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DEVELOPING NEW BUSINESS IDEAS206

Smith incorporated Federal Express in 1971, intending to establish
operations at Little Rock, Arkansas, because of its central location. The
barriers he faced were considerable. The business concept did not lend
itself to a gradual roll-out. A significantly high minimum level of
infrastructure would have to be in place for the concept to be attractive
to customers. Although Smith was able to put up $4 million of his own
money, $80 million was still required. The financial community was
reluctant to provide funding to establish such a large undertaking.
Integrated express delivery services had been operated before – by the
Indian and French Post Offices, for example, and by American Airlines
shortly after World War Two – but no venture to date had succeeded.

An additional major block was that the air freight industry was heavily
regulated. Furthermore, the authorities at Little Rock, his preferred
central location, were reluctant to incur expenditure on upgrading the
facilities for the benefit of a fledgling enterprise which in their eyes was
likely to fail.

Smith attacked the various barriers with courage and conviction. He
cited the independent market research agencies’ reports to eventually
secure funding from corporate investors. He used his passion and
influencing skills to generate short-term capital from General Dynamics,
which was apparently convinced as much by Smith’s enthusiasm for his
business model as by financial motive. Smith’s enthusiasm extended to
tracking down General Dynamics’ hospitalised financial officer in order
to close a deal by a particular deadline. Smith sailed extremely close to
the wind in securing bank loans on his family trust, of which his sisters
were also trustees. The sisters considered that a due process of
consultation had not been followed.

Smith chose to buy small corporate jets at highly competitive rates from
Pan Am, partly because prices had collapsed in the wake of the oil crisis-
induced recession and partly because he intended to operate Federal
Express under the provision for air-taxi services so as to circumvent
mainstream airline regulations. Even to achieve this, Smith had to
persuade Washington to increase the maximum weight limit because the
corporate jets which he was buying exceeded the current limit.

In 1973, Smith located his premises in Memphis, Tennessee, where the
more entrepreneurial authorities were keen to support him, realising
that the overnight delivery operation could create jobs, put the airport to
profitable use at night and establish the city as a trans-shipment centre.