Imagine your computer breaks down.
You’re a PC Master Race type of guy and it’s your most valuable possession: it’s custom built, ultra powerful, and on the bleeding edge of technology.
You check to see what’s wrong: it’s the processor, it’s burnt out from all your late-night Kpop sessions.
You pick up your phone and order a new one: after all, it costs only 2 thousand dollars.
Four hours later, you hear a knock on your door: it’s the FedEx guy, and he’s got your processor.
Just fifty years ago, this scenario would sound like it was straight out of a science fiction book.
Compare that to today, when we’re so used to fast transcontinental deliveries that we barely even think about them.
This week’s post is dedicated to one of the companies that made such deliveries possible: FedEx.
Now, the story of FedEx is really a story about airplanes.
You know how important airplanes were during the 20th century.
From dropping bombs on Nazis to supplying food to West Berlin, they completely changed the rules of warfare and logistics.
It wasn’t just the military that benefited: the commercial airline industry also took off in the decades after World War 2.
The 50s and 60s came to be known as the Golden Age of Flying, a time before the popularity of cramped seats and crying babies.
There was, however, one industry that lagged behind military aviation and commercial airlines: the courier industry.
That might seem strange.
After all, if planes can carry people, then why not packages too?
Well, the surprising answer is, that they carried both.
Before the 1970s, the airline industry was one of the most tightly regulated ones in the US.
The Civil Aeronautics Board had authority over all domestic air transport.
They could set fares, pick routes, and choose airlines, essentially acting as the federal equivalent of Agent Smith.
Regulation was so tight that most freight was moved not through specialized air carriers, but through the cargo hold of regular commercial aircraft.
Instead of being at the mercy of the CAB and having to pay for its own delivery fleet, the courier could just rent the space he needed on passenger flights.
This solution made sense economically, but it also meant deliveries would be very slow, especially to smaller cities with fewer flight routes.
This issue of cost versus speed was the topic of one Yale student’s economics essay.
His name is Fred Smith, and in his essay he outlined the basics of an overnight delivery service, the idea that would eventually give rise to FedEx.
His professor didn’t really like the paper though, and gave him a C on it.
A few years later, when he graduated from Yale in 1966, Fred joined the US Marine Corps.
He served two tours of duty in Vietnam, and he got to see first hand how the military handled their logistics.
When he returned from service in 1969, he immediately started working on his courier idea.
To make it happen, in the true spirit of the American dream, he got a small loan of 4 million dollars from his father’s trust fund.
Fred’s original plan was to use his courier service to deliver checks between the Federal Reserve banks.
Now, the way the checking system work is like this: I write you a check and you cash it in at your local bank.
They send the check to one of the Federal Reserve banks, where it gets validates.
From there, the check travels to my bank, where the payment is settled.
As you can imagine the process was very slow, sometimes taking as long as 10 days to complete.
Fred’ plan was to speed up the whole thing by delivering the checks overnight using his delivery fleet.
The Federal Reserve initially agreed to the idea, and so Fred bought two Falcon business jets to start things up.
He even decided to name his company Federal Express, and incorporated it on June 18th, 1971.
Things were looking good, until the Federal Reserve decided to pull out on their agreement.
Fred was stuck without a client, but he didn’t give up.
Instead, he raised 91 million dollars from venture capitalists.
He spent a big chunk of that money on marketing, and he finally launched his service in 1973 with a fleet of 14 Falcons that would fly between 25 cities.
It was a good start, but that very same year the Arab members of OPEC initiated an oil embargo.
The price of oil doubled over the next two years, and since jet fuel is made from refined oil products (kerosene, naphtha, gasoline), the early Federal Express saw their costs skyrocket.
By the start of 1975, they had lost more than 29 million dollars just from running their business.
Things were so bad that the company’s bank account in July amounted to less than 5 thousand dollars.
Fred knew he couldn’t pay for next week’s fuel costs ($24,000), so he did what any reasonable businessman would in his position: he flew to Las Vegas and played blackjack with the company’s last 5 grand.
It was a questionable move, but Fred ended up winning 27 thousand dollars, enough to keep Federal Express going for another week.
That week ended up being all that mattered, since by then Fred had managed to secure another loan from investors.
His strategy was a polar opposite of what the airlines and other couriers were doing.
While everyone was cutting costs and raising prices, he was still spending money on marketing.
Federal Express grew rapidly over the next two years, processing almost 20,000 packages a day in 1976.
By the end of 1977, they had 8 million dollars in profit, with over 31,000 regular customers: not just local firms, but big guys like IBM and the US Air Force.
Their success was in large part due to their focus on smaller cities.
While all the major airlines fought for market share along the big passenger routes, Federal Express were raking in millions with almost no competition.
A lot of that profit was spent on lobbying for deregulation.
Remember how strict the CAB was at the time?
Well, Federal Express and other air freight companies were pushing hard against it, and their efforts finally paid off in 1978 with the introduction of the Airline Deregulation Act.
This was a huge win for Federal Express.
It removed most of the CAB’s authority, as well as other old rules that hurt the industry: one of the regulations lifted, for example, was about the weight of cargo that could be transported.
Prior to the act, Federal Express planes were forbidden from carrying more than 7,500 pounds.
This was hugely ineffective, since they had to use a bunch of smaller aircraft instead of a single big one.
The Deregulation Act gave Federal Express the freedom to expand, and they did so rapidly.
By 1981 they were the largest air freight company in the US, and their fleet had increased to 32 Falcons, 38 Boeing 727s, and 5 Boeing 737s.
Other companies quickly caught on to how successful the Federal Express model was, and so they started copying it.
Outside the US, Germany’s Deutsche Post express service, now known as DHL, were also offering overnight freight.
To answer their competitors, Federal Express went on an buying spree, acquiring courier companies in the US, Britain, the Netherlands, and the United Arab Emirates.
By 1988 they were operating in 90 countries across all continents, and their overnight service revenue was almost double that of their closest competitor.
In 1994 Fred Smith finally gave up on the cumbersome Federal Express name, and replaced it with the more popular FedEx.
Today, FedEx is the third biggest air courier in the world: they operate 8 separate divisions and provide service around the globe.
Interestingly enough, even after the Airline Deregulation Act they remain one of the biggest lobbyists in the US.
They spent over 5 million dollars on lobbying just in the first three months of 2010.
Back in 2005 they donated 250 thousand dollars to support George Bush’s second inauguration.
Their latest move was in 2015, when they acquired TNT Express, one of their biggest European competitors, for the meager sum of 4.4 billion dollars.
UPS had also tried to acquire TNT, but the European Commission has blocked them on antitrust grounds.
Fred Smith is still the CEO of FedEx 45 years later, and you have to hand it to him, he’s done a pretty good job so far.
Let’s hope, for the sake of our PC Master Race guy, that he continues to do so in the future.
I hope you enjoyed FedEx’ story.
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