December 28, 2015

Drone delivery could win in the suburbs but trucks with many packages could be lower cost to high rise apartments and offices

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 are 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. This means drone deliveries could win in the suburbs but lose to skyscrapers where existing truck deliveries of many packages could the the better solution.

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.

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.

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.

The drone startup Matternet is not just planning a drone delivery network. It has already run one—in Lesotho, a landlocked country surrounded by South Africa.

Matternet has delivered crucial supplies (and chocolate) via drone in Haiti after the earthquake, and when the founders wanted to prototype a drone network, they turned to Maseru, the capital of Lesotho. In Lesotho, almost 1 in 4 adults has HIV, and even in the capital, paved roads are scarce, which makes it difficult to transport goods. So Matternet’s drones delivered blood samples from clinics to hospitals where they could be analyzed for HIV/AIDS.

Blood samples were perfect cargo: small, light, valuable, and time-sensitive. Since Maseru has little air traffic and the routes from the clinics to the hospitals did not change, most of the process could be automated. The drones flew without a human pilot and had clear landing areas where they recharged automatically. Matternet CEO Andreas Raptopoulos says it took their drones 15 minutes to fly 4.4 pounds of cargo 6.2 miles, and that the Maseru network successfully covered an area 1.5 times the size of Manhattan.

It was a good price point. Even though the pilot took place several years ago, Raptopoulos says that each delivery cost only 24 cents.

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.

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