AMAZON: THE FUTURE OF LOGISTICS AND THE REAL COSTS OF UNMANNEND AERIAL VEHICLES (UAVS)

Unmanned aerial vehicles (UAVs), also known as drones, are said to be the future of logistics. However, to determine the real costs of UAVs, we have to look at three essential aspects

1. How many drones are required?
2. Which investments must be made for the drone fleet?
3. What are the costs of drone shipments?

I would be very astonished if you haven’t yet heard about retail giant Amazon and its plans for unmanned aerial vehicles (UAVs), otherwise known as drones, in distribution.

To determine the real costs of UAVs, we have to look at three essential aspects:

1. How many drones are required?
2. Which investments have to be made for the drone fleet?
3. What are the costs of drone shipments

Jeff Bezos (CEO of Amazon) keeps talking about shipping products to consumers’ homes via an UAV. However, it isn’t that easy to simply develop UAV’s and send parcels to customers, because there are many FAA regulations (Federal Aviation Administration) to consider, regarding aerial traffic, safety, regulation of the usage of UAVs in general, etc.

But in the end, after all FAA regulations and requirements are defined and determined, questions will pop up, like “is it possible to replace the classic mail & parcel service through drones?” and “If yes how many UAVs are required in the long term to do so?”.

Well, understanding the volume of drones needed is only one aspect of the equation, the other being the cost of purchasing, deploying, and maintaining this drone army. To understand how much this could potentially cost to implement, the graphics shows what Amazon would incur in capital and operating expenses between 2019 and 2023 (85.000-450.000 drones).

Ok, now we know approximately how many drones are needed within the next 3 years to start the unmanned aerial vehicle revolution. And the required amount keeps growing, at least with round about 20% p.a.

First of all, we have to clarify which kind of drones are currently available in the market. Right now, there are diverse build types of drones like Fixed-Wings, Tilt-Wings, Unmanned Helicopter and Multicopters. All with their own advantages and disadvantages.

Assuming a quick research and the statement of Jeff Bezos himself, that he wants to use some kind of 8-propellor octocopter, as basic model for his amazon drones, the price for one drone will be between $100 and $300.

Despite the assumption that the drone prices will decrease within the next years and using lower estimates of 125$ and higher estimates of 500$ per drone, the plan would likely require a multi-year multi-million-dollar capital investment.

Considering the capital and operating costs of $8.0 million for the “low-cost” variant ($125 drone) and that amazon spends billions of dollars for fulfillment and shipping operations each year (e.g. $11.5 billion in 2015) an additional 1% for future investments seems to be an easy decision.

Before heading the next question (“What are the costs of drone shipments”), let’s take a quick view on amazon’s current costs per shipment.

There are two aspects which have to be mainly considered regarding the costs per shipment. First, we have the shipment to the amazon distribution center and secondly the shipment to the customer himself.

We will concentrate on the shipping costs to the customer, as the other logistic costs are unlikely to increase or be replaced by drones in the long term.

As we know now the actual costs of “classic” shipping let’s take a look on the costs per-shipment via drones.

Research showed very low costs per-shipment compared to the classic delivery model, starting with $0,18 compared to $2.1 in 2019.

Regarding this information, facts and figures, it is not a question “if” drones are the future in the logistics market, but simply a question of “when” are drones starting to takeover this market.