What Freight Flows are telling us about the Economy and What should you be

doing?Donald Broughton Donald Broughton Chief Market Strategist, Managing Director, Senior Equity Analyst Chief Market Strategist, Managing Director, Senior Equity Analyst

June 25, 2014June 25, 2014

Why Slow Growth, No Growth?Why Slow Growth, No Growth?Constant Message of “Be Afraid”Increased RegulationDemographicsDisintermediationUnless you are in:

E-CommerceFrackingIntermodal

Executive SummaryDemand is accelerating, in all modes (Truck,

Rail, Airfreight).Capacity is getting tighter, in all modes

(broadly in Truck, specific areas of Rail, Airfreight).

Pricing power is surging, in all modes (broadly in Truck, specific areas of Rail, Airfreight).

Cap-Ex budgets are being actively revised up, in all modes.

Fracking! Fracking! Natural Gas - Price & Supply Natural Gas - Price & Supply

How plentiful is the supply?

Why is the price so low?Can it stay low for a long time?

Historical US Crude Oil Production – US, TX & ND

Drilling often produces Oil & Gas

Natural Gas Flaring Around 34%, of the natural gas produced, is

estimated to be flared in North Dakota annually

Terrible natural gas pricing and the rapid growth of the Bakken are key catalysts

Rapid build-out required in Natural Gas Midstream assets

Natural gas in North Dakota is liquids rich

Natural Gas Midstream Infrastructure Oneok is spending $1.8 Billion on three gas

plants and gathering systems Each plant will have 100 Mmcf/d capacity Flaring is estimated to drop to between 15-

20% of total production after the three plants are built, from 34% currently. National average is 7%

Real World ApplicationsReal World ApplicationsWho is testing & what are they finding?Major LTL’s Large over the road TL fleets

Who is adopting & in what formats? Local P&D fleets, Utilities, etc.

E-Commerce Increasingly Impactful

100

110

120

130

140

150

160

170

Combined FDX/UPS Ground Volumes4QMA Indexed to CYQ4'98

-10.0%

-8.0%

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

-30.0%

-20.0%

-10.0%

0.0%

10.0%

20.0%

30.0%

Airfreight vs. GDPGDP (right axis)

Domestic Airfreight (left axis)

International Airfreight (left axis)

Source: A4A, BEA, and Avondale Partners

Even The Strategery of Domestic Even The Strategery of Domestic Airfreight has Begun to ReboundAirfreight has Begun to Rebound

500,000

600,000

700,000

800,000

900,000

1,000,000

1,100,000

1,200,000

Revenue Ton Miles (000s)

U.S. Domestic Total Air Cargo Ton Miles(1989 - Present)

Source: A4A

Hope for Change Here…?Hope for Change Here…?

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000

Revenue Ton Miles (000s)

International Total Air Cargo Ton Miles(1989 - Present)

Source: A4A

-40.0%

-30.0%

-20.0%

-10.0%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%Asia Pacific Airfreight

Avondale

IATA

3 per. Mov. Avg. (Avondale)

Sources: Airport Authorities, IATA and Avondale Partners

-40.0%

-20.0%

0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

Avondale APAC Airfreight vs. SIA APAC Semiconductor Billings

Avondale APAC

SIA APAC Semis Billings

Sources: Airport Authorities, SIA and Avondale Partners

-30.0%

-20.0%

-10.0%

0.0%

10.0%

20.0%

30.0%

40.0%European AirfreightAvondale

IATA

3 per. Mov. Avg. (Avondale)

Sources: Airport Authorities, IATA and Avondale Partners

-8.0%

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

-20.0%

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%

20.0%

Rail Carloads vs. GDP

GDP (right axis)

Rail Carloads Ex Coal and Ag (left axis)

Source: American Association of Railroads, BEA, and Avondale Partners

180

200

220

240

260

280

300

320

340

360

ThousandsTotal Carloads Originatedby Class I U.S. Railroads

Source: AAR & Avondale Partners

95,000

105,000

115,000

125,000

135,000

145,000

155,000

165,000

Coal Carloads

Natural gas prices have risen markedly in recent weeks given very cold temperatures. We believe coal will continue to improve through Q1,

and are growing increasingly optimistic about utility inventory replenishment in all service territories.

Source: AAR & Avondale Partners

38,000

43,000

48,000

53,000

58,000

63,000

68,000 Chemical Carload Volume

8,000

10,000

12,000

14,000

16,000

18,000

20,000

22,000

24,000

26,000

5,000,000

10,000,000

15,000,000

20,000,000

25,000,000

30,000,000

35,000,000

Petroleum Carloads vs. North Dakota Oil Production

North Dakota Oil Production Petroleum Carloads

30,000

32,000

34,000

36,000

38,000

40,000

42,000

44,000

46,000

48,000

50,000

Chemicals (ex petroleum) Carloads

Source: AAR & Avondale Partners

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

0.0

5.0

10.0

15.0

20.0

25.0

Auto Carloads vs. Light Vehicle Sales

U.S. LVS SAAR Automotive CarloadsWe expect auto volume growth to moderate in the coming months

given higher inventory levels, though we do still expect this category to

grow above GDP.

Source: AAR, Ward's & Avondale Partners

10,000

12,000

14,000

16,000

18,000

20,000

22,000

24,000

26,000

28,000

30,000

0.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0

160.0

180.0

200.0

Construction Materials vs. Housing Starts

U.S. Unadjusted Monthly Housing Starts

Lumber, Forest, Stone, Clay, Glass Carloads

We expect the Canadian rail embargo on lumber toweigh on volumes here in the short-term

Source: AAR, CensusBureau& Avondale Partners

$0.00

$1.00

$2.00

$3.00

$4.00

$5.00

$6.00

100

125

150

175

200

225

250

275

ThousandsIntermodal vs. Diesel

US Intermodal Units Originated

Avg On-Highway Diesel (left axis)

Source: AAR, DOE & Avondale Partners

Not Just Trucks…Rail System Showing Strain

21

22

23

24

25

26

27

28

29BNSF Train Speeds - Overall

Rail CapEx Re-accelerating

$14,000

$14,500

$15,000

$15,500

$16,000

$16,500

$17,000

$17,500

$18,000

2011 2012 2013 2014E

Class I Rail Capex ($M)

Source: Company Filings and Avondale Partners estimates

+8%

Tonnage Poised to Continue Recovery?

90

95

100

105

110

115

120

125

130

135

140Monthly Truck Tonnage Index (2000 basis 100)

Seasonally Adjusted Data

Non-Seasonally Adjusted Data

Source: American Trucking Association and Avondale Partners LLC

Avondale's Projection

In Tonnage We TrustDomestic Truck Tonnage growing at 8%, but

loads were flat until mid 2013

-15.00%

-10.00%

-5.00%

0.00%

5.00%

10.00%

ATA Non-Seasonally Adjusted Truck Volumes3MMA YoY

Tonnage

Total Loads

Dry Van Loads

Source: American Trucking Association and Avondale Partners LLC

Trucking Capacity• Oldest fleet in history (avg age >6 yrs)• No additions to current fleets• Vulture acquisitions• Trades lead to smaller fleets• Regulations shrink capacity further

(CSA/EOBR’s/HOS)• Of remaining fleets, many not able to meet

modern supply chain needs• Failure rates starting to go up again• Transcore Spot Index and Cass TL Pricing Index

both establishing all time highs

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

Miles Per Tractor During EOBR Implementation

Source: Company filings and Avondale Partners estimates

Based on population of trucking companies which have already gone through the EOBR adoption process

Q1 is quarter in which we estimate at least 2/3 of fleet was outfitted with EOBRs

-10.0%

-8.0%

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

-4.0%

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%TL Industry Per Mile Analysis

OR (ex SWFT, fuel and gains) YoY Change - left axis

Cost per company mile (ex SWFT, fuel) - right axis

Total rate per mile (ex SWFT) -right axis

Source: Company filings and Avondale Partners estimates

Not Dead Yet…

$0.90

$1.40

$1.90

$2.40

$2.90

$3.40

$3.90

$4.40

0

200

400

600

800

1000

1200

Truc

king C

ompa

ny F

ailu

res

Total Trucking Failures (on a quarterly basis)vs. Average Retail Diesel Fuel Price (Including Taxes)

Total Trucking Failures

Avg Diesel Fuel Price

Source: Avondale Partners estimates and EIA

Aver

age R

etai

l Die

sel F

uel P

rice

($ p

er g

allo

n)

But Dying Soon?

$0.90

$1.40

$1.90

$2.40

$2.90

$3.40

$3.90

$4.40

-

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

50,000

Tota

l Tru

cks

Total Trucks of Companies Failing (on a quarterly basis)vs. Average Retail Diesel Fuel Price (Including Taxes)

Total # Trucks

Avg Diesel Fuel Price

`

Source: Avondale Partners estimates and EIA

Aver

age D

iese

l Fue

l ($

per G

allo

n, In

cludi

ng T

axes

)

Failures Increasing Alongside Demand…Unusual

90.0

95.0

100.0

105.0

110.0

115.0

120.0

125.0

130.0

135.0

140.0

0

5000

10000

15000

20000

25000

30000

35000

40000

45000

50000

ATA

Seas

onal

ly A

djus

ted

Truc

k To

nnag

e

Truc

ks R

emov

ed

Demand vs. Failures

Trucks Removed

ATA Seasonally Adjusted Truck Tonnage

Pricing vs. Demand: 1993-Present

80 85 90 95 100 105 110 115 120 125 130 135 140 145 150 155 160

60

70

80

90

100

110

120

130

Truc

kloa

d pe

r Mile

Pric

ing

Inde

x

ATA

Seas

onal

ly A

djus

ted

Truc

k To

nnag

e In

dex

Truckload Pricing vs. Truckload DemandTruckload Demand Only One Factor in Pricing

ATA SA Truck Tonnage Revenue/mile

Pricing has stayed positive in periods of declining demand as long as

capacity was also declining.

Pricing vs. Demand: 2005-Present

120

125

130

135

140

145

150

155

100

105

110

115

120

125

130

135

Truc

kloa

d pe

r Mile

Pric

ing

Inde

x

ATA

Seas

onal

ly A

djus

ted

Truc

k To

nnag

e In

dex

Truckload Pricing vs. Truckload DemandTruckload Demand Only One Factor in Pricing

ATA SA Truck Tonnage Revenue/mile

Pricinghad generally held or gone up in soft

demand...

Pricing vs. Capacity Reduction: 1998-Present

80

90

100

110

120

130

140

150

160

0

5000

10000

15000

20000

25000

30000

35000

40000

45000

50000

Truc

kloa

d pe

r Mile

Pric

ing

Inde

x

Truc

ks R

emov

ed

Truckload Pricing vs. Number of Trucks RemovedTruck Company Failures Typically Support Pricing When Demand is Weak

Trucks Removed

Revenue/mileIncreases in the rate of

capacity exiting the market have been

followed by strength in pricing -even when demand was weak.

Sources: ATAand Avondale Partners

Pricing vs. Capacity Reduction: 1998-2002Relationship Evident

90

92

94

96

98

100

102

104

106

108

110

0

5000

10000

15000

20000

25000

30000

35000

40000

45000

50000

Truc

kloa

d pe

r M

ile P

ricin

g In

dex

Truc

ks R

emov

ed

Truckload Pricing vs. Number of Trucks RemovedTruck Company Failures Typically Support Pricing When Demand is Weak

Trucks Removed

Revenue/mile

Sources: ATAand Avondale Partners

Pricing vs. Capacity Reduction: 2006 - PresentRelationship Evident

125

130

135

140

145

150

155

0

5000

10000

15000

20000

25000

30000

35000

40000

45000

50000

Truc

kloa

d pe

r Mile

Pric

ing

Inde

x

Truc

ks R

emov

ed

Truckload Pricing vs. Number of Trucks RemovedTruck Company Failures Typically Support Pricing When Demand is Weak

Trucks Removed

Revenue/mile

Spot Index vs. Capacity Reduction: 1998-Present

-100%

-50%

0%

50%

100%

150%

200%

250%

300%

0

5000

10000

15000

20000

25000

30000

35000

40000

45000

50000

YoY

Chan

ge in

Spo

t Ind

ex

Truc

ks R

emov

ed

Truckload Spot Index vs. Number of Trucks RemovedCompany Failures Typically Support Spot Market When Demand is Weak

Trucks Removed

YoY Change in Spot Index

Spot Index vs. Contract Pricing: 1999-Present

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

-75%

-55%

-35%

-15%

5%

25%

45%

65%

Truckload Spot Index vs. Contract PricingSpot Market Imbalances Tend to Lead Contract Pricing Directionally

YoY Change in Spot Index (left)

YoY Change in Contract Price (right)

“Predictions” for 2014 - 2016

Cheaters still cheat, guard your CSA scoreEOBR’s will have a big impact on capacity and

an even bigger impact on equipment visibilityDriver market gets even tougherTL pricing power of 4 to 6 %Margins for both the equipment provider and

the broker will continue to be under pressureConsolidation in transportation poised to

dramatically increaseHard, durable assets increasingly valuableFracking and natural gas woefully under-

estimated

What Freight Flows are telling us about the Economy and What should you be

doing?Donald Broughton Donald Broughton Chief Market Strategist, Managing Director, Senior Equity Analyst Chief Market Strategist, Managing Director, Senior Equity Analyst

June 25, 2014June 25, 2014