FedEx at Forty: Fred Smith's Million Dollar Dream Machine

Excerpts from Memphis magazine's 1978 cover story on FedEx.

photograph by Steve Davis

These days it’s fascinating to read the early media coverage of FedEx. Reporters tended to call the company “Federal” and tried to explain the reasoning behind the “hub-and-spoke” system that seems so logical now. A June 1973 Commercial Appeal article put it this way: “Each night, Federal Express’ jet fleet will pick up packages at more than 100 cities around the country and fly them into Memphis to the central sorting facility. There, a computer-controlled apparatus will sort the packages at the rate of 10,000 per hour. Seventy minutes after arriving, all packages can be enroute to their destination aboard the same planes that brought them to Memphis.”

By the end of 1973, newspapers reported that the company’s “mini-freighters” — referring to the sleek Falcon jets — were serving 31 major markets. Within 12 months, those markets would expand to 124.

Employment and expansion were zooming along as fast as the jets. “Beginning with 14 employees a year ago, Federal Express now employs 750,” said another newspaper article from 1973, which also alluded to the firm’s new $3 million sorting center (the word “Hub” had yet to catch on with local reporters). “Total employment by the end of next year is predicted to be 1,200.” Within a few years, shipments by the “little package company” topped 3.5 million, and FedEx customers numbered more than 20,000.

In 1978, both Federal Express Corporation and Memphis magazine were in their infancy. FedEx was 5 years old, this publication barely 2. In August of that year assistant editor Kenneth Neill (now this magazine’s editor and publisher) penned a cover story, “Fred Smith’s Million Dollar Dream Machine.” So instead of re-inventing the wheel — or the hub — to tell the story, we’ll use excerpts to convey key events in the early days of FedEx:



Six years ago, Fred Smith 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 into an idea-that-would-never work, and started an enterprise which he hoped would revolutionize air freight.”



America 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 and Salt Lake City — places that were not connected by direct passenger routes.”



Smith wanted a completely self-con-
tained system, one which maintained its own delivery trucks and depots and 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.”



The whole hub notion defied
 traditional air freight logic. How could it make sense to send parcels from Los Angeles to Seattle by way of Memphis? Smith and his colleagues never doubted their non-linear system. Arthur Bass, an aviation consultant who joined the company at its formation, described traditional air-freight operations: ‘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 in wires. All we did was build a junction box in Memphis, so that nobody needed more than one wire.’”




August 1978


The inception of such a nation-
wide 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. Smith was assisted by New Court Securities Corporation, a New York investment firm which specializes in getting new businesses off the ground. There were many skeptics, but a fair share of converts. By the end of the year, Smith and New Court had managed to pull off what one local broker called “the greatest sales feat of all time.”



A total of $72 million worth of 
investments was secured, including contributions from General Dynamics, the Prudential and Allstate 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.”



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. Both surveys gave us the same answer: Federal Express could and should work.”



Federal Express actually com-
menced operations on April 17, 1973, carrying a grand total of 186 packages. ‘It was a pretty grim night,’ Smith recalled.”



By the end of that year [1973] the
 company was serving more than 50 cities with its fleet of French-made Falcon jets, converted from passenger to cargo according to design plans drawn up by Smith himself.”



By mid-1974, the steady growth in
 revenue was unable to match the increased operational costs. ‘What we were really up against,’ Smith recalls, ‘was the problem of recognition. We had to make our name a household word, to convince air-freight users that Federal Express could and would give them the overnight service it promised.’”



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.’”



Perhaps the greatest danger
 during this period was that one of the better-known air-freight forwarders such as Emery 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.”



By early 1976, demand for FedEx
 services was beginning to outstrip the capacity of its small planes. The company petitioned the Civil Aeronautics Board for permission to use larger aircraft. But the CAB, citing regulations  dating back to 1958, prohibited air-taxi services [which was how FedEx was classified] from operating with plane payloads of more than 7,500 pounds .



Undaunted, Fred Smith took his
 case to Capitol Hill. Dozens of congressmen were wined and dined in Memphis, where they could see for themselves the efficiency and effectiveness of the Federal Express operation. ‘I have seen free enterprise,’ commented Rep. Dale Milford of Texas, ‘and it is alive and well in Memphis, Tennessee.’”



In 1977, the Federal Express Bill, which gave air-taxi services the right to fly bigger planes, breezed though Congress. Federal Express bought seven Boeing 727s, with a cargo capacity five times that of the old Falcons. Profits soared. By 1980, Federal Express is expected to gross more than $300 million — 20 times more than its first year of operations.



Although a few competitors for 
its small-parcel business have appeared on the economic horizon, the future 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.’”

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