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This article was published in the March 2016 issue of STORES Magazine.

Drones promise rapid order fulfillment, but significant challenges remain

Since Amazon announced its drone program more than two years ago, a number of retailers have been investigating the feasibility of drone delivery.

While the idea is often met with skepticism, the practice has already begun. DHL Parcel started delivering medications to the remote German island of Juist in 2014, while California startup Matternet is making drone deliveries of medical supplies in places like the Dominican Republic and Haiti. The first U.S. drone delivery approved by the Federal Aviation Administration took place last July when a drone made a delivery to a remote location in Virginia.

For retailers, drones offer the promise of rapid fulfillment. Amazon unveiled its drone delivery ambitions in December 2013 when CEO Jeff Bezos said it could use drones to make deliveries in 30 minutes or less. Since then, the retailer has been testing the concept and lobbying the FAA to approve trials of its program.

David Vos, head of Google’s Project Wing drone delivery program, told CNN in January that it’s possible that consumers will be able to receive purchases by drone within the next one to three years. He says there is enough “completely unoccupied” airspace for the safe operation of delivery drones; Google is currently working with NASA to create an air traffic control system, and Vos maintains that mass numbers of drones can be operated overhead in a manner that people below “won’t even notice.”

In October, Walmart submitted an application to the FAA requesting permission to test drones for delivery “to customers at Walmart facilities, as well as to customer homes.”

In October, Walmart submitted an application to the FAA requesting permission to test drones for delivery “to customers at Walmart facilities, as well as to customer homes.” Walmart spokesman Brian Nick told MarketWatch the company would test the technology to manage its network of distribution centers and stores. He said there is a Walmart store within five miles of 70 percent of the U.S. population and “it certainly creates some interesting possibilities for us.

‘Significant barriers’

While drones are capable of delivering small packages, there are still significant barriers to deployment, says Logan Campbell, founder of consulting company Aerotas. Drones lack “sense and avoidance” technology that would allow them to “see” one another like radar technology for manned aircraft. Regulators say it’s a necessary element to have in place before tens of thousands of drones can make long-distance flights out of operators’ sight.

“There are some technologies in development but there isn’t yet a fixed solution,” Campbell says, “and it’s absolutely necessary for this to work on a mass scale” and reduce the risk of crashes.

At a NASA convention in California last summer, Amazon proposed a special air zone for its delivery drones, an area between 200 feet and 400 feet from the ground that would be reserved for flying drones at speeds of 70 miles per hour or more. Gur Kimchi, Amazon’s delivery-by-drone project co-founder, said at the time it would “guarantee the greatest safety” and allow thousands of drones to fly under “their own technological steam without the involvement of humans through air traffic control.”

Moving vehicles, curious onlookers, children, dogs, birds, even criminals with nefarious intent could all pose significant risk to drones when they’re closer to the ground.

Mary Cummings, director of the Humans and Autonomy Lab at Duke University’s Pratt School of Engineering, says the real problems are “socio-technical” — how humans and technology interact. She says the last part of a journey to a customer’s door could be the riskiest: Moving vehicles, curious onlookers, children, dogs, birds, even criminals with nefarious intent could all pose significant risk to drones when they’re closer to the ground.

Cummings says drones could also be susceptible to hacking. “How to keep drones safe from those intentional and non-intentional acts, and how to keep the public safe, particularly for the descent to landing, is going to be very challenging.”

Logistical challenges

Currently, the FAA does not allow commercial operation of drones without a special exemption; nearly all of the more than 3,000 exemptions are for use in photography, real estate, construction and agriculture. The agency bars drones from carrying payloads and they must be operated in “line of sight,” meaning within direct vision of the operator. People who operate drones under an exemption must also be licensed pilots.

A reading of the FAA’s public statements and actions over the past few years leads to the conclusion that wide-scale drone deliveries aren’t going to be authorized soon.

Campbell calls it “understandable” that the FAA is moving slowly because the United States has the busiest and most complex airspace in the world. He says while there are many low-risk drone applications, there remain many “big issues with safety” for mass-scale drone deliveries. He believes it will be “at least a few years” before the FAA grants approval for any kind of urban delivery, and that would only be for limited test cases.

The National Retail Federation told the FAA in November that retailers are looking at drones not only for package delivery but loss prevention efforts and warehouse evaluations. While safety is important, the agency “must balance competing interests in order to preserve innovation.”

In 2015 the FAA considered whether retailers should be required to collect registration information from drone purchasers at the time of sale, but NRF convinced the agency that registration should be the responsibility of the buyer and take place after purchase.

Campbell says there are still many logistical challenges to delivering products by drone. Amazon and other retailers would need extensive infrastructure to support drone deliveries. He believes one of the easiest ways to ensure safety would be for businesses and consumers to have dedicated drone “landing zones” on their property.

“It’s going to require an enormous on-the-ground infrastructure to make it work,” he says. “Safety is a big problem in terms of scaling it up to 30 minutes at everyone’s doorstep.”

In theory, human operators could take over operation during the last 50 feet to manually pilot packages in place. More human involvement would increase costs, though, and raise privacy issues, since operators would need cameras to navigate the drones and might have visual access to backyards and open windows.

“That’s another concern of that model,” Campbell says. “Realistically, it’s going to have to be fully autonomous to be scaled.”

It’s likely that regulators will also require backup features to keep drones aloft in the event of a battery, motor or propeller failure, he says. They would also be limited in size and speed so as to minimize damage to property and people in the event of a crash.

Insurance companies will likely play a big role in guiding operating procedures. Lloyd’s of London last year released a report which noted that while the potential of drones is hard to deny, the “concerns around safety, security and surveillance could pose significant risks to users of this nascent technology.”

Drone flight

While the FAA has authority over airspace, local laws may have the authority to mandate how and where drones can land.

Anne Lockner, a partner and co-chair of the retail industry practice group at Minneapolis law firm Robins Kaplan, says there are plenty of legal questions to be addressed and “a whole world of things that could go wrong with endless liability.”

She points to not only the potential for injury but various state laws regarding privacy and property rights. Even once the FAA opens the doors to drone deliveries, there could be myriad legal issues: While the FAA has authority over airspace, local laws may have the authority to mandate how and where drones can land.

“There’s a big risk assessment with many variables that we don’t know about yet and laws that aren’t clear,” Lockner says.

Cost-effectiveness

In theory, drone deliveries would reduce the need for human labor and offer more rapid fulfillment. But with the high costs of capital investment and consumers’ expectation of free shipping, there are financial challenges.

In traditional transportation methods, the transporter needs to make lots of deliveries over a short period of time to keep the cost per delivery low — UPS or FedEx trucks can carry hundreds of packages and make dozens of deliveries before returning to the warehouse, while drones are expected to carry only one package at a time.

While major transportation companies are showing interest in drones, they appear less enthusiastic than Amazon. Myron Gray, president of U.S. operations for UPS, said at a New Orleans conference that carrying one package at a time is a disadvantage. “You need density and scale to make money in transportation.”

David Binks, president of Europe, the Middle East and Africa for FedEx Express, told the International Business Times that while there may be a time when drones find a niche, “I don’t know whether that would [be as] a widespread parcel delivery network.”

Retailers are tight-lipped about their drone projects, though Tasha Keeney, an analyst with investment firm Ark Invest, believes drone deliveries can be financially viable for Amazon. Her analysis shows that the price for delivering a five-pound package within 10 miles in 30 minutes could be less than $1, compared with average costs of $12.92 for same-day delivery by UPS Ground or $8.32 by FedEx Ground.

Delivery drones

Keeney says the types of small drones Amazon is proposing range from $1,000 to $3,000; if each drone were to average 30 deliveries daily, the retailer would need 30,000 to 40,000 drones at current sales levels — as well as some 50,000 extra batteries, bringing the total drone investment to roughly $130 million.

She estimates Amazon would need about 6,000 drone operators, each responsible for 10-12 drones and paid roughly $50,000 annually. Total labor costs of the drone program would be $300 million per year. As most drones would operate on fixed, programmed autopilot courses, these operators would monitor drone activity and occasionally intervene for manual landings or flight path diversions.

The estimate also assumes $25 million yearly in bandwidth service for streaming video, $15 million for maintenance and $4 million for electricity to charge the batteries.

Keeney says 86 percent of Amazon’s deliveries weigh fewer than five pounds and about 25 percent would be within 10 miles of an Amazon facility, making some 400 million packages eligible for drone delivery. She estimates the retailer’s cost to be 88 cents per delivery, and assumes Amazon would make drone delivery free for Prime customers and $1 for all others.

“I think it can work,” Keeney says. “The capital costs are not prohibitive. The biggest component would be the labor costs and they’d have to be selective in what they deliver, but it can absolutely be profitable.”

‘People with trucks’

Campbell believes Amazon would likely roll out drone deliveries in test markets and use data to expand and fine-tune the concept. “For high value-to-weight goods, the economics do make sense,” he says. “Drones can be very reliable and if you amortize the capital costs over a large number of deliveries, it can work.”

Workhorse truck and drone

Analysts envision a “hybrid” system where delivery trucks are equipped with drones that make smaller deliveries while the driver continues with larger packages.

Few analysts expect drones to completely replace delivery trucks and humans, since large packages cannot be flown and some need to be carried into a house. Keeney does envision a “hybrid” system where delivery trucks are equipped with drones that make smaller deliveries while the driver continues with larger packages.

When combined with things such as autonomous vehicles, she believes that deliveries will become more economical and automated. Drones “will be used and it will happen but they won’t be the only delivery source,” Keeney says. “You’re always going to need people with trucks.”

Lockner says Amazon’s concept could come to fruition because of the scale and influence of the company. But she also believes that few retailers will have the time, energy and resources to invest in drone programs at this point.

“Companies that have the wherewithal and motivation to do it must see some financial benefit down the road,” she says. “They may make it happen but I don’t think it’s something most retailers are going to engage in.”

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