The future of deliveries

Trading Straits

Drones can deliver goods faster, cheaper and more sustainably than traditional methods. But how are they shaping the global supply market and what are the benefits and challenges of using them? Reed Smith partners Laura-May Scott and Gregory Speier discuss the current state and future trends of the drone delivery market, the key drivers and barriers of its growth, and the legal and regulatory implications of this emerging industry.

This podcast is part of the From A2B: Decoding the global supply chain series, where Reed Smith lawyers share insights on the latest developments and issues affecting the transportation sector.

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Transcript:

Intro: Trading Straits brings legal and business insights at the intersection of the shipping and energy sectors. This podcast series offers trends, developments, challenges and topics of interest from Reed Smith litigation, regulatory and finance laws across our network of global offices. If you have any questions about the topics discussed on this podcast, please do contact our speakers.

Laura-May: Hello and welcome to the Reed Smith podcast channel, Trading Straits. My name is Laura-May Scott, and I'm a disputes partner at Reed Smith, working out of London.

Gregory: And I am Greg Speier, a partner in the transportation industry group at Reed Smith, working out of our Princeton, New Jersey office. Today, we will be exploring how technology and innovation are transforming the world of logistics and transportation. Specifically, we will talk about one of the most exciting and also controversial developments in the delivery industry; drones.

Laura-May: So drones, or unmanned aerial vehicles, are flying machines that can be remotely controlled or programmed to perform certain tasks, such as surveillance, photography, or delivery. In recent years, drones have been increasingly used by couriers and e-commerce companies to deliver goods faster, cheaper, and often more sustainably than traditional methods. Today, we will uncover how drones are shaping the global supply market and what the benefits and challenges are of using them.

Gregory: Yep, that's true. And we definitely have a lot to get through today. And it's really fascinating to see how drones are transforming the delivery industry overall. And, you know, this is all new. You know, the drone delivery market is still very new. It's in its infancy, but it's growing so fast. It's growing rapidly. And according to a 2023 study conducted by market research platform, Markets and Markets, the current state of global drone logistics and transportation is expected to reach $16.1 billion, that's US dollars, by 2030. So in about five years, it's going to be a $16.1 billion industry. And that's up from not even $1 billion last year.

Laura-May: Yeah, I mean, that's a compound annual growth rate of over 50%. It's huge.

Gregory: Yep, absolutely. Huge is right. And so what is the main driver behind this growth? It's cheaper, there's more convenient delivery market options, especially in certain industries. Think about e-commerce, healthcare, agriculture, mining. You have all of these industries that are demanding, you know, cheaper, faster, more convenient delivery market options. And then also that's coupled with technological advancements, the hardware, the software, the infrastructure, and all of the largest players right now, the big ticket retailers, they all want to be delivering products by drone, and many are already doing so.

Laura-May: Exactly that. And as a result of that growth, we're seeing key trends coming out of the market. And I'd have to say that the first and most obvious one to me is the development of more sophisticated and autonomous drones as we see the technology develop in the way that you've described, Greg. There's the integration of other drones with other modes of transportation, such as trucks, trains, or ships working together with drones to deliver things. And obviously, there's also the emergence of new business models and regulations that enable and support drone delivery.

Gregory: Absolutely. And from the customer point of view, also, the drones can deliver products faster, cheaper, more convenient delivery options. And think about all the time sensitive and urgent products that could be delivered to remote areas or much more quickly, medicine, food, electronics, urgent items that customers need. Those could all be delivered by drone.

Laura-May: Yeah, and they offer that flexibility and personalization because customers can choose when and where they want to receive their packages and often can track that delivery in real time. So for the couriers themselves, the companies, obviously drones can offer lower operational costs than some of the other more traditional methods of transportation and delivery. And, you know, they can create higher efficiencies, higher customer satisfaction if obviously the job is done correctly. And they can often reduce fuel consumption, labor costs, vehicle maintenance, and avoid traffic jams and road accidents and theft, et cetera. There are so many benefits.

Gregory: That's so true. And another big issue where there's another benefit of drone operations, sustainability. Delivery can reduce the carbon footprint. I mean, just driving down the highway around where I live, you just see trucks and trucks of big retailers. And so if we're able to reduce some of that traffic or customers driving to and from pharmacies or the big box retailers to have so much less pollution and cars and trucks on the road, the impact is potentially huge.

Laura-May: Totally. They also offer, I guess, something, just stepping back slightly, which is the wider social and environmental benefits. They can save lives by delivering life-saving supplies, as you said, such as medicine, vaccines, to rural health facilities, or even to war zones, where there's a significant issue in accessing the land, and drones can get in there and do that more efficiently and safely than any other mode of transport.

Gregory: Yeah, good point. War zones, very timely as well. So that's definitely a great point. Another benefit of drone operations, they will, from my perspective, create jobs, employing drone operators, technicians, entrepreneurs, all who can leverage drones to offer new services or products. So drones could have a positive impact on many aspects of not only the environment, but society as well.

Laura-May: I totally agree. So we're espousing all the virtues of drones, but we should flag also that there are obviously several challenges and risks that drone delivery face, especially as it's an emerging market. And those can be both technical and non-technical.

Gregory: Yeah, it's really important we discuss that. On the technical side, there are challenges. Reliability, safety, and security. Drones, like any product, it can malfunction, crash, be hacked. There could be damage caused to person, property, injury, theft. There are also airspace concerns to ensure drones are not crashing into other drones or drones are not interfering with the airspace of other operations that are out there. And then the potential of nuisance claims. We've already seen a few filed in the U.S. With the interference of drones and the sound and how they interfere. And if you look up to the sky and all of a sudden there's drones interfering with the ground rights of your property. So these are all things that from the U.S. side, the FAA is considering. They are rolling out different blueprints and regulatory frameworks. And they'll continue to do so as drone operations increase and evolve. And we'll talk about it a little bit later. Technology is constantly improving. So there are solutions in terms of having more robust and resilient drones. And then coupled with the implementation of strict quality and safety standards, I really do think that the drone space is ready to take off.

Laura-May: Yeah, I agree. You mentioned airspace, Greg, which is absolutely a concern. And I guess the key issue there that you touched on is that we have to ensure that drones integrate in the right way with the existing traffic management system, because drones can interfere with other aircraft, planes, helicopters, balloons, and cause collisions or delays. And I think as we see more drones emerge over time, we will have to manage that more carefully.

Gregory: Yeah, no doubt about that. And kind of what I see as some solutions to this are, we need the development of a dedicated and coordinated drone traffic management system, but also the establishment of clear and consistent rules and regulations. And there has to be all along the way collaboration with various stakeholders, obviously the government and regulators, but also the airlines and drone operators. And one thing that is noteworthy and worth mentioning is that over the summer in Dallas, Texas. Zipline International and Wing Aviation, they were permitted by the FAA, the Federal Aviation Administration, to deliver packages to customers via drone beyond visual line of sight. BVLS is how we refer to that. And that means that the operators are able to operate these drones so far that they cannot see them. And that's really incredible and is a huge advancement from the U.S. point of view. And these drones were able to do that due to technology, an advancement known as UTM, or Unmanned Aircraft System Traffic Management. And so with UTM, there's a cooperative interaction between drone operators, service providers, and the FAA to make sure that there's real-time communication. And so despite this technology, I've been in the business for a long time, it is inevitable that, unfortunately, that there probably will be a crash of some kind occur that is significant and noteworthy, causing significant injury to people, property, or both.

Laura-May: Yeah, and I guess those using drones will want to off-board some of that risk, some of that accident risk, and I certainly think that's where insurance can help. So as of 2024, in the UK, we've implemented a comprehensive set of drone laws regulated by the Civil Aviation Authority to ensure the safe and responsible operation of drones to avoid those sorts of issues that you've identified, Greg. And the CAA here in the UK regulates drone usage together with the local authorities who may have specific requirements or rules for drone flights within their jurisdiction. And in addition to that, there are sometimes local bylaws that can regulate particular restricted airspaces.

Gregory: Yeah. So, I mean, that makes me think, like in your view, Laura-May, does the insurance you need depend on the size of your drone and what you are using it for?

Laura-May: Yes, exactly that. So in short, if you fly a drone that weighs less than 20 kilograms for fun, you know, as a sports or as a hobby, then you can choose whether or not you have insurance. But if the drone is over 20 kg, then you do need insurance. And certainly if you use it for work or business purposes, then you need insurance.

Gregory: Okay, so the CAA requires commercial drone operators to hold a quote-unquote adequate level of insurance, which that includes public liability and aviation-specific liability?

Laura-May: Yes, yes, Greg, that's it. So public liability insurance needs to be compliant with EC Regulation 785 of 2004, and that regulation applies to all air carriers and to all aircraft operators flying within into out of all over the territory of a member state to which the treaty applies and the UK is caught within that. And according to that regulation a drone operator must purchase at least 750,000 special drawing rights. SDRs they're often referred to. And that's when they're operating an aircraft of up to 500 kg so those SDRs are effectively just supplementary foreign exchange reserve assets they're defined and maintained by the international monetary fund. I think at this time, 750,000 special drawing rights equates to around just under 770,000 pounds, British pounds. But insurers effectively write the cover on a minimum coverage basis. So that means at all times, the insured will be covered for the equivalent of 750,000 SDRs. And that allows for any currency fluctuations that exist in relation to the denominated policy currency agency that's chosen. So as a drone operator, you'll always want to know that you're covered at least to the minimum amount required by regulation. And that's how the insurance is written.

Gregory: Oh, wow. All right. So but what happens if you fail to comply?

Laura-May: Well, failure to comply with the regulation can result in fines or revocation of permissions to fly within the UK and the EU. So they are pretty severe. And I should note that the position in the U.S. and obviously globally is different. There is no one answer to drone regulations and particularly in the U.S. As it's such a large land it really varies depending on the type, purpose, location and operation of the drone. But the FFA as you mentioned Greg is the main authority that regulates the airspace and therefore the use of drones within the U.S. And the FFA has different rules and requirements again depending on whether it's recreational or commercial or public or educational drone use. And they also set out rules in relation to how you should register and certify and safely use your drone. I think other federal, state and local authorities may also have their own laws and regulations regarding drone use too. If any of our listeners want to understand more about the rules in the US, then please do reach out to us. And a good starting place in terms of resources is the Know Before You Fly campaign that was issued by the FAA together with other drone organizations. And in that campaign, there are lots of tips, best practices and FAQs for drone operators. It's a great place to start before you seek legal counsel.

Gregory: Yeah. And if we just pause here for a second, it makes me realize in real time that this is a lot of information that drone operators would want to get familiar with before attempting that first drone delivery.

Laura-May: Totally. In reality, commercial drone operators will want wider reaching insurance cover than what is required by the local regulation, I'm sure. Because one of the purposes of insurance is obviously to off-board risk and the scope of insurance available for drones in the market is wide. So you could include, for example, accidental damage insurance within your drone insurance policy. And that would come in handy, obviously, if the drone crashes, the insurance would cover the cost of repairing or replacing the drone if it's accidentally damaged. You can also get theft insurance, and that might be a prudent investment where people find ways to intercept drones and use them for illegal activity. No doubt as the market grows, we'll begin to see more of that. Another insurance that's often included is flyaway insurance.

Gregory: Flyaway insurance? I'm not so familiar with that. Could you talk a little bit more about that?

Laura-May: Of course. So flyaway insurance provides cover if your drone is lost due to flyaway. And that occurs when your drone suddenly loses contact with the controller and flies away uncontrollably. Sounds slightly scary, I guess. And you'd hope it wouldn't happen very often. But if you're a commercial drone operator, that's key that you know where your drone is. And that insurance gives you that comfort in the event that something happens. I'd say with all of this, as a commercial drone operator, you must liaise with a lawyer to find out what the requirements are under the local law in your area. And then sit down with your broker to discuss bespoke insurance cover and what's available in your local insurance market. Because as I say, things are emerging and the cost, for example, of commercial drone insurance will totally depend on a variety of factors such as where is the drone being used? What level of cover is required, what's the intended use of the drone. You really need to explain everything so that insurers understand what risk they are being expected to cover.

Gregory: All right. Very interesting. And so in your view and in your expertise, do you think that the insurance requirements and scope of coverage available will develop and expand as the technology does?

Laura-May: Yeah, I think the insurance market is in its infancy in the way that the drone market is at the moment, the products being offered by insurers will evolve as the market does. I guess moving on, Greg, it would be remiss of us not to mention some of those non-technical challenges that we mentioned earlier. I think most we can say are related to social, ethical, legal implications of drones, because as you've said earlier in this podcast, drones can raise concerns about privacy, noise, nuisance or liability among the public, the customers or the local authorities.

Gregory: Yeah, I think some of the solutions are education and awareness to the benefits and risks of drones. And I believe that the FAA is doing a good job putting out various campaigns, the Know Before You Fly campaign, for instance, and getting everyone, the public in our country, getting comfortable with drones. And so that includes the creation and enforcement of fair and transparent policies and laws. Another non-technical challenge is the economic and financial viability of drones. So for all the benefits that we see that drones could play for our society and economy, there's also some opposition to the market. They could see drones as disruptive, unfair, or unprofitable, especially in some established or regulated markets. So I do think the future of drone delivery is bright, no doubt about that, but it is also uncertain.

Laura-May: Agreed. I think the market will continue to grow and diversify, as we've said, and more companies and industries will begin to adopt and experiment with drones. and more customers and regions will demand and benefit from drones too. They will want to see that efficient delivery, for example, of an item that they've ordered online. I think we're also agreed, Greg, that the market will continue to innovate and integrate. We haven't seen the end of innovation in terms of technological advancements for drones. And as more technologies and platforms enable and support drones, we'll see more modes and networks that complement the use of drones.

Gregory: Yeah, definitely. And I think the market will also face some uncertainties and disruptions as regulations and policies affect and shape drones and as risks, various threats challenge drone operations. And one such risk is with respect to product liability related issues and legal issues in the US. And one issue that comes to mind right now is federal preemption. So a lot of state and local governments are passing laws about drone operations, about when they could fly, how high they could fly, all different things trying to control operations of drones. But the question then becomes, what happens when those laws conflict, either expressly or implicitly, with laws passed and regulations that are federal in nature? So that's where federal preemption comes in. Will states have any power to enact laws that are in any way counter to federal laws governing drones? So the courts are just beginning to sort all that out. A second issue involves a recent Supreme Court. The U.S. Supreme Court came out earlier this year with a significant decision, the Loper-Bright Enterprises decision, where the Supreme Court overturned Chevron deference and they upended 40 years of administrative law precedent. So another question that comes to mind for me is an open question of how courts across the country are going to deal with the deep regulatory body of laws and regulations governing flight in the US. How are courts going to view those going forward in light of the Loper Bright decision?

Laura-May: Yeah, totally. I mean, there's so much to grapple with there. What about from a product liability viewpoint, Greg?

Gregory: Yeah, from a product liability viewpoint, manufacturers, they should take note. So FAA regulations and standards, those are all great. So for a manufacturer to say, well, I complied with an FAA standard or regulation, that by itself is not dispositive in a future litigation. Should your product cause injury or damage to a person or property. So at a trial, you could no doubt tell a jury that, hey, my product complied with these FAA regulations. But that's not the question that the jury ultimately has to grapple with. The jury will have to conduct various tests, a risk versus utility test, or in other jurisdictions, what's known as a consumer expectations test to determine whether or not a product manufacturer should be found liable for a potentially or allegedly defective product. And under a product defect cause of action, there are three different prongs that a plaintiff could pursue. Those are defective design. Defective design means that there's some flaw in the way of the engineering design of the product that resulted in the project failing and causing injury in some way. There's defective manufacture. The manufacturing defect means that the product came off of the line differently manufactured than the rest of them, that it's not a specification. And because of that defect, there was some problem that caused injury or damage. And the third is failure to warn or instruct. So this is a big one, I think, in an emerging market, such as the drone delivery market. So for instance, if a drone or if it's alleged that a drone does not come with adequate warnings or instructions about the proper use, maintenance or risks about that operation, and this leads to harm, the manufacturer, the designer, or even the seller in some instances may be liable for damages. So, and we also talked about nuisance claims before as well. So, and then the last potential liability for a manufacturer. A designer or a seller is a breach of warranty claim. So a breach of warranty claim is the allegation if a drone does not perform as promised or expected and that it's not delivering the features and quality and durability that are advertised, that could result in a potential claim against a manufacturer, a seller, or a designer. So I'm telling you, there's really no shortage of legal issues on the horizon in the US as it concerns drones. Insurance, as you talked about, is key, and consulting with legal counsel is imperative.

Laura-May: I totally agree. Better to be safe than sorry, especially where this tech is so new. Despite the risks we've outlined, the use of drones is an exciting technology. I think we agree with each other there. And it will continue to transform the global supply chain as time goes on. The drone market will not only deliver goods, but it would also deliver value and impact as drones evolve to support different industries commercially and contribute generally to some of those social and environmental things that we've talked about.

Gregory: Yeah, absolutely. And my prediction is that drone delivery will continue to expand. And our recommendation is that drone delivery stakeholders, they should watch carefully as the laws and regulatory pictures relating to drones develops. And there's no doubt that it will.

Laura-May: And it sounds like then that we're going to be about to do a part two of this episode in a year's time, Greg.

Gregory: Yeah, that's the deal. That's the deal. Well, thank you so much, Laura May. It was really, really nice talking with you about this topic. And thank you to the listeners for tuning in.

Laura-May: Yes, thank you. And if you enjoyed this episode, then please do subscribe, rate, and review us on your favorite podcast platform. And please do share your thoughts with Greg and I and feedback to us on our social media channels.

Outro: Trading Straits is a Reed Smith production. Our producers are Ali McCardell and Shannon Ryan. For more information about Reed Smith's energy and natural resources or transportation practices, please email [e-mail]. You can find our podcast on podcast streaming platforms, reedsmith.com, and our social media accounts at Reed Smith LLP.

Disclaimer: This podcast is provided for educational purposes. It does not constitute legal advice and is not intended to establish an attorney-client relationship, nor is it intended to suggest or establish standards of care applicable to particular lawyers in any given situation. Prior results do not guarantee a similar outcome. Any views, opinions, or comments made by any external guest speaker are not to be attributed to Reed Smith LLP or its individual lawyers.

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