UPS paves profitable path for drone deliveries as it prepares for nationwide takeoff

United Parcel Service (UPS) expects to receive Federal Aviation Administration (FAA) approval by the end of the year to conduct drone delivery anywhere in the United States.

We’re taking off the training wheels and starting to ride,” said Bala Ganesh, vice president of UPS’s Advanced Technology Group.

The 112-year-old delivery company just announced the creation of a new drone subsidiary called UPS Flight Forward, Inc. UPS has filed for Part 135 certification from the FAA.

A drone, made by CyPhy Works, stands over the UPS package it carried to Children's Island off the coast of Beverly, Massachusetts, U.S. September 22, 2016, during UPS's demonstration of a drone making a commercial delivery of a package to a remote or difficult-to-access location. Picture taken September 22, 2016. REUTERS/Brian Snyder

According to a company press release UPS Flight Forward will be allowed to conduct flight operations beyond line of sight, day or night, with an unlimited number of drones and operators in command once the FAA grants final certification.

“This is moving into deployment,” Ganesh said. “This is turning into reality. It is no longer just a concept.”

Drone flights already underway

UPS is already using drones to deliver blood samples and specimens at the WakeMed hospital campus in Raleigh, North Carolina. It’s part of an FAA pilot program for drone delivery. There are anywhere from five to 10 flights a day, but the FAA limits those flights to an area within the WakeMed campus.

Other companies like Alphabet (GOOGL) subsidiary Wing Aviation have been flying drone delivery test programs with similar restrictions. But Wing Aviation received Part 135 certification from the FAA in April and it plans to expand into commercial home delivery in Southwest Virginia with what it calls, “a delivery trial” later this year.

Ganesh said the planned UPS drone expansion will dwarf Wing, because UPS is already generating revenue.

[Read also: UPS teams up with 3 major retailers, launches new services to expand delivery]

Path to profitability

UPS was the first company in the country to earn money from drone deliveries when its flights began in the spring at WakeMed. It’s one reason Ganesh said, “We are going to be a charter airline and they (Wing) are a crop duster.”

UPS, according to Ganesh, has already identified a pathway to profitability by aligning its drone delivery program with health care systems like WakeMed in Raleigh. “We want to take that and start moving it to other hospital systems in the U.S,” he said. Although Ganesh doesn’t have a timeline for when UPS Flight Forward will pay for itself.

UPS Flight Forward is in negotiations with 25 hospital systems nationwide and Ganesh said advanced conversations are underway with five systems. “We are laser focused on the user case that is profitable,” he said. The plan to align with health care outlets is “a good use case for us based on the current cost benefit,” he added.

Winnipeg, Canada – July 20, 2016: Two UPS Boeing-757 Cargo Freighters sit on the ramp at Winnipeg James Armstrong Richardson International Airport with the Air Traffic Control Tower in the background

Flying into the unknown

Ganesh said all of this will take time to implement and he declined to say if or when UPS plans to expand its program into home parcel package delivery. “I don’t know what the final goal is, so for now we are focusing on health care and urgent point-to-point movement as our priority,” he said.

UPS already operates one of the world’s largest airlines, 251 cargo jets, ranks first in destinations served and fourth in the amount of cargo hauled, according to the The International Air Transport Association (IATA). FedEx (FDX) ranks first in amount cargo hauled.

The experience UPS has with airline logistics and its safety record will help it expand the new drone delivery business, Ganesh said.

“Every technologist wants all the cool things to come true,” he said. “The thing is, how do you do it in a scalable profitable manner?”

UPS Flight Forward plans to balance the appropriate use cases and market openness to drone deliveries. “We will continue to do that as we scale and we will continue to do that to be profitable in the long run,” Ganesh said.

Adam Shapiro is co-anchor of Yahoo Finance On the Move.

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