A version of this story originally appeared in the August 1978 issue of Memphis magazine.
Memphis International Airport. Midnight. The day’s last flights have long since departed into the darkness. The television sets over the ticket counters glow silently, indicating that only one flight — a Delta to Atlanta — will leave Memphis over the next six hours. The ticket counters are closed, the baggage claim belts still and empty. The terminal is deserted, except for a few men with mops and a sailor asleep against his duffel bag in an isolated corner.
But north across the main runway, a complex of buildings is bathed in light and buzzing with activity. Its parking lot is jammed with cars, and groups of men are scurrying back and forth across the runways, as if preparing for the arrival of the aliens from Close Encounters of the Third Kind.
On cue, lights begin to descend from the sky. A single small Falcon jet, lights blinking, zooms in for a landing. Within minutes another lands. And another. Then a 727 comes in. Then another Falcon. Over the next two hours, 70 planes of various shapes and sizes descend, nosing up to a huge football field-sized building like suckling pups. Small trucks hurry from plane to plane, towing freight vans. Workmen move small packages — the biggest about a 70-pound armful — from the purple and white planes to the vans, and the vans are then rushed into the building.
Inside, they are backed up to an enormous split-level conveyor belt. More than a hundred men and women pick the parcels from the vans, place them on the belt, and sort them into different bins along the line, to be towed back out to the planes. They work fast. Overhead, a giant basketball scoreboard clock is counting down the minutes. For three hours, the high-speed activity continues. Outside, the planes are being refueled, and by 3 a.m. they are reloaded, their engines roaring and their lights ablaze. For the next hour the sky is alive again with 727s and Falcon jets taking off.
Then all is quiet. By 4:30 a.m., the complex is deserted. By dawn, the airport terminal is beginning to stir again, observers now and then throwing an uninterested glance toward the silent complex across the main runway. And in Omaha, Seattle, Jacksonville, and nearly 70 other U.S. cities, purple and white jets, the words “Federal Express” in large letters along their sides, are coming in to land.
By the end of 1973 the company was serving more than 50 cities with its fleet of 25 French-made Falcon jets.
Photograph courtesy FedEx.
Six years ago, a young Memphian took an idea that the experts said would never work, added $4 million of the family fortune, somehow talked the big-money capitalists into investing an unprecedented $72 million, and started an enterprise which he hoped would revolutionize air freight. The enterprise lost $24 million in its first two years, and the experts snickered. Today, just four years later, the company is grossing more than $15 million a month and is worth more than $160 million — and the “experts” are scrambling to buy stock in it.
The young man was Frederick Wallace Smith, and his big idea became Federal Express, headquartered in that airport complex that bustles at midnight and slumbers at dawn. And at a time when most American industries are dominated by faceless conglomerates, Frederick Wallace Smith seems a throwback to the age when “oil” meant John D. Rockefeller and “automobile” meant Henry Ford.
Few modern companies have been influenced so much by the ideas and personality of one man. Yet “tycoon” is just about the last word that comes to mind when one meets young Mr. Smith. Still only 34 years old, he looks and acts more like a graduate student than a corporate executive, despite the streaks of gray which are beginning to appear in his hair.
But this youthful exuberance and informality are deceptive. Although his rise to economic stardom has had its share of miraculous elements, Smith’s origins hardly make him a Horatio Alger hero. He was born into the upper crust of Memphis society; his father, a successful bus and restaurant magnate, died a millionaire in 1948. The younger Smith attended Memphis University School and Yale University, from which he graduated in 1966 with a B.A. in economics and political science. After college he enlisted in the Marine Corps and spent two years in Vietnam, where he flew more than 200 combat missions and won both Bronze and Silver Stars.
Coming out of the service in 1970, Smith could easily have rested on his laurels and his family’s fortune. But the Vietnam veteran was not prepared for so passive a future. He needed fresh challenges as Don Quixote needed windmills. Aviation had always been Smith’s first love (he had gotten his pilot’s license when only 15), so he bought Little Rock Airmotive, an Arkansas firm that specialized in aircraft modifications and engine overhauls, and began to get his feet wet in the world of American business.
At this time the erstwhile Ivy Leaguer also began giving serious consideration to an idea which he had used as the theme for an economics research paper at Yale: the design of an efficient air cargo network which would make possible the rapid delivery of small parcels to all parts of the country. America had never had a satisfactory air freight system. Cargo needs had always been subordinated to the needs of the passenger market. For example, there was virtually no way to move parcels quickly between secondary cities such as Birmingham, Alabama, and Salt Lake City, Utah — places that were not connected by direct passenger routes. Moreover, nearly all passenger planes flew during daylight and evening hours, suspending operations between midnight and 7 a.m. This meant that overnight movement of packages was nearly impossible, even between those places that were well served by the commercial airlines.
Young Smith put forward what he today describes as “a systems approach to a systems problem.” Instead of using existing airlines and maintaining depots in a number of cities, he proposed the establishment of a single sorting facility which would serve the entire country. Every evening, planes from a hundred cities would bring parcels to this “hub.” Within a matter of hours they could return to home base, laden with packages bound for those destinations. Smith wanted a completely self-contained system, one which maintained its own delivery trucks and depots as well as airplanes. In this way, he could ensure that any package accepted for delivery on a particular evening would be delivered to an addressee in any other city in the network on the following morning.
Ironically, Smith’s term paper had received a barely passing grade at Yale. (“I was a crummy student,” he chuckles. “Just like Winston Churchill.”) But he realized, perhaps better than his professors, that the pattern of American economic development was changing rapidly, and creating tremendous demand for just the sort of system he envisaged. Since World War II, many companies had moved out of the traditional urban centers of the Northeast, and into smaller cities that were not well served by the passenger air network. At the same time, many new industries — producers of computers and electronic equipment, for example — depended upon rapid service to all parts of the country in order to attract and to maintain customers.
Smith did not have to look far to see just how crucial the time element had become in American industry. At his own aircraft conversion plant in Little Rock, delays in parts deliveries wasted man-hours and cost the company valuable contracts. “If a hospital in Texas needs a heart valve tomorrow,” he observed, “it needs it tomorrow.” Fred Smith resolved to be the man who would make these special deliveries possible.
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At the tender age of 28, Smith was ready to take his biggest gamble. Investing nearly all of his personal fortune of roughly $4 million, he established Federal Express, an all-cargo carrier which in 1972 received certification as an air taxi service from the Civil Aeronautics Board. This enabled the company to operate wherever it liked, as long as its planes did not carry payloads in excess of 7,500 pounds.
Smith chose Memphis as the site for his national sorting hub. This choice was based upon more than his own ties to the city. Its central geographic location was an obvious advantage, as was the fact that Memphis rarely experiences the sort of bad weather that interferes with flight operations. Perhaps most important was the fact that the city offered excellent airport facilities which were not overcrowded, allowing the company to do its own thing with minimal interference from, or inconvenience to, other airport users. Ned Cook, chairman of the Airport Authority as well as head of Cook Industries, gave Smith his wholehearted support, viewing the project as one that could bring both jobs and money into the city.
On the company’s first night of operations in 1973, the hub sorted only 18 packages.
The new company, however, was more than a hamburger franchise. The inception of such a nationwide operation required more capital than even a millionaire could provide. Money was needed to purchase airplanes and support equipment, and to maintain employees, as well as pickup and delivery facilities at several dozen airports.
Raising this kind of money is never an easy task. Smith was assisted by New Court Securities Corporation, a New York investment firm that specializes in getting new businesses off the ground. Potential investors were flown to Memphis and shown around the new comple beginning to take shape at the airport. There were many skeptics, but there were also a fair share of converts. By the end of the year Smith and New Court had managed to pull off what one local broker has called “the greatest sales feat of all time.”
A total of $72 million was secured, including contributions from General Dynamics, the Prudential and All-State Insurance Companies, and megabanks such as Chase-Manhattan and Citibank of New York. Never in American business history had a newly formed corporation raised such an enormous amount of venture capital. That Federal Express was able to gain the financial support of this country’s most hardheaded corporate investors says much about the personality of Frederick W. Smith.
“He struck me very favorably,” recalls one New York investor who first met the young Memphis entrepreneur during this period. “It was immediately obvious that his interest in this project was more than financial. He displayed a deep personal and intellectual commitment to the idea which he was trying to sell.”
But Smith had more going for him than zeal. Long before Federal Express had gone into operation, he had asked two separate research organizations to study his air freight idea to determine whether or not it was economically feasible. “Neither knew what the other was doing,” he recollects, “yet both surveys gave us the same answer: Federal Express could and would work.”
Armed with these results, Smith was able to convince the money men that his company was a worthwhile investment. “Fred had done his homework,” recalls Charles Lea of New Court, who served as liaison between Smith and potential investors during this period. “He had such a total grasp of the American air freight situation that he could outline the transportation needs of every major industry in every major city, right off the top of his head. He knew existing cargo routes backwards and forwards.”
Smith’s dynamism attracted executives as well as investors, and it was during this period that most of the present board of directors joined the company. Men of diverse backgrounds, nearly all had experience in the aviation industry, and could understand how his express air freight service might well become one of the greatest transport innovations of this era.
But in 1973 that potential had not been transformed into reality. No matter how strong, the convictions and patience of both investors and employees were destined to be tested severely over the next several years.
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Federal Express actually commenced operations on April 17, 1973, carrying the grand total of 18 packages. (“It was a pretty grim night,” Smith recalls today.) By the end of that year the company was serving more than 50 cities with its fleet of 25 French-made Falcon jets, converted from passenger to cargo aircraft according to design plans formulated by Smith himself.
But while Federal Express was now off the ground, it was by no means over the hump. A stroke of ill luck brought the Arab oil embargo at the very time when the fledgling company could least afford it. As fuel prices skyrocketed during 1973 and 1974, steady growth in revenue was unable to match increased operational costs. By mid-1974 Federal Express was losing over $1 million a month.
Reluctantly, the company was forced to return to its original investors for additional working capital. Most were understandably upset by the company’s performance; several refused to assist in the bail-out operation. Those who grudgingly put up the additional $11 million extracted several pounds of flesh from the company, in the form of high interest rates on their loans and hundreds of thousands of shares of company stock.
Prospects seemed bleak: “FEDERAL EXPRESS TAKES A NOSEDIVE,” read a Businessweek headline in July 1974. “What we were really up against,” Smith recalls today, “was the problem of recognition. We had to make our name a household word, to convince the air freight users that Federal Express could and would give them the overnight service it promised. Our marketing people were sure that they could do this, but we all knew it would take time.”
Perhaps the greatest danger during this period was that one of the better-known (and more solvent) air freight forwarders such as Emery Air Freight or Air Express would decide to launch its own rapid-delivery, small-parcel service, with a similar hub-and-spokes network. “At that stage we could have gotten our brains blown out,” concedes Smith today.
Fortunately for Federal Express, no direct competition appeared upon the horizon. As late as 1974, most air freight specialists still believed that Smith’s small-parcel operation would fold. Few thought that there were profits to be made by flying into places like Cedar Rapids, Iowa, and Manchester, New Hampshire. The whole hub notion defied traditional air freight logic.
Smith and his colleagues, however, never doubted their non-linear system. Granted, Federal Express planes flew extra air miles, but this duplication was more than compensated for by the efficient sorting system which kept packages moving, not sitting in depots and delivery trucks. Arthur Bass, an aviation consultant who joined the company at its formation and is now its second-ranking executive officer, described traditional air freight operations in graphic terms: “It was just as if everybody in a room wanted to talk to each other by telephone, and you had to lay a wire to each and every person. You would soon be entangled with wires. All we did was build a junction box in Memphis, so that nobody needed more than one wire.”
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By early 1975 the junction-box approach was beginning to yield dividends. The marketing division headed by Vincent Fagan had done its job so well that the hub was handling more than 12,000 packages nightly. It was clear that the public was beginning to place its trust — and its packages — in the hands of Federal Express. The company won over important corporate clients such as Exxon, DuPont, and Westinghouse, and secured a considerable amount of government business. Among its most significant commercial customers was Xerox, which in November 1975 agreed to maintain most of its computer parts inventory in a Memphis Parts Bank operated by Federal Express. “We have found Federal to be a very customer-oriented organization,” comments Robert Camp, manager for logistics and distribution at Xerox headquarters in Rochester, New York. “Their service on rush orders is excellent, with over 95 percent of deliveries made on time.”
Monthly operations first showed a profit in February 1975, and the company remained in the black for the rest of the year. By year’s end Federal Express was generating more than $7 million in revenue per month. But demand for its services was beginning to outstrip the capacity of its fleet of a few dozen small planes, now carrying nearly 20,000 parcels a night. Traffic was so heavy on some routes that the company petitioned the Civil Aeronautics Board for permission to use larger aircraft, planes that would make it possible for the company to expand services and reduce costs. But the CAB refused to allow an exception to its own regulations, which prohibited certified air taxi services such as Federal Express from operating with plane payloads of more than 7,500 pounds.
Undaunted, Fred Smith took his case to Capitol Hill. “Outdated, passenger-oriented regulations have restricted the development of all-cargo services really needed by air shippers,” testified Smith before the Senate Commerce Committee. “The waste caused by these archaic constraints has reached incredible proportions.”
Despite the logic of his arguments, however, Federal Express’ bid for exemption was opposed by both the established passenger airlines and air freight forwarders. Robert Prescott of Flying Tiger Air Freight was particularly scathing. “They [Federal Express] should stay on their motorcycles with their special delivery service, where they belong,” he fumed.
This air industry opposition was strong enough to prevent Federal Express from getting the right to fly bigger planes in 1976. By 1977, however, Smith’s persuasive powers had won support from powerful figures such as Senators Howard Baker and Ted Kennedy. Dozens of congressmen were wined and dined in Memphis, where they could see for themselves the efficiency and effectiveness of the Federal Express operation. Most were impressed. “I have seen free enterprise,” commented Rep. Dale Milford of Texas, “and it is alive and well in Memphis, Tennessee.”
With such powerful allies, Federal Express was better able to tackle its industry opponents; its position was also improved by growing public support for airline deregulation. The so-called Federal Express Bill — which gave freight-carrying air taxi services the right to fly bigger planes — breezed through both houses of Congress, and was signed into law by President Jimmy Carter in November of that year.
Within weeks of deregulation, Federal Express bought seven Boeing 727s and acquired options to purchase six more. With a cargo capacity five times that of the old Falcons, these new aircraft made possible a dramatic increase in the number of parcels that the company was able to handle. By the spring of 1978 more than 35,000 packages were being transported nightly. The addition of the 727s has freed smaller aircraft for other routes, making it possible for Federal Express to expand its spider-web network to the present total of 78 airports. In the fiscal year just ended, the company grossed $160 million and had profits of over $20 million. By 1980, Federal Express is expected to be grossing nearly $300 million, almost 20 times more than it earned during its first year of operations.
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Needless to say, times have never been better at Federal Express; revenues have increased at an annual rate of more than 50 percent since 1976. While this staggering growth cannot be maintained forever, it is clear that Fred Smith’s “motorcycle” company is fast becoming one of the giants of American air freight.
One measure of this success came this April, when the company decided to go public in order to raise capital to pay off some of its $55 million in outstanding debt. Roughly one million shares were offered at an initial price of $24 a share. The new issue took off faster than one of the company’s new 727s. Brokers agreed that it was the hottest new issue since Coors Brewery went public in 1975. “We had more demand by leaps and bounds than we had shares,” commented Ed Bennett of Dean, Witter, Reynolds, Inc.
At present, public investors control only about 26 percent of Federal Express stock. Much of the remainder is controlled by the original venture capitalists, who have made out like bandits as a result of the company’s success. Fred Smith himself has maintained a 15 percent interest in the company which he founded. At current market prices, his share of Federal Express is worth around $20 million.
Despite their success, neither Smith nor his executive colleagues, none of whom are over 50, seem ready to retire to the country club. Federal Express has grown so big that the company will be shifting to a multihub system in the near future. When operational, this multihub system will make it possible for the company to quadruple its carrying capacity. Already, the Federal Express route network connects more than 3,000 city pairs, more than any other airline in America.
If Federal Express has brought windfall profits to those most directly involved with its birth and growth, there’s no doubt who’s been the biggest winner: the city of Memphis. More than 2,100 people work at the sorting center and in the administrative offices at the airport, making Federal Express the city’s tenth largest employer. Wages are comparatively high (hub workers start at $4.25 an hour), benefits are excellent, and the company has never had a layoff. If and when other hubs are developed, company officials insist that Memphis will remain corporate headquarters for the entire operation.
Smith is quick to point out how important employee esprit de corps was during the dark days of 1973 and 1974, when paychecks were sometimes postdated and pilots occasionally used their own personal credit cards to purchase fuel for their aircraft. “Fred may have been carrying the ball,” recalls public relations director Bill Carroll, “but the rest of us were blocking like hell!”
Indeed, Federal Express employees seem remarkably loyal. When Federal Express went public in April, 220,000 shares of stock were reserved for employees at $22 a share, $2 below the initial market price. Demand was so high that shares had to be rationed, with no one receiving more than 328.
Besides providing employment, Federal Express has brought new wealth and fresh talent into a city strongly in need of both commodities. Many highly skilled employees — pilots, technicians, engineers, and executives — take home more than $25,000 per year. Much of this money is now finding its way into business ventures in all parts of the city.
Indeed, the success of Federal Express has had many snowball effects. Several national companies have followed Xerox’s lead and incorporated their inventory requirements at its Memphis Parts Banks. “Federal Express offers Memphis far more than the success story of a 50 percent yearly expansion rate,” notes Dr. Thomas Vietorisz in a recent survey compiled by Economic Research Associates of Dallas. “It is the seed around which a cluster of new activities can crystallize.”
All of which is very good news for Memphis, Federal Express, and Frederick W. Smith. Although a few competitors for its small-parcel express business have appeared on the economic horizon, the future of Federal Express seems extraordinarily bright. “It would take at least $300 million to take a shot at blowing Fred out of the water,” notes one local economist, “and even then the bullet would probably miss.”
Just the same, little boys and college business students should not dream too seriously of becoming the Fred Smiths of the next generation. The Federal Express saga must be kept in perspective. Such success stories have always been and probably always will be as rare as snowflakes in July. Despite the brilliance of his air freight idea, Smith needed wealth, contacts, and a considerable amount of luck to get Federal Express airborne. Money-making on this scale, unfortunately, is not for most of us.
This does not detract from what Fred Smith and Federal Express have achieved, however. “The development of this company,” observes Ben Ward of Morgan, Keegan and Company, “has been the greatest single economic event in Memphis since the Holiday Inn boom of the early Sixties.”
2008 photograph of Frederick W. Smtih by Brad Jones.
