Drone Delivery’s Next Challenge Is How to Clear Cost Hurdles
Airborne delivery tech is improving, but the economics of getting packages to homes must be solved for a wider rollout
By
Liz Young
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June 7, 2024 at 5:30 am ET
Drone operators have figured out how to defy gravity to deliver items from diapers to prescription medicines by air. Making a profit is proving more challenging.
Companies from Walmart and Amazon to delivery app DoorDash have started aerial deliveries in parts of the U.S., as they look to speed up fulfillment while reducing carbon emissions.
But those deliveries cost significantly more than using a car, bike or van to deliver goods, partly because of federal regulations requiring each drone to remain within sight of a human employee, logistics experts say.
A report by consulting firm McKinsey last year said delivering a single package by drone costs $13.50, compared with $1.90 a package using a delivery van, assuming the vehicle carries 100 orders, and $3 for an electric car handling five packages. The report said the cost would drop to $1.80 a package if drone operators could instead have each employee monitor 20 drones at once.
“It’s all a question of how many people do you have involved in the drone delivery,” said Robin Riedel, a partner at McKinsey. If drone operators can reduce the labor required for each delivery, “the costs go down pretty tremendously,” he said.
The unit-cost measure is a crucial obstacle for drone operators that also face regulatory obstacles and community concerns over safety, privacy and noise as they try to propel their technology toward widespread use.
Drone operators say they have a clearer path this year because federal regulators have granted several companies permission to fly more freely.
Amazon last week was the latest drone-delivery company to receive permission from the Federal Aviation Administration, the nation’s air-safety regulator, to fly its drones beyond so-called visual line of sight.
Amazon said the waiver will allow the company to extend drone delivery in College Station, Texas, to more customers. The e-commerce giant plans to integrate drone deliveries into its existing delivery network later this year by launching drones directly from its same-day delivery facilities rather than drone-specific sites.
The company declined to comment on its cost per delivery.
“If we execute our plan, this capability will be brought to our customers in a manner that brings something that’s delightful to them and improves the experience for them and improves our environment and is affordable for both us and for them,” said David Carbon, vice president of Amazon’s Prime Air division. “It’s certainly still a business equation, but we’re working backwards from where that customer is.”
Matthias Winkenbach, director of research for the Massachusetts Institute of Technology’s Center for Transportation and Logistics, said drone operators have to bring down unit costs to compete with traditional delivery methods.
For a typical online order, “if you’re just not competitive with other modes, if your costs per delivery are like in the two-digit dollar figures, that just doesn’t fly,” Winkenbach said.
Drone companies handling more high-value, specialty goods such as healthcare supplies might find it easier to sell customers on higher delivery costs, compared with companies delivering low-margin consumer goods and restaurant orders, Winkenbach said.
Companies also need to gain greater scale in their delivery operations to bend the cost curve.
San Francisco-based drone operator Zipline says it has cut its cost per delivery dramatically over the past decade as it has handled more packages.
The company began delivering medical goods in Rwanda in 2016 and started aerial deliveries in the U.S. in 2020, where it has since received FAA approval to fly beyond line of sight.
Chief Executive Keller Rinaudo Cliffton said the company can now spread its operating costs for the drones across more deliveries. “As we’ve scaled, it’s really improving economics,” he said.
Virginia Beach, Va.-based DroneUp is working to reduce its costs by cutting labor. The company, which delivers goods on behalf of companies such as Walmart, fast-food chain Chick-fil-A and healthcare provider Riverside Health, earlier this year announced a new system that can load and unload its drones autonomously.
Chief Executive Tom Walker said each delivery in 2020 cost DroneUp hundreds of dollars. That came down to about $38 a delivery by the end of last year, and Walker said he is aiming to bring the cost below $3 by early 2025.
“Seventy-four percent of our cost is labor, loading the drone, unloading the drone, rotating batteries, and so forth,” Walker said. “If you drop 74% of your labor, right out of the gate, that’s a pretty significant driver.”
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