Could blockchain technology replace GDSs and BSPs for Airline ticket distribution?
The Airline industry is fascinating for the collaboration that can happen between Airlines. Even when they are in fierce competition, many airlines are willing to work together if this can help to cut down the costs.
In the early 80’s many travel agencies were still relying on flights listing and had to call each airline to book flights. Airlines found out that this was not cost effective and started to build, mainly within the International Airline Transport Association (IATA), the infrastructure to automatize the reservation processes for Travel Agencies.
In today’s world, Travel Agency sales are organized around a few actors:
- Global Distribution Systems (GDS) as the tool to book in real time the seats;
- IATA Clearing House (ICH) as the tool to handle netting between all participants: between Airlines for interlining, between Airlines and Travel Agencies for ticket sales; and also between Airlines and Airports Handling Agents for all airports operations;
- Billing and Settlement Plan (BSP) (or ARC in the US) for settlement of sales from Travel Agents to Airlines.
With the fast evolution of technologies, are these actors — build in the 70’s or 80’s — still relevant?
Current Airline distribution landscape
In the travel industry, a significant portion of the airline tickets sales are handled through Travel Agencies. You have of course the long tail of brick-and-mortar Travel Agencies, but also the Online Travel Agencies (OLTA), or Travel Management Companies (TMC) for businesses.
For the large majority, Travel Agencies are issuing airlines tickets through Global Distribution Systems (GDS), namely Sabre, Amadeus and Travelport. The Billing and Settlement Plan (BSP), or Airlines Reporting Corporation (ARC) in the US, is an essential piece to allow accounting and financial processes between the involved parties. This is a huge and truly global mechanism, according to IATA:
There are BSP operations in some 180 countries and territories. The system currently serves approximately 400 participating airlines with an on-time settlement rate of 100%. In 2016, IATA’s BSP processed $219.0 billion.
The BSP allows two type of payments at the time of the sale:
- The Travel Agency can decide to be Merchant of Record for the transaction, which means that they will collect the money and pay the airline later
- The Travel Agency can decide to let the airline be Merchant of Record, passing the traveller's payment information (in general a Credit Card), to the airline. The airline gets the money directly and pays later a commission to the agent.
The BSP system is tight to the IATA Clearing House (ICH) that automatically does the accounting between the participants: at the end of a billing period, each participant receives a single Credit or a Debit.
While the BSP system is great as an enabler, it comes with a number of limitations:
- Accreditation: In order to participate in the BSP system, Travel Agents must undergo a strong financial review and lock-in funds in order to avoid a situation where a Travel Agent would sell a lot of tickets and go bankrupt. This basically means that it’s very difficult for some companies or start-up to get an IATA accreditation.
- Delayed payments: Payments through the BSP are done at the end of a billing period, which can cause some cash-flow issues for the Travel Agencies or Airlines. For example a Travel Agency doing 100% of airline-merchant sales will get paid its commission only after the billing period (eg: one month). This can be mitigated by balancing the number of transactions done in either of the Merchant of Record modes; at the cost of an additional complexity.
- Limited Methods of Payments: To guarantee compatibility between the large number of participants, the number of payment options in the airline-merchant mode is limited: the large majority is Credit or Debit Card, and only a few airlines accept something else than Visa, MasterCard or American Express. Ideal? Alipay? Naah, use the travel agency merchant model.
Bottom Line: the barrier to entry for small companies and startups willing to create a Travel Agency is really high, innovation is limited in this space.
With NDC BSPs are still alive but GDSs become Aggregators
Travel Agencies and Airlines have always been searching for mechanisms to get out of the GDS & BSP system as much as possible. In a given country, a local Travel Agency can partner directly with the leading airline in this country and sell directly tickets through a dedicated portal provided by the Airline. Of course this does not scale for Travel Agencies operating globally or selling international tickets.
Recently, Airlines have been pushing through IATA the New Distribution Capabilities (NDC) XML standard in an effort to allow more direct connections between Travel Agencies and Airlines, in particular for ancillary services.
Ironically, GDSs have been quick in embracing the Aggregator role and pass the IATA NDC Certifications. Strange? If you think about it, NDC is a technical enabler but it does not scale-up on the business side: Travel Agencies, in particular in the long tail, can not establish a direct connection and business relationship with any airline in the world!
Did NDC killed the BSP model? Well no, because it is still required to manage the accounting between Travel Agencies and Airlines, the only difference is that Airlines (the Offer Responsible Airline, ORA in NDC world) can now submit sales to the BSP. Also as a side note the IATA Clearing House is still a key element in NDC for interlining, see this report.
Blockchain for airline ticket distribution
For any blockchain enthusiast, all these accounting and settlement processes between Airlines and Travel Agencies could be a perfect fit for the blockchain:
- Decentralized trust between many parties, no more accreditation needed
- Inventory search-able and book-able with smartcontracts
- Instant Payments and currency conversions with cryptocurrency
- Travel Agent in control of the payment methods
- Easier to access for small companies and innovative startups
In my opinion it is no more a matter of if, but a matter of when and how. Multiple players could be well positioned to tackle this challenge:
- Travacoin obtained an Passenger Innovation Awards at IATA’s World Passenger Symposium in Dubai in October 2016 for compensation vouchers. Could it be an hidden IATA Proof of Concept ?
- UATP, a major player in airline payments, has integrated bitcoin payments since 2015.
- Winding Tree is creating an open-source decentralized distribution platform for Travel (see my tutorial to see how it works for Hotels), and partnered with major airlines such as Lufthansa.
- Any other?
It will take some time before we observe a complete shift to the blockchain for airlines ticket distribution and there are some major technical challenges to solve first. However knowing the history of collaborations between airlines, we might have some surprises!