Hillblom was determined to get the USPS to back off, just as he had done with Hong Kong’s postal authorities, but it would be harder this time. The U.S. Postal Service had issued new regulations in 1974, defining a letter broadly as “a message directed to a specific person or address and recorded in or on a tangible object.” The postal service exempted items like newspapers and telegrams, but the new rules applied to just about anything that DHL might carry.
After studying postal law further, Hillblom was convinced that the postal service was extending its power far beyond what the founding fathers had in mind when they created it. DHL couldn’t afford to wage a legal battle against the USPS and its large staff of lawyers. But he felt certain that he could persuade Congress to intervene on his behalf. So Hillblom embarked on a lobbying campaign, recruiting other private carriers, most notably Federal Express’s Frederick Smith.
Fred Smith’s transformation of Federal Express into one of America’s most admired companies is one of the great entrepreneurial success stories of the late 1970s. He was the son of a wealthy entrepreneur in Memphis who had started the Dixie Greyhound bus line and a chain of restaurants called the Toddle Houses. Smith’s father suffered a heart attack in 1948, when Fred was four years old, leaving young Fred and his two half sisters a multimillion-dollar trust fund. As a boy, Smith suffered from Perthes’ disease, a hip ailment that required him to use crutches until he was 10. But in high school, he played football and learned to fly.
In 1962 Smith went to Yale University, where he came up with an idea for an overnight delivery company. It’s fleet of planes would pick up packages, fly them to a central hub where they would be sorted, and then transport them to their final destination by the next morning. Smith laid out the concept in a paper for his economics class. He got a C. “I remember reading it,” Smith’s roommate Dennis Tippo said. “When he got it back, I think Fred joked about the grade. This idea always seemed to be in the back of his mind. In some of our bull sessions, all of us talking about life and things in general, several times he brought up the concept of Federal Express.”
After Yale, Smith did two tours in Vietnam as a marine, fighting in some of the war’s bloodiest battles and earning numerous medals. He would later say that he acquired his management skills in the military and certainly learned how to deal with pressure. “Some people do well under stressful conditions, dangerous conditions,” one of his superiors, former lieutenant colonel Donald Rexroad, told Vance Trimble, author of Overnight Success: Federal Express and Frederick Smith, Its Renegade Creator. “He was one of that kind.”
When Smith returned to the United States, he moved to Little Rock, Arkansas, and tried to put his college business plan to work. In 1970, he went to the Federal Reserve with a proposal to fly checks between its member banks so they would clear faster. While he awaited a decision, Smith borrowed $3.5 million, bought two twin-engine jets, and came up with a name for his company: Federal Express. But the Federal Reserve turned him down, leaving Smith with two idle planes and a significant amount of debt.
Rather than abandoning his idea, Smith went ahead and founded Federal Express. Dark-haired, handsome, and exuding self-confidence and southern charm, he persuaded older executives at established companies to quit their jobs and work for him, promising that they would get rich. He persuaded manufacturers to sell him more planes, even though they wondered sometimes if he would be able to close the deals. Smith also talked local bankers into lending him more money.
The planes had to be small. The Civil Aeronautics Board tightly regulated the aviation industry at the time and rarely approved the creation of new airlines. Smith ultimately got around that by purchasing small, French-built Falcons, which allowed Federal Express to operate as an air taxi service. Early on, the company made most of its money by flying mail for the U.S. Postal Service. “They needed service primarily in the northeast where they were having some problems getting mail moved rapidly on an overnight basis,” says Roger Frock, a former Federal Express senior vice president. “We bid and we were awarded six routes.”
In 1973 Smith moved Federal Express to Memphis, which had a larger airport, and established its headquarters there. The company threw together a makeshift hub in an old World War II–era hangar. It opened offices in seven cities, hired ground couriers, and found vans for them to drive. Smith’s salespeople told him there would be plenty of orders in March when Federal Express started its overnight service. He was crushed when the planes arrived around midnight with only six items, including a birthday present Smith had purchased for an employee and a bag of dirty laundry.
Smith decided to ignore the failure and “officially” launch the service five weeks later. This time, the Federal Express fleet of 14 Falcons delivered 186 packages to 25 cities. The business grew steadily after that, but the company was constantly starved for cash. Every Monday, it had to pay its jet fuel suppliers $24,000; its pilots sometimes had to put it on their credit cards. One Friday night, Federal Express had only $5,000 in the bank. The following Monday, Roger Frock discovered that its balance had miraculously risen to $25,000. Smith confessed that he had flown to Las Vegas over the weekend and won $25,000 at the blackjack table.
“You mean you took our last $5,000?” Roger Frock said. “How could you do that?”
“What difference did it make?” Smith shrugged. “Without the funds for the fuel companies, we couldn’t have flown anyway.”
In late 1974, Smith raised $52 million in venture capital for Federal Express, a record for a start-up company at the time. But shortly after, he told his board that he was about to be indicted for allegedly forging his attorney’s signature on a document several years earlier indicating that his family trust had agreed to secure a $2 million loan from a Little Rock bank to keep Federal Express afloat. Ten days later while he was behind the wheel of his 1972 blue Ford LTD, Smith struck and killed a 53-year-old handyman who was leaving a Memphis bar around midnight. Oblivious, Smith drove on, only to be arrested by a police officer who happened to be following him and charged with leaving the scene of an accident.
Under pressure from his board, Smith agreed to step aside as chairman and chief executive of Federal Express, though he remained president and continued to run the business. Late one night Smith called Frock and Mike Fitzgerald, another of his top managers, and told them he was quitting. “There’s just too much pressure, and I can’t take it anymore,” Smith said. Frock and Fitzgerald told Smith to meet them at Federal Express’s office at the Memphis airport and persuaded him to change his mind. Toward dawn, Smith’s mood brightened. “I could really go for a beer,” he said. Fitzgerald produced a warm six-pack from the trunk of his car. Smith cooled it down with a blast from a fire extinguisher. “Just a little thing I learned in Nam,” he said.
The following day, Federal Express’s top executives rallied behind Smith and threatened to quit if the board fired him. Smith kept his job, and from then on, his luck turned. The district attorney in Memphis dropped the criminal charge against him. A Little Rock jury acquitted him of the forgery charges after Smith testified unabashedly that he had falsified the documents to save his company from going under. In July 1975, Federal Express turned its first monthly profit, and from then on, it operated in the black.
Soon, Federal Express needed bigger planes to keep up with all its orders. The Civil Aeronautics Board refused to grant its request, but tolerance for heavy-handed regulation was beginning to wane in Washington. Smith went to Capitol Hill, where he wooed legislators and swayed them with his argument that such antiquated rules unfairly limited the prospects of new companies like his. Smith acted as though he understood aviation law as well as anybody else, and he probably did. When a young general counsel of the House aviation committee tried to lecture him about how a new law should be crafted, Smith pulled a copy of the Civil Aeronautics Act of 1938 out of his own attorney’s briefcase and waved it in the general counsel’s face. “You d
on’t know anything about this act,” Smith snapped at him. Then he ripped the 250-page document in half and tossed it onto the table. “This is what I think of your argument,” he said. Smith prevailed. In 1977, President Jimmy Carter signed a law deregulating the airfreight industry and freeing Federal Express to purchase DC-9s and Boeing 747s. Soon after, Federal Express went public, raising $18 million from investors in a stock offering.
The business press lionized Fred Smith and his upstart package delivery company. “Two tours in Vietnam and a six-year struggle to turn a college paper and a flock of purple airplanes into an airline have streaked Fred Smith’s hair with gray at the age of 34,” the Associated Press wrote. “But the still boyish-looking founder of Federal Express Corp., having made believers out of the doomsayers, shows no sign of retreating behind a stack of stock certificates.”
However, Federal Express also attracted the attention of the USPS, which sent its overzealous inspectors into the company’s Memphis hub. They opened packages in which they found items that fitted the postal service’s new letter definition, such as receipts, catalogs, and even bumper stickers. Just as they had done with DHL, postal officials threatened Federal Express customers with fines and advised them to use the agency’s competing Express Mail service instead.
Early on, Smith had been reluctant to join Larry Hillblom’s crusade to break the postal service’s monopoly, but now he was receptive. The two men struck up an unlikely friendship. Hillblom spent much of his time now in the South Pacific, where he pursued a hedonistic lifestyle. (After Hillblom’s death in a plane crash in 1995, the Wall Street Journal and other publications reported that he bedded teenage girls, preferably virgins, and had sired a number of children who wanted a piece of his fortune.) He rarely visited Washington and when he did make an appearance, he refused to put on a suit and tie like a typical chief executive. He wore jeans and T-shirts just as he had done in college and usually had one of his girlfriends with him. Smith, on the other hand, was comfortable in Washington and willing to be the public face of the lobbying campaign. “He was just charismatic,” says John Zorack, a lobbyist who worked for Federal Express and DHL during this period. “He could sell an issue like nobody I’ve ever known.”
After its chaotic first few years, the USPS had begun to solve some of its problems. The clerks at the sorting machines learned the new system, and the percentage of letters arriving on time rose dramatically. The USPS adjusted the machines at the bulk mail centers so that packages could flow through them safely. In 1978, the board chose William Bolger, a 55-year-old former postal clerk and World War II bombardier from Waterbury, Connecticut, to be the postmaster general. Slim and gray haired, he was the first rank-and-file postal worker to hold the top position since Harry Truman had named Jesse Donaldson in 1947, and he came to the job with an intimate knowledge of the mail system, unlike most of his predecessors. “Everybody saw Bolger as the guy who can fix things,” says Michael Coughlin, the assistant postmaster general of mail processing at the time. “Periodically, Bolger would pick up a pile of customer complaints, telephone the senders and see if he could personally help them.”
Bolger had an idea to speed up mail processing with a nine-digit zip code, which would enable to the USPS’s machines to sort letters so thoroughly that they would arrive at post offices in the order that letter carriers would deliver them. Eventually, the nine-digit code would become the standard for the mailing industry, but initially, Bolger’s customers and their Congressional allies refused to support it, saying that nobody would be able to remember nine numbers. So Bolger offered sizable discounts to companies that pre-sorted their mail. It was a proposition that junk mailers found irresistible because it increased their profits.
Bolger was also determined to prevent private express from encroaching on his turf. “I’ll resist, with every fiber of my being, any legislation to make it easier for private delivery systems to operate,” he vowed. However, Bolger was about to learn the limits of a postmaster general’s power under the new system. Before the reorganization, he could have exchanged local postmaster appointments for votes, but now he faced a hostile congress with little to offer. This was never more evident than when Bolger and his aides confronted Fred Smith and his allies in 1979 at hearings on the USPS’s monopoly held by the House Subcommittee on Postal Operations and Services.
The USPS’s general counsel Louis Cox tentatively defended the regulations. A tall, Harvard-educated attorney with gray hair and thick, black-framed glasses, Cox insisted that the postal service would lose billions of dollars a year if it was weakened.
The subcommittee’s chairman, Charles Wilson, quickly grew impatient with Cox. “There are some interests, including many good USPS customers, charging that the postal service is expanding its monopoly,” Wilson said. “Why?”
Cox professed astonishment. “I may say I have asked myself that same question,” Cox said. “I don’t really know the answer for sure.”
When Wilson pressed Cox for a definition of a letter, the USPS general counsel responded with breathtaking opacity: “What is a letter? A letter is not just ‘Dear so and so’ in handwriting and so on,” Cox mused. “A letter is quite an expansive conception.”
“I am just telling you, Mr. Cox,” Wilson said, “that if you don’t become more realistic about the needs of business with their time-sensitive materials and have a more realistic approach to the interpretation of a letter, you are going to lose the whole doggone thing.”
“I appreciate that,” Cox replied.
“I’m trying to help you,” Wilson insisted.
“I appreciate that, too, in every sense of the word ‘appreciate,’” Cox said.
Cox argued that the idea of time sensitivity raised a myriad of legal questions. “We have seen bills introduced saying in somewhat more elaborate words that time sensitive mail, which is to say, mail that must be delivered by noon the next business day or within 12 hours or something of that kind, should be excepted,” he said. “But if I postpone writing to someone I ought to write to until the stroke of midnight, as it were, then all of a sudden that letter of mine is, I guess, time sensitive.”
“Obviously that is not what we are talking about,” Wilson retorted.
“I know it isn’t,” Cox replied. “But if words of that kind are enacted into or put into our regulations, how are we going to enforce it?”
“That is what you went to Harvard for, for gosh sakes, to learn how to do these things,” Wilson said.
“Even our best educational institutions are imperfect,” Cox said. He insisted the USPS could provide rapid delivery for customers with Express Mail. No, it wasn’t available everywhere in the country yet, but the USPS was working on that. Cox urged the subcommittee not to loosen its letter monopoly until the agency had a chance to fully test it.
Then it was Smith’s turn to testify. He said he could provide a good definition of a time-sensitive message; it was one that customers would gladly pay Federal Express to transport rather than entrust it to the much cheaper, but shamefully inefficient U.S. Postal Service. He suggested that Cox had been less than candid when he claimed to be ignorant about why people were upset with the USPS’s expansive definition of a letter. “They go in and use the private express statutes as an intimidating tool to create users for the Express Mail system,” Smith said. “That is the reason you are hearing so much about it right now. We are absolutely convinced of it.”
To hear Smith tell it, the USPS had only itself to blame for the rise of Federal Express and other private carriers that had materialized in recent years. “It is undeniably clear that the substantial increase in the number and importance of private delivery, express and courier services has coincided with a worsening decline in the quality of service rendered by the Postal Service,” Smith said. He called on Congress to rein in the postal service and keep its inspectors out of the mailrooms of his customers. “Such practices amount to a raw
abuse of government power,” Smith said. “Such practices demand legislative action.”
Executives from companies like Merrill Lynch, Bankers Trust, Prudential Insurance Company, and Aetna Life & Casualty testified that they too wanted the USPS to back off. “At a time when we are battling inflation and trying to keep insurance affordable, it is absurd for the Postal Service to attempt to extend the monopoly to items that are not, in any ordinary popular sense, letters,” said Philip Shaughnessy, an Aetna vice president. “It is important to know that the great majority of the tons of material we ship each day is further distributed through the Post Office at first-class rates.”
Hillblom didn’t appear before the subcommittee but DHL’s attorney Jim Campbell did. Early in his testimony, Campbell mentioned that DHL had offices in many Asian cities. Chairman Wilson interrupted him, “Let me stop you here,” he said. “You say you operate in Hong Kong and Singapore?”
“Yes, sir.”
“Good, we had hoped to visit those places in August to look into overseas private service, among others issues.”
Wilson’s subcommittee members must have exchanged surprised looks. Before the hearing, Campbell had learned that Wilson liked to take an annual government-paid trip to the Far East with his South Korean–born wife, but he hadn’t found a reason this year. Now Wilson had one. DHL and Federal Express were more than happy to arrange for dinners in August for the subcommittee members and their wives in Hong Kong, Singapore, and Seoul. Larry Hillblom showed up to make his case in this less formal setting. “When we went to Hong Kong, Larry was our host,” says lobbyist John Zorack, who went along for the trip. “I had to laugh. We had a reception. Larry never wore anything but blue jeans and T-shirts. I said, ‘Larry, you’ve got to at least dress up a little bit.’ He went out and got a white shirt with embroidery on it. That was pretty high class for Larry.”
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