FROM THE CHAIRMAN

Dear Colleagues:

Welcome to Norfolk Southern's new monthly publication, NS Newsbreak.

In this first issue, you will find more information about some of the initiatives we are launching to improve our financial performance and to bring Norfolk Southern's resources more in line with the realities of today's markets.

We are redesigning our infrastructure to better accommodate traffic patterns and growth opportunities. Our goal is to reduce costs and improve service consistency by streamlining our network and reducing multiple handling of traffic. In addition, we are continuing to align our work force with our business levels. We are doing the same with our physical assets, including freight cars, facilities and track.

These decisions follow careful analysis by many of our people working on the "NS21" process improvement program.

As we move forward, NS Newsbreak, the Norfolk Southern Web site, MEMO, broadcast faxes and face-to-face meetings will help keep us all informed.

NS has a long track record of success. The improvements in our operations during the past year and our continuing leadership position in safety are testimony to the hard work and dedication of our people.

To meet the challenges ahead, we must adapt quickly to the pace and competitiveness of today's marketplace. I am confident that we will succeed and that the Thoroughbred team will again set new standards for our industry.

David R. Goode
Chairman, president
and chief executive officer

Changing markets drive
system rationalization

Norfolk Southern's traditional markets and traffic mix have changed significantly in the past 10 years. A declining export coal market and increasing intermodal traffic mean that NS must rethink its core system structure.

"That's the driving force behind the company's decision to resize its 21,800-mile network," said Jim McClellan, senior vice president Planning, Norfolk. The line rationalization is one component of an NS restructuring announced in January.

"As we've done many times in the past, we've taken a very close look at every mile of track we own," he said. "We analyzed diversity of commodities on routes, growth potential and proximity to our changing marketplace. It is clear to us that available resources must be focused on improving our core network.

"Our current route structure adds a level of complexity that is the enemy of reliability," he said. "We see network simplification, of which route rationalization is just one element, as an essential part of improving service reliability."

McClellan said 48 percent of NS' active stations account for only 1 percent of the company's rail revenue. A large number of low-volume interchange points also have been identified.

"We have to look at the way we schedule our trains to accommodate our changing marketplace," he said. "The effort now under way with Multimodal to develop a zero-based operating plan also addresses our need to improve service quality.

"I liken it to airlines," he said. "They have a core route structure that carries the bulk of their flights. They don't try to go everywhere, and planes are rather full when they do fly. We have to run our railroad more that way than the way we have in the past."

The company will identify about 4,000 miles of track that could be used differently. Among the possibilities are selling or leasing to short line railroads, having required track upgrades funded by the customers on low-density lines, and abandoning some lines.

"Low-density lines could be transferred to short line operators who can continue to provide the local rail service," said Steve Eisenach, director Strategic Planning, Norfolk. "Our goal is to keep the traffic moving on the main lines. That way everyone benefits."

Eisenach said a federal loan program recently made available to short line railroads to fund rail improvements could help them maintain lines over which they would operate.

"Now that we've identified these 4,000 miles of track, we'll focus on the best way to preserve rail service to that track," said Eisenach. He said it will take about two years to resize NS' system for maximum efficiency. In the end, NS and its customers will see many benefits.

McClellan summed up the benefits to NS and its customers, saying, "We'll be able to concentrate on our core system and provide better service to our customers. We'll also maintain our traffic from low density lines feeding into our core system, just as smaller airlines feed into major airline hubs."

Network redesign will improve
service reliability, reduce costs

With an expanded rail network and changing markets, Norfolk Southern has to change the way it conducts its business to remain competitive. That's why NS is redesigning its service network with the assistance of MultiModal Applied Systems.

"The service that MultiModal provides allows us to test various scenarios for our operations," said Mark Manion, vice president Transportation Services and Mechanical. "We can try 'what ifs' and see the effect on the entire network using MultiModal's software. That gives us a tremendous advantage in our ability to develop a successful plan. Our goal is to develop a plan that simplifies our operations, implement the plan and run our railroad according to it."

A cross-functional team with membership from Marketing, Transportation Planning, Car Distribution, Strategic Planning and field operations is developing the plan with input from regional and division transportation departments.

"We have to define our network routes, create consistent service with high reliability, develop a catalogue of services available and sell those services along those routes," said Dan Mazur, assistant vice president Strategic Planning. "We can't be all things to all people."

Work on the network plan began in early January. Blocking and train plans are being developed and tested. Mazur said actual plan implementation will start around the end of the second quarter 2001.

Flexibility will be a key to success once the plan is implemented, according to Tony Ingram, vice president Transportation - Operations.

"The plan will provide a common set of metrics for our operations," he said. "It will help us deal better with changing economic conditions and budget issues. And, most of all, it will bring consistent, reliable service to our customers."

NS21 enters new phase

During the last quarter of 2000, Norfolk Southern conducted an analysis of business processes in seven key areas of the company. Called NS21, the study identified methods to enhance NS performance at every level as the company enters the 21st century.

Teams of NS employees studied processes in Engineering, Claims, Car Management, Customer Facing activities, Real Estate, Purchasing and Mechanical. They also benchmarked NS business processes against companies inside and outside the transportation industry. Mercer Management Consulting facilitated the analysis.

"NS21 teams took a detailed look at how we conduct our business in these seven areas," said Kathryn McQuade, senior vice president Financial Planning and chairperson of the NS21 steering committee. "This, combined with their benchmarking efforts, showed us how hard we have to work to regain our leadership position in our own industry, as well as re-establish ourselves as a leader in U.S. industry."

Improvement recommendations were made to NS' management committee in early January.

NS21 has entered a new phase as a number of those recommendations are being implemented. Others will follow as appropriate.

Among the improvements to be implemented quickly are restructuring Casualty and Freight Claims processes and realigning car management activities. Related to car management is the planned disposition of 12,000 freight cars, a component of an NS restructuring announced in January.

"NS21 teams took an unbiased and impartial look at these areas, focusing on process, and the recommendations they've made will, over time, make NS a stronger, more dynamic company," said McQuade.

McQuade said more recommendations will be implemented as the year progresses.

Other members of the steering committee are Tom Mullenix, vice president Human Resources; Rob Martínez, vice president Marketing Services and International; Mark Manion, vice president Transportation Services and Mechanical; Steve Renken, senior vice president - Chief Information Officer; and John Friedmann, assistant to the chairman.

Claims processes strengthened

Norfolk Southern's Casualty and Freight Claims departments will see some changes as a result of NS21. Processes within the departments were analyzed and benchmarked against other railroads and several large claims organizations in the insurance industry. Recommendations were made to the management committee in early January.

Recommendations being implemented include a centralized claims management system that eliminates nonessential reports and allows more discretion by local agents and direct supervision in determining how to handle claims most effectively.

"Our review gave us a clear picture of what we do well and where we might be able to improve our casualty and freight claims processes," said Joe Folk, assistant vice president Planning and Analysis, Norfolk. Folk headed the NS21 Claims team with assistance from Marsh Company, the parent company of Mercer Management Consulting.

"We hope to be able to eliminate a lot of time-consuming paperwork," said Henry Light, vice president Law, Norfolk. He said that because claim agents have large territories, handling some claim reports by telephone or field supervision in some cases could reduce the agents' travel burden and costs.

The NS21 review also indicated that NS could rely more on electronic communication in the claims process. "We are sending large files to numerous places by U.S. mail and relying on letter correspondence," Folk said. "Large claims organizations we visited are moving quickly to electronic transmission and communication via the Internet. This allows agents to devote more time to claims investigation and settlement and less on paperwork."

NS' freight claims processes also were studied by the team. "We're implementing recommendations that include selective increases in staff to work through a backlog of claims, and increasing authority levels for supervisory personnel to settle claims, all of which will benefit our customers," said Paul Davis, director Damage Prevention, Atlanta.

"These improvements will give both our casualty claim and freight claim agents more latitude in decision-making and enhance communication within their departments," said Folk. "That will benefit everyone."

Car management team
recommends realignment

One area of study under the NS21 banner was Norfolk Southern's car management processes. Team members Fred Ehlers, Transportation Services; David Lawson, MODALGISTICS(sm); Alan Shaw, Coal Business group; and John Turbyfill, Information Technology, led the effort to analyze all the processes associated with car management, benchmark against other companies and make recommendations for improving the way NS manages its freight car fleet.

Among the recommendations being implemented are combining some transportation marketing functions, standardizing performance measurements for Coal and Merchandise services, disposing of 12,000 surplus freight cars, initiating Web-based car ordering modules and continuing development and implementation of decision support tools for fleet management.

"Car management decision-making was not as well coordinated as it must be," said Ehlers, director Transportation Planning and Operations, Atlanta. "It resided either in Transportation or Marketing, and sometimes their goals were at odds."

Combining Coal Marketing and Coal Transportation into the Coal Business group was a recommendation of the team implemented Feb. 1.

"Combining Coal Marketing and Coal Transportation into the Coal Business group gives us a common focus and enables us to provide a much better product to our customers," said Bill Fox, senior vice president Coal Marketing, Roanoke, who leads the group. "NS also benefits by improved internal communications and coal car fleet management synergies."

"Communication and cooperation among all those who deal with coal car movements is enhanced," said Kathryn McQuade, senior vice president Financial Planning. "By establishing clear, common goals and performance measures that apply to everyone in the group, we can speak to the customer with one voice and develop service that is reliable and profitable."

Another recommendation being implemented is moving Merchandise Marketing's Equipment Marketing group into the company's Car Distribution Unit, aligning people with similar accountabilities to better manage the same assets.

"This will bring the same kind of consistency we expect to see with the reorganization of the coal group," said Lawson. "Our goals and performance measures will be complementary, not competitive. At the end of the day, NS wins, but most importantly, our customers win."

Another team recommendation being implemented is the disposition of 12,000 surplus freight cars. All car types are included in the surplus.

"By getting rid of the surplus, we can concentrate on maintaining and managing a fleet that sees plenty of use," said Mark Manion, vice president Transportation Services and Mechanical.

Additional enhancements to car management will include Web-based car ordering capabilities and enhanced decision-support tools, both currently in development.

2001 Railroad Retirement and
Survivors' Improvement Act News

A coalition of railroads and rail labor organizations has renewed its effort to see the Railroad Retirement and Survivors' Improvement Act pass both houses during this session of Congress.

With the new Congress comes new committee chairmen and committee members, so the coalition is working to educate them, and key members of the Bush administration, about the merits of the proposal.

"We're making the rounds on the Hill to remind everyone of the importance of this bill to railroad employees and their families," said James A. Hixon, senior vice president Administration, Norfolk.

Hixon said the bill is the same as last year's HR 4844 that would have reduced the age to receive a full annuity from 62 to 60 with 30 years of service; improved surviving spouse benefits; reduced vesting from 10 to five years; reduced artificial caps on benefits that penalize long-term employees who leave the industry; reduced carrier taxes by an equivalent amount; and required carriers to ensure that the Railroad Retirement Account maintains sufficient fund-to-benefit ratios in the future by agreeing to automatic future tax hikes if necessary.

As with last year's agreement, the carriers agreed to provide retiree health insurance at age 60 instead of the current 61 and annually increase the existing $75,000 cap on benefits by the rate of medical inflation once the bill is enacted. Under the agreement, Railroad Retirement funds may be prudently invested in non-governmental securities.

"We expect to see a lot more activity on the bill after March 1," said Hixon. "When we have a tentative timetable for its consideration, we'll be asking railroad employees and retirees to help as they did last year by sending letters of support to their congressional representatives. Until then, we'll keep everyone informed of our progress."