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Big Bang to Big Bucks: Drones Are Coming to a Sky Near You

Unmanned aerial vehicles (UAVs) have been the tech stars in the wars in Afghanistan and Iraq — as well as in the more amorphous War on Terror. But with final combat operations in Afghanistan scheduled to end in December 2014, manufacturers of UAVs (also called drones) are looking toward their next market opportunity: commercial applications here at home.

Congress and President Barack Obama gave the nascent commercial drone industry a shot in the arm earlier this month, ordering the Federal Aviation Administration to craft a plan to open up U.S. airspace to thousands of unmanned drone aircraft by 2015. The new mandate was part of the agency’s $64.4 billion funding bill, which includes money for its fuel- and time-saving NextGen air traffic control system. Now the FAA will need to safely work drones into the national airspace mix as well.

The law requires the FAA to permit police, firefighters and other first responders to launch their own UAVs within 90 days — as long as the drones fly above 400 feet and don’t weigh more than 4.4 pounds. By next year, the weight limit rises to 55 pounds. The agency has an aggressive timetable in which to develop safety regulations and specify technical requirements.

Why the big push for putting these unmanned drones into U.S. airspace? Simple — it’s big business. The applications appear endless for these pilot-less aircraft — which range in size from AeroVironment’s (NASDAQ:AVAV) 3-inch-long Nano Air Vehicle to Northrop Grumman’s (NYSE:NOC) RQ-4 Global Hawk, whose 116-foot wingspan is larger than that of an Airbus A320.

Drones can be used for everything from to border control to law enforcement surveillance to infrared heat detection for firefighters. They also can be used for mapping, remote monitoring of oil fields and industrial sites or for agricultural and weather applications. Advocates say the commercial applications of the technology are limitless.

Of course, those applications also could include shooting video through windows of private homes and streaming it to YouTube or setting up cheap, 24/7 surveillance of celebrities. A coalition of privacy groups including the American Civil Liberties Union, the Electronic Privacy Information Center and Consumer Watchdog last week sent a letter to Acting FAA Administrator Michael Huerta urging him to make privacy concerns paramount in the agency’s rule-making process.

“The increased use of drones poses an ongoing threat to every person residing within the United States,” the privacy advocates said. “Private detectives are starting to use drones to track their targets. Google (NASDAQ:GOOG) has deployed street drones in other countries to supplement the images of StreetView. Criminals and others may use drones for purposes of stalking and harassment.”

Safety issues are perhaps a greater concern in drone operation, since even the most high-end aircraft with the most skilled operators have been known to crash or collide with other aircraft. A U.S. drone crashed in northwest Pakistan on Saturday, apparently because of a technical problem.

And last year, one of Textron (NYSE:TXT) subsidiary AAI’s RQ-7 Shadow drones collided with a U.S. Air Force C-130 transport in midair over Afghanistan. Although the transport plane landed safely, it sustained significant damage to the wing — including a ruptured fuel tank.

Still, this is a huge business opportunity for UAV manufacturers to find new commercial business. And many so-called “dual use” technologies were born military and developed wildly lucrative commercial business applications — two examples being nuclear technology and GPS.

Looking at the commercialization of drones from an investment perspective, here are a few key companies that could benefit if the market soars as high as some advocates believe:

  1. Boeing’s (NYSE:BA) Insitu subsidiary develops the ScanEagle and NightEagle drones.
  2. Northrop Grumman has an extensive family of drone aircraft including the Global Hawk, Firebee, Bat and Hunter.
  3. BAE Systems (PINK:BAESY) offers the “flapless” Demon drone.
  4. Textron’s AAI subsidiary produces commercial UAVs that include the Shadow family as well as Aerosonde and Orbiter.
  5. AeroVironment’s commercial UAVs include the Wasp, Raven and Global Observer lines.
  6. Schiebel Technology is privately held and produces the Camcopter UAV, a rotorcraft that can deliver a wide range of video applications.
  7. General Atomics Aeronautical Systems is privately held and best known for the Predator and Grey Eagle families.
  8. Raytheon‘s (NYSE:RTN) Missile Systems has developed the stealthy Killer Bee drone.

Bottom Line: Although privacy is a rallying cry for many, individuals have virtually no privacy rights today when it comes to being photographed outside. Manufacturers and users will argue — likely successfully — that the drones pose no greater threat than traffic cameras or security cameras at stores and ATMs. Photographing individuals inside their own homes might be a bit of a sticky wicket for commercial drone advocates, however.

Still, the FAA will have to walk a tightrope if it is to permit widespread, yet safe, operation of vast numbers of commercial drones of all types in the national airspace. Expect the FAA to issue tight restrictions on operations near airports, to require advanced onboard sensors that can steer the drones away from aircraft and perhaps even require operators’ licenses. Expect the Department of Homeland Security, the FBI and other agencies to keep a close eye on the potential for diversion of drones by potential terrorists.

As of this writing, Susan J. Aluise did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media,

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