The Economics of Drone Delivery 

 Thanks to leading freight forwarder FLEXPORT for this in-depth look at the economics of drone delivery.

Two years ago, Jeff Bezos promised that Amazon would soon deliver packages by drone. “I know this looks like science fiction,” the Amazon CEO told a 60 Minutes reporter, as he stood with several Amazon drones. “It’s not.”

Bezos’s primetime announcement sparked a lot of interest—and a media consensus that it was a publicity stunt to get Christmas shoppers thinking about Amazon. After all, federal law prohibited commercial drones from flying over populated areas, and airplanes were already experiencing close calls with hobbyists’ drones.

But the drone community is not acting like the prospect of delivering packages by drone is a pipe dream. Amazon just released an update of its Prime Air program. Executives at Google Wing claim they will deliver packages in 2017 via drone. Walmart has asked the Federal Aviation Administration for permission to test drone delivery, and venture capitalists have invested in drone delivery startups.

So what makes the drone community believe deliveries are a good idea? Assuming the technology works, do the economics make sense?

The Drone’s Milk Run

Drone deliveries look like the future: unmanned quadcopters rapidly delivering packages to our doors, eliminating both wait times and the cost of human labor.

But from an economic perspective, it’s easy to see how drone delivery could be an elegant technological solution in search of a problem.

That’s because the economics of last mile delivery is driven by two factors, route density and drop size. Route density is the number of drop-offs you can make on a delivery route, often called a “milk-run” in industry parlance. Drop-size is the number of parcels per stop on the milk run.

If you make lots of deliveries over a short period of time or distance, the cost per delivery will be low. Likewise, if you drop off lots of parcels at the same location, the cost per parcel will be low.

delivery-trucks-drones

Can drones compete with this truck? Photo by qnr

Drones perform poorly on both of these economic aspects of last-mile delivery. The current prototypes that companies have unveiled usually carry just one package, and after the drone makes its delivery, it has to fly all the way back to its home base to recharge its batteries and pick up the next package.

Compare that to the current status quo: delivery trucks. A delivery truck from UPS makes an average of 120 stops a day to deliver hundreds or thousands of packages. Don’t they seem to be better than drones?

How short-distance drone deliveries work

In late November, Amazon released a slick video  demo of Prime Air, a drone delivery system designed to “get packages to customers in 30 minutes or less.” It comes on the heels of a similar production from Google’s Project Wing, which showed a drone delivering dog food in Queensland, Australia.

Both these companies and others say they expect to be flying soon.

We approached these companies’ claims with skepticism. After all, in Amazon’s demo, a drone that the companysays can fly 15 miles delivers a pair of soccer shoes. But what if you don’t live within 7.5 miles of an Amazon warehouse? And will Amazon keep drones on standby for when you order 50 pounds of diapers? Drone delivery is still speculative, and Amazon and co. aren’t revealing all their plans. But a few simple statistics show that distance and weight may not hold back drone delivery.

In official documents, Amazon has written that 86% of its packages weigh under 5 pounds. As for distance, Walmart has noted that 70% of Americans live within 5 miles of a Walmart. This is great for the prospect of drone delivery. Amazon’s fulfillment centers are not as ubiquitous, but the company has shown willingness aplenty to move its products and warehouses closer to the customer.

If products start close enough to consumers that drones can deliver them in 30 minutes, we may very well see drone delivery even if it costs more than the humble UPS truck. “Faster delivery has always been a goal,” says Logan Campbell, the CEO of Aerotas, a drone consultancy. “Seven day delivery was common. Now we’ve become used to Amazon Prime 2-day delivery.”

There haven’t been many analyses of drone air freight costs. The ones that do exist suggestion that drones have the potential of being both faster and cheaper than delivery costs.

In a report by ARK Invest, Tasha Keeney suggests  that Prime Air could cost Amazon only 88 cents per delivery. If Amazon charged customers $1 per delivery, Keeney estimates, the company could earn a 50% return on its investment in drone infrastructure while offering same-day delivery that is significantly cheaper than current alternatives.

ark-invest-drones-analysis

Graph, data, and analysis by ARK Invest

The analysis is still mostly speculative. Keeney imagines that 6,000 operators who earn $50,000 per year will operate 30,000 to 40,000 drones. Each drone will make 30 deliveries per day. Her analysis ignores depreciation, and questions like: “How will drones avoid airplanes and deliver packages in Manhattan?” And there’s another core issue: $12.92 is the price UPS charges to consumers, but its actual marginal cost of delivering one more package along a route they are delivering to already is probably closer to $2. When push comes to shove, will drones be able to compete? The rest of her analysis incorporates the costs of electricity, backup battery packs, bandwidth, upgrades to facilities, and so on.

Keeney’s assumptions also stick to the middle ground: She presumes that Amazon will gain permission to fly drones out of sight, with each operator responsible for 10-12 drones, but not that Amazon will soon automate the entire process. That said, other analyses, which assume that more pilots will be needed, put the cost closer to $10-$17 per delivery.

 

Test cases for drone deliveries

The first legal delivery in the United States via drone took place on July 17, 2015.

That day, a drone operated remotely made three trips to transport medicine from the Lonesome Pine Airport in Wise, Virginia, to a nearby fairgrounds. The demonstration was the result of a partnership between the drone startup Flirtey and 2 organizations that provide healthcare in rural, underserved areas.

The flight demonstrates two aspects of the future of drones and air freight: that technology is not the limiting factor, and that drones’ most obvious appeal is not for personal deliveries.

“The technology is here,” says Logan Campbell of Aerotas. “You see fully autonomous flights already” for uses like surveying construction sites, farmland, and mining operations.

“It’s gotten incredibly easy to fly,” adds Roger Sollenberger, spokesman of3D Robotics, whose free, open source software powered Flirtey’s delivery drone. 3D Robotics’ drones, he says, make it so easy to program flight paths that the average parent can use it to record family moments.

Instead, the real challenge is the regulatory environment. The FAA has banned all commercial uses of drones in the U.S., and while the agency increasingly grants exemptions, the Flirtey flight is the only freight exemption that allowed a real delivery rather than testing in unpopulated areas.

 

DHL-deutsche-post

A drone delivery test by German Deutsche Post AG in December 2013. Photo by Frankhöffner

When is the future?

Drones are in a situation similar to the one faced by self-driving cars. Companies have demoed the technology, so the real obstacle is the legal and regulatory environment. In both cases, this means integrating the technologies into daily life could take a long time—or it could happen very quickly.

Current drone economics are good for deliveries that take less than 1 hour. Are people willing to pay a major premium for the service? Perhaps. It may not be too late to order Christmas presents on December 23, 2020.

Despite the current inability of drones to match the efficiency of a delivery truck’s milk run, the economics of delivering air freight by drone seem compelling. That’s why Amazon and Google are investing in the R&D. That’s why Matternet is testing drone deliveries with Swiss Post and Swiss World Cargo. And that’s why the drone community expects deliveries to happen—even if not as quickly as executives like Bezos promise.

Source: The Economics of Drone Delivery