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The Truth About Amazon's Drones

Stocks in this article: AMZN

The best example probably comes from Amazon's Prime Air promo clip shown on 60 Minutes: Amazon and the FAA both confirmed that Amazon's drones are currently illegal here at home, so the firm had to shoot its video clip overseas.

Will the System Work?

All of the regulatory challenges assume that Amazon's Prime Air will work as advertised in the first place.

Amazon's presentation gave us a pretty good idea of the niche that Prime Air would be used for: shipping small items under five pounds within a 10-mile radius of a distribution center within 30 minutes. It certainly sounds like an attractive service, especially when you consider the fact that it covers around 86% of the items Amazon delivers.

But the logistics seem a little questionable.

>>Sell These 5 Toxic Stocks to Avoid a Christmas Crash

For an Amazon drone to make the 10-mile trek one way in 30 minutes, it would need to be traveling at a brisk 20 miles per hour, and that assumes a direct flight path from the distribution center to the destination. If the FAA allows drones to fly "highways in the sky," it could add significant mileage to a trip. That also doesn't factor in shipment preparation times. If it takes 10 minutes for Amazon's teams to prepare an order, we're talking about a 30 mile-per-hour ground speed to make a 30-minute delivery.

For a two-foot-square aircraft, that's a scale speed of around 300 miles per hour for a full-scale helicopter. On a breezy day, scale speeds of 500 miles per hour may be necessary to hit that same 30-minute delivery time.

We don't know how much Amazon's drones are going to cost. Package delivery firm DHL is testing drones of its own that currently run $54,900 each -- and that's for a vehicle with half the payload of Amazon's octocopters. It's reasonable to think that Amazon will be able to acquire a fleet of octocopters in a few years for much less than that -- until you amortize R&D costs for FAA certification across each aircraft.

Because Prime Air can only carry one item at a time, Amazon needs at least one aircraft for every order that it receives from the time one drone gets sent out to the time it returns for another pickup (longer if we add recharging to the equation).

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