When will drone delivery actually make sense? Here’s what McKinsey cost model predicts

For hundreds and thousands of people in the United States, 2022 was the year commercial drone delivery finally became a reality. Walmart expanded its drone delivery operations to 36 hubs spread across Arizona, Arkansas, Florida, North Carolina, Texas, Utah, and Virginia. Alphabet’s Wing began delivering to Texas’ Dallas-Fort Worth area. Heck, even Amazon‘s drone delivery program finally took off in a couple of cities in California and Texas before the year came to a close.

A lot more activity is expected in 2023, with Mitsubishi Electric going as far as to put together a drone-based logistics platform that will bring shippers, drone manufacturers, drone operators, and other service providers under one roof.

But as enticing as the promise of ultrafast drone delivery is, in the long run, this last-mile logistics model will be able to replace other means of transportation only when it is truly cost-effective – which begs the question…

How much does drone delivery actually cost?

McKinsey & Company ran some numbers and fished out the unit delivery costs of different transport modes, including drone delivery. Take a look:

A drone delivering a single package is estimated to have a direct operating cost of approximately $13.50. And this cost is not competitive with electric cars and vans doing a single delivery or any type of vehicle doing multiple deliveries in a single run.

But that could change if the regulatory environment were to better support drone delivery. The single most important factor driving up the cost of drone delivery right now is labor. In the McKinsey model, this factor accounts for 95% of the cost. And that’s because, in most countries, regulations state that a pilot can only operate and monitor only one drone at a time. Many regions also require a visual observer to monitor the airspace in which the drone operates.

Therefore, if drones were to become truly cost-competitive, the number of drones per operator would need to increase greatly. This means that technology will also need to advance significantly in terms of drone autonomy, sense-and-avoid solutions, and uncrewed traffic management systems. Once these innovations are in place, regulations will need to evolve, enabling larger numbers of drones per operator. More specifically, a single operator may need to manage as many as 20 drones in a densely used airspace to gain potential cost advantages from drone delivery.

“If drone operators can eventually manage 20 drones simultaneously, our analysis, using reasonable assumptions, suggests that a single package delivery will cost about $1.50 to $2,” the McKinsey report says. This is in line with the per-package cost for an electric car delivering five packages and any type of van delivering 100 packages in a milk-run format when a driver delivers all packages in a single trip — a process that is not always feasible.

There’s no doubt that drone technology has the potential to meet a range of last-mile consumer use cases, such as food and beverages, convenience products, and other small packages, as well as B2B needs, such as moving medical samples to labs. And as McKinsey analysts point out:

As the industry steps out of its infancy, drones may become cost-competitive at a direct operating cost level. In fact, under certain conditions — such as in regions with poor road infrastructure or when pooling deliveries does not make sense — drones may already be the most cost-effective mode of delivery.

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