8x-2.8x 2.1x 1.9x 2.0x

Other TruckRyder System Inc. (R) 3.4x-4.3x 4.0x-5.0x 4.4x 4.1x 4.3x 1.4x-2.0x 1.4x-2.1x 1.8x 1.7x 1.8x

Trucking Average (11,13) 5.0x-7.4x 5.3x-7.4x 6.3x 5.7x 6.1x 2.0x-3.0x 2.1x-3.0x 2.3x 2.0x 2.2x

S&P 500 (10) - - - - - 2.5x-2.8x 2.4x-2.8x 2.4x 2.0x -

Footnotes:(1) Most recently reported (quarterly basis) fully diluted share count.(2) Date of last rating change along with direction of change (U=Upgrade, D=Downgrade, S=Suspended, I=Initiated).(3) Valuation methodology for all stocks is based on a forward rolling target P/E multiple to derive our year-end 2007 price targets, unless otherwise indicated.(4) Risks to our target prices: weaker-than-anticipated economy leading to reduced demand and/or pricing, multiple contraction into improving earnings, and increased regulation by government.(5) First Call average rating scale: 1="Buy", 3=Hold, 5=Sell. # Analysts=number of sell-side analysts covering the stock, as listed by First Call.(6) Our Bear Stearns EPS estimates include the impact of stock option expensing under FAS 123(R) for fiscal years beginning after June 15, 2005.(7) Historical P/E multiples represent blended forward P/E estimates.(8) Blended 12-Month Rolling Forward P/E, EV/EBITDA, and P/B consist of 12-month forward estimates from current date.(9) Enterprise value defined as market cap plus debt minus cash and cash equivalents. Excludes OBD.(10) S&P 500 EPS, Book value, and Target Price based on consensus.(11) XPRSA is not Bear Stearns rated. All forward estimates are based on First Call consensus. Not included in any valuation averages.(12) YRCW data are pro forma including ROAD data from 2002-2006. 2005 YRCW EPS estimate represents the sum of 1Q05 of the former YELL's stand-alone EPS and 2Q (which represents a stub quarter of USFC results included), and 3Q and 4Q YRCW continuing post-USFC deal EPS. 2006 EPS estimate is pro forma the USFC deal.(13) SWFT removed from all valuation averages.



Exhibit 64. Bear Stearns Ground Transport Truck Universe — Comparative Financial Returns, 2004-08E COMPOUND ANNUAL GROWTH RATES 2003-2008E OPERATING RATIOS (1)

Gross Revenue Op. Inc. EPS 2004 2005 2006 2007E 2008E

Truckload (TL) Truckload (TL)Covenant Transportation (CVTI) 5.7% -7.0% -20.1% Covenant Transportation (CVTI) 94.5% 97.3% 98.6% 98.6% 97.4%Heartland Express (HTLD) 10.1% 11.4% 14.1% Heartland Express (HTLD) 79.5% 80.1% 81.0% 80.0% 79.9%J.B. Hunt Transport (JBHT) 7.9% 18.9% 22.8% J.B. Hunt Transport (JBHT) 88.9% 88.2% 88.4% 88.2% 87.6%Knight Transportation (KNX) 21.0% 22.3% 22.1% Knight Transportation (KNX) 82.1% 82.1% 82.0% 82.9% 81.5%Swift Transportation (SWFT) 7.5% 10.1% 14.3% Swift Transportation (SWFT) 93.5% 93.5% 91.9% 93.8% 93.4%Werner Enterprises (WERN) 8.5% 7.0% 8.0% Werner Enterprises (WERN) 91.6% 91.7% 92.1% 93.1% 92.5%U.S. Xpress (XPRSA) (6) 12.9% 21.9% 19.8% U.S. Xpress (XPRSA) (6) 96.4% 97.7% 96.1% NA NAGroup Average (6) 10.1% 10.5% 10.2% Group Average (6) 88.3% 88.8% 89.0% 89.4% 88.7%

Less-than-Truckload (LTL) Less-than-Truckload (LTL)Arkansas Best Corp. (ABFS) 4.1% 9.4% 11.7% Arkansas Best Corp. (ABFS) 92.6% 91.4% 92.7% 94.7% 93.8%Con-way Inc. (CNW) 6.4% 5.3% 11.4% Con-way Inc. (CNW) 92.3% 91.1% 91.6% 92.8% 93.3%Old Dominion (ODFL) 19.2% 26.8% 26.3% Old Dominion (ODFL) 91.3% 90.8% 89.9% 90.1% 89.6%Saia, Inc. (SAIA) 15.0% 22.8% 33.6% Saia, Inc. (SAIA) 95.0% 94.2% 93.8% 94.0% 94.1%YRC Worldwide. (YRCW) (7) 3.7% 7.7% 7.6% YRC Worldwide. (YRCW) (7) 94.9% 94.0% 94.6% 96.4% 95.8%Group Average 9.7% 14.4% 18.1% Group Average 93.2% 92.3% 92.5% 93.6% 93.3%

Other Truck Other TruckRyder System Inc. (R) 8.0% 15.2% 16.9% Ryder System Inc. (R) 92.1% 91.7% 91.5% 91.2% 91.3%

Trucking Average (6) 9.7% 12.5% 14.1% Trucking Average (6) 90.7% 90.5% 90.7% 91.3% 90.8%

RETURN ON AVERAGE TOTAL CAPITAL (2) FREE CASH FLOW RETURN ON AVG. TOTAL CAPITAL (3)2004 2005 2006 2007E 2008E 2004 2005 2006 2007E 2008E

Truckload (TL) Truckload (TL)Covenant Transportation (CVTI) 4.7% 2.0% -0.5% 0.7% 1.7% Covenant Transportation (CVTI) 3.2% -5.0% -0.2% 7.0% 5.0%Heartland Express (HTLD) 16.8% 16.3% 17.1% 14.6% 13.4% Heartland Express (HTLD) 16.8% 14.1% 11.6% 15.0% 15.6%J.B. Hunt Transport (JBHT) 17.6% 21.9% 20.8% 18.0% 16.8% J.B. Hunt Transport (JBHT) 12.4% 12.5% 10.1% 10.3% 9.0%Knight Transportation (KNX) 17.7% 19.0% 18.5% 16.3% 17.5% Knight Transportation (KNX) -7.1% 1.3% 1.4% 5.1% 8.3%Swift Transportation (SWFT) 8.7% 9.2% 11.4% 8.8% 9.4% Swift Transportation (SWFT) -13.6% -2.6% 15.9% -0.5% 4.3%Werner Enterprises (WERN) 11.6% 11.4% 10.2% 8.7% 9.7% Werner Enterprises (WERN) 4.5% -14.9% 4.5% 16.4% 5.1%U.S. Xpress (XPRSA) (6) 2.2% 1.3% 1.3% NA NA U.S. Xpress (XPRSA) (6) -6.9% -2.7% -6.8% NA NAGroup Average (6) 12.8% 13.3% 12.9% 11.2% 11.4% Group Average (6) 2.7% 0.9% 7.2% 8.9% 7.9%

Less-than-Truckload (LTL) Less-than-Truckload (LTL)Arkansas Best Corp. (ABFS) 16.2% 16.9% 14.2% 9.6% 10.9% Arkansas Best Corp. (ABFS) 14.6% 14.5% 4.8% 3.1% 2.0%Con-way Inc. (CNW) 10.3% 14.5% 14.8% 12.5% 12.8% Con-way Inc. (CNW) 15.2% 0.8% 11.3% 7.8% 8.6%Old Dominion (ODFL) 10.4% 11.5% 11.5% 9.7% 9.9% Old Dominion (ODFL) -0.6% -4.8% -5.7% -9.4% -2.4%Saia, Inc. (SAIA) 6.5% 7.9% 10.7% 10.8% 10.2% Saia, Inc. (SAIA) -2.5% 8.2% -11.0% -7.0% -1.5%YRC Worldwide. (YRCW) (7) 10.2% 10.0% 9.9% 6.6% 7.4% YRC Worldwide. (YRCW) (7) 11.7% 5.9% 6.2% 0.5% 1.4%Group Average 10.7% 12.2% 12.2% 9.8% 10.2% Group Average 7.7% 4.9% 1.1% -1.0% 1.6%

Other Truck Other TruckRyder System Inc. (R) 7.2% 7.7% 7.5% 7.2% 7.4% Ryder System Inc. (R) 3.0% -7.5% -11.5% 3.0% 2.4%

Trucking Average (6) 11.5% 12.4% 12.2% 10.3% 10.6% Trucking Average (6) 4.8% 1.9% 3.1% 4.3% 4.8%

NET DEBT RATIO (4) FREE CASH FLOW YIELD (5)2004 2005 2006 2007E 2008E 2004 2005 2006 2007E 2008E

Truckload (TL) Truckload (TL)Covenant Transportation (CVTI) 46.2% 47.5% 61.5% 59.3% 57.4% Covenant Transportation (CVTI) 2.7% -4.6% -0.2% 7.4% 5.1%Heartland Express (HTLD) 0.0% 0.0% 0.0% 0.0% 0.0% Heartland Express (HTLD) 5.3% 4.7% 4.1% 6.0% 7.3%J.B. Hunt Transport (JBHT) 11.7% 21.2% 36.3% 33.7% 28.3% J.B. Hunt Transport (JBHT) 4.2% 3.5% 2.9% 3.1% 3.2%Knight Transportation (KNX) 0.0% 0.0% 0.0% 0.0% 0.0% Knight Transportation (KNX) -1.7% 0.3% 0.3% 1.4% 2.7%Swift Transportation (SWFT) 49.1% 43.5% 28.6% 26.5% 20.5% Swift Transportation (SWFT) 1.8% -2.4% 9.3% 0.1% 2.5%Werner Enterprises (WERN) 0.0% 2.6% 7.3% 0.0% 0.0% Werner Enterprises (WERN) 2.1% -7.9% 2.6% 10.4% 3.4%U.S. Xpress (XPRSA) (6) 59.1% 58.9% 71.1% NA NA U.S. Xpress (XPRSA) (6) -5.7% -2.3% -5.2% NA NAGroup Average (6) 17.8% 19.1% 22.3% 19.9% 17.7% Group Average (6) 2.4% -1.1% 3.2% 4.7% 4.0%

Less-than-Truckload (LTL) Less-than-Truckload (LTL)Arkansas Best Corp. (ABFS) 0.0% 0.0% 0.0% 0.0% 0.0% Arkansas Best Corp. (ABFS) 7.9% 9.0% 2.9% 2.1% 1.5%Con-way Inc. (CNW) 5.5% 0.3% 25.1% 23.2% 21.7% Con-way Inc. (CNW) 16.3% 0.2% 4.5% 3.1% 4.2%Old Dominion (ODFL) 26.0% 32.0% 42.7% 41.8% 39.9% Old Dominion (ODFL) -0.3% -2.3% -2.6% -5.7% -1.7%Saia, Inc. (SAIA) 39.2% 34.1% 38.0% 38.9% 36.7% Saia, Inc. (SAIA) -1.7% 6.8% -6.4% -4.0% -0.9%YRC Worldwide. (YRCW) (7) 30.4% 46.3% 39.7% 39.5% 38.2% YRC Worldwide. (YRCW) (7) 2.5% 1.4% 1.6% 1.5% 2.5%Group Average 20.2% 22.5% 29.1% 28.7% 27.3% Group Average 4.9% 3.0% 0.0% -0.6% 1.1%

Other Truck Other TruckRyder System Inc. (R) 57.1% 60.7% 63.5% 61.7% 59.9% Ryder System Inc. (R) 2.2% -5.8% -8.4% 2.3% 1.9%

Trucking Average (6) 22.1% 24.0% 28.6% 27.1% 25.2% Trucking Average (6) 3.4% 0.2% 0.9% 2.3% 2.6%

Footnotes:(1) Total operating expenses as a percentage of total revenue, including fuel surcharge.(2) Total Capital defined as total debt including off-balance-sheet debt plus total equity. Return on average total capital defined as net income + tax-affected interest / total capital.(3) Free cash flow (Cash from Operating Sources - Change in Working Capital - Net capex, prior to acquisitions, dividends, and share repurchases) / Enterprise Value. Historical market cap figure used in EV represents an average between high/low market cap ranges during each year.(4) Net debt ratio (%) defined as (debt + off-balance-sheet debt - cash) / (debt + off-balance-sheet debt - cash + equity). A net cash position is shown as a 0% net debt ratio.(5) Free Cash Flow (Cash from Operating Sources - Change in Working Capital - Net capex, prior to acquisitions, dividends, and share repurchases) / Total debt + Total leases + Total equity.(6) XPRSA is not Bear Stearns rated. All forward estimates are based on First Call consensus. Not included in any averages.(7) YRCW figures are pro forma including ROAD data and USFC data from 2002- 2006.


Addendum

Important Disclosures

Pacer International Inc. (PACR), UTi Worldwide Inc. (UTIW), HUB Group, Inc. (HUBG), EGL, Inc. (EAGL), Expeditors International of Washington, Inc. (EXPD), Universal Truckload Services (UACL), Forward Air Corporation (FWRD), C.H. Robinson Worldwide, Inc. (CHRW), Landstar System, Inc. (LSTR), J.B. Hunt Transport Services (JBHT), Werner Enterprises, Inc. (WERN), YRC Worldwide Inc. (YRCW), Arkansas Best Corporation (ABFS), U.S. Xpress Enterprises, Inc. (XPRSA), Covenant Transport, Inc. (CVTI), Heartland Express, Inc. (HTLD), Old Dominion Freight Lines, Inc. (ODFL), Swift Transportation, Inc. (SWFT), Saia, Inc. (SAIA): Bear, Stearns & Co. Inc. is a market maker in this company’s equity securities.

Genesee & Wyoming (GWR), Burlington Northern Santa Fe (BNI): Bear Stearns is affiliated with the specialist that makes a market in the common stock of this issuer, and such specialist may have a position (long or short) and may be on the opposite side of public orders in such common stock.

For important disclosure information regarding the companies in this report, please contact your registered representative at 1-800-999-2000, or write to Sandra Pallante, Equity Research Compliance, Bear, Stearns & Co. Inc., 383 Madison Avenue, New York, NY 10179.

Ratings for Stocks (vs. analyst coverage) Outperform (O) — Stock is projected to outperform analyst’s industry coverage universe over the next 12 months. Peer Perform (P) — Stock is projected to perform approximately in line with analyst’s industry coverage universe over the next 12 months. Underperform (U) — Stock is projected to underperform analyst’s industry coverage universe over the next 12 months.

Ratings for Sectors (vs. regional broader market index) Market Overweight (MO) — Expect the industry to perform better than the primary market index for the region (S&P 500 in the U.S.) over the next 12 months. Market Weight (MW) — Expect the industry to perform approximately in line with the primary market index for the region (S&P 500 in the U.S.) over the next 12 months. Market Underweight (MU) — Expect the industry to underperform the primary market index for the region (S&P 500 in the U.S.) over the next 12 months.

Bear, Stearns & Co. ratings distribution as of March 31, 2007 (% rated companies/% banking client in the last 12 months): Outperform (Buy): 41.7%/16.6% Peer Perform (Neutral): 49.4%/11.8% Underperform (Sell): 9.0%/7.2%

For individual coverage industry data, please contact your account executive or visit www.bearstearns.com.

Addendum

Important Disclosures

Analyst Certification The Research Analyst(s) who prepared the research report hereby certify that the views expressed in this research report accurately reflect the analyst(s) personal views about the subject companies and their securities. The Research Analyst(s) also certify that the Analyst(s) have not been, are not, and will not be receiving direct or indirect compensation for expressing the specific recommendation(s) or view(s) in this report. Edward M. Wolfe

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