The Passing Of Fred Smith And A Tale Of Two Companies

On June 21, Fred W. Smith, founder of Federal Express, passed away. He is rightfully remembered for founding the express shipment industry utilizing a hub and spoke model, which became the standard for airlines and other transportation modes.

Although from a wealthy family (his father owned the Toddle House restaurant chain and Dixie Greyhound Lines), he served two tours in Vietnam as a Forward Air Controller (FAC) in the Marine Corps, winning a Silver Star, Bronze Star and two Purple Hearts.

Smith was a legendary entrepeneur. He is said to have received a C on his economics paper at Yale outlining the concept of an overnight delivery system. In 1970, he used his inheritance of $4 Million ($32 Million in 2025 dollars) to purchase the controlling interest in an aircraft trading company and a year later launched Federal Express.

To do this, he had raised $91 Million ($724 Millon in 2025 dollars) in venture capital. He used this investment to buy 14 Dassault Falcon 20 jets and began offering service to 25 cities. The service network was originally patterned on the Federal Reserve, flying checks between banks in a region to a central clearinghouse to speed clearing transactions. The adoption of “Federal” in the name was a bit of a marketing ploy to gain the attention of the Federal Reserve to adopt the service and convey a national scope. In addition to checks, the business soon expanded to include small packages.

For several years, the business struggled. A legendary story told of Smith struggling to pay a $24,000 fuel bill due the next day. Going to Las Vegas with his last $5,000, he won $27,000 at the blackjack tables saving the company.

All of this is true, but there is another critical aspect to the success of FedEx which is rarely mentioned.

After serving 10 years in the Air Force and completing graduate school, I joined Emery Air Freight Corporation as a Vice President in 1981. Emery was the leader in air freight and particularly for heavy items, especially those that were needed for industrial purposes. Emery carried everything from heavy machine parts to steam shovel teeth. The margins in the business were highly attractive When a factory line is down for want of a critical part, the price of transit is trivial compare to the cost of lost production.

Emery’s business was not just national like Federal Express at the time, but global. The reason for this was that it utilized the belly cargo of airliners as well as dedicated freighters operated by the likes of Flying Tigers. It also had a highly profitable customs brokerage capability that could shepherd international shipments through the intricacies of foreign duties and regulations.

John C. Emery, Sr. had served in the US Navy during World War II as a logistics officer where he learned the ropes of utilizing the airlines to forward time sensitive cargo. Following the war, in 1946, he formed Emery Air Freight and was the first air freight forwarder to apply for a license from the Civil Aeronautics Board as a common carrier.

This designation meant that Emery would provide services to the general public, as opposed to more limited contract carriers, and was vigorously opposed by the US airlines. Nevertheless, the license was granted in 1948.

Emery built up the services needed on the origin and destination sides of the carriage transaction. Instead of a customer needing to contract directly with the airlines to utilize their cargo services, Emery would pick up the item, convey it to the airport, utilize Emery’s contracted cargo capacity, retrieve the item at the destination and deliver it to the end customer.

By 1966, five years before the founding of Federal Express, Emery had 60 domestic US offices and 30 internationally. It managed 40% of the cargo handled by US air freight forwarders and accounted for two thirds of their earnings according to a New York Times article in that year.

John Emery, Senior died in 1969 and his son became CEO. Suddenly sitting atop the industry leader, John, Junior regarded Fred Smith with a combination of amusement, disdain or pity. There were multiple instances where Emery would deliver Federal Express packages to Federal Express customers when their planes or systems had broken down. In those early days when Smith was hitting the blackjack tables, Emery could have easily put Federal Express out of business.

However, Smith was playing a different game. Smith owned its fleet of aircraft and was not dependent upon airline schedules or performance for transit. Although such an “integrated system” was substantially more expensive, Federal Express had managed to survive its early years due in part to the acquiescence of competitors like Emery.

Eventually, Federal Express capitalized on this capability by introducing the now famous slogan of “When it absolutely, positively has to be there overnight.”

In 1983, when I left Emery for McKinsey & Co., Federal Express had overtaken Emery in revenues, and the value of an integrated air and ground fleet was apparent. Emery had followed suit with their own fleet of 24 aircraft and a hub in Dayton, The company could easily have prospered by maintaining its focus on heavyweight freight as Federal Express could not handle anything above 70 pounds and UPS was yet to enter the field.

But the same complacent attitude that had allowed Federal Express to survive in the early years led Emery to attempt to copy the now burgeoning upstart. Emery carried overnight letters like Federal Express even though it lost money on every envelope. Emery’s system was tuned for heavier shipments that were largely business t0 business and not office or residential. After an unsuccessful acquisition of Purolator Courier a few years later, Emery was sold to Consolidated Freightways and now exists as a division of UPS.

The story of a founder’s son losing the family business is a common one. However in this case it allowed an entire new industry to arise, changing the way business is done around the world and providing the platform for Amazon and e-commerce in general to prosper.

Years later, while leading the Global Aerospace and Defense Practice of McKinsey, I had the occasion to meet and serve Fred. I considered it a great honor.

Emery Air Freight

Air freight industry

heavyweight, envelopes

727 hub Dayton

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Amazon

railroad pricing