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Federal Over Nightmare Express

September 24th, 2011

By Katherine Smith, PhD

The aggressive FedEx online legislative campaign to prevent the passage of the FAA Reauthorization Act of 2009 is just about everywhere these days.

[Some claim] UPS is resorting to a cynical strategy: If UPS can’t restore parity by making itself more competitive, why not cripple FedEx ? with help, of course, from the Teamsters, who want FedEx employees to join their union. After all, everyone knows FedEx Drivers Aren’t Pilots.

FedEx says it’s not fair to bail out UPS just because they are having trouble competing in the overnight delivery market.

Maybe that’s true, but get this, Fred Smith’s www.BrownBailout.com campaign has to be the ultimate hypocrisy.

Why is there a Federal in Federal Express?

Fred, in an interview with Atlanta Bureau Chief Dean Foust, explains:

“For our network, I used as a model the economic activity of the Federal Reserve banking system, because it was in those days a perfect model of the economic activity in the U.S. And that's where the [Federal Express] name came from. It just stuck in my mind. I wanted something that sounded substantial and nationwide, and American Express had already been taken [laughs].”

Well, I guess that’s possible [laughs out loud].

Federal Express, now the FedEx Corporation, has been one of the great entrepreneurial success stories of the past quarter-century ? the story of how Smith built FedEx into a $27 billion delivery juggernaut has become a part of Corporate Americana.

Fred Smith, according to the biographers, had transportation in his blood.

If not for his mother, the gregarious and popular Frederick W. Smith would have never gone to college.

In 1962 Fred, a mediocre student, enrolled at Yale University.

He went out for football and typed 12-15 pages for a 1965 term paper. The paper, the legendary outline for Federal Express, was submitted to the professor of his Economics 43A class, and according to Fred, “probably made his usual C."

Did I mention he was a member of the Skull and Bones secret society?

In 1970, Fred was on fire with his newest grade C brainchild, which “got him especially close to the Worthen Bank.” The biographers note he “landed a rare meeting with the Federal Reserve Board in order to build the nucleus of his airplane network by proposing a future contract for overnight air express services.”

Hmm, a rare meeting. Did I mention he made friends with George W. Bush and John Kerry when he was at Yale?

Below is the FedEx chronology. You are entitled to come to your own conclusions.

1970 - Smith purchased the controlling interest in an aircraft maintenance company, Ark Aviation Sales, and by 1971 turned its focus to trading used jets.

June 18, 1971 - Smith founded Federal Express with his $4 million inheritance (about $21 million in 2008 dollars), and another $91 million (about $484 million in 2008 dollars) in venture capital. Fred Smith on the Birth of FedEx

Whoa, Venture what?

Venture Capitalists wouldn’t survive long enough to be called vulture capitalists if they went around making a $484 million investment in a business model that received a mediocre grade from a Yale Economics professor.

Even a child without a degree from Yale knows that for Fred to be successful, a massive investment in infrastructure would be required. An investment made in anticipation of a mass market for an overnight service, in which the pricing would have to be downward manipulated low enough…to create demand. The Myth of "Free" Enterprise Economic System

Fred didn’t bother with any market research to justify the investment because in 1973 there weren’t millions of Americans saying to them selves, “Damn, I forgot it was Grandma’s birthday tomorrow. Why the heck isn’t there an affordable overnight service to get Granny’s birthday card delivered, before 10 a.m.?”

Or better yet, you are the ex-Tennis Pro, Michael Zausner. Michael invented Solar Recover, a natural spray to rehydrate skin when people spend too much time in the sun. Michael wants to start a business that will employ three full-time and 10 part-time employees, but his customers won’t order Solar Recover unless they can get that hydrating spray delivered overnight…for $9.95.

The overnight delivery market exists because of a downward manipulated price (cost-effective) created the demand. Silver, but no Silver Lining

You don’t send that overnight letter because it’s $9.95; it’s $9.95 to get you to send it to Granny.

History confirms Fred’s professor was generous with that C.

1972 ? Fred had a couple of purple, orange and white jets and a mini-size corporate staff but the $484 million wasn’t enough startup capital, nor was there market data to lure investors to his door. In meeting after meeting, he met with negative reactions from potential investors. Fred Smith on the Birth of FedEx

Unlike most businesses, as his professor pointed out, you can’t start small and grow over time. From the outset, Fred had to build an entire network to make it work. In order to lock up enough planes for his fleet, he signed a contract to buy 23 more Falcons from Pan Am for a total of $29.1 million.

April 17, 1973 - The Federal Express is marketing itself as "the freight service company with 550-mile-per-hour delivery trucks," but the company is losing up to a million a month. [Fred hadn’t convinced enough Americans they needed to get that important document to it’s destination by 10 a.m. the next day, so it could sit on someone’s desk unopened for the next three days.]

The Infamous Las Vegas Story

While waiting for a flight home to Memphis after being turned down for capital by General Dynamics, Fred impulsively hopped a flight to Las Vegas, where he wins $27,000 playing blackjack. Fred says, “the $27,000 wasn’t decisive, but it was an omen that things would get better.” Soon after, he raises another $11 million. [Another version of the Las Vegas story is that he won enough hands of blackjack to meet the payroll. Take a guess what the payroll would be on a company that is losing $35,000 a day. Anyway, the smoking gun is the $11 million. No one in their right mind would loan him $11, let alone $11 million, to cover less than one year of an operating loss.]

But wait, the story gets even better.

January 31, 1975 - Smith was indicted for using a forged document to obtain a $2 million bank loan [another gamble to make the payroll]. Then, shortly before midnight on that same day engulfed by his personal crisis, while driving home from his office, he hit and killed a 54-year-old black handyman. Fred left the scene, unaware he had ever hit the man.

Fortunately, in one of those coincidences that don’t happen very often, like the same person winning the lottery three weeks in a row, an off-duty policeman was directly behind him and witnessed the entire incident. Fred Smith - Federal Express Renegade

Fortunately is an understatement, without that “off-duty” policeman who would have believed Fred's story?

The policeman was able to discern that Fred was “unaware he had ever hit the man” by noticing that Fred left the scene right after the accident. [Isn’t that called hit and run?]

And even more fortunately, Fred was found not guilty in the bank fraud trial, and soon afterwards, thanks to that off-duty policeman (and undoubtedly his friends from Yale), the hit-and-run charge was dismissed. [Whew, lucky for us Fred didn’t go to jail. Where would our legal system be without the benefit of an overnight delivery service for those time-sensitive documents? You know the ones that involve crimes like bank frauds and hit-and-runs.]

By now, you have probably guessed his roommates at Yale got their buddies at the Federal Reserve to create a bunch of money out of thin air and loan it to Fred.

Why would the Fed help Fred make overnight package delivery so cheap only the rich could afford to use the U.S. Post Office?

The answer starts with the Brussels November 12, 2008 press release: FedEx announced that by 2020 it plans to reduce carbon dioxide emissions by 20% from its fleet of 557 aircraft and improve the fuel efficiency of its 37,000 vehicles by 20%.

“Our role is to connect the world in responsible and resourceful ways. The world faces big challenges, and we believe that collective, sustained efforts can create greater possibilities for people, businesses and nations worldwide.” - Frederick W. Smith, Chairman, President and CEO

And here comes the best part, remember the fleet of over 557 aircraft?

Fred is replacing the 727s with Boeing 757s, which will reduce the amount of CO2 his planes emit by more than 350,000 metric tons every year.

Whoa, so Fred, let’s get this straight. Your fleet of aircraft are putting at least 1,750,000 metric tons of CO2 into the atmosphere every year so I can get my screenplay on my agent’s desk the next day by 10 a.m. so he can pile it on top of all the other screenplays he can’t get around to reading until next week.

Read the following from How Much Pollution Does Air Travel Cause And What Are The Solutions To The Pollution Caused By Air Travel? and think Overnight Service and Fred’s commitment to the environment.

“Air travel is now recognized as a major source of air pollution.

And what are the solutions to the pollution caused by air travel? No one wants (We All Say) to make pollution and global warming worse. Yet no one wants to stop travelling by air to go on holiday etc., etc…so, what can be done????

Air travel causes a lot more damage to the environment via carbon emissions than any other form of transport because it burns much more fuel, and aviation fuel (kerosene) is particularly polluting. Airlines do not pay tax on their fuel so they have no incentive to use less or make their prices reflect the damage done to the environment by flying.

Some facts: Air travel cause 0.17kg/km/per person, whereas driving a car causes 0.14kg/km/per person. The world’s 16,000 commercial jet aircraft produce more than 600 million tons of CO2 annually, almost as much as the entire African continent. A return flight from London to Miami (14,207 kms) produces 2,415 kg of CO2 per passenger, more than the 2,255 kg produced annually by the average British motorist’s 16,108 km.

But as you say ? it’s nice to be able to fly places! The solution really is to cut down on transport use in everyday life ? cycle, walk or take the bus instead of driving. Shop close to home and go on holidays around your area. Try to limit international travel to when it is absolutely necessary (use teleconferencing!), and (especially in Europe where flights are so cheap!) catch the train rather than fly! Ultimately, aviation fuel should be taxed to reflect the damage it does to the environment ? and then plane flights will become more expensive so that people will only take them when necessary ? and not from London to Cardiff!”

Now read the following from A Nation on Wheels: The Automobile Culture in America Since 1945, but think about FedEx’s fleet of 557 fuel-efficient aircraft and 37,000 vehicles.

“Historian Mark S. Foster has estimated that “fully one-third of the total environmental damage caused by automobiles occurred before they were sold and driven.” He cited a study that estimated that fabricating one car (imagine an Airplane) produced 29 tons of waste and 1,207 million cubic yards of polluted air. Extracting iron ore, bauxite, petroleum, copper, lead, and a variety of other raw materials to process steel, aluminum, plastics, glass, rubber, and other products necessary to construct automobiles consumes limited resources, uses great amounts of energy, and has serious environmental repercussions.

In recent years, for example, the automotive industry in several developed countries was a major purchaser of iron and steel (30 percent), lead for batteries (46 percent), aluminum (23 percent), and platinum for exhaust fume control (41 percent). Approximately 75 percent of the cost of the industry’s power comes from electricity, but the auto industry also consumes natural gas (15 percent of energy expenditures), and coal and coke (over 8 percent), as well as steam, oil, and propane.

The following is about Vehicle assembly plants, but think Airplanes about Airplane manufacturing facilities.

Vehicle assembly plants themselves are major polluters. In the early 1990s, there were 20 engine plants in the United States, more than 40 assembly plants, hundreds of metal stamping facilities, and thousands of suppliers. Automotive plants release sulfuric acid and other smokestack emissions into the air.

In addition, the Environmental Protection Agency (EPA) listed car and truck assembly plants among the top ten waste producers in the country. In 1990, the American automotive industry accounted for 1 percent of all hazardous waste or 172 kg per vehicle produced. Paint shops, in particular, utilize large quantities of solvents; in the State of Michigan, these paint-shop solvents account for almost one-fourth of all pollution from volatile organic compounds. The introduction of water-based paints was meant to drastically reduce solvent contamination, but the retrofitting of paint shops is costly, and the large quantities of water used there and elsewhere in the plants do not leave as clean as when they entered. The network of supply industries, building infrastructure, and transportation systems necessary to produce and deliver vehicles to the consumer also must be factored into any discussion of the environmental impact of the automobile.”

Fred and FedEx are committed to long-term environmental goals to save the environment.

He recently told his pilots to idle less on the runway.

Want to find out more about the Federal Reserve? Click here to read The Federal Reserve(s) are (four) Dummies.

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More articles by Katherine Smith can be found at the home of Thought-Provoking Articles.

Katherine Smith, PhD mandrell2010@gmail.com

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