FedEx employs well over half a million people worldwide, has a market cap of over $40 billion
dollars, and delivers millions of packages every day in countries all over the world. But,
in the early 1970’s, this future shipping empire depended on one man,
$5,000, and a weekend in Las Vegas. This is the absolutely crazy story of FedEx.
Frederick Wallace Smith, founder of FedEx, did not get off to a good start in life. At
the age of four his father passed away, and for the first 10 years of his life, Fred was
afflicted with a type of childhood arthritis called Perthes disease that affected his hips,
temporarily causing a loss of blood flow and affecting his ability to walk. Thus,
Fred was forced to spend his early years in leg braces and use crutches
to get around. And Fred faced bullying as a child because of his condition.
However by his 10th birthday Fred had overcome this, and he not only was able to walk,
but within a few years began to acquire a love for flying - something that would
play a pivotal role in his future success.
But during high school, Fred started his first small business, The Ardent Record Company,
which he founded along with some friends. It started as a small recording studio in a garage,
but eventually grew into a larger recording company which actually still operates to
this day. However Fred left the company in 1962 to go to Yale University and study economics.
In his junior year, Fred wrote a term paper where he proposed a business idea that he
said could revolutionize the way goods were transported. Now at the time, packages were
shipped throughout the US in the cargo holds of commercial airliners, and thus delivery
schedules were at the mercy of the passenger airlines. This meant package delivery times
were much slower and less predictable. So for people who had something to send urgently - for
example medical supplies or legal documents, surely there had to be a better and faster way?
So Fred’s idea was to buy a fleet of jets, fly in the middle of the night whilst
airports weren’t busy with outgoing flights, then sort the packages at one central hub,
and deliver the packages from there by truck. Fred believed this idea of carrying small high priority
packages at night would mean that companies and individuals could have their packages
delivered in just 1 or 2 days, much faster than the current restrictive airline schedule.
Fred was excited about his idea and handed in his college paper - however he ended up only getting a
C grade from his economics professor, who told him that the idea wasn’t feasible and wouldn’t work.
Fred was obviously very deflated by this. But he was still convinced the idea had potential,
and wanted to pursue it and prove his professor wrong. However after graduating
from Yale in 1966 he would not get a chance to act on it. The Vietnam war had become
more intense and Fred's flying experience led him into three years in the U.S Marine Corps,
including two tours in Vietnam as a navigator. His life was undoubtedly in danger during this period,
and on one occasion he even survived a Viet Cong ambush.
However during Fred’s time in the military, two crucial things happened. Firstly,
he paid close attention to how the military handled both sending and receiving goods,
and noticed many ways their shipping logistics could be improved. There
were often times where supplies took too long to get from one place to another.
And secondly, in his spare moments in the barracks, Fred would always play blackjack - and
he very quickly got a reputation for being really good at it. Of course at the time,
Fred was just playing for fun, a brief distraction from the horrors of war. But little did Fred know
that this card game would completely change his life, and the entire future of shipping.
After leaving the Marines in 1970, and witnessing the destruction of war,
Fred said he was so “sick of destroying and blowing things up”,
and that he “came back determined to do something more constructive.”
So, once again thrusting himself into the unknown, at age 26,
Fred began working at his father-in-law’s business called Arkansas Aviation Sales,
and soon bought a controlling interest in the company.
The business was originally an aviation servicing and repair company, but Fred helped transform it
into more of an aircraft dealership, which significantly increased company profits.
But Fred was frustrated with how slowly things moved - shipping parts from one point to another
took too long, and the company was regularly struggling to get the parts they needed on time.
Fred was once again reminded of his idea from his economics paper that would enable shipments to be
delivered across the country within just 24 hours, as they wouldn’t be reliant on
passenger planes that happened to be flying to the destination the package was going.
So, Fred began planning out a system using both air and ground transportation, that would be
more efficient, and involve non-passenger planes taking the packages to a central sorting facility,
where they’d then be sent off on their own separate routes and delivered by trucks.
It was a hub and spoke system that he felt could truly revolutionize
shipping. But he concluded he needed 14 jets to begin his full operation.
Now Fred’s family were wealthy, as his father had been a successful businessman who’d run
several different enterprises, including a restaurant chain called Toddle House. And thus
before Fred’s dad had passed away he’d setup a trust fund for Fred. However, despite this,
Fred still had nowhere near enough money for the size of the operation he was planning.
So, Fred began pitching it to investors - and they were impressed with Fred’s knowledge
of the airline industry. It was clear Fred had put a lot of thought into this system,
and investors knew what a lucrative business this could be if he pulled it off - so by
1972 Fred managed to get around 91 million dollars in loans and venture capital funding
to build his revolutionary shipping business. Now Fred’s initial plan was actually to focus
on checks to start with. Of course nowadays we take for granted money being instantly
transferred all over the world, but back in the days when people sent checks as payments,
it was often a very long process. And so Fred contacted The Federal Reserve,
America’s central banking system, hoping they could strike up a partnership. At the time,
checks would often have a ten day turnaround time, whereas with Fred’s new shipping system
it could be a 24 hour process, allowing them to quickly deliver checks between the federal
reserve banks. The Fed seemed to like the idea as well and agreed to the deal, so Fred went
ahead and bought and outfitted a small fleet of light weight aircraft to fulfil the contract.
Landing The Fed as a client also inspired Fred’s choice of business name,
as he originally called the company: Federal Express.
Thus Fred’s shipping business was finally born, and the Federal Express logo was
proudly plastered on each plane, letterhead, business card, and bulletin board. Fred had
his first client, and a very big client at that, and so the future looked exciting.
And then, quite suddenly, The Federal Reserve backed out of the deal - meaning Fred was stuck
with the planes, bills, and the name Federal Express - despite no longer working with the Fed.
This was a massive setback, but Fred kept the name Federal Express anyway - in fact it
wouldn’t be until 1994 that he changed the company name to FedEx Corporation instead,
because most people simply referred to the company by the shortened nickname FedEx anyway.
But anyway, back in the early 70’s, since he was no longer going to be transporting
checks for The Federal Reserve, Fred turned his attention to shipping small
urgent packages for businesses and consumers. And on April 17th, 1973, FedEx officially began
operating. Fred chose to base the company in Memphis since it was fairly centrally located
in the US which made it an ideal hub for Fred’s plan. Plus, Memphis airport agreed to make certain
adjustments they needed for the business to operate smoothly, and had additional hangar
space readily available. Plus, the airport was rarely closed because of bad weather.
So, FedEx was in business - and on the first night of operating,
14 aircraft delivered 186 packages to 25 different US cities. And word
of this overnight delivery system quickly spread. The vision Fred had had back when
he wrote that economics paper all those years ago was finally now a reality.
But little did Fred know, a crisis was about to begin that would completely destroy the business.
Just as Fred’s business was beginning, so was the 1973 oil crisis. You see, because
of political tensions in the Middle East, The Organization of the Petroleum Exporting Countries,
known as OPEC, placed an oil embargo on countries they believed were supporting
Israel - which included the United States where Fred was operating his business. Since the US
heavily relied on oil from the middle east, they were one of the hardest hit countries,
and the oil prices quadrupled. And these rapidly rising fuel costs put FedEx in serious trouble.
Federal Express was just getting off the ground and the 14 Falcon air planes took
a lot of jet fuel. And because of the oil embargo, jet fuel was hitting historic high
prices with no potential downturn in sight. As a result, FedEx’s operating costs were
spiralling out of control, and the company was losing an estimated $30,000 per day.
Fred’s vision was literally running out of gas, and Federal Express’s
hopeful beginnings were losing altitude. It’s estimated in the first 26 months of business
Fred Smith saw a $29 million dollar loss. And understandably, investors were not so
keen on putting more money in since it was unclear when oil prices would drop again.
Fred became so desperate that he had to ask his loyal employees to hold on to their pay checks
and not cash them for as long as possible, in order to try and keep the company afloat. Fedex
pilots and drivers even started using their own credit cards to fuel up and get reimbursed later,
as they knew how little money the company had left. Fred himself completely stopped taking
any pay from the company because there wasn’t really any to take.
But it still wasn’t enough. The oil embargo and difficult economic
situation was all too much. The company got down to its last $5000 in its bank
account, and at that moment, Fred received a fuel bill for $24,000.
It was a Friday, and with $5,000 in the business bank account,
and a bill of $24,000 due by Monday, it seemed Federal Express was heading for bankruptcy.
In a desperate last ditch attempt to save the business,
Fred Smith tried to land a potential investment deal with General Dynamics
which could secure an emergency cash influx. He put his best suit on,
and went into the meeting believing this could be the turning point for his company. But the
deal fell through. Due to the volatility of the current situation and the need to be conservative,
General Dynamics rejected his pitch. After this denial for further business financing, it seemed
Fred could not afford to pay the fuel bill, and therefore this was the end of his business.
Sitting in an airport lounge on his way home from that meeting, Fred,
feeling utterly depressed, began to think about the future of his then 389 employees,
and how they were all going to lose their jobs. He thought about his dream, how close they were,
but how ultimately his economics professor was going to be proved right all along.
As he sat in an airport lounge in Chicago, he knew that once he landed back in Memphis he’d
have to break the bad news to his team. He’d have to admit defeat and perhaps pack up the
things in his office. After all, unless he could pay the fuel bill, the planes wouldn’t fly Monday.
For a moment, Fred felt completely defeated. It was over.
But then he started to give himself a pep talk…
This was Fred Smith who’d beat a childhood of physical pain and overcome his disease.
This was Fred smith who’d got his pilots license at age 15,
and help start a record company in a garage while in high school.
This was Fred Smith who’d graduated from Yale, and survived two tours in Vietnam.
In that moment Fred vowed that if the banks and investors wouldn’t
give him the money he needed to save the business, he’d get it himself.
Fred was due to start boarding his flight in a few minutes,
but at the last moment, he decided he wasn’t going back to Memphis.
Instead, Fred withdrew the final $5,000 in his company’s bank account,
and impulsively booked a new flight instead to a different destination.
Fred Smith was heading to Las Vegas.
Fred had decided, “If we’re going to go down, we’re going to go down with a fight.” - That’s
why he’d taken the company’s last $5,000 and decided he was going to gamble it,
and try to win enough money to pay FedEx’s bills.
So, the survival of FedEx came down to a weekend of gambling in Las Vegas.
Once Fred landed in Vegas he headed straight to the blackjack tables.
Now blackjack is a pretty simple game; your cards need to add up to a higher number than the dealer,
but not go over 21. However, in the 70’s there were some blackjack tables which
just used one deck of cards, which meant it was easier to count cards and gain an edge,
a skill Fred had developed in the marines from all the time he spent playing the game.
Of course, whilst this gave him a slight advantage, it was still a game reliant on
luck - and Fred’s luck definitely went both up and down. He’d win a couple of hands,
but then lose a couple, and so his winnings went up and down as well.
It was nerve-racking enough playing when there was just money on the line,
but this was his entire company on the line. His dream. And the jobs of all his employees.
But Fred remained focused, playing hand after hand, and at one point managed to get up to
$35,000. He felt unstoppable. But then he had a bad hand,
and then another. His confidence started to shake. His earnings were quickly falling.
But luckily, he stopped with just enough. By the end of the weekend Fred had successfully
turned Federal Express’ remaining balance of $5,000 into $27,000. And that was enough to
pay the looming fuel bill, and keep the company in the air for another week. So Fred quit while
he was ahead, deposited the cash in the business bank account, and headed home.
Now obviously $27,000 wasn’t going to save the company long-term,
but it bought himself and the company a little more time to come up with a plan.
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When Fred returned, his team at FedEx were shocked to learn that Fred had taken the
company’s final $5,000 and literally gambled it. But to be fair to Fred,
there had been logic to his decision, without paying their
fuel bill the company was doomed to fail, so he essentially felt he had nothing to lose.
And as it happened, the gamble quite literally paid off. It not only showed
Fred was willing to risk it all for the business, but it had bought Fred
more time to speak with investors. And sure enough, within a couple of weeks,
Fred had managed to get new investors to come on board, and put in $11 million dollars.
This resulted in their first profitable year in 1976.
Now, during the turbulent ‘70s most airlines and couriers were playing it very conservative and cut
their costs as much as possible. But Fred, ever the gambler, decided that whilst their competition
were being risk averse, it was the perfect time for FedEx to double down on their marketing and
go all in. So FedEx far outspent the competition with big advertising campaigns. This significantly
increased FedEx’s market share in the industry and improved the brand identity and recognition.
However, they weren't even attempting to take business from the big guys,
they were going after new territories and new markets. Federal Express initially kept its
focus on smaller cities rather than the large ones where airline cargo holds were still delivering
packages. This meant FedEx had much less competition and reached a lot of new customers.
By 1976, 19,000 parcels per day were being moved. And due to their ability to handle big
shipments so quickly, they soon attracted big customers like IBM and even the US air force.
Federal Express was expanding quickly. But very soon there was another roadblock
that Fred Smith and his team would have to deal with… the government.
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During the later half of the 1970’s logistic companies of all shapes and sizes were beginning
to pop up. Trucking was changing, shipyards were growing, and the transporting of packages by air
was on the rise. But something was stifling progress… Airline Transport Regulation.
Because of previous regulations secured by the major airlines,
they’d developed a monopoly on moving larger, weightier goods in their cargo
holds. They got paid to move people and they got paid to move packages, and they could move
a lot because the regulatory laws gave them precedent. And unlike companies such as FedEx,
the airlines didn’t have the same weight restrictions on their planes. For example,
FedEx could not legally carry more than 7,500 pounds per plane, which restricted them to only
small aircraft, which obviously hindered how much they could expand their business.
But if that restriction were to be lifted, the sky was the limit, and Fred could use
the largest planes possible to grow his business faster and expand his customer reach.
So, Fred Smith decided to make another bold move, and joined forces with his competitors - FedEx
and other small carriers banded together and vigorously lobbied the US government, and the then
President Jimmy Carter. FedEx spent several years lobbying congress for deregulation of air cargo.
And this shared desire for true and fair competition paid off. In 1978 President Carter
created and signed The Airline Deregulation Act, which removed the restrictive limits in place for
couriers, such as the restriction about how much weight could be on board a plane. This gave FedEx,
and many other similar carriers, the ability to fly as large of planes as they could afford,
and thus provide genuine competition to the big commercial airlines.
Fred Smith was now free to expand and grow to an almost limitless level.
With this new found freedom given by the Federal Government, Fred decided to take the company
public on the stock market - and in 1978 FedEx had its IPO on the New York stock exchange,
helping Fred raise even more money for the company. This influx of more money allowed
Fred to expand the company’s destination list, which meant building new hubs all
over the United States, along with buying more and bigger planes. Fred finally had the freedom,
the funding and the drive to take his company to a whole new level.
With more freedom, and more planes, the 1980s saw even more rapid expansion for FedEx.
In 1981, FedEx opened its first World Hub in Memphis and built the company up
to being the largest Air Freight Company in the U.S at that time.
Fred also expanded the company's technology as well, and it’s reported Fedex were the
first U.S. company to use computers to internally manage and track packages.
And by 1983 the financial security of FedEx was no longer in question. Sales
topped $1 Billion for the first time. And by 1984
they started intercontinental operations with shipping services to Europe and Asia.
Year after year during the 80s, FedEx stacked up new record breaking stats. And by the end
of the decade, they were operating in 90 countries across all continents.
They also bought international couriers such as Geico Express International and Flying
Tiger to help give them a stronger foothold in other countries too.
Another big development Fedex pioneered in the 90’s was allowing passengers to track
their parcels themselves online via the internet.
And by the end of the 90’s, Fedex was the number 1 overnight shipping service in the world.
However since FedEx’s business model was clearly successful,
more and more competition had also popped up.
So FedEx began buying other companies to expand their offerings further - for example in 2004
FedEx purchased the printing business Kinko’s for $2.4 billion. They also acquired logistics
companies, customs and duties companies, and many more businesses. This allowed FedEx to
vertically integrate and be a part of the full package sending experience,
and if you look at FedEx’s services today, you’ll see it’s so much more than just the
simple service of shipping packages from point A to point B like when the company first began.
As of today, FedEx’s number of planes, hubs, and destinations have grown to staggering numbers,
whilst Fred himself has become a multi-billionaire, as he’s still
the largest individual shareholder of FedEx. And since it’s reported FedEx has over 700
planes in their fleet, it’s actually one of the world’s largest airlines.
Not bad for a business idea that only got given a C grade.
However, if you want to see an even crazier underdog business success story,
you’re definitely gonna wanna watch the story of Nike - I think you’re gonna really enjoy
this one. Just click the thumbnail here and I’ll see you there in a second.