March 10, 2015 at 5:00 am ET
American drone manufacturers are ready for liftoff in the wake of a tandem of proposed federal rules that will provide a flight plan of regulatory certainty and flexibility for innovation at home and abroad.
Recently, the Federal Aviation Administration (FAA) issued a long anticipated draft rule governing commercial use of drones. Soon after, the State Department announced that it would allow the export of military ones. These proposed regulations set the stage for drone makers to launch their sales into orbit.
This sector consists of three primary segments—traditional defense companies such as Lockheed Martin and Boeing; tech acquirers such as Google and Facebook; and smaller manufacturers such as AeroVironment, L-3 Communications, and 3DR. Defense firms will benefit the most from the export of armed drones, while tech acquirers and smaller manufacturers stand to gain the most from the draft commercial rule.
That draft commercial rule favors manufacturers of drones on the smaller side, limiting commercial operation to drones that weigh less than 55 pounds. It also restricts speed, altitude, permissible flight paths, and hours of operation, while requiring the maintenance of constant visual line-of-sight. Despite these restrictions, the FAA chose not to include other, more onerous requirements, such as mandating that operators hold pilot licenses.
But the biggest burden is that, at least for now, dropping cargo is prohibited—delaying Amazon’s Prime Air service delivery. As a result, Amazon’s tests have been forced overseas and could ultimately be fully relocated abroad unless the final regulation adequately addresses this concern.
Companies desiring drone technology will increasingly find it easier to simply purchase it rather than develop it, a trend which already has led some large players in this space to become acquisitive. For example, Google purchased Titan Aerospace and Facebook bought Ascenta last year. Startups such as Matternet, Skycatch, and Airware remain attractive targets. One year ago, Lockheed Martin entered a joint agreement with AeroVironment, the producer of the Raven — the world’s best-selling drone — to pursue drone development opportunities focused on its Global Observer, a surveillance drone capable of extreme heights and prolonged flight duration. This partnership allows exploration of a more permanent arrangement, while harnessing strengths from each.
Besides pursuing acquisitions, American drone makers are also poised for a major expansion of sales overseas. Although the specific contours of the export approval process remains classified, drone manufacturers will be able to demonstrate their revenue growth to investors in the coming months. Countries with more active combat roles are likely to purchase larger armed drones from defense firms, but the most lucrative market will still be for smaller drones which gather intelligence, like those made by AeroVironment. Several drones in its inventory are versatile, fit in a backpack, launch by hand, and can land almost anywhere.
Over the longer-term, innovation will continue apace with consolidation. Domestically, Google[x] and 3DR have joined forces to advocate pro-drone regulations in Washington through a trade association called the Small UAV Coalition. Delivery companies FedEx, DHL and UPS have confirmed interest in drone delivery fleets and Facebook founder Mark Zuckerberg said last year that he was seeking to bring the Internet to two-thirds of the Earth that still lacks high-speed access by “beaming Internet from the sky” via drones. Other applications include insurance companies surveying damaged houses, shark monitoring near beaches, and missing person searches. The message from the drone industry is clear: companies intend to push technological limits as far as regulators allow.
The question is how far the FAA is willing to bend based on the input it receives during the ongoing two-month comment period. Going forward, a major step for industry would be allowing heavier drone allowances in expanded operating areas, and the ultimate goal for many firms would be permission to carry cargo. Operator-less automatic drones are also under development and could be advantageous to help companies reduce last mile delivery costs.
Internationally, regulation is more fragmented than in the United States, and drones could enable emerging markets to accelerate economic growth by skipping traditional infrastructure requirements to expand commerce, the way mobile phones have spread through much of Africa. No main road connects East and West Africa—drones could supplement traditional transport systems by seamlessly transiting goods across the continent. Manufacturers are keenly aware of these opportunities and if the FAA regulations do not evolve accordingly and quickly, the industry’s focus will shift to less restrictive regulatory environments in other countries.
Between technological breakthroughs and the potential for regulatory arbitrage, the government will face increasing pressure to be responsive and innovative to the industry’s needs. It will be incumbent upon the FAA to boost the sector’s growth trajectory rather than keeping its revenues tethered to the ground.
Brandon R. Barford is partner at Beacon Policy Advisors LLC a policy research firm based in Washington, D.C.
Marci D. Stewart is a first-year MBA candidate at the Darden School of Business at the University of Virginia.