Blockchain Platform Ideas That Will Enable The Airline Industry

Blockchain technology is fast becoming the new buzz word within the financial industry with applications spreading across transactional to legal to insurance and beyond. So what does all of this mean to the Airline industry and why should this be something to look at in more detail?

What is a Blockchain?

Before we can understand the value of a blockchain, we first need to understand at least the basics. A blockchain is a cryptographically secured, distributed ledger — essentially a record of transactions, which may or may not contain Smart Contracts (programs on the blockchain that operate on the ledger data):

• Transactions on the blockchain are kept permanently and are signed using public-key cryptography. They are then ordered in blocks.
• Every block is reviewed by network participants or nodes. (On public blockchains they are known as “miners”). A block is committed to the canonical historical record when the nodes agree via a consensus algorithm that the data inside is accurate. This is achieved without the need for a central authority.

On a public blockchain, blocks are not easily produced. Nodes on a public chain perform laborious calculations to earn the right to publish a block. This high level of processing power required to make entries, and the ‘cost’ of authenticating new transactions reduces levels of spam and provides Sybil tolerance. (A Sybil attacks makes use of the ability to inexpensively flood a system with fake accounts.)

Public, Consortium, Private

Public Blockchains

• Permisionless because anyone can join as a participant
• Must be expensive and difficult to publish a block to prevent fraud and spam (Proof of Work/mining)
• Examples include Ethereum and Bitcoin

Consortium Blockchains (shown here)

• Also called Semi-Private or Shared Permissioned Blockchains
• Only verified participants are allowed to publish blocks
• Can be lower latency and high transaction throughput than public networks

Private Blockchains

• Also called Permissioned Blockchains
• Designed for rapid application development, instant deployment, and single-enterprise deployment solutions

Enter Ethereum

• The Bitcoin blockchain is limited in functionality due to design choice to focus on the monetary network use case
• Ethereum generalizes this by adding a Turing-complete native scripting language and execution environment (Ethereum Virtual Machine) to its blockchain
• Ethereum transactions can include executable code and storage (comprising Smart Contracts)

Business Benefits

• Transactions confirmation efficiencies (from days to seconds)
• Immutable record keeping
• Secure records that can be publicly available
• Future proofing for new features based on business logic changes
• Complete automation of legal and back office functions

Rising Interest

• Deloitte creates the Digital Crypto-Currency Community (DC3) to educate business leaders
• 50+ banks join the R3 CEV blockchain consortium
• Visa, NASDAQ, AMEX announce blockchain based initiatives
• Microsoft partners with ConsenSys to launch Ethereum Blockchain As A Service (EthBaaS)

Further reading on the concepts of blockchain and Ethereum can be found here

https://bitsonblocks.net/2015/09/09/a-gentle-introduction-to-blockchain-technology/

https://bitsonblocks.net/2016/10/02/a-gentle-introduction-to-ethereum/

In general terms the key features of blockchain can be summarised as follows

Distributed Ledger

• Details of agreed transactions are replicatedacross many peers, which removes the need for a central authority — the details of the transaction are recorded and encrypted and then shared so that all participants have a common agreement. This provides a high level of reliability and business continuity so that if one node were to fail the remaining peers will not be impacted. Once the data is agreed it becomes fixed and final it is encrypted and stored across all the peers.

Secure

• By the nature of the distributed ledger concept, the data in the ledger is secure from tampering. Simply put, if someone were to try to modify a record the security hash would not match the other copies of the ledger and it would be rejected. This means that important records can be maintained on the blockchain with a high degree of trust.

Trusted

• The full history can be viewed which means that goods and services can be validated as ‘genuine.’ For example Everledger1 is working to register diamonds onto the blockchain by using the unique fingerprint of each diamond and associating this with a digital record. This way it can be certain that a buyer can guarantee that these diamonds are not Blood Diamonds.

Speed of transactions

• One of the biggest causes of delays in the current world is related to trust, or rather the lack of trust. If a payment were made today, money would have to go out of one bank account and into another one, possibly in another country. First the bank has to ensure that the person sending the money is authorised to do so and that there is enough funds, the bank then has to transfer the money to another bank who have to validate the recipient details are correct and ensure checks are completed to prevent fraud and money laundering, as just one example. Trust is already established on the blockchain and therefore the transaction speeds are much much faster– usually a few minutes. No longer do you have to wait days, weeks or longer for transactions to complete.

Reduced Transactional Costs

• By the removal of the overhead of the central authority, transactions can happen at a much reduced cost point. For example there would be no need to have a minimum transaction fee in the same way we need to do today for credit card payments. This means that it would be possible to monetize items which are not commercially viable today.

Back in the 1990’s, no one could really say for sure how the internet would transform businesses, and yet whole industries have sprung up to support internet tools and concepts. Just as the telephone, personal computer and internet have modified and sped up the way we do business, so too will blockchain. Whereas the Internet is a network of communication, blockchain can be thought of as a network of value.

So what does this mean for Airlines?

What follows are just a few examples of how blockchain technology could affect the future of the airline industry. It is fair to say that blockchain and other distributed ledger technology has the ability to improve transactional flows, improve trust and provide immutable record retention. It is not intended to be a list of all beneficial things, there are some areas which might become regulatory, which would need the airline to adapt to the new world and require some new approaches.

Maintenance/Repair/Overhaul (MRO) — All future state changes in an aircraft’s lifecycle from the initial purchase to every transfer of ownership or lease and maintenance event can be tracked on the blockchain — providing an incorruptible record of service. This would mean that the provenance of every part of the aircraft is instantly available and would speed up due diligence around future lifecycle events. Maintenance events could be set in advance and non-conformity would appear within the aircraft maintenance record. Each supplier would have identity, reputation and business processes be on the blockchain and would provide only certified genuine parts. Payments for products (e.g. parts) or services (e.g. repairs) would not be subject to delays typical in the legacy financial system.

Airport Collaborative Decision Making (ACDM) — The situation at airports is that there are lots of separate and untrusting parties coming together for the common goal of getting the aircraft landed, turned around and airborne again within the constraints of realistic turnaround times, weather events, and with safety above all. With so many institutions and systems jointly breaking down silos and sharing information has become a hot topic. This would be perfect ground for a consortium blockchain where each party would write to the chain and allow each party to see a true picture of what is happening in near real time at an airport. This would mean that decision making would not happen in isolation resulting in fewer delays and potentially highlighting areas which regularly cause delays.

Air Miles and Loyalty Programmes — he first instance of a blockchain it was created to power a non-government issued currency, namely Bitcoin. However, airlines have been using non-government issued currency for years: air miles. With air miles on the blockchain, passengers can pay for goods and services in a secure fast and reliable method without credit card processing fees. Instead of ‘earning’ miles, customers can just buy them in the same way they can exchange currency today, or could earn them outside of flying alone if they select to be paid in air miles for services.

Ancillary Revenue — Take away the need to use a credit card, and airlines can benefit from monetizing much smaller items. Transaction fees are small (currently between $0.10 and $0.50 per Bitcoin transaction2 and less than $0.01 for a simple Ethereum transaction. Premium Content or on-board services could be provided through the IFE system which could be purchased for as little as $0.25-$1.00 and still be viable. Partnerships with other providers along the passenger’s travel plans could be sought to offer bundled deals with discounts to the passenger and preferential rates if using air miles, etc.

In-Flight Entertainment (IFE) — Speaking of on board activities, Swiss company Decent is looking to “recreate the overall process of online content distribution by creating a user-friendly, secure, Blockchain driven media network.”3 Airlines could offer on board content such as movies and TV shows and only pay for what passengers watched.

Smart Contracts and Compensation — Regulatory authorities could demand that compensation events happen automatically using an Ethereum style blockchain using smart contracts — for example if a flight is delayed, after a predetermined amount of minutes customers could then be credited without the need of the lengthy process in place today — this is something that the airlines would then have to plan for in order to mitigate the financial burden this would add to the carrier’s bottom line.

Flight Planning –The current system for air traffic services and overflight payments is done today by reconciling flight plans sent to the authorities, and comparing with what was actually flown. This is time consuming and likely to be error prone depending on the information and tools available to the airline. Flight plan data could be encoded and sent throughout each flight and the associated payments automatically calculated and transmitted. This could also apply to landing fees with the aircraft automatically knowing the runway and gate information and transmitting payment via the blockchain.

Flexible Charter — In an ideal world, no flight would ever take off until all tickets were sold. The financial engineering required to manage volatility of demand in a competitive pricing environment represents a significant part of making sure an airline remains profitable. However, the kinds of transformations wrought by Uber and AirBnB make it obvious that, with the right systems in place, there are no underused or blocked resources for which a market cannot be found. Crowdfunding sites like Kickstarter operate by shifting risk from investors to pre-purchasers. Potentially similar models be used to aggregate future demand for flights and organize bottom-up risk-sharing micro-charter operations.

Luggage Chain of Custody — Although luggage loss rates are at historic lows, issues still persist, and a blockchain-based solution for tracking luggage would smooth the hand-off points where different teams take over responsibility for passenger items. Instead of a customer having to wait at a conveyor, and then find his airline’s luggage counter when a bag doesn’t show, all airlines could track luggage handling on a single blockchain which is readable by the passenger. The traveller could even be able to see if their luggage is on the plane. Smart contracts could also be deployed to automatically trigger insurance payouts when luggage is delayed or irrevocably lost and a single luggage desk covering all airlines can replace the different branded desks (airline or alliance) at the baggage claim hall as we see today.

Cargo and Customs Clearing — Cargo handling is facing a lot of pressure especially as drone technology matures. One way airlines can stay competitive is to reduce costs and improve speed of transit. Once the goods are digitally tracked and validated on the blockchain and the sender and receiver are also digitally bonded to the transaction, it might be possible to speed customs clearing with any import duty paid via the blockchain. This transparency and validation will allow for faster processing and a reduction in paperwork.

Passenger Identity — Once validated on the blockchain, it would make it harder to impersonate or commit fraud. Companies such as uPort4 are designing systems to allow users to create digital verification of individuals on the blockchain. This would drastically reduce the current friction and burden of processing paper passports and relying on human checks to validate passenger identification. An ancillary revenue could be to charge passengers who insist on maintaining a sovereign passport in the future.

Conclusion

The above list is by no means exhaustive. Certainly there are other applications for blockchain and as new technologies enter the market, it will also add to the pressure on airlines and the software vendors who supply their IT needs, to adapt to these new market forces.

In many cases, the blockchain is the underlying engine that will be read, interpreted and written back to by future software programs. Whether these software solutions are developed in-house or by external vendors, it is clear that the blockchain has the potential to play a leading role in disrupting many facets of future business methodologies within the airline industry. Airlines will certainly benefit from paying attention to the new potentials available, as well as to mitigate regulatory changes which would negatively impact the airline.

Overall the power that can be harnessed from understanding and adopting blockchain technology will result in reduced costs, greater visibility of the true picture, more reliable supplier chain and logistics as well as improving the passenger experience. As much as the Internet is the engine on which most companies now do business, blockchain technology offers so much flexibility to improve margins, improve data security and remove a lot of the friction to trading globally and improving decision making flows.

Authors

Chami Akmeemana is the former Fintech advisor to the Ontario Securities Commission. He is also the Executive Director of regulatory solutions at ConsenSys Inc. Chami is the Managing Director Global markets at the Global Risk Institute. He has a multi-faceted background that includes engineering, law enforcement, entrepreneurship with successful exits, and big data.

Joseph Lubin is the founder of ConsenSys, a company that develops applications and utilities for the next-generation decentralized web, and co-founder of Ethereum.

Andy Baker has over 9 years working in the Airline and Travel Industry, on top of more than 20 years in IT in various technical roles. Andy has experience in consulting, project management and addressing the needs of Airlines.

Contributions from — R. Jesse McWaters, Project Lead — Disruptive Innovation in Financial Services World Economic Forum.

Jesse leads the World Economic Forum’s exploration of fintech and financial innovation. He is the co-author of the World Economic Forum’s groundbreaking “Future of Financial Services” report which establishes a taxonomy of fintech innovations and considers their implications on the financial services ecosystem. More recently, he co-authored an in-depth exploration into the potential of blockchain to revolutionize financial services (“The Future of Financial Infrastructure”) as well as an investigation of the importance of digitizing identity for the financial system (“A Blueprint for Digital Identity”).

References

1 http://www.everledger.io/

2http://bitcoin.stackexchange.com/questions/17830/whats-the-minimum-transaction-with-bitcoin

3http://www.the-blockchain.com/2016/08/10/swiss-blockchain-decent-foundation-announced-details-investment-fund/

4https://uport.me/#home