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Are your Airline Tickets About to Become Smart Flight Tokens?

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Let’s be honest, beyond the miracle of human flight airline tickets aren’t too great of a product. They’re expensive, and once you’ve bought one you often can’t modify, transfer, or upgrade it without fees and an hour on the phone. What you get these days is a glorified paper ticket sent to your email. C’mon airlines, this is the 21st century!

The problem can be traced back to the antiquated booking and payment systems still used in the industry. Blockchain technology has opened up an opportunity to truly drag this system into the digital age. But the path from the old system to a new one will be difficult. Can blockchain-based platforms really pull off the biggest airline ticket upgrade in history?

We would like to thank the team at Further Network for their contributions to the design and implementation of the research and to the analysis of the result.

Airline Tickets are Outdated

In the last few years, domestic and international flights have become massively democratized. Billions of people are now flying all over the world. Thousands of airlines, hundreds of countries, travel agents, connecting flights, airline partnerships, complex baggage allowances, and evolving customer expectations have made the industry mind-bogglingly complex. And we haven’t even got to integration with other travel services like hotels and car rentals.

Instead of effectively deploying information technology to connect all of these dots, the airline industry has just tried to add a little digital seasoning to their old paper system. As Keith Wallis of Air Canada puts it, “We have made ourselves artificially different and the systems were built 40 years ago. With the advent of e-commerce, we tried to adapt our systems instead of moving to modern systems.”

So what problems does this archaic ticketing system actually cause?

1. Inflexible tickets for passengers

The most obvious problem most of us are familiar with is the “sticky ticket.” Once you’ve bought a ticket for a flight, it’s either impossible or expensive to change it.

A little research into the true cost of flying reveals that the vast majority of US domestic (99%) and international flights (89%) don’t allow flight cancellations at all; you simply have to forfeit the entire fare. The few that do allow you to cancel charge a fee of $287 for the privilege. A change to a domestic or international flight will set you back $191 and $247 respectively. These are massive hidden costs for passengers.

The airlines themselves don’t mind these fees all that much. In fact, many of them are making their profits off of these extra costs. However, this “hidden-fee” business model is inherently unsustainable. First, because as passengers become regular customers they will become much wiser to these costs. Second, because it’s anti-competitive behaviour and regulators are already moving to make these fees more transparent.

tickets, tokens

2. Transaction difficulties for the airlines

Apart from deteriorating the quality of their product, the current ticketing system also causes transaction headaches for the airlines. A ticket could be sold anywhere in the world, by any of thousands of travel agencies. The funds for a sale have to pass from the passenger, to the agency, to the airline, eventually passing through international borders along the way. Moving money around like this isn’t easy.

Right now, these international billing settlements between airlines and agencies are done with services like the IATA Clearing House and ACH. IATA does not disclose the exact amount of charges and we only know Clearing House’s costs. Payments in this system are slow and take 15-45 days, and the cost for airlines to use these systems include:

  • Application fees (~$100-$1,000)
  • Participation deposits (~$5,000)
  • Membership fees (~$225 per month)
  • Annual fees (~0.03% + $20,000 for billings over $20 million)

Besides this, if we take banks, credit cards, and payment gateway costs (1,2%) into account, then the transaction fees will be around 2,2% for IATA members and 3,5%-5% for non-IATA airlines.

3. Big capital barriers for travel agencies

Travel agencies sell tickets on behalf of airlines. As current international transactions currently take weeks, airlines need a guarantee of payment from travel agencies in case something goes wrong. This takes the form of a huge deposit of $25,000 to $350,000 or an expensive letter of credit from a bank. Multiple providers and clearinghouses means multiple deposits.

In addition to these financial barriers, the need for these financial agreements means expansion is slowed down for both the airlines and the agencies.

Tokens: A better way of structuring

Blockchain technology has introduced the idea of crypto tokens on platforms like Ethereum. A token is basically data stored in a distributed database (AKA a blockchain). Permission to access and change this data can be safely given to whoever needs it, and updates can be seen immediately by all parties.

These collaborative properties make tokens an ideal technology for tickets. Airlines could create a token for each of their available seats and make them available to agencies and passengers on the blockchain. Every time one is purchased or updated, that information would near instantly propagate to everyone else. This could drastically simplify the current system of updating airline tickets.

From Tickets to Smart-Tokens

The real power, however, is that crypto tokens are programmable – they can have their own built-in rules and can automatically execute those rule when the conditions are met.

When you buy an airline ticket, you aren’t just buying a piece of paper. You are entering into an agreement with the airline. This agreement has conditions and obligations, for example:

  • Adding an extra bag costs $25.
  • Changing passenger details must be done at least 7 days prior to the flight.
  • Ticket cancellation costs $100 and has to be done at least 28 days before departure.

A flight token could execute these rules automatically, without any customer service operators, and update on every party’s system instantly. As long as the rules of the original agreement are met, you could change your flight, buy extras, or get a refund without ever having to contact customer support. These can even be multi-signature contracts between passengers, airlines, and agencies, with updates triggering multiple, simultaneous transactions between the different parties.

Cryptocurrency transactions

Another powerful feature of crypto tokens is that their transactions are run using cryptocurrency. Using cryptocurrency for transactions allows for:

  • Near instant settlement time (seconds, not weeks).
  • Lower transaction fees (typically a few cents even for large transactions).
  • Decentralizing the whole settlement process, removing the need for a middleman.
  • Easy cross-border payments.

These properties mean that cryptocurrency payments can solve many of the industry’s settlement problems. Airlines get a simpler, cheaper transaction system and can start to build a more flexible product, and agencies have lower capital requirements and barriers to expansion. The only loser would be the middleman organizations such as the IATA.

Projects Underway

cryptocurrency payments, airlines

There are already projects working to make these blockchain flight tokens a reality. Further Network is developing the “Smart Travel Record,” a token with all the properties mentioned above and more.

Further describes Smart Travel Records as completely customizable travel assets which can be used in both B2B and B2C models. Tokens that are easy to purchase and can be upgraded with inflight entertainment, baggage extras, or even transferred peer-to-peer without an intermediary.

The Further Network will operate on its own blockchain, and use its own digital currency to run transactions on the Aton network. All Smart Travel Record transactions will be done instantly and low cost with Aton. To provide high capacity TPC, the platform uses IBM Hyperledger Fabric & Stellar. The idea is that Aton will become the common currency of travellers, travel providers, hotel wholesalers, and travel agencies.

Travelblock is another project grappling with the blockchain-booking idea. Their aim is to lower the cost of travel by using blockchain technology. To do this, they envision a one-stop-shop where travelers can book hotels, private resorts, cruise lines, and flights directly on the platform, focusing on a great consumer experience.

Winding Tree is a blockchain travel project that takes a more B2B approach, offering a new distribution platform for selling travel assets.

Beyond Just Airline Tickets

We’ve gone into detail about the issue of airline tickets, but Smart Travel Records like those from Further Network and Winding Tree’s distribution platforms are easily generalized to the whole tourism industry.

Car rentals and hotels are huge industries that are heavily linked to air travel. Those that book a flight with an agency often book a room, transport, and insurance at the same time. As a Smart Travel Record, all of these can be merged into one travel asset that can be instantly customizable, exchanged, upgraded, or divided up as needed. Further Network describes each item on a Smart Travel Record like a lego brick that can be built on top of others or removed.

With this system, an entire business trip, from airline tickets to hotels, could be transferred to another name with one simple blockchain transaction.

We’ve created an infographic to better explain this idea to you:

transactions, centralized system, blockchain, decentralization

Is the Industry Ready for an Overhaul?

Disrupting an industry as complex and international as travel is not an easy task. A blockchain system would need to:

  • Be robust enough to handle billions of transactions safely
  • Process 1,000s of transactions per second
  • Offer enough benefits to get airlines, agencies, and travellers onboard
  • Have a clear plan to transition from older systems to the new one

Satisfying all of these is difficult. The safety features of blockchains are already proven by networks like Bitcoin and Ethereum, but they haven’t yet solved how to scale large numbers of transactions.

Also, the success of projects like Further Network, Winding Tree, and Travelblock depends entirely on the size of their network or ecosystem. Ticket transfers and cryptocurrency settlements only work if everyone uses the same network. Marketing and the ability to partner with travel firms will be crucial. The most difficult part will be showing airlines and agencies a clear path to the new system as well as convincing them that the journey will be worth it.

Network effects are strong, and say that when it comes to network projects, its usually winner takes all (e.g. Google for search). The three projects we’ve mentioned all have similar ideas: to disrupt the travel industry’s booking system. The network that can grow most successfully will take the lion’s share of the success.

Despite these hurdles, one Russian airline is already making moves. In 2017, S7 Airlines began implementing a blockchain ticketing system for domestic flights. The system uses the Ethereum blockchain to simplify payments and reduce settlement times, but is only the beginning of a true blockchain solution. S7 does not immediately use blockchain technologies but does via Alfa-Bank, who mediates the flight insurance. The electronic insurance policy is purchased from the bank separately (among other options, it includes flight cancellations). But flight cancellations can still only be done for domestic flights.

blockchain, peer-to-peer, smart tickets

Conclusion

Airline tickets are stuck in a technological bottleneck. Coordinating purchases, transfers, and payments across hundreds of airlines, agencies, and countries is expensive and inefficient under the current system. It has been bogged down by the inadequate adoption of new technologies.

The blockchain is an amazing technology that allows for easy, near instant, trustless collaboration between different parties with a common goal. These difficulties of the travel industry seem like the perfect environment to apply it in. Upgrading travel tickets to smart tokens has immediate benefits like fast transactions, instant settlements, and more efficient collaboration between all the parties. There is also potential for airline tickets to become more flexible and customizable, but that depends on if the industry can get onboard.

However, getting to a new solution won’t be easy, but the payoff could potentially be huge for whoever can pull it off.

All materials on this site are for informational purposes only. None of the material should be interpreted as investment advice.

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