Merchant Innovation

Is Drone Delivery Economically Feasible, Practical?

In a perfect future, drones would zip through the sky carrying packages containing everything from pet food to baby diapers over our heads in the most efficient, affordable and expedient manner of delivery possible, while we all went about our daily lives (and we’d all have robot butlers, too).

But alas, we don’t live in a perfect world, and although the technology is increasing each and every day, it still appears as though it will be some time before the flying drone is the preferred, practical or even most affordable option for retail delivery.

First and foremost, there’s that whole pesky issue of the Federal Aviation Administration, who finally released late last month an updated list of regulations on flying drones for commercial use, such as Amazon’s much-promised and long-awaited drone delivery service Amazon Prime Air. Let’s just say, with a mandate that any drone used for commercial purposes cannot carry more than 50 pounds and must fly within sight of its human operator, that sort of throws a monkey wrench into the whole idea of massive drone delivery service right off the bat. At least for the time being.

But is such a concept even economically feasible to begin with?

Apart from just being a cool idea, drone delivery is appealing because it does not involve a human and can get packages from Point A to Point B faster because they are flown and not driven on a truck. Theoretically, you could just have drones delivering packages all night and day because a drone never gets tired or needs to stop to eat or go to the bathroom (a drone’s operators are not so fortunate, however).

But a new study by Flexport’s Dan Wang, entitled “The Economics Of Drone Delivery,” finds that drones performed poorly when it came to two basic tenants of delivery service: “route density and drop size.”

“Route density is the number of dropoffs 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,” Wang wrote. “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.”

The problem with drone delivery in its current form is that a drone can do neither of these things particularly well (and certainly not as good as a UPS driver and truck).

Most drones can now typically carry only one package at a time, which the FAA has restricted to 50 pounds or less, and once it makes a delivery, the drone then has to fly all the way back to the delivery station to charge its batteries and pick up another package.

Compare this to a UPS delivery truck, which Wang said, on average, makes about 120 stops a day and also comes with a driver that can deliver multiple packages per stop and hundreds a day before ever needing to return to the warehouse to grab more or refuel.

Although not much analysis is out there right now on drone shipping costs, a speculative report by ARK Invest’s Tasha Keeney looking at Amazon’s Prime Air program sought to peg the delivery service at $1 per delivery (certainly on the lower end of all current delivery options … unless you already get free shipping through Amazon Prime, which costs you $99 to begin with).

Under this model, Keeney estimates that 6,000 trained drone operators, who will be paid about $50,000 per year, will operate 30,000 to 40,000 drones at the height of Amazon’s Prime Air service, while each drone will make about 30 deliveries a day. So, already, Keeney is speculating that Amazon will somehow be able to get the FAA to adjust its line-of-sight requirement for drone pilots and is figuring that, in order for the service to be profitable to Amazon, a drone operator will have to control at least six drones at a time. But that number could actually reach upwards of 10 to 12.

Unfortunately, the technology or skillset for this sort of advanced drone armada does not yet exist.

Keeney estimates that the average drone delivery would cost Amazon about $0.88 a delivery, so even at that very low rate of $1 per delivery, Amazon would still be turning a profit on its Prime Air delivery service (to say nothing of the profit it makes on the item itself that the drone is delivering) and offering a service that is significantly faster (and so much cooler) than its competitors. Oh, but Keeney also notes that, in order for this model to work, the average Prime Air delivery item could not weigh more than five pounds and the Amazon delivery facility had to be at least 10 miles or closer from the customer.

Compare that to the $5.25 the post office charges for one-day priority mail or the $8.32 or $12.92 that FedEx or UPS charge, respectively, for their one-day “ground” delivery options.

To say nothing of the adherent coolness factor of having that new DVD you’ve been waiting months for arriving on your doorstep via a drone instead of the mailman.

Of course, the only problem with this (and it’s the same reason we don’t have robot butlers) is that the technology or the FAA is just not there yet.

But now you see why Amazon’s Jeff Bezos, Google's Project Wing, Walmart and so many others are so intrigued by the idea of the drone delivery business.

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NEW PYMNTS DATA: HOW WE SHOP – SEPTEMBER 2020 

The How We Shop Report, a PYMNTS collaboration with PayPal, aims to understand how consumers of all ages and incomes are shifting to shopping and paying online in the midst of the COVID-19 pandemic. Our research builds on a series of studies conducted since March, surveying more than 16,000 consumers on how their shopping habits and payments preferences are changing as the crisis continues. This report focuses on our latest survey of 2,163 respondents and examines how their increased appetite for online commerce and digital touchless methods, such as QR codes, contactless cards and digital wallets, is poised to shape the post-pandemic economy.

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