Commercial Drones Hover Just Around the Corner

Commercial Drones Hover Just Around the Corner

Widespread commercial drone delivery got one step closer to reality.

The Wall Street Journal reported Tuesday that United Parcel Service (UPS) got the go-ahead from the Federal Aviation Administration to use unmanned aircraft to deliver health supplies.

It’s the first step toward routing consumer packages via drone delivery throughout the United States.

Get used to the future being up in the air …

For some, the idea of electric drones buzzing overhead is downright dystopian. Science fiction teaches us that these “eyes in the sky” are the foundation of surveillance culture. They can follow us everywhere we go, and there is nothing we can do about it.

Related post: A force for good … or government?

But to business leaders, they represent cost efficiencies. (AMZN) CEO Jeff Bezos began talking about drones in 2013. Amazon Prime Air, a separate subsidiary, started working with NASA to develop an air traffic management system.

The big idea was to fly next-generation drones at low altitudes, 400 feet or less, in locations that that were not accessible by road or fixed routes.

The FAA granted the Seattle, Wash., e-commence giant permission in 2015 to begin testing a prototype. And the company even patented a large beehive-like depot in 2017, to house, charge and dispatch the robotic package carriers. The wild idea of flying parcels seemed imminent.

Related post: Same-day air delivery flies higher with 5G

However, Amazon has never been able to push its concept across the finish line with regulators. Controlling hundreds of drones at once, the strength and speed of the operating network and the drones’ susceptibility to strong weather shelved any hopes of commercial release.

But this week, UPS executives got there.

The agreement with the FAA is the first of its kind, setting the stage for the Atlanta-based logistics company to set up unlimited fleets of drones and pilots on the ground, according to the WSJ.

Its Flight Forward subsidiary will begin with the shipment of medical supplies and specimens across various campuses in North Carolina. CEO David Abney says the operation will grow to 100 or more hospital complexes within months.

As the expansion unfolds, managers expect drone delivery for UPS packages to become a reality for rural communities that are difficult to service conventionally.

The commercial drone market in the U.S. was valued at $5.8 billion in 2018, but stands to surge to $129.2 billion by 2025, a possible 56.5% compound growth rate. Source: Grand View Research

While progress from trial-run to standard service is pretty straightforward here, the play for investors is less direct.

UPS is a giant company. Drone delivery will play a very small role in future sales and earnings. And while being the first mover is an advantage, it’s going to take some time for this to be reflected in the share price.

In the interim, the best way to invest in the development of commercial drones is through the companies providing the components.

In September 2017, Heico Corp. (HCI) acquired AeroAntenna Technology, which makes high-performance active antenna systems for the defense industry and commercial aircraft.

The press release for the acquisition noted the deal was the largest ever for the niche-market aerospace contractor.

But managers at Heico saw a big, new market on the radar …

The Hollywood, Fla., company has been a consistent grower because managers has always been two steps ahead of competitors when moving into new markets.

AeroAntenna allows Heico to become an instant player in drone subsystems.

The company is growing annual sales in the middle teens. Revenues reached $1.8 billion in 2018, up 16.6% year-over-year. At the same time, managers have maintained gross margins of 40%, and operating margins above 20%.

Heico shares are up 55.3% in 2019.

[Heico is one of a rare breed of stocks that, simply, doesn’t suck. Here’s what I mean by that …]

This story is similar to what is transpiring at Sony’s (SNE) image sensor business …

Today, the Japanese consumer electronics company has 50% market share in the sensors found in cameras, smartphones and commercial drones. Its scale, substantial intellectual property portfolio and best-in-class devices limit competition.

It’s simply more cost-effective for companies to buy the sensors from Sony than build their own custom units.

All this is coming at an opportune time. As commercial drones move from testing to reality, a new market for those sensors  will take shape.

An important piece of the future of logistics is up in the air. It’s time for investors to begin taking stakes.

Best wishes,
Jon D. Markman

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Comments 1

Col. Charles H. Bale October 21, 2019

Drones are a wave of the future. one of the areas that is so important is a delivery of medicine to the people that are unable to get out and get their medicine. Delivery charges by car or vehicle are very very high today. I would imagine that the drone cost would drop exponentially no. I would hope so anyway. That’s where I see that the biggest advantage to the elderly is anyway.

I don’t see real big drones delivering dresses and clothes and shoes and large items. I do however see them delivering items that are small and can be handled easily with a drone that’s a reasonable size.

The real

Problem I see is people keeping them in destroying them. you know one of the things that comes to mind is shooting them out of the sky. You know many people would think of them more like a skeet shoot broad axe. and when I say many I mean people that tend to have an attitude and there are many of those in the United States today I think that’s something that has to be worked out especially new laws have to be passed to have severe penalties for people possibly shooting him out of the sky specially if it was medicine or something that needed to get from one hospital to another quickly and officially a specially say let’s say transplant type deliveries.