FedEx Corporation History

Company Perspectives:

FedEx understands there is no such thing as a "glide path" to sustained profitability and market leadership in our industry. Instead, we're continually applying new information technologies, strategic management initiatives and aggressive marketing strategies to better connect with customers, reduce operating costs and improve profitability.

Company History:

FedEx Corporation specializes in overnight delivery of high-priority packages, documents, and heavy freight. The company created the overnight air-express industry virtually singlehandedly in the 1970s; its success was such that by the 1990s it faced the sincerest form of flattery: increasing competition from rival carriers. However, FedEx's continued mastery of logistics and its ability to track packages during the shipping process has enabled it to retain its leadership role in the express air cargo industry, as well as act as a moving warehouse for numerous corporate and individual customers. It operates in 211 countries, and serves all of the United States, providing 24-to-48-hour delivery of valuable, time-sensitive cargo to any destination worldwide.

FedEx was founded as Federal Express Corporation in 1971, by 28-year-old Memphis, Tennessee, native Frederick W. Smith. Smith, a former Marine pilot, originally outlined his idea for an overnight delivery service in a term paper he wrote for a Yale University economics class. He felt that air freight had different requirements than air passenger service and that a company specializing in air freight rather than making it an add-on to passenger service would find a lucrative business niche. Speed was more important than cost, in Smith's view, and access to smaller cities was essential. His strategies included shipping all packages through a single hub and building a private fleet of aircraft. Company-owned planes would free the service from commercial-airline schedules and shipping regulations, while a single hub would permit the tight control that got packages to their destinations overnight. In making his dream a reality, Smith selected Memphis as his hub: it was centrally located and despite inclement weather its modern airport rarely closed.

Term Paper Topic Becomes Reality, 1973

Smith supplemented a $4 million inheritance from his father with $91 million in venture capital to get his idea off the ground. In 1973 FedEx began service in 25 cities with a fleet of 14 Dassault Falcon aircraft and 389 employees. The planes, which were relatively small in size, collected packages from airports every night and brought them to Memphis, where they were immediately sorted. They were then flown to airports close to their destination and delivered by FedEx trucks the following morning.

Smith's idea was costly indeed; it required creating an entire system before the company's first day of business. FedEx added to these start-up costs by beginning expensive advertising and direct-mail campaigns in 1975. The company lost $29 million in its first 26 months of operation: in 1975 alone it gained $43.5 million in sales against an $11.5 million loss. Smith's investors considered removing him from the helm of the fledgling company, but company president Arthur Bass backed the young founder. Bass improved delivery schedules and FedEx's volume climbed to the point where it was profitable: By late 1976 the company was carrying an average of 19,000 packages a night, and by year's end it was $3.6 million in the black.

In 1977 company profits hit $8 million on sales of $110 million. The company had 31,000 regular customers, including such giants as IBM and the U.S. Air Force, which used it to ship spare parts. It also shipped blood, organs for transplant, drugs, and other items requiring swift transport. FedEx serviced 75 airports and 130 cities. While the major airlines gave the company stiff competition on heavily traveled passenger routes, there was virtually no competition on routes between smaller cities. Its principal competitor, Emery Air Freight, used commercial airlines to ship packages, giving FedEx an important time advantage.

Airline Deregulation in 1977 Fuels Growth

Deregulation of the airline industry in 1977 gave the still-struggling company an important boost. At the time of FedEx's startup, the U.S. airline industry had been subject to tight federal regulation. In fact, the company had only managed to get into business through an exemption that allowed any company to enter the common carrier business if its payloads were under 7,500 pounds. These self-same regulations, written in 1938 to protect passenger airlines, would ultimately hold back FedEx's growth. The company was forced to fly up to eight small Falcon jets side-by-side to bigger markets when use of one larger jet would have saved money. Smith led a legislative fight to end regulation, and a bill doing so was passed in 1977. Deregulation meant the company could fly anywhere in the United States anytime, and use larger aircraft like 727s, and later, DC-10s. FedEx bought a fleet of used 727-1OOCs, using its Falcons to expand into small- and medium-sized markets.

In 1978, with its prospects looking solid, FedEx went public, selling its first shares on the New York Stock Exchange. The move raised needed capital and gave the company's backers a chance to gain back a portion of their initial investment. Profits for 1979 were $21.4 million on sales of $258.5 million. By late 1980 FedEx was well established and growing at about 40 percent a year. It had 6,700 employees and flew 65,000 packages a night to 89 cities across the United States. Its fleet included 32 Falcons, 15 727s, and five 737s.

Explosive growth continued as a tidal wave of businesses switched to overnight service. Miniaturization of consumer electronics and scientific instruments translated into increasing numbers of small, valuable packages needing express shipment. In addition, many U.S. companies were shifting to just-in-time inventories as a way to keep prices down, lessen quality-control problems, and cut costs. Consequently, these companies often needed emergency shipment of goods and parts, and FedEx was there to provide that much-needed service. It soon began billing itself as a "500-mile-an-hour warehouse."

Competition and Price Wars During the 1980s

A decline in the reliability of the U.S. Postal Service caused even more companies to switch to FedEx for important packages. Courier-Paks became the fastest growing part of the company's business, accounting for about 40 percent of revenue. In 1980 Courier-Paks&mdash-velopes, boxes, or tubes used for important documents, photographs, blueprints, and other items--cost the consumer $17 but guaranteed overnight delivery. By mid-1980 the company had eight $24 million DC-10s on order or option from Continental Airlines, each capable of carrying 100,000 pounds of small packages. It had also acquired 23 additional used 727s, and operated 2,000 delivery vans.

In mid-1981 FedEx announced a new product that would bring it into direct competition with the U.S. Postal Service (USPS) for the first time: the overnight letter. The document-size cardboard envelope, which could contain up to two ounces, would be delivered overnight for $9.50 at that time.

By 1981 Federal Express had the largest sales of any U.S. air freight company, unseating competitors like Emery, Airborne Freight, and Purolator Courier, which had gone into business about two decades earlier. Unlike FedEx, competitors shipped packages of all sizes using regularly scheduled airlines, and didn't stress speed; FedEx's narrowly focused, speed-oriented service won over many of its competitor's customers. To compete, Emery copied FedEx's strategy, buying its own planes, opening a small-package sorting center, and pushing overnight delivery. Airborne also entered the small-package air express business. United Parcel Service of America (UPS), the leading package-shipper by truck, moved into the air-express business in 1981. The USPS began heavily marketing its own overnight-mail service after FedEx's Courier-Pak began eating into its revenues. The Postal Service's overnight mail was about half the price of FedEx's, but was not as accessible in many locations.

While FedEx was the leader in the U.S. overnight package-delivery industry, DHL Worldwide Courier Express Network built a similar service overseas; the two would become major competitors when FedEx started building its own overseas network. Such increased competition put pressure on FedEx's niche, but its lead was large and its reputation excellent. In 1983 the company reached $1 billion in annual revenues--the first company in the United States to do so within ten years of its start-up without mergers or acquisitions.

Aggressively Pursues International Market Dominance

In 1984 FedEx made its first acquisition, Gelco Express, a Minneapolis-based package courier that served 84 countries. Hoping to recreate its U.S. market dominance overseas, the company made further acquisitions in Britain, the Netherlands, and the United Arab Emirates. Meanwhile, UPS also began building a competing overseas system.

By the late 1970s Smith had realized that up to 15 percent of the company's Courier-Pak business was information that would eventually be digitally transmitted as telephone and computer technology improved. He spent $100 million to develop his own electronic-mail system, which was launched in 1984 as ZapMail. A system for sending letters by fax machine and couriers, ZapMail was plagued by technology problems from the beginning: Fax machines broke down frequently; light-toned originals would not transmit; minor telephone-line disturbances interrupted transmissions. ZapMail cost $35 for documents up to five pages, plus $1.00 for each additional page, and high-volume customers soon discovered it was less expensive to install their own fax machines. The program also faced competition from MCI Communications' electronic-mail system. ZapMail was still losing money in 1986 when FedEx abandoned the system, taking a $340 million charge against earnings. In line with the company's policy of limiting layoffs, the 1,300 employees working on the ZapMail system were absorbed into other FedEx operations.

In 1985 FedEx took a major step in its attempt to expand its services to Europe by opening a European hub at the Brussels airport. Revenue reached $2 billion in 1985. In 1986 the company opened sorting centers in Oakland, California, and Newark, New Jersey, to more quickly handle shipments to nearby high-volume destinations. And FedEx's hubs were being transformed into warehouses for its clients, as parts were stored there until customers needed them, then shipped overnight. For example, IBM used FedEx to store mainframe parts and get them quickly to malfunctioning computer systems. This trend coincided with a decline in FedEx's overnight mail volume, which was hurt by the spread of fax machines and the lower rates charged by competitors. Revenue for 1987 was $3.2 billion, while rival UPS collected about $1.7 billion from overnight delivery.

By 1988 FedEx, with 54,000 employees, was providing service to about 90 countries and claimed to ship about 50 percent of U.S. overnight packages. Mounting competition, however, had led to a price war that eroded company profits from 16.9 percent of revenue in 1981 to 11 percent in 1987. Profits in 1988 were $188 million on revenue of $3.9 billion.

Expanding overseas proved tougher than FedEx had anticipated, and the company's international business lost $74 million between 1985 and 1989. In February 1989, hoping to quickly develop a global delivery system, FedEx bought Tiger International, Inc., for $883 million, thereby acquiring its heavy-cargo airline, Flying Tiger Line. Before the acquisition, FedEx had landing rights in five airports outside the United States: Montreal, Toronto, Brussels, London, and limited rights in Tokyo. The company hoped to supplement these with the delivery routes Tiger had built over its 40-year history, which included landing rights in Paris and Frankfurt, three Japanese airports, and cities through east Asia and South America. FedEx could use its own planes on these routes instead of subcontract to other carriers, which the company had been doing in many countries. Tiger's large fleet of long-range aircraft also gave FedEx an important foothold in the heavy-freight business. In 1988 Tiger had 22 747s, 11 727s, and six DC-8s; 6,500 employees; and revenue of $1.4 billion. Unfortunately, many of Tiger's planes needed quick repairs to meet U.S. government safety deadlines, which led to lower-than-anticipated profits.

The purchase price paid by the company--which several analysts claimed was too much--also increased FedEx's debt by nearly 250 percent to $2.1 billion, and put the company into a market that was more capital-intensive and cyclical than the domestic small-package market. Owning Tiger also put FedEx into an awkward position--many of Tiger's best customers were FedEx's competitors, and the company feared it might lose many of them. Such fears proved unfounded, although Tiger's on-time record temporarily fell to 80 percent after the takeover, climbing to 96 percent by early 1990.

At the same time price wars continued with competitors, some of which made inroads into the overnight market. Earnings from UPS's overnight service rose 63 percent between 1984 and 1988, and its revenues tripled. FedEx had a 55 percent share of the U.S. overnight letter market and shipped 33 percent of U.S. overnight packages. It was clearly the leader in the express-delivery business, but its growth was slowing. FedEx's U.S. shipment volume grew 58 percent in 1984 but declined to 25 percent in 1988. The company compensated by pushing its higher-margin package service, which grew 53 percent from 1987 to 1989. Analysts estimated that packages provided 80 percent of FedEx's revenues and about 90 percent of its profits.

In April 1990 FedEx raised its domestic prices, ending the seven-year price war. The U.S. air-freight industry was consolidating, and rival UPS had heavy capital expenses from its own overnight air service, giving its competitor room to raise its prices. FedEx needed the extra profits--estimated at between $50 million and $75 million a year&mdashø help pay for losses in its international business. Its foreign operations lost $194 million in 1989 as it struggled to integrate Tiger and build a delivery system in Europe. Tiger was unionized but unstructured; FedEx was non-union but bureaucratic. Several uneasy months passed while the two systems were unified and a pilot seniority list was drawn up. To help increase overseas tonnage, the company introduced one-, two-, and three-day service to large shippers between 25 cities worldwide and 85 cities in the United States.

Maintains Market Lead in the 1990s

FedEx entered the 1990s with increasing competition in the U.S. market, but was able to maintain its leading market share. UPS, now its main competitor, continued to slowly woo away some customers by introducing volume discounts, a policy which it had resisted for years. FedEx responded by instituting a customer-by-customer review of its own pricing strategy that resulted in a consolidation of subcontractor trucking routes, the streamlining of pickup and delivery routes, and an increased profitability of certain freight runs; in some cases prices were also adjusted upward. Enhancements were offered to express-service customers, including earlier-in-the day service options, computer software that allowed FedEx clients to electronically prepare all shipping documentation, and Internet tracking of shipments via FedEx's new homepage. And the company's network of retail affiliates was expanded, with new FedEx drop-boxes installed in more than 870 office supply superstores nationwide. The results: Despite erosion from aggressive competitors, FedEx's domestic package volume rallied in mid-1992, with revenues growing from $7.6 billion to $7.8 billion over the previous year.

Internally, FedEx began company-wide cost-containment policies to reduce waste and overhead, as well as gain increased efficiency in meeting the needs of its customers. The company's Station Review Process allowed the most effective local policies to be shared by the entire FedEx station network. Despite cost-cutting measures, however, employee-related expenses rose when FedEx became mired in over two years of contract negotiations with the Air Line Pilots Association (ALPA). Despite what Smith had considered generous enough salaries and benefit packages to keep the threat of unionization at bay, heated labor negotiations ultimately resulted in the 1996 unionization of FedEx's 3,100 pilots. However, only a few weeks after the pro-union vote, an organization of company pilots was petitioning the National Labor Mediation Board to call a second vote to oust the union, leading analysts to doubt ALPA's continued influence over FedEx budgetary policy. On the plus side, the expiration of a federal cargo tax during the federal budget impasse of January 1996 would provide FedEx with a fiscal boost as the company maintained prices despite a temporary hiatus in federally directed excise payments.

In the early 1990s FedEx's foreign operations were troubled, and their losses dragged down company earnings. While overall sales rose from $5.2 billion in 1989 to $7.69 billion in fiscal 1991 operating income fell from $424 million to $279 million over the same period, much of it resulting from the costly development of overseas markets. Industry analysts were divided over whether or how soon the company would be able to make its foreign operations profitable. Some analysts questioned how long FedEx could accept international losses while carrying $2.15 billion in long-term debt.

Smith countered such concerns by arguing that when the company's international volume increased, international service would become profitable. In an effort to boost that volume, FedEx traded in its 727s for larger-capacity Airbus Industrie jet aircraft for their three daily European-destination flights, filling extra cargo space with non-express packages to increase per-flight profitability. In 1994 the company became the first international express cargo carrier to receive system-wide ISO 9001 certification; by mid-decade international service accounted for 12 percent of the company's business: FedEx linked over 200 countries and territories worldwide, representing the bulk of global economic transactions. By 1996 the company could boast sales of $10.27 billion against operating income of $624 million.

Further Expansion and a Look to the Future

Aggressive international route expansion included creating divisions in several hemispheres. A Latin America and Caribbean division was created in 1995 to integrate services within the second-fastest world's economic growth area. And in September of that year the company introduced FedEx AsiaOne: a next-business-day service between Asian countries and the United States. Via a hub established at Subic Bay, Philippines, FedEx planned to duplicate its successful hub-and-spoke delivery service within 11 of that continent's commercial and financial centers. Unfortunately, the company's plans were confounded by the Japanese government, which limited FedEx's flying rights from Japan to other Asian countries in mid-1996, after a series of talks between the U.S. and Japan failed to reach a compromise. While the U.S. government contemplated appropriate sanctions against the Japanese government for its failure to honor existing flight privileges with FedEx, Japan viewed the company's growing success in Asia as a threat to its own overseas cargo industry. Despite difficulties with Japan, the extension of its world-renowned service to the Pacific Rim area placed FedEx in a strategic position within one of the fastest-growing economic centers in the world--particularly with regard to China, where the company was the sole U.S.-based cargo service then authorized to do business.

Through 2015 the international express air cargo market was predicted to grow nearly 18 percent per year; FedEx was expected to reap a major portion of that growth as it saw its foreign operations increasing by as much as 25 percent per year. By retaining the confidence of its customers through its logistical capabilities, expanding the carrying capacity of its fleet of over 557 fuel-efficient aircraft and 37,000 vehicles, and a continued dedication to providing cost-effective express service, "FedEx it" continued to be the generic way to request express shipment.

Principal Subsidiaries: Federal Express Aviation Services; Federal Express International; Flying Tiger Line Inc.; Tiger Inter Modal Inc.; Tiger Trucking Subsidiary Inc.; Warren Transport Inc.

Further Reading:

• Flaherty, Robert J., "Breathing Under Water," Forbes, March 1, 1977.
• ------, "Transportation," Business Week, March 31, 1980.
• Foust, Dean, et al, "Mr. Smith Goes Global: He's Putting Federal Express' Future on the Line to Expand Overseas," Business Week, February 13, 1989.
• Greising, David, "Watch Out for Flying Packages," Business Week, November 14, 1994.
• Nomani, Asra Q., "Sparks Fly over Air-Cargo Agreement," Wall Street Journal, March 1, 1996.

Source: International Directory of Company Histories, Vol. 18. St. James Press, 1997.

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