Drone Airspace: A New Global Asset Class

There’s still time to protect competition and innovation in drone services and technology

This essay won third prize in the CSPI Essay Contest: Policy Reform for Progress.

Background

The first mobile telephone service, linking moving cars, debuted in the United States in 1946. However, the technology languished for decades globally as national regulators dribbled out spectrum to inert industry supplicants via multi-year rationing proceedings.

In 1980, McKinsey & Co. advised AT&T, their client, that US mobile phone subscriptions in 2000 would top out at less than 1 million. Two years later, in 1982, with company breakup imminent, AT&T executives volunteered to federal antitrust officials to forfeit their minuscule, money-losing mobile phone business. Unfortunately for AT&T shareholders, McKinsey analysts were off by two orders of magnitude – there were more than 100 million mobile phone subscribers in 2000. In AT&T’s and McKinsey’s defense, they didn’t anticipate two intervening spectrum policy innovations: government auctions and flexible-use rules.

Government spectrum sales and liberal technology rules were first proposed in 1951 by law student Leo Herzel¹ as a technique to allow the development of competing radio technologies. The provocative idea faced rejection by DC telecommunications experts and industry, including an immediate law review rebuttal by a former FCC chief economist. In 1962, the RAND Corporation commissioned a spectrum policy paper from prominent economist Ronald Coase. His recommendation of government spectrum sales, an idea drawn from Herzel’s paper, was fiercely criticized by RAND’s internal reviewers for ignoring FCC expertise in technology selection. Coase’s draft submission to RAND was considered so explosive and damaging to RAND’s reputation if published that they suppressed the report.²

However, spectrum in the late-1980s was appreciating in value, and administrative assignment of spectrum was increasingly contested. A handful of heterodox FCC economists had begun operationalizing the spectrum markets idea and convinced Congress to authorize spectrum auctions in 1993. Other countries followed suit and cellular phones rapidly went from an expensive curiosity to a life-changing and ubiquitous service.

Today, there’s a similar gold rush for a new global asset class – drone corridors and low-altitude airspace. Policymakers must adopt airspace markets, lest drone services become ossified by regulation like wireless services pre-1993. Private investment is pouring into the commercial drone industry, including small drones as well as large, electric cargo drones and passenger drones. Drone airspace resembles spectrum in the 1980s, an appreciating asset that could be bought, subleased, traded, and borrowed against – if it were only permitted.

Much like legacy spectrum policy, there is immense technocratic inertia towards rationing airspace use to a few lucky drone companies. The Federal Aviation Administration (FAA) has begun drafting long-distance drone rules for services like home delivery, business-to-business delivery, and surveying. In the next decade, drone services companies will deploy mass-market parcel delivery and medical deliveries in urban and suburban areas to make deliveries and logistics faster, cheaper, and greener.

There’s no congestion today, but regulators have yet to identify methods to manage airspace in anticipation of millions of small and large drones contending for high-traffic routes and for landing. Linear networks – whether air travel, railroads, roadways, or the Internet – cluster into a hierarchy of congested nodes and face lumpy traffic peaks. Drone routes will too. Federal officials recognize that the current centralized system of air traffic management won’t work for drones: at peak times today, US air traffic controllers actively manage only about 5,400 en route aircraft.

Red flags abound, however. FAA’s current plans for drone traffic management, while vague and preliminary, are clear about what happens once local congestion occurs: the agency will step in to ration airspace and routes how it sees fit. Further, the agency says it will closely oversee the development of airspace management technologies. This is a recipe for technology lock-in and intractable regulatory battles.

US aviation history offers the alarming precedent of expert planning for a new industry. In 1930 President Hoover’s Postmaster General, who regulated airmail routes, and a handpicked group of business executives teamed up to “rationalize” the nascent airline marketplace. In private meetings, they eliminated the established practice of competitive bidding for air routes, divided routes amongst themselves, and reduced the number of startup airlines from around forty to three.

“Universal” and “interoperable” air traffic management are popular concepts in the drone industry, but these principles have destroyed innovation and efficiency in traditional airspace management. The costly US air traffic management system still relies on voice communications and manual writing and passing of paper slips. Large, legacy users and vendors dominate upgrade efforts, and “update by consensus” means the injection of innumerable veto points. Drone traffic management will be “clean sheet,” but interoperable systems are incredibly difficult to build and, once built, to upgrade with new technology and processes. More than 16,000 FAA employees worked on the over-budget, pared-down, years-delayed air traffic management upgrades for traditional aviation.

Airspace Markets Proposal

It’s often only in hindsight that we see that technocrats and their industry dependents cloaked anticompetitive market division and stifling government micromanagement with pretend expertise, insider-dominated stakeholderism, and volumes of startup-destroying rulemaking deliberations. As the AT&T and McKinsey episode reveals, even the financially interested participants don’t see what’s happening. There’s still time to protect competition and innovation in drone services and technology. To avoid anticompetitive “route-squatting” and sclerotic bureaucratic control of a new industry, aviation regulators should announce a national policy of “airspace markets” – government sales of high-demand drone routes, resembling present-day government spectrum auctions.

With airspace markets, winning bidders win the exclusive license to manage, combine, and sublease air corridors. Importantly, operators have the freedom to iterate and to use the drone traffic management systems and technologies of their choice (subject to generally applicable FAA safety rules like separation minimums and emergency procedures). This freedom to upgrade without competitor or vendor approval is absent in traditional aviation but necessary in a fast-moving sector like drone wireless and sensing technology. While relinquishing control is painful, officials benefit by turning a regulatory cost center into a profit center. The US and state governments will receive regular, passive revenue from commercial use of this new asset class – aerial corridors.

This airspace markets proposal has circulated at publications ranging from the Marginal Revolution blog, drone trade press, Government Accountability Office reports, and an Airbus white paper. However, like spectrum sales, the idea of airspace markets has met visceral opposition in Washington. Four states attempted to codify the airspace markets proposal in 2021, but each bill was defeated by opposition from a handful of drone companies.

The idea is circulating, however, and some in industry have welcomed it, including a former FAA Chief Counsel. It’s only a matter of time before parties outside of DC aviation circles notice the commercial prospects of airspace markets. In the next few years, as drone delivery programs expand, linear property owners and rights-of-way managers – railroads, telecoms, utility companies, municipalities, and REITs – will wake up to the possibility of generating passive income from their currently unused air rights.

Next Steps

When that happens, federal and state aviation authorities will be under immense pressure to prevent route markets for drones. Fortunately, current state laws tolerate and sometimes even encourage low-altitude (sub-200 feet) airspace sales to commercial users. At the higher altitudes where cargo and passenger drones will transit, the FAA’s authority is broad and allows for airspace markets. The agency has statutory authority to “assign the use of the navigable airspace under such terms, conditions, and limitations as [the agency] may deem necessary in order to ensure the safety of aircraft and the efficient utilization of such airspace.”³ The FAA can lease “any interest in property,” including airspace, for “adequate compensation,”⁴ and the Secretary of Transportation is instructed by statute to “plac[e] maximum reliance on competitive market forces.”⁵ These state and federal laws have never before been contemplated for drone and aviation services, however. Therefore,

1. For low-altitude (sub-200 feet) airspace, the USDOT and FAA should announce a policy endorsing the ability of linear property owners to lease airspace to drone and property investors. This would almost immediately summon 8 million miles of drone corridors into existence above roadways, plus millions more miles above railroad and utility rights-of-way.

2. For the higher-altitude routes that the FAA controls, the agency should begin designating cargo and passenger drone routes – central business district to airport corridors will be in high demand – and announce a policy of competitive bidding when there are more interested parties than corridors.

3. In anticipation of competitive bidding, the FAA should form an interagency task force with the Federal Communications Commission to advise on auction and lease of government assets. The FCC’s spectrum team has conducted dozens of auctions yielding hundreds of billions of dollars of revenue.

The current government proposals, shared and regulated airspace and infrastructure access, makes investments precarious. In contrast, exclusive corridors give licensees stability of possession that induces the significant infrastructure investment necessary for mass-market drone delivery, sensor, and logistics systems. This is the model that drives tens of billions of capex investment into US wireless systems, which recently upgraded to 5th-generation (5G) services.

It took over 40 years for Leo Herzel’s thought experiment about spectrum sales to become the global standard for government spectrum disposition. Before it was an inevitability, the idea was mocked by FCC staff, suppressed by the RAND Corporation, and ignored (at great expense) by AT&T and McKinsey & Co. Airspace, like spectrum, is an intangible global asset class. It should take less than four decades for regulators and industry to see the possibilities of airspace markets.

Brent Skorup is a senior research fellow at George Mason University's Mercatus Center and a visiting faculty fellow at the Nebraska Governance and Technology Center at the Nebraska College of Law. Follow him on Twitter @bskorup.

Read the other prize-winning essays from the CSPI Essay Contest:

• “Gathering Steam: Unlocking Geothermal Potential in the United States” by Andrew Kenneson

• “Mo’ Money Mo’ Problems” by Maxwell Tabarrok

• “The University-Government Complex” by William L. Krayer

• “It’s Time to Review the Institutional Review Boards” by Willy Chertman

1. Herzel, Leo. 1951. “‘Public Interest’ and the Market in Color Television Regulation.” University of Chicago Law Review 18(4): pp. 802-816.

2. Coase, Ronald. 1998. “Comment on Thomas W. Hazlett: Assigning Property Rights to Radio Spectrum Users: Why Did FCC License Auctions Take 67 Years?” The Journal of Law and Economics 4(S2): pp. 577-580.

3. 49 U.S.C. § 40103.

4. 49 U.S.C. § 40110(a)(3). Emphasis added.

5. 49 USC § 40101(a)(6).