What Fred Smith Did
“Move fast and break things” is the mantra for those who start companies in the digital age. That wasn’t so easy for Fred Smith. Smith, who died on June 21, founded parcel giant Federal Express Corporation, now called FedEx. He is often credited with conceiving the hub-and-spoke system of package delivery. That is inaccurate; as best I can tell, the hub-and-spoke concept was developed by the predecessor to United Parcel Service in the 1910s. Smith’s great contribution was to demolish regulations that stifled innovation in transportation.
When Smith founded Federal Express, in 1971, U.S. air transportation was tightly controlled. Both passenger and all-cargo airlines had to prove to the Civil Aeronautics Board that public convenience and necessity justified any new route. Incumbent carriers usually sought to block any new service. Federal law, however, exempted very small planes from CAB’s economic regulations. That’s why Federal Express took off in 1973 with planes designed to carry nine passengers. By establishing a hub in Memphis — something that airlines flying larger planes could not do without CAB approval of each route — it initially moved documents and computer parts among 25 cities. Soon thereafter, the CAB exempted slightly larger planes from economic regulation, and Federal Express took full advantage. “Nobody at the Civil Aeronautics Board ever thought that somebody was going to use that change in the regulations to put a nationwide overnight air express system in place,” Smith told me when I spoke with him last year. “But that’s what permitted it.”
With business booming, Smith wanted to buy full-size jets. In 1975, the CAB refused approval. He descended on Washington, telling anyone who would listen how regulations were stifling a new type of air freight service. Debates over airline deregulation were just beginning, and when deregulating passenger service proved too complicated to accomplish in 1977, Congress approved a much simpler bill eliminating the CAB’s authority over air cargo. The Air Cargo Deregulation Act, now generally forgotten, made it practical to offer overnight delivery service nationwide.
Smith also ran up against the Interstate Commerce Commission, the agency that regulated surface transportation. The ICC allowed airlines to pick up and deliver air cargo only within 25 miles of an airport they served. When it proposed to expand that zone to 35 miles in 1979, more than 1,600 parties objected. Smith played a role once more as Congress deregulated trucking the following year, enabling Federal Express to pick up and deliver anywhere in the country.
The sweeping deregulation of transportation that Fred Smith helped achieve underlies the massive growth in international trade starting in the 1980s. Ironically, another key figure in globalization chose not to be part this story. Smith told me that he tried to recruit container shipping pioneer Malcom McLean as an early investor in Federal Express. “McLean turned me down,” Smith said, “but we had a nice relationship.”
Tags: air cargo, regulation