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.