FAA Rules Prevent Amazon From Using Drones ... for Now

The idea of Amazon's (NASDAQ: AMZN  ) drone delivery always seemed like something out of science fiction. Now it appears the program has been formally grounded -- at least for now -- by the Federal Aviation Administration. 

The FAA has always been opposed to using drones for commercial purposes, but the depth of the organization's opposition was not fully known until earlier this week.

In a document that was first detailed by Ars Technica Monday, the FAA made the pronouncement that businesses cannot use drones for delivery. The document seeks comment on the federal board's interpretation of rules that currently outlaw the commercial use of drones, or what it calls "model aircraft." The FAA has taken the position that commercial operation of drones has been illegal since 2007. A federal judge ruled in March that the FAA enacted those regulations illegally because it did not take public input before adopting the rules in violation of federal law. 

This could open a door for Amazon to get the rules changed if the public overwhelmingly supports the program. A more likely result is the FAA taking public comment in order to comply with the federal standards so it can keep enforcing its existing ban.

The FAA has promised that it will revisit the commercial application of drones later this year, though there is no reason to believe it will change its stance unless there is public outcry in support of programs like Amazon's.

Where the FAA draws the line
The FAA permits using drones or model aircraft for recreational purposes. It also specifically bars commercial uses as spelled out in the aforementioned document:

To qualify as a model aircraft, the aircraft would need to be operated purely for recreational or hobby purposes, and within the visual line of sight of the operator. The policy statement also clarified that AC 91-57 applied only to modelers and specifically excludes its use by persons or companies for business purposes.

A later part of the document spells out the ban on commercial uses of drones:

Any operation not conducted strictly for hobby or recreation purposes could not be operated under the special rule for model aircraft. Clearly, commercial operations would not be hobby or recreation flights. Likewise, flights that are in furtherance of a business, or incidental to a person's business, would not be a hobby or recreation flight.

The FAA also specifically tweaked Amazon by declaring that delivering packages for a fee is a commercial use that is thereby not allowed. Of course, Amazon could try to skirt that by not charging for the delivery, but it would be hard for the retailer to argue that using drones for delivery counts as a hobby even under those circumstances. So as it currently stands, the law stops the company's Amazon Prime Air drone delivery service from being launched.

What is Amazon doing?
When Amazon CEO Jeff Bezos announced the project on 60 Minutes in December, he acknowledged that it might take years to implement -- at least four or five, optimistically. He also admitted that one of the biggest challenges will be convincing the FAA that it's safe.

The drones would enable the company to offer inexpensive same-day delivery from the network of warehouses the company has built around the United States. Same-day delivery -- which the company is pursuing via a variety of means -- would theoretically remove one of the few remaining advantages traditional brick-and-mortar retail stores have.

Why does Amazon want to use drones?
The challenge for Amazon is the so called "last mile" -- bringing a package that last little bit from a warehouse to a customer's door. Rob Howard, CEO and founder of Grand Junction, a company that specializes in last-mile deliveries, spoke with The Motley Fool via email. He believes that whether it's drones, trucks, or another method covering that final stretch to the doorstep, the retailer will lower its costs by controlling the last part of the delivery process itself. He also said that cost is not the only factor for the company.

"While cost is certainly a consideration, that's a tactical way of thinking about logistics, and Amazon thinks strategically," Howard told the Fool. "I believe the real motivation is to offer the best possible customer experience. During the holidays, they were left holding the bag with customers in the wake of UPS' service problems, which will only increase as residential and e-commerce deliveries grow. Amazon is also moving to expand their same-day delivery service level nationwide, and today their only option to be successful at this are the local courier networks, who have traditionally struggled to provide a professional delivery experience."

The creation of a last-mile delivery service would also allow the company to leverage that service to offer shipping for items that go beyond what Amazon stocks.

"I'm willing to bet, however, they will offer use of their courier network to marketplace sellers that fulfill through their distribution centers," Howard said. "The network is the only nationwide network in retail, and other companies could leverage it to provide same-day delivery or even lower their costs for next-day delivery."

Will it work?
While drones have always seemed the least likely scenario, Amazon will ultimately build a last-mile delivery network that allows it to control its customer experience to a greater degree. Much of that will likely be done by building a fleet of trucks and partnering selectively. Drones, however, could play a part if the company can both perfect its program and convince the FAA -- and the public -- that it's safe.

The long development time for Amazon Prime Air gives the company years to sway public opinion, woo the FAA, and win over other politicians. It's not really important to Amazon's business how it figures out last-mile -- merely that it does. Drones could well be part of that even if the day it happens is far in the future.  

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