Amazon proposes drones to deliver small shipments to customer doors.
In the late 1970s and early 1980s, when a dominant Boeing and a nascent Airbus were busy designing the passenger planes of today, engineers didn’t pay much attention to the cargo equation.
Amazon Chief Executive Officer Jeff Bezos’ disclosure on 60 Minutes Dec. 1 that Amazon was studying the use of unmanned aerial vehicles (UAVs) to deliver small packages in urban areas was met with skepticism by some supply chain experts.
Amazon Prime Air would use drones to deliver packages ordered over the Internet within 30 minutes.
“That is classic Jeff Bezos. He’s playing his magic tricks again,” Michael Zakkour, a principle with Tompkins International Consulting in Raleigh, N.C., said the following day during a conference call about global sourcing trends hosted by investment bank Stifel Nicolaus. “This is, ‘Look at my hand over here while I’m doing something else over there.’ I can give 100 reasons why he’ll never do home drone delivery.”
Amazon has shaken up the retail sector for years and continues to put pressure on brick-and-mortar stores with its free-shipping options, Amazon Prime service that offers free shipping on all purchases for a small upfront fee, Amazon Fresh grocery delivery service, and same-day delivery in a limited number of test markets.
In November, the company announced it would use the U.S. Postal Service to deliver some Amazon orders on Sunday for Amazon Prime customers. The service is now limited to New York and Los Angeles, but the company expects to roll it out to Dallas, Houston, Phoenix, New Orleans and other key cities in 2014.
One of the main hurdles Amazon will have to first overcome is getting Federal Aviation Administration approval to use UAVs for commercial purposes within U.S. airspace. Amazon says rules could be in place in time for it to begin Prime Air in 2015, but regulations for complex issues often take much longer to promulgate than expected. In November, the FAA produced a roadmap for safely integrating unmanned aircraft into airspace currently used by commercial, military and general aviation aircraft. Regulators are trying to figure out how to allow drones to operate without impacting current operators, reducing existing airspace capacity, or placing airspace users or people and property on the ground at increased risk. Aviation policies and regulations must be developed covering airworthiness of equipment, personnel, and operations and procedures.
Until now, UAVs have primarily been used domestically by the military and U.S. Customs for border-security purposes. Potential commercial uses include aerial photography, surveying land and crops, communications and broadcasting, monitoring forest fires and environmental conditions, disaster response, cargo transport, advertising, and protecting critical infrastructure.
“It looks like science fiction, but it’s real. From a technology point of view, we’ll be ready to enter commercial operations as soon as the necessary regulations are in place,” the company wrote on its Website.
FAA regulatory approval could be very difficult, Ed Wolfe and Scott Group of Wolfe Research opined in a client note. They also said weather and technology issues pose a hurdle for drone delivery.
In the interview, Bezos explained the device could possibly carry items weighing up to five pounds. He estimated that would cover 86 percent of what Amazon currently sells, but admitted the service would have a limited range.
“These generations of vehicles, it could be a 10-mile radius from a fulfillment center. So, in urban areas, you could actually cover very significant portions of the population,” he said, according to a CBS transcript. “And so, it won’t work for everything; you know, we’re not gonna deliver kayaks or table saws this way.
“I don’t want anybody to think this is just around the corner,” he continued. “This is years of additional work from this point.”
In an email to American Shipper after the conference call, Zakkour said liability, crime and privacy issues will also constrain Amazon from deploying a drone fleet.
Drones raise the specter of big government and corporations quietly spying on the populace from the sky. FAA says part of its rulemaking process will address privacy concerns, but Zakkour and others predict there will be a big public backlash against domestic use of drones.
Amazon also has to be concerned about liability if one of its rotary UAVs malfunctions and injures or kills someone with its blades, Zakkour said. The retailer will also find it difficult to navigate in urban environments with tall buildings and must worry about people trying to steal or shoot down the vehicles, he said. Others note that questions about who owns data captured by drones must be resolved.
A Chinese parcel carrier is already testing drone deliveries, according to a report by CNET.
Drone deliveries offer the potential to address congestion, vehicle emissions, and driver shortages in an era of growing Internet shopping and home delivery, Sandeep Kar, global director of commercial vehicle research at Frost & Sullivan, said in a commentary pushed to reporters by the market research firm. Amazon’s Prime Air, if it were to become successful, could impact third-party logistics providers and carriers such as FedEx and UPS, which might “lose a portion of the rapidly growing low-weight, time-critical urban delivery business, which Amazon could vertically integrate, unless these companies offer similar services to Amazon or other retailers at a cost and value proposition that makes it more attractive for businesses to engage with them.”
Amazon has a small fleet of its own delivery trucks for Amazon Fresh, which is offered in Seattle and Los Angeles.
The Wolfe stock analysts concurred that Amazon is gunning for the big parcel delivery operators.
“With the development of its own trucking capabilities to deliver Amazon Fresh and high frequency items in major cities, the recent partnership with the Post Office, and now its development of delivery drones, it seems Amazon is at least on a path to eventually bypass UPS and FedEx,” they wrote.
But, they added, any financial harm to the express carriers would be minimal.
“Neither carrier quantifies their largest customers, but we estimate Amazon accounts for 2 to 3 percent of revenue for both (roughly assuming 2.5 million packages per day, $5 per package and a 60/40 split with UPS and FedEx). So if Amazon gradually migrates pieces of its business away from UPS and FedEx, the impact doesn’t seem too material. The risk to us though is that Amazon continues to grow as a percentage of retail sales and that UPS and FedEx might not benefit as much as we once thought from this growth,” the Wolfe team said.
Drone deliveries hold more promise in closed-loop industrial environments, Kar added.
“The real and meaningful application of this technology lies in intra-factory/intra-company logistics and deliveries, and also in the automotive original equipment market and aftermarket, where it can bring about revolutionary changes in efficiencies, cost and time effectiveness,” he said.
Amazon’s foray into drones is further testament to the rapid growth of e-commerce and how retailers are trying to offer a convenient shopping experience across all physical and digital sales channels. As part of that strategy, retailers are putting enormous time and effort into figuring out how to use stores as fulfillment centers and optimize home delivery in a way that makes economic sense. Walmart, for example, is kicking around the idea of crowd sourcing — inviting shoppers who sign up with a special smartphone app to make deliveries on their way home in exchange for a fee or a discount on their purchases. Walmart is also testing a same-day delivery service called Walmart To Go in five metro areas using its own delivery trucks, according to Reuters.
Bezos’ purchase of the Washington Post earlier this year exemplifies how Amazon’s founder tries to divert attention from what he is really up to, Zakkour said on the Stifel call. “Why did Amazon buy the Washington Post? Is it because Bezos is a great believer in a free and vigorous press and wants to bring back print? No. He bought the Washington Post because newspapers have one of the most highly developed delivery and logistics infrastructures” for same-day delivery, he said.
(Note: Amazon was not involved in the deal. Bezos bought the newspaper with his own money.)
Zakkour said Amazon is similarly using grocery delivery as a loss leader to get other profitable merchandise into homes.
“The only business with smaller margins than the grocery business is online home delivery of groceries,” he said.
Amazon Fresh offers free delivery for orders above $50 and charges $9.99 for lesser orders.
The online retailer will also deliver books, Kindles and other merchandise along with groceries, and it is using grocery delivery as a channel for selling other products, Zakkour said.
Jim Tompkins, founder of Tompkins International, blogged on the company’s Website that Prime Air is a marketing coup more than a real operational possibility because it sends the message that Amazon is cutting edge and focused on speed for the customer.
“The real genius is in the public relations value and its timing. He nailed it. Everyone is talking about Amazon today, the busiest day of the online shopping year. By the end of Cyber Monday (Dec. 2), the National Retail Federation estimates that 131 million Americans will have shopped online on this day alone,” he wrote.