How Fred Smith Built FedEx Into A Giant

Forbes

5 hours ago

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Frederick Wallace Smith, the billionaire founder of FedEx, passed away at age 80 on Saturday.
Smith was a visionary who was early to spot the need for an all-freight airline to ship packages around the world—smartly betting that passenger jets could never handle all of the world's shipments. But his success was far from certain. When Forbes profiled Smith in March 1977, he was a 32-year-old entrepreneur still using small jets to ferry packages around the nation. He was hoping to win government approval to upgrade to large planes, and his private equity backers were seeming to grow impatient. 'Will [FedEx] go on to become a $1-billion company?' we asked.
Smith ended up taking FedEx public a year after our story, and grew it into a true giant over five decades at the helm. By the time Smith stepped down as CEO in 2022, at age 77, FedEx's market capitalization had surpassed $50 billion. operates in more than 220 countries and generated $87.7 billion in revenue in 2024. Smith remained executive chairman until his death. He's survived by his wife, Diane Smith, and ten children. He was worth an estimated $5.3 billion .
F REDERICK WALLACE SMITH has a favorite story. It goes like this: Three men are shipwrecked on a desert island. Suddenly an authoritative voice echoes from the sky: "In ten minutes a tidal wave will obliterate this island." Pandemonium ensues. One man falls on his knees and prays. The second falls on a native girl and a bottle of booze. The third fellow runs like crazy. "What do you think you're doing?" the terrible voice demands. Still running, the runner gasps: "I'm going to jump in the ocean and figure out how to breathe under water."
Surviving against impossible odds, breathing under water as it were, is a habit with 32-year-old Fred Smith, the son of a wealthy Tennessee entrepreneur who died when Fred was four years old. As a young boy in Memphis, Fred was crippled by a bone disease, learned to defend himself against bullies by swinging his crutch. Cured at age ten, he became an excellent football player, learned to fly at 15. In Vietnam, where he served two terms totaling 27 months, Smith won five medals. As a Marine infantry company commander, he almost miraculously survived a Vietcong ambush that cut down the men on either side of him. With his helmet, grenade and pistol gone, Smith retrieved the pistol to bring down his Vietcong attacker. "I was so frightened that I aimed at his head and hit his knee," he said. "To this day I don't understand how he missed me because they always aim for the company commander." On his second Vietnam tour, Smith served as a pilot of forward control planes, surviving over 200 ground-support missions.
All this was just a warmup for the brazenly bold adventure that Smith was about to pull off in the business world. Back from Vietnam, he was soon embarked on what has turned out to be the biggest venture-capital startup deal ever tried in the U.S. — Federal Express Corp.
"I got so sick of destruction and blowing things up — on people I had nothing against — that I came back determined to do something constructive," Smith recalls. At this point, he went back to an idea that had fascinated him while a student at Yale in the mid-Sixties.
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In an economics class, the professor agreed with the prevailing theory that air freight was the wave of the future and would be the primary source of revenue for the airlines. Smith wrote a paper disagreeing. No way, he said, because the passenger route patterns were wrong for freight and because costs would not come down with volume.
The only way air freight would work, Smith wrote, was through a whole new system that would reach out to smaller cities as well as big ones and be designed for packages, not people. His point was simple: Air freight would only work in a system designed specifically for it, not as a simple add-on to passenger service. The professor gave Smith's paper a low grade. Looking back, Smith quips: "I was a crummy student — like Winston Churchill."
Smith's idea, now reborn, was to start an all-freight airline that would fly primarily at night when the airports weren't congested. It would carry small, high-priority packages when speed of delivery was more important than cost. It would bring all the freight to a central point (Memphis), then disperse it to the ultimate destinations. That way his organization could free a full planeload for a smaller city, say Cedar Rapids, Iowa, because it would consolidate all Cedar Rapids shipments at the central depot.
This was not your ordinary $1-million or $2-million venture-capital startup. What Smith was proposing was the creation in one swoop of an entire nationwide system. "I was naïve," Smith says. "I believed a good concept would attract all the money. By the time I found it wasn't true, I had gone so far that I couldn't stop."
In the end, Smith raised an astounding $91 million to finance his untested idea. (To anyone who understands the venture-capital game, this is roughly equivalent to learning how to breathe under water.) First, he put in some $8 million of his own family's money. Then he got the enthusiastic backing of Manhattan-based, Rothschild-backed New Court Securities; New Court investments came to $5 million. With New Court behind him, Smith was able to put together a virtual Who's Who of venture capital, including General Dynamics, Heizer, Allstate Insurance, Prudential Insurance and Citicorp Venture Capital Ltd. However, Smith's problems were only beginning. The passenger airlines with a sideline in freight and the freight-only lines did not relish the prospect of additional competition. Long and haggling hearings before the Civil Aeronautics Board were in prospect. Luckily there was a loophole: Planes with a payload under 7,500 pounds did not need CAB permission to operate. Smith went ahead and assembled a fleet of small, 550-mile-per-hour French-built Falcons, constructed a main base at Memphis and began servicing 75 airports. Nightly Federal's Falcons would pick up packages at each of the airports, fly them to Memphis, then sort them out for immediate reshipment to other cities. At the other end, Federal trucks sped them to their destinations. With luck a shipment made by afternoon got delivered by the next noon. Operations started in April 1973.
Forbes named Fred Smith one of America's 100 greatest living business minds in 2017. Martin Schoeller for Forbes
In the beginning the losses were horrendous; in Federal's first 26 months they mounted to $29 million. The investors were getting antsy. Federal was falling far short of Smith's projections. There was talk of kicking him out. Smith's own sisters were suing him for misinvesting the family fortune. But Arthur Bass, Federal's operating man, stood by Smith. Bass, 44, a pilot and airline consultant, gradually improved the delivery schedules, and Federal began to come out of its tailspin. By last fiscal year, Federal's revenues hit $75 million, and the company was $3.6 million in the black. Seldom in history had a company gone from nothing to that size so swiftly. In this fiscal year, ending May 31, Federal should make $8 million on $110 million revenues.
Federal now counts 31,000 regular customers. The biggest is the U.S. Air Force, which uses Federal to ship the spare parts needed to keep its planes flying. Another major customer: International Business Machines Corp. Others include shippers of film, blood, organ transplants and drugs.
On heavily traveled passenger routes, such as New York to Chicago, Federal has plenty of competition from the major airlines. But it has virtually none in moving packages from smaller cities — from El Paso, Tex. to Rochester, N.Y., for example; or Jacksonville, Fla. to Cedar Rapids. Emery Air Freight, which ships via regular airlines, has been meeting some of Federal's competition by chartering its own planes in areas where airlines like Delta and Eastern have cut back less-traveled routes or night service, both crucial to air freight. But Emery cannot match Federal's nationwide air-delivery service. As a freight forwarder Emery is not permitted to operate its own planes and cannot reach the Cedar Rapids of America as quickly as Federal.
To meet the competition, Federal has evolved a two-tier pricing system. On routes where there is serious competition, Federal tries to undercut Emery by as much as 10%. It recoups on exclusive routes by charging higher rates — arguing that higher-priced service is better than poor service for these towns.
Are Smith's troubles over? Alas, no. At the moment, Federal is up against a serious ceiling on its capacity. The small Falcons can't always handle the available business on some routes, and, as a result, some packages must be held over. As a consequence, Federal's on-time delivery record has slipped from 96% to about 90%; now some couriers not only deliver packages but wait to see they get on the plane. The solution: bigger aircraft.
One day soon Federal will file with the CAB a request for permission to fly bigger planes, such as Boeing 727s, and extend service from the present 75 airports and 130 cities to 170 airports and 300 cities — virtually the entire country. On the busier routes, 727s would take over; a single one could replace five Falcons flying nightly wingtip to wingtip on the Los Angeles-Memphis route, for example. On the lighter routes, Federal would still use its Falcons. The savings from using bigger planes alone would increase profits by $9 million a year.
This will be Federal's second effort to obtain the right to use bigger craft. Last year the Senate passed a Smith-inspired bill that would permit Federal Express to rapidly institute larger all-cargo flights. The bill died in the House; it was bottled up in a subcommittee headed by Representative Glenn Anderson from Southern California, where opponent Flying Tiger Line is headquartered. This was a severe setback for Smith.
In addition to the problem with the CAB, Federal's balance sheet is in terrible shape. The big losses have cut equity capital to just $7.8 million, vs. $52.5 million debt. However, if CAB authorization is forthcoming, Federal's backers have expressed a willingness to help recapitalize the company. There are, moreover, plenty of second-hand Boeings around, and Federal could quickly assemble a fleet of big jets.
If it gets to that stage, the next step would be to take Federal public, not only to raise additional capital but to provide Federal's long-suffering backers with an opportunity to get some of their money out. Venture capitalists are not infinitely patient.
Maybe Federal will get the right to fly 727s. Maybe it won't. But it has come a long way already. As President Art Bass puts it: "The absolute worst that can happen to us now is that we will be a limited success. It is no longer possible, as it was a year ago, that we'll go down the tube."
Will Federal go on to become a $1-billion company? Will Fred Smith once again win a victory of mind over matter, of will over "reality"? Tune in next time for the answer.