The Drones Are Here
Drones are here. Production is up, prices are down, and they’re showing up practically everywhere. Including, of course, where you don’t want them – as the headlines of drones interfering with firefighters in California last week illustrated so clearly. Infrastructure will never be the same again.
Hot off the press are the “drone airlines.” In late September the first of these became certified in the US by the FAA, run by UPS (UPS now runs the first official drone airline). UPS Flight Forward now has the same status as business jet operators, or airline services that run on-demand rather than scheduled services. UPS can now expand from its North Carolina pilot, where it has run over a thousand revenue-generating flights on a hospital campus, moving supplies around. Only a few weeks later (or a few weeks ago, however you want to think about it), Alphabet’s Wing began commercial deliveries using drones. The first operating segment of Wing’s business is just north of UPS’ pilot, in southern Virginia, and is being used to deliver packages for major clients, such as Walgreens. By the end of October, Uber had gotten into the contest, showing the design of the new six-rotor (for vertical takeoffs and landings) drone, with about 20-mile range, it plans to integrate into its Uber Eats delivery chain.
While it’s possible that pilotless airlines will eventually be a thing, the real impact that these flying drones will have in transportation is on logistics. As costs continue to fall, and range continues to increase, and the machines continue to get smarter, and urban roads continue to be congested, drones have the potential to create major advantages for logistics companies. Increasingly they are as cheap or cheaper to buy than ground transport vehicles, and they can get from point to point faster than most vehicles can – at least within the range of the drones. For now the transport advantage is limited to small and/or high-value cargo, but one can see this boundary evolving rapidly in the near future.
To date (well, one month into official commercial drone services), only a handful of companies are involved. The early adopters already have major investments in electronics and technology surrounding transport logistics. But while it is logical that these players have gotten out the door first, the barriers to other firms adopting drones as part of their own logistics chains are pretty low. Sure, regulation is an issue, especially today in jurisdictions such as the US where most services are regulated; it is not surprising that Europe has seen little or no movement in drones to date. Rules are coming. Putting in place the surrounding technology to use and organize a large fleet of drones is a major investment, but the technology is getting simpler – and the costs keep coming down. Expect the use of this technology to spread fast. Some of the biggest potential for drone transport may well be in the mega-cities of the developing world. There logistics are the most inefficient, and therefore costly for users, and entry regulations likely to arrive later than in heavily-regulated Europe. The relative value-added of cargo transporting drones may be especially high in places like Mumbai, Bangkok, Buenos Aires, and Lagos.
The prospective infrastructure market for drones is not limited to transport. Some power utilities have shown significant interest in the technology (see “Why Power Companies Love Drones,” from Bloomberg New Energy Finance). Here the driver is not so much the ability of drones to carry things from one place to another, but rather their ability to carry increasingly powerful, increasingly small, and increasingly cheap imaging technology aloft over hundreds of miles of power transmission lines. As BNEF points out, drones offer a cheaper and more effective way of monitoring infrastructure than traditional methods of sending workers to dangerous, remote terrain. Drones have already come into widespread use by power companies in the US, and it is forecast that upwards of 400,000 will be deployed in the energy sector by 2020. Aside from transmission lines, drones can also inspect wind turbines and solar panels for nicks and other issues which may reduce production efficiencies. They can also potentially be used for simple repairs on lines – as seen in their use by Duke Power after Hurricane Maria in Puerto Rico. The market is not trivial. Price Waterhouse Coopers has estimated the market for drones just in the US energy sector at $9.5 billion. Again, while this technology is rolling out initially in the US, one can see – especially as prices keep dropping – its very high value for utilities in the developing world, where logistics of getting to lines and monitoring is often made more complicated by geography and poor surface transport. For utilities in sub-Saharan Africa in particular, which often have extremely high Transmission and Distribution losses, drones may offer a low-cost means of saving very large amounts of money – not to mention significantly improving the availability of electricity.
An intriguing corner of infrastructure where drones may offer even yet higher value is: water. The impact of flying drones on an infrastructure service delivered largely below-ground may not seem intuitive. The important thing to focus on here is what a drone is: it is not primarily a “mini-airplane;” rather, it is a mobility platform – technology to move something else around. The something that gets moved around in logistics is a client’s cargo. The something that gets moved around for a power company is imaging technology, specifically above-ground imaging technology. For a water utility, moving imaging technology around can be extremely valuable: it just has to be underwater imaging technology, rather than above-ground. Now, this exists. And it is cheap. Check on Google, and you’ll find several submersible drones you can buy yourself – some for under $1,000 (see Forbes: Most Drones Fly. This Drone Swims). Water utilities have higher transmission and distribution losses than power companies – in fact for many water utilities, “non-revenue water,” essentially water lost somewhere in the underground pipe system, is the highest cost element for the company, and higher than profits. The problem for water utilities is that it is difficult to see underground pipes: it’s expensive and disruptive to dig them up. Ideally, you want to be sure that you know exactly where a leak is before you dig. This is where drones come in: a submersible drone with a camera makes it much cheaper and faster to find leaks, meaning that pipe maintenance becomes much cheaper, less risky, and faster. One can see potentially large impacts here on the economics – and service standards – of water utilities. And again, one can see the potential value-added being the highest where the inefficiencies today are the greatest: in the developing world.
For infrastructure investors, what are some of the implications of drones? The most visible and likely will probably be in logistics. As we saw above, the more inefficient a market for commercial transport is today, the greater the potential impacts of drones to carry cargo. So one can see logistics companies everywhere in the world wanting to improve their business by incorporating them. With the hurdle of mastering some of the technology involved, one could also potentially envisage in some markets a type of company which does not exist today: cargo transport companies specialized in drone usage, especially in markets with many large urban areas and challenging ground transport conditions – say Brazil, or Nigeria. Given the potentially widespread use for drones in any geography, one can also foresee the creation of companies specialized in selling, servicing, and/or leasing drones in multiple markets – potentially across different infrastructure sub-sectors. For power and water utilities, where drones can potentially have a significant impact on reducing transmission and distribution costs, yet where incumbent utilities may not be at the forefront of deployments of new technologies, one can see the possible development of wide-spread programs to encourage, facilitate, and finance the deployment of drones. And many more. Investors will want to become conversant with this new technology, look for related investment opportunities which have not existed previously, and be a channel for clients to see how these can impact their businesses.
Yet another disruptive technology impacting infrastructure. As with some of the others – wind turbines and solar panels – drones have the potential to enable the delivery of services more cheaply and efficiently. But as with some of the others – dockless scooters for example – they have a less favorable side too. As we saw this Summer with the attack on Saudi Arabian energy facilities by drones launched from Yemen, a mobility platform to move things around can carry destructive cargo as easily as useful cargo. So as with the proliferation of more efficient electronic control systems and data management which has helped utilities, but also opened them up to more risks, so with drones. Drones will have a big market, and a big impact on infrastructure – and they’ll be one more element of risk for companies to keep an eye on. Off we go!