Drone Delivery: Future Megatrend or Major Failure?
Sam Mattera Motley Fool
The night before Cyber Monday 2013, Amazon (NASDAQ:AMZN) CEO Jeff Bezos headlined a special 60 Minutes report. The founder of the online retailer used the opportunity to unveil Prime Air, a radical new concept that holds the promise of more rapid delivery. At some point in the future, Bezos said, Amazon’s customers would be able to receive their order in as little as 30 minutes, delivered via automated drone.
Since then, there has been little movement in the space. The technology exists, but current federal regulations make Prime Air an impossibility. That, however, could be about to change.
Giving same-day delivery an entirely new meaning
Currently, the Federal Aviation Administration (FAA) requires commercial drone operators to obtain a waiver from the agency. The FAA has granted many of these waivers (known as Section 333 exemptions), but even with them, drone use is still strictly controlled. Drones must weigh less than 55 pounds, operate only in the daytime and in good weather, and, most significantly, stay in the line of sight of the pilot operating it. These regulations make Amazon’s Prime Air a non-starter, as Amazon’s plans call for both totally unmanned vehicles and for far-reaching delivery routes.
But the FAA is currently reviewing its rules, and could put in place new regulations that make Prime Air viable. In July, the FAA announced that its new drone rules would be in place within a year, hopefully before next June. Amazon has not made any firm commitments, but has said it would look to begin drone deliveries as soon as regulators permit it to do so.
The upside to Prime Air seems obvious. Since its inception, the biggest hurdle to online shopping has been convenience — while brick-and-mortar retailers offer almost instantaneous gratification, shopping online comes with an unfortunate delay. In 2005, when Amazon announced Prime, free two-day shipping was unheard of, and many criticized the concept. Since then, however, Amazon has added tens of millions of Prime subscribers, and its sales have risen by a whopping 1,120%. Obviously, Amazon’s business has evolved in many other ways, but it seems clear that faster shipping has played a vital role in its success.
Amazon has since expanded Prime to include same-day delivery in more than a dozen cities. Reviewing the service back in June, GeekWire’s Todd Bishop called it “magical,” even though it took him a full nine hours to receive his parcel. Image the superlatives 30-minute delivery could evoke.
But there are still significant hurdles to clear
But even if the FAA permits it, Prime Air could be hampered by other issues. The drones wouldn’t be capable of delivering large or oddly shaped packages. When he announced it back in 2013, Bezos said Prime Air deliveries would have to come in at under 5 pounds and fit within particular specifications. That covers 86% of the goods Amazon currently stocks, but even popular consumer electronics, such as the PlayStation 4 console, wouldn’t make the cut.
Deliveries would be further limited to areas within a 10-mile radius of an Amazon fulfillment center, according to the original plans. While many major metropolitan areas could be serviced, Amazon’s fulfillment centers are limited to just 26 states.
In May, ARK analyst Tasha Keeney claimed that Amazon could offer the service profitably if it instituted a $1-per-package charge. Delivering a single package by drone, Keeney estimated, would cost Amazon roughly $0.88. However, like same-day delivery, Amazon could make it a Prime perk, making the effects on its business more complicated.
Turning publicity stunt into reality
To date, Prime Air has largely been vaporware — a successful publicity stunt ahead of a major online shopping holiday, but nothing that would directly affect Amazon’s shareholders. But with the FAA’s regulations set to change, the next 12 months could be quite exciting. With the ability to delivery packages as quickly as a pizza, Amazon could further cement its status as America’s largest retailer.
