Casino Lore: FedEx Saved by Blackjack Winnings
Frederick Smith started FedEx operations on April 17, 1973 after becoming interested in the transportation of cargo while studying Economics at Yale. Smith saw a need for a faster and more reliable service, specifically overnight transportation, as society shifted towards the computer information age. He wrote about it in a term paper in 1965, and when asked what he got on it, Smith replied with, “I don’t know, probably made my usual C.”
After graduating and spending time in the Marine Corp, Smith returned to the idea, which had become even more important. By this time, another company was attempting to provide solutions for the courier issue by using passenger planes to move goods. However, these planes weren’t designed for the transportation of products and they followed airline passenger routes, which slowed things down.
Smith saw the issues and designed a plan to address them. But he still had his fair share of issues in the beginning. With $84 million to get things started, Smith bought 14 planes and set up the headquarters in Memphis. He designed a “hub-and-spoke” system where goods were flown overnight to Memphis – the central “hub” location – and then processed and sent out to their destinations through “spokes” (specific routes).
It was an ambitious plan with high operational costs. As the price of fuel increased in the mid ‘70s, FedEx was in debt millions of dollars. One week, they didn’t have enough money to fuel the planes. The company had a mere $5,000 to its name.
Feeling like he had nothing to lose, Smith headed to Las Vegas where he gambled the remaining $5,000, turning it into $27,000 playing blackjack. The money allowed FedEx to operate for another week, and things got better from there. Smith received another $11 million in funding and launched an ad campaign that improved the brand’s visibility. At the same time, the government was loosening its regulations on the postal delivery monopoly, which couldn’t provide adequate service to industries that needed faster and more reliable deliveries.
The company went public on the New York Stock Exchange in 1978 and is now worth between $25 and $35 billion. Not a bad outcome for a mediocre term paper.