The Underhill Curio: The Federal Express Wager

underhill.ethanEthan Underhill, MBA Class of 2016

A Yale undergraduate named Fred Smith wrote an economics term paper in 1965 outlining a new system of package delivery logistics. The young student felt that the rise of computer automation could usher in a more efficient era of shipping; small parcels could be sorted through automated processes and delivered overnight via plane at a premium cost. When asked 20 years later what grade he had received on the paper, Smith said offhand, “I don’t know what grade, probably my usual C,” inspiring the legend that the work that described the core idea of his future company only earned a mediocre academic appraisal.

Smith served two tours in Vietnam in the Marine Corps after college, where he carefully observed military procurement and delivery systems. He had continued ruminating on a new package delivery service since college, and following his discharge from the Marines in 1971 he set out to secure venture financing to establish Federal Express. On April 17, 1973 his fleet of 14 planes delivered 186 packages to 25 cities during the first night of full operation.

Of course, operating an aircraft-based package delivery service at a small scale was tremendously expensive. Despite expansion to new cities, the rising fuel costs of the mid-1970s cut into FedEx profits. The company operated at a loss for its first two years, and $80 million in investment had dwindled to $5,000. Without $24,000 to pay the company’s fuel bill, it looked like Fred Smith’s college vision might be only a C-worthy idea after all. Bankruptcy loomed over the shipping company, despite its expanded fleet and reach.

UnderhillSmith decided that only drastic action could possibly save his vision after General Dynamics rejected another last-ditch fundraising proposal. So he secretly took the company’s last $5000 to the Las Vegas blackjack tables. Roger Frock, then a senior vice president of operations, said that Smith shrugged off confrontation when his secret gamble was discovered, pointing out that the company was done for whether he lost the money or not. Since FedEx still exists today, the outcome of Smith’s bet is clear – he managed to turn the $5,000 into $27,000, just enough to pay the fuel bill and operate the company for one additional week. Additional fundraising efforts finally panned out just in time, and the company saw its first profits in 1976. It went public in 1978, and now it operates a fleet of over 650 aircraft and 100,000 ground vehicles, delivering an average of 10.5 million shipments per day. In its first year as a publicly traded company the company posted annual revenues of $160 million (around $605 million adjusted for inflation) – last year that was up to $47.5 billion.

It’d be a different story now, one about a failed company no one had heard of, if Fred Smith had instead turned that $5,000 into $0. Today Smith himself might be CEO of nothing, instead of one of the world’s largest and most recognized logistics companies. But as he pointed out at the time, that’s not what happened.

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