L-40-235

April 29, 1940

Mr. Thomas T. Railey, General Counsel Missouri Pacific Transportation Company . 2003 Missouri Pacific Building St. Louis, Missouri

Dear Sir:

Reference is made to your letter of May 23, 1939, and refer­ ence is also made to my letter of August 21, 1939 to Mr. Eckert in which I indicated without a formal opinion that the Missouri Pacific Transportation Company (hereinafter referred to as Transportation) was subject to the Railroad Retirement and Unemployment Insurance Acts. I am setting forth herein detailed reasons for that determination.

It is my opinion that Transportation is a company directly owned and controlled by a carrier by railroad subject to Part I of the Interstate Commerce Act and an employer under the two Acts, that Trans­ portation is also engaged in the operation of equipment and facilities and the performance of a service in connection with the transportation of passengers by railroad, within the meaning of Section 1(a) of the Acts and Section 202.07 of the Regulations, 4 Federal Register 1479 (April 7, 1939). Therefore, I conclude that Transportation is an employer under these Acts.

Since its incorporation on November 15, 1928 under the laws of the State of Delaware, Transportation's capital stock has been com­ pletely owned by the Missouri Pacific Railroad Company, Guy A. Thompson, now Trustee (hereinafter referred to as Railroad), a "carrier employer" under the Railroad Retirement and Unemployment Insurance Acts. There­ fore, Transportation has been directly owned and controlled 1 by a carrier employer within the meaning of Section 1(a) of the two Acts. In this connection it may be noted that certain principal officers of Transportation are officials of the Railroad. Thus P. J. Neff is Vice- President of Transportation and in charge of the passenger traffic of Railroad. H. C. Hale is in charge of the accounting department of Trans­ portation and assistant auditor of Railroad. Moreover, G. W. Marriott, Assistant to the Vice-President and General Manager of Transportation, was formerly Secretary to the Vice-President of Railroad. D. M. Boone, Dispatcher of Transportation, was previously employed by Railroad in its supply and accounting departments.

1 Regulations, Section 202.04, supra, provide that company is con trolled where there exists the powor to control. -2- Mr. Thomas T. Railey, General Counsel

The relation between Railroad and Transportation is made clearer by briefly examining the trend of the transportation industry since the War.1 For more than half a century the railroads had sup­ plied the primary means of transportation, but with the popularization of the motor car came a sharp whittling of income. The private auto­ mobile was cheaper and afforded greater freedom of travel. The rail­ roads' answer, in part, was the passenger bus. It could meet the "selling points" of the automobile. And so the bus era grew. In 1926 busses carried 42.2% as many passengers as did railroads, and in 1930, 71.9%.

The railroads' bus enterprise was not a haphazard, half­ hearted experiment. Investigation and planning led the roads to lay out their bus lines to serve two prime purposes. First, their opera­ tion was substituted for branch and local main line train service which the railroads could not possibly or advantageously abandon completely. Substantial operating economies were achieved. The bus operations were not necessarily in and of themselves profitable, but were satisfactory when consideration is given to the costs otherwise incurred. Bus and train schedules were coordinated. An incidental effect was reduction in the number of train stops. Second, supplementary operation was installed. It took shape in the supply of more frequent service between points served by trains and in the elimination of through trains. Thus the rails retained traffic by the feeder capacity of the bus and by the public's continued dealing with railroad organizations.

To return from the generic to the specific, let us examine the Railroad and Transportation. 2 In the midst of ever decreasing passenger revenue, Railroad decided on the bus solution.3 In this

1. See Coordination of Motor Transportation, 182 I.C.C. 263 (1932).

2. Detailed information has been secured not only from Transportation, but also from data in the files of the Interstate Commerce Commission, Docket No. MC 61616 with Sub. Numbers 1-10.

3. Consider Mr. Marriott*s statement in the Hearing re The Purchase of Dardanelle Transfer Company, November 25, 1936.

"Q,. Will you give us briefly a statement as to the background of the formation of the Missouri Pacific Transportation Company?

A. The decision of the Missouri Pacific Railroad to purchase the stock of the Missouri Pacific Transportation Company and to finance it was made following an intensive investigation by the officers of the Company in the year 1928 to determSne the effect of the bus industry in the territory of the Missouri Pacific on the earnings of the Missouri Pacific Railroad and its affiliated lines. (Continued on page 3) -3- Mr. Thomas T. Railey, General Counsel regard Mr. Neff’s statements are revealing. On direct examination in the application for Certificate of Public Convenience and Necessity between Natchez and New Orleans, before the Interstate Commerce Commis­ sion,1 June 8-9, 1936, at page 9 he testified:

”Q. Do you know what reason the Missouri Pacific Railroad Company had for purchasing the entire stock of the Missouri Pacific Transportation Company?

”A. Yes, sir, the reason for purchasing the Trans­ portation Company stock was decided upon after an investigation which I personally made as to effect of highway bus service along the Missouri Pacific Railroad, and the subsidiary lines, Gulf Coast Lines and the International Great Northern, following which it was decided that the Missouri Pacific Rail­ road Company and its affiliated lines could coordinate the service of their railroad and highway transporta­ tion to reduce unprofitable train service, and still give the territory served by the railroads necessary transportation facilities, and it was felt that it would be better for the railroads to own their subsid­ iary company, to operate bus service, than it would be to contract for that type of service with the car­ riers who were already occupying the field and who it was felt would not be sympathetic in all cases with the idea of coordination, which in the end is the cheapest type of combined rail and bus service. (Emphasis supplied)

3. (Continued from page 2)

The conclusion was reached due to a declining passenger rev­ enue, which was making it necessary to discontinue unprofitable trains, also for the reason that bus service could be substituted, in some instances, for such train service. Further, that the bus and train service could be coordinated to provide increased transportation facil­ ities and that such coordination could be more practicably handled by the Railroad Company owning its own subsidiary rather than through contract arrangements with independent bus companies, for the reason that independent bus companies were known to consider their own serv­ ice paramount, irrespective of any service performed by the Railroad, and that there would be great difficulty coordinating independent bus service with rail service. The results have proved the wisdom of the plan both to the railroad and the public, and have resulted in effi­ cient and adequate service to the public rather than duplicate or extravagant or wasteful service.” 1. See Interstate Commerce Commission Docket No. MC 61616 2. See Re Extension of Operations, Missouri Pacific Transportation Co., (Continued on page 4) -4- Mr. Thomas T. Railey, General Counsel

With that purpose in mind, Transportation's lines were laid out in the same territory as Railroad often paralleling or acting as feeders to Railroad. Transportation's growth was meteoric. In 1937 its routes covered 4948 miles and it conveyed 2,227,000 passengers. Its busses operated in Nebraska, Kansas, Missouri, Colorado, Illinois, Arkansas, Tennessee, Texas and Louisiana.

A comparison of the bus routes with concomitant parts of Railroad reveals a striking coordination. Every bus line contacts points served by Railroad. Many of the bus routes closely parallel Railroad's lines serving the identical communities; other busses run between the same termini as Railroad but do so by different route; some act as feeders and still others link Railroad points previously unattached.

Parallel operations resulted in a reduction of the number of stops of through trains. More frequent service was made possible between points which continued to be served by trains. Feeding and linking activities increased passenger convenience and Railroad's flexibility. In addition, substitutional service was inaugurated. In the answered questionnaire LQ-2 Transportation wrote:

"It ^/^Transportation/ operates its own Motor Coach equipment between the Points, as follows, in Substitution of Passenger train service on the lines of the Parent and Certain of its Affiliated rail lines and it recovers in Payment therefor, from the rail lines for this service, an amount which together with the revenues actually received from the transportation of Passengers, etc. - i3 estimated to cover the actual cost of Operating the Motor Coach Equipment in this service.

Substitution of Motor Coach Operations for Passenger Train Service -

Account St. Louis, Brownsville & Mexico Ry. Amount Received Effective 1955 through 1937

Harlingen to Mission, Texas 8-1-33 $ 6,567.12

Account Missouri Pacific Railroad Co.

Union to Lincoln, Nebr. 8-1-33 993.00 Atchison to St. Joseph, Mo. 8-1-33 3,071.96

2. (Continued from page 3) 6 M.C.C. 173, Feb. 25, 1938 wherein the Interstate Commerce Commission concluded at p. 174 "applicant was organized to coordinate the trans­ portation of passengers by motor vehicle with the rail service of the Missouri Pacific System." *< i «

-5- e Mr. Thomas T. Railey, General Counsel Poplar Bluff - Charleston, Mo. $ 6,102.00 Batesville to Newport, Ark. 6,788.96 Ft. Smith to Paris, Ark. 18,810.00 Hope to Nashville, Ark. 6,945.04 Wynne to Helena, Ark. 6,863.92 McGehee to Warren, Ark. 11,754.00 Montrose to Crossett, Ark. 10,122.00 Kansas City to Omaha, Nebr. 11,288.96 Sedalia to Kansas City, Mo. 15,261.08 McGehee to Little Rock, Ark. 5,100.04 Poplar Bluff, Mo. to Little Rock, Ark. 18,999.00 Little Rock to Gurdon, Ark. 6,825.08 Little Rock toHot Springs, Ark. 3,780.00 Eldon to Boonville, Mo. 3-18-34 6,372.51 Jefferson City to Bagnell, Mo. 8-1-33 18,800.00 157,877.55

"Fourth - It operates its own Motor Coach Equipment han­ dling passengers, baggage, mail and express for account of the Beaumont, Sour Lake and Western Ry., (an affiliated rail line) between the Rice Hotel, the Union Station and the City limits connection of the Affiliate in Houston, Texas.

"Passengers and Baggage are ticketed direct to end from the City of Houston on through tickets to point of destina­ tion, and are handled by Respondent to and from the above points in its own Motor Coaches.

"For this service Respondent is paid a flat rate per coach mile.

"Beaumont, Sour Lake & Western Railway

Effective Amount Received 1935 Through 1937______

Handling passengers, express and mail between McCarthy Ave., Eugene Street, Rice Hotel and Union Station 9-1-31 $ 28,946.83

"Fifth - Service of a similar character in substitution of rail service is also performed by Respondent for account of the St. Louis, Brownsville and Mexico Ry. (an affiliated rail line) between the points of Corpus Christi and Robstown, Texas.

"For this service Respondent is paid a flat rate of $500.00 per month. Respondent collects and retains all revenues and the % difference between the revenues accruing on the route and the $500.00 compensation is paid by the rail line to Respondent. > SL

-6- Mr. Thomas T. Railey, General Counsel

"St. Louis, Brownsville & Mexico Ry. Amount Received Effective 1935 through 1957

Handling mail, express, baggage & passengers, Corpus Christ! to Robstown, Texas 1-1-29 $ 14,163.12."

Bus replacement of the passenger train meant that operating economies were achieved, since substitution naturally occurred where train service was least profitable. The replaced portions of the road forged the links in the chain of Railroad’s system; hence sched­ ules were coordinated with connecting trains, and it is noteworthy that Transportation’s charges for these services were the actual costs of the operations. Thus by substitution and supplementation, Trans­ portation's activities were coordinated with Railroad to withstand the competition of the private automobile and the independent bus and to reduce the heavy operating costs of Railroad.

Thus far we have seen that the physical layout of Transpor­ tation was planned to supplement and substitute Railroad's lines. Additional management features completed the scheme.1 Transportation honors Railroad’s tickets.2 Correlation exists between the schedules of parent and subsidiary. The time-tables bear frequent references to connecting busses or rail cars.3 In fact the Railroad’s table sets out in full some bus schedules. An example of this phase of the coordination is revealed by T. D. Moss, Assistant Passenger Agent of Railroad, at the hearing before the Interstate Commerce Commission on November 25, 1936 re Transportation’s Purchase of Property of Dar- danelle Transfer Company, wherein he testified at page 108:4

1. In this regard it is significant that Transportation's bus opera­ tors are members of tho Brotherhood of Railroad Trainmen which organi­ zation on January 1, 1936 entered into an agreement with Transportation.

2. Tariff No. 160-1, I.C.C. #2905, issued by G. J. Maguire, Agent, March 18, 1936, lists over 300 stations on Railroad's lines for which Transportation may accept its parent's tickets.

3. Railroad's time-table bears tho following reference: "Address P. J. Noff, 1601 Missouri Pacific Building, St. Louis, for travel information if your city is not listed on pagos 49-50-51 of this folder." Transportation’s table boars this pertinent statement: "Additional Information - regarding the Motor Coach Service of this Company will be found in the current issues of System time-tables, a copy of which may be obtained from any Agent of this Company, or any Agent of the Missouri Pacific Lines."

4. Interstate Commerce Commission Docket No. MC 61616 -7- Mr. Thomas T. Railey, General Counsel

"* * * Q,. You are familiar with the proposed bus schedules that will be operated over the line from Fort Sbiith through Paris to Russellville, if the application before the Commission be approved?

A. Yes, sir.

ft. You are also familiar with the rail schedules into Fort Sbiith and Russellville and Little Rock?

A. Yes, sir.

ft. What have you to say as to possible competition of the rail and bus schedules in the event this application be approved, and the proposed bus schedules put into effect?

A. Our train 115 with these proposed bus schedules, arriving Fort Staith at 9:09 A.M., will connect with our 9;30 A.M. bus operation arriving Russellville 12:15 Noon. That will take care of all inter­ mediate points between Fort Smith and Russellville. At Russellville the proposed bus operation arriving at Russellville 12:15 will connect with Train 115 at Russellville for Little Rock and New Orleans.

ft. In that connection, Mr. Moss, this Train 115, as I under­ stand you, goes southeast to Little Rock. Is that correct?

A. Yes, sir.

ft. Does it make all intermediate point stops?

A. No, sir. Train 115 makes practically all stops between Russellville and Little Rock.

ft. So that the prospective passengers on the bus operation will have the election of either train service southeast of Little Rock, or bus service. Is that correct?

A. Yes, sir, and through passengers preferring rail service into Russellville will have through train service all the way to New Orleans. Nov/, there are some others here, too.

ft. Go right ahead, sir.

A. In addition to Train 115, this proposed bus schedule leav­ ing Russellville 5:59 P.M., arriving Fort Sbiith at 7:00 P.M., will connect with Train 116 leaving Fort Smith at 8:32 to Kansas City and points west. Also, Train 117 that arrives at Russellville from Kansas City at 5:57 A.M., will be coordinated v/ith our 6:50 A.M. schedule out of Russellville to Dardanelle, Subiaco and Paris.

ft. Those three trains you mentioned are in opposite directions? -8- Mr. Thomas T. Railey, General Counsel

A. Yes, sir.

Q, Are there any other schedules in opposite directions with which there will be connections at both Russellville and Fort Stnith?

A. We have at Fort Smith — there will be a connection with the Frisco to Paris, Texas, going down that line, but not at Russell­ ville.

Q. Well, the schedules then, that you have given, will give or provide one each way daily through these communities between Fort Smith and Russellville via bus, the coordinated rail-bus service at either end?

A. Yes, you take Train 116 from New Orleans, arrive at Russell­ ville at 5:07 P. M. That will give service as far as Paris, leaving Russellville at 8;00 P. M .

Q,. That’s an additional schedule?

A. Oh, yes, that’s an additional schedule.

Q,. Is it a fact that coal buyers come into the territory, who are desirous of using rail connections out of Russellville or Fort Smith?

A. Yes, sir; that’s true.

Q. But have not at the present time adequate service in the intermediate territory through Paris, to make the connections?

A. That is correct.

Q,. Is it the practice of the Missouri Pacific to sell tickets in connection with the bus company?

A. Yes, sir, Missouri Pacific rail tickets are honored by Missouri Pacific Transportation Company.

Q. So that a man buying a ticket in that fashion has the elec­ tion of the route to use, does he not?

A. Bus or rail, yes, sir.

Q. In addition to the schedules you have cited, there will be additional schedules performed for the convenience of the patrons along thi3 line?

A. Yes, sir, at the intermediate stations." (Emphasis supplied) . < > 4 k

-9- Mr. Thomas T. Railey, General Counsel

The purchase of the Dardanelle line which has been so neatly placed in Railroad’s system is typical of the entire pattern, but the scheme included more detail. Many of Transportation’s main depots were located at Railway’s stations such as at:

Brownsville, Texas Camden, Ark, Corpus Christ!, Texas Eldon, Mo. El Dorado, Ark. Ft. Scott, Kan. Harlingen, Texas Hot Springs, Ark. Lincoln, Neb. McGehee, Ark. Mission, Texas Palestine, Texas Pine Bluff, Ark.

In addition Railroad leased to Transportation motor-coach garages and filling stations at Poplar Bluff, Mo., McGohee, Ark., Atchison, Kansas, St. Louis, Mo., and Little Rock, Ark.

Railroad’s efforts in the bus field have not been in vain. As Mr. Neff explained at the Hearing (Supra, p. 4), page 9:

”0,. What have been the results of the operation, so far as the transportation company is concerned, having in mind the intensive study that you have referred to?

”A. Well, the results have been just what we estimated they would be in the beginning. Tho railroad company did make sub­ stantial savings in trains and mileage, and did fulfill the public requirements for transportation in thoso instances with the bus service.”

Starting on page 12 Mr. Neff testified more specifically:

”Q. What has been the result of your company’s bus business since its inception with respect to the effecting of economies for the Missouri Pacific Railroad?

”A. There has been a very substantial saving to the Missouri Pacific Railroad due to the substitution of bus service for unprofitable passenger train service, and an estimated annual saving to the railroad'from that source I would like to read. In the year 1929, $141,845.00; in the year 1930, $416,015.00; in the year 1931, $667,543.00; 1932, $710,002.00; 1933, $708,857.00; 1934, $643,951.00; 1935, $642,079.00. -10- Mr. Thomas T. Railey, General Counsel

"The total of those savings amounted to $3,930,293.00 or about 1.8 times the total investment of the Missouri Pacific Railroad Company in the Transportation Company.

”In other words, the Missouri Pacific Railroad has already been repaid 1.8 times in its train expense savings and savings for the investment of $2,275,000.00 which it now has in the Missouri Pacific Transportation Company, and those savings I have every reason to believe will con­ tinue in approximately the same or perhaps greater amounts in the future.

In addition to the substantial savings resulting from the bus service provided by Transportation, Railroad has been able to regain passenger traffic previously lost to the more flexible and less expensive bus mode of travel as well as to retain passenger traffic which might otherwise have been lost. Thus the Public Util­ ities Commission of Colorado held in Transportation’s Application for a Certificate of Public Convenience, February 26, 1935, applica­ tion #2231:

”The objection by the employee of the Missouri Pacific railroad is based upon the fact that they fear it would mean a reduction in steam train service with a consequent loss of employment for some of its mem­ bers. The record would indicate, however, that employ­ ment would be increased rather than diminished by the granting of the instant application.”

Railroad has been able to substitute busses for less profit­ able rail lines; it has been able to increase its service by more frequent runs between points; it has been able to retain and increase the number of feeder lines.

At this point it may be pertinent to indicate the economic tie-up more fully. On November 30, 1935 Transportation was indebted to Railroad for $5,614,623.22 whereas the bus company’s total assets were equal to $5,108,181.77. On November 30, 1937 Transportation owed Railroad $5,535,577.39 and its total assets were $5,248,177.52. On May 31, 1938 Transportation’s total assets were $4,309,864.38 and its liability to associated companies was $5,993,880.92. On Octo­ ber 31, 1939 Transportation owed associated companies $5,723,518.57,

1. These savings were the result of elimination of unprofitable train service by providing local bus transportation which led to faster train service and to the abandonment of unprofitable branch line opera­ tion. See Mr. Holmes’ argument in the Hearing before the Interstate Commerce Commission in Washington, December 1, 1936. -11- Mr. Thomas T. Railey, General Counsel whereas its total assets equalled $3,756,808. Railroad’s large investment in Transportation has been maintained despite continued deficits from the bus operations which roughly amounted to $2,275,000 from 1928 to 1935.

It is clear from all the foregoing data that in its bus operations, Transportation has been principally engaged in the opera­ tion of equipment and facilities and the performance of service in connection with the transportation of passengers by railroad, within the meaning of Section 1(a) of the Railroad Retirement and Unemploy­ ment Insurance Acts and Section 202.07 of the Regulations, 4 Federal Register 1479, April 7, 1939.1

That Transportation's situation is not unusual is evident from the fact that precedents abound. The Burlington Transportation Company, owned by the Chicago, Burlington and Quincy Railway, operated in the same territory as its parent in both a supplemental and substi­ tutional capacity. Although not very profitable in and of itself, its relation to the railroad rendered it valuable. The bus company honored the railroad tickets; time-tables were correlated; the parent guaran­ teed its subsidiary against loss for certain mileage; and large loans had been advanced by the railroad. The Burlington Transportation Com­ pany was held to be an employer within the Acts, General Counsel's Opinion No. 1939 R.R. 99, August 31, 1959. The Laurel Lino Transporta­ tion Company, owned by the Lackawanna and Wyoming Valley Railroad, acted in a feeder capacity, honored its parent's tickets and correlated its time-tables with Railroad. This bus company was also held to be an employer within the Acts, General Counsel's Opinion of August 31, 1939. See also my opinion on Monon Transportation Company, December 30, 1938, approved by the Board, B.O. 39-1; General Counsel's Opinion No. 1939 R.R. 46 on Reading Transportation Company, approved by the Board, B.O. 39-330; see my opinion re Bangor and Aroostook Transporta­ tion Company, March 31, 1939.

From its origin, Transportation has provided services of the utmost importance t6 Railroad's system of transportation. It has enabled the Railroad to replace certain train service which had proved too costly and inflexible with less expensive and more flexible bus service. The bus operations have supplemented the Railroad by way of feeders and parallel lines, and have been substituted for certain Rail­ road lines. The huge savings to Railroad constitute tangible evidence of the economic and functional relation between parent and subsidiary. Railroad has utilized two forms of transportation in an effort to pro­ vide a better and cheaper service than can be rendered by one alone.

1. The Missouri Pacific Freight Transport Company, organized April 5, 1938, superseded Transportation's position as a freight handler. The Freight Transport Company has been held an employer within the mean­ ing of the Acts. General Counsel's opinion of December 27, 1939. -12- Mr. Thomas T. Railey, General Counsel

I conclude therefore that the Missouri Pacific Transporta­ tion Company was on August 29, 1935 and thereafter has been an "employer” within the meaning of the Railroad Retirement and Unemploy­ ment Insurance Acts. Service to it is creditable accordingly under those Acts, and in accordance with the provisos of Sections 1(f) and 202 of the Act of June 24, 1937, service to it is creditable toward annuities from the date of incorporation (Nov. 15, 1928).

Very truly yours,

Lester P. Schoene General Counsel cc: Mr. M. Eckert Chief Accounting and Finance Officer Missouri Pacific Railroad Company Missouri Pacific Building St. Louis, Missouri