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IS THE FUTURE NOW FOR DRONE DELIVERY SERVICES?

Just a few years ago, the idea of a “drone” line item in your financials seemed far-fetched. All that most of us knew about drones – also known as Unmanned Aerial Vehicles (UAVs) – was what we’d seen in military surveillance newsreels.

Then came December 1, 2013. That was when the U.S. news show 60 Minutes aired an interview with Amazon CEO and founder Jeff Bezos in which he revealed his company’s secret initiative – 30-minute package delivery using special drone technology. Bezos said the new approach would change the world, but he was careful to qualify his claim by noting that the logistics still needed to be worked out and that actual widespread commercial drone deliveries were years away.

The trouble was, FAA regulations prohibited drone use for commercial purposes. In early 2012, some Los Angeles real estate companies were warned by the Federal Aviation Administration (FAA) to stop using drones to shoot videos of their for-sale properties. This was one of the first known skirmishes in the quickly evolving battle over how drones can – and can’t – be used by for-profit businesses.

FOR SOME INDUSTRIES, HOWEVER, THE

DRONE REVOLUTION HAS ALREADY ARRIVED.

COMMERCIAL AND RESIDENTIAL REAL ESTATE

COMPANIES WERE AMONG THE EARLIEST

ADOPTERS, QUICKLY PERCEIVING HOW

EFFECTIVE DRONES COULD BE AT PROVIDING

BOTH THE BIG-PICTURE AERIAL VIEW AND

DETAILED SHOTS OF DIFFICULT-TO-ACCESS

LOCATIONS.

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The regulatory community gradually caught up. Beginning in September 2014, the FAA granted thousands of Section 333 exemptions. Then, on June 21, 2016, the FAA and U.S. DOT jointly announced the adoption of Summary of Small Unmanned Aircraft Rules (Part 107), which finalized the first operational rules for routine commercial use of small UAVs. Its effective date is August 29, 2016.

While not technically replacing the exemption process, these new rules (see details below) create sufficient guidelines for effective commercial drone use without the effort, expense and delays experienced by many who pursued a Section 333 exemption.

It is also important to understand that the new drone rules do not apply universally. More specifically, the new rule does not throw open the gates to unfettered package delivery by drone. The rule’s first listed exclusion is for “Transporting Property for Compensation (Air Carrier Operations).” In addition to being unfeasible under some of the new rules – such as the requirement that the UAS always remain in sight of its operator or that it not travel over uninvolved people – the FAA’s explanation of the rule goes to great lengths to stress the need for significantly more advancement in the technology and the practice before Amazon and Google can start dropping drones on your front step.

Drone delivery advocates seem to recognize this. While the signs are encouraging and the new FAA rule moves the process one step closer to reality, there is still work to do. An analysis of the first 3,136 exemptions granted by the FAA found that only 3 were for aerial delivery, compared with over 2,500 for aerial photography and nearly 2,000 for real estate uses (with a significant amount of redundancy in these categories). Activities related to inspections, construction, filmmaking and advertising also received far more exemptions from the FAA than aerial delivery did, according to the study by the Association for Unmanned Vehicle Systems International (AUVSI).

On the other hand, this technology is coming and there’s no stopping it. “Within months you will see the incredible impact of these rules with commercial drones becoming commonplace in a variety of uses,” said Michael Drobac, a lawyer at Akin Gump who represents drone efforts at companies like Amazon and Google.

Quoted in a New York Times article about the adoption of FAA Part 107, Drobac added, “This will show the technology is reliable and then it becomes harder to argue against broader uses — like for delivery.”

The Case for Using Drones for Package DeliveryWhen Bezos stunned the 60 Minutes crew with his video of a drone delivering a package, he was adamant that any obstacles could be overcome. “It will work, and it will happen, and it’s going to be a lot of fun,” he told CBS’s Charlie Rose.

The service – Amazon Prime Air – would deliver packages of up to five pounds in under 30 minutes to customers within 10 miles of a distribution center. “It turns out that the

vast majority of the things we sell at Amazon weigh less than five pounds,” said Paul Misener, Amazon’s vice president for global public policy, in a 2015 interview with Yahoo! Tech’s David Pogue.

Amazon’s delivery drones will not be piloted the way the typical commercial

UAV is. Instead, they will be programmed using a global positioning system (GPS) and navigate with “sense-and-avoid” technology.

These drones are more like horses than cars,” Misener told Pogue. “If you have a small tree in your front yard, and you want to bang your car into it for some reason, you can do that. Your spouse might not be happy with you, but you can do it. But try riding a horse into the tree. It won’t do it. The horse will see the tree and go around it. Same way our drones will not run into trees, because they will know not to run into it.”

“WITHIN MONTHS YOU WILL SEE THE INCREDIBLE IMPACT

OF THESE RULES WITH COMMERCIAL DRONES BECOMING

COMMONPLACE IN A VARIETY OF USES,”

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Not to be outdone, Google anticipates that its Project Wing drone delivery service will begin in 2017. Fast Company reported that Google received patent approval for “mobile delivery receptacles” that coordinate with its delivery drones. “Effectively the mobile delivery receptacles are remote boxes on the ground with wheels. They communicate and guide the drones in the sky via infrared beacons or lasers. Once located, the drone flies down to ground level and transfers its package into the mobile delivery receptacle, which then secures it and scurries off to a secure holding location,” the January 2016 article read.Wal-Mart and other prominent online retailers are also looking at drone delivery and it is clearly a hot topic among third-party logistics (3PL) providers as well.

DHL, a global logistics company, is already employing its “Parcelcopter” for limited use in parts of Europe. It delivers urgently needed supplies, such as medicine, to a small, remote North Sea island off the German coast. DHL completed a three-month test of Parcelcopter on May 9, 2016, and became the first postal service to successfully deliver packages to customers by drone, according to the company.

That same day, United Parcel Service (UPS) announced a partnership with drone startup Zipline and Gavi, the Vaccine Alliance, to deliver blood for transfusions by drone throughout Rwanda.

The Benefits of Drone DeliveryEven with some of the world’s largest companies eyeing the benefits of drone delivery technology, economic analysis is hard to find. This is likely because there are so many variables and unknowns at this point.

Existing research suggests that the economics of drone delivery will work, however. A study by ARK Invest, a New York City-based investment management firm, suggests that Amazon Prime Air could cost the company as little as 88 cents per delivery. ARK Invest says Amazon could quickly recoup its investment even charging customers just $1 per delivery.

“We believe that there are over 400,000 annual shipments from Amazon to US customers that would be eligible for drone delivery,” the report says. “The drones are relatively inexpensive, so an investment of around $130 million could prove sufficient for the cost of the drones and support infrastructure. Combined with service, maintenance and fueling of the drones, we believe that Amazon would have to spend roughly $350 million annually to support the drone delivery program at full penetration. Assuming a 15% discount rate, Amazon could earn a healthy return on capital pricing the service at $1 per delivery.”

Amazon and the others chasing the lead position in drone delivery argue that their true motivation goes beyond profit; rather, it is to provide faster and better service to customers, particularly when the need for speed is great.

GOOGLE RECEIVED PATENT APPROVAL

FOR “MOBILE DELIVERY RECEPTACLES”

THAT COORDINATE WITH ITS DELIVERY

DRONES

DHL DELIVERS URGENTLY

NEEDEDSUPPLIES, SUCH AS

MEDICINE, TO A SMALL, REMOTE

NORTH SEA ISLAND OFF OF GERMANY

UNITED PARCEL SERVICE ANNOUNCED

A PARTNERSHIP WITH ZIPLINE AND

GAVI, TO DELIVER BLOOD FOR

TRANSFUSIONS BY DRONE

THROUGHOUT RWANDA

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Matternet, based in Menlo Park, California, has been running drone deliveries of medical supplies and specimens in countries around the world since it was founded in 2011. It says that its Matternet ONE is “the first smart drone for transportation,” and that it “revolutionizes last-mile logistics, transforming the way you access things locally.”“The technology is here,” said Oliver Evans, Matternet’s head of global business development, in an interview with Sally French of the MarketWatch website. (Her title is Social Media Editor and Drone Reporter, another indication of the growing importance of drone technology.)

“It’s much more cost-, energy- and time-efficient to send [a blood sample] via drone, rather than send it in a two-ton car down the highway with a person inside to bring it to a different lab for testing,” added Matternet founder and CEO Andreas Raptopoulos.

Navigating the Hurdles to Drone DeliveryThe technology may be here, but even with the adoption of FAA Part 107, the regulatory structure necessary for viable drone delivery in the U.S. is not. At least not yet.

After initially holding back the reins, the FAA and other U.S. government agencies clearly concluded that waiting was not an option.

By June 2016 when the new rule was announced, the FAA had awarded well over 5,000 exemptions. In April 2016, the FAA also granted its first approval for a night flight of a commercial drone. This allows Industrial Skyworks Inc. to use drones at night to inspect buildings and roofs, which is a reversal from a prior stance against any commercial drone operation after sunset.

The issue of government authority remains muddy as well. States and localities are prohibited from passing certain laws related to aircraft and commerce, and the FAA reauthorization bill reaffirms federal authority over state laws in drone legislation. Other areas are open to state and local interpretation, and all the FAA did with Part 107 is recommend that other entities follow their lead.

Despite the progress, there remains an abundance of caution surrounding some aspects of the issue.

“IT’S MUCH MORE COST-, ENERGY- AND

TIME-EFFICIENT TO SEND [A BLOOD SAMPLE]

VIA DRONE, RATHER THAN SEND IT IN A

TWO-TON CAR DOWN THE HIGHWAY WITH A

PERSON INSIDE TO BRING IT TO A DIFFERENT

LAB FOR TESTING.”

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Fears of drone/plane collisions are still driving some of the conversation from the regulatory perspective. Close calls between drones and planes are reported more frequently, including one alleged collision between a drone and a British Airways plane. Officials have since questioned whether it was actually a drone at all, saying it may have simply been a plastic bag.

Other concerns more specific to drone deliveries – real or exaggerated – include the fear of hacking, theft and attacks on delivery drones, noise and sight pollution caused by teeming drones filling the skies, and safety matters of drones crashing into people and property.

“We have the most complicated airspace in the world,” Secretary of Transportation Anthony Foxx told CBS News in October. “And these new entrants, these unmanned aircraft would be just another layer of objects that we have flying in our airspace.”

Foxx, who oversees the FAA, compares the drone revolution to the arrival of automobiles. “All of a sudden, this new entrant is trying to occupy the same space as horse-drawn carriages. In some respects, that’s where we are. We’re trying to integrate this new use in a space that’s been occupied by airplanes, helicopters, hobbyists and general aviation for so long.”

If the FAA isn’t ready when Amazon and the others are, don’t expect them to wait. “We have customers all around the world, of course. There’s no reason why the United States must be first. We hope it is,” said Amazon’s Misener.

What’s Next Caution aside, some of Foxx’s own employees say that the technology of drone delivery is proven and that its arrival is inevitable. Michael Whitaker, Deputy Administrator of the FAA, testified in front of a House Oversight Committee that a group called RTCA [Radio Technical Commission for Aeronautics] is scheduled to complete new drone standards in 2016. It began work in 2013 at the request of the FAA.

“These standards will help resolve two of the difficult challenges facing the industry for integration of UAS [Unmanned Aircraft Systems] into the NAS [National

Airspace System],” said Whitaker in a June 2015 written testimony. “NASA, the FAA, and industry partners have successfully demonstrated a proof-of-concept airborne DAA [Detect-and-Avoid] system and prototype radios for use as command and control systems for UAS.”

There is little doubt that drone delivery holds particular intrigue for online retailers, logistics service providers and even warehousing companies. Delivering a product faster and more efficiently, as drones potentially can, could be the game-changer that many people say it is.

In warehousing, robotics has already taken hold as a technology that improves efficiency in specialized situations. And while it is unlikely that drones can serve in a “pick-and-place” capacity inside a warehouse due to navigation and weight limitations, they may be very useful in inventory management. Drones are known as a good alternative for going places that are difficult to get into and drones could allow for a tighter, less space-intensive warehouse design. Dronescan and Nelmia Robotics Insight are just two of the companies offering drone-based inventory management products.

Bezos’ vision of 30-minute package delivery still has many hurdles to overcome before it becomes a reality. Yet, with dozens of companies working on the technology and government agencies tackling the legislative issues, it seems likely that we’ll see broad-based drone package delivery before the decade ends.

When exactly can you expect to get your drone-delivered new shoes within a half-hour of ordering them? “Months sounds way too aggressive to me, so the timescale is measured in years.” Bezos told The Telegraph of London last August. “But it will happen. One day, Prime Air deliveries will be as common as seeing a mail truck.”

Learn More Cresa IndustrialJim Winter617.758.6080 | jwinter@cresa.com

GOOGLE RECEIVED PATENT APPROVAL

FOR “MOBILE DELIVERY RECEPTACLES”

THAT COORDINATE WITH ITS DELIVERY

DRONES

DHL DELIVERS URGENTLY

NEEDED SUPPLIES, SUCH AS

MEDICINE, TO A SMALL, REMOTE

NORTH SEA ISLAND OFF OF GERMANY

UNITED PARCEL SERVICE ANNOUNCED

A PARTNERSHIP WITH ZIPLINE AND

GAVI, TO DELIVER BLOOD FOR

TRANSFUSIONS BY DRONE

THROUGHOUT RWANDA