“Blockchain can provide trust without intermediaries”
Few people realize that from the moment you search online for an air ticket to the time you arrive at your destination, the airline is just one of around 26 business partners involved in the aviation chain.
Financial settlement systems of International Air Transport Association (IATA) handle $7.7 billion annually to financial institutions in fees — more than 20% of the world airline industry's estimated 2016 net profit. Financial institutions (banks, card schemes, etc.) are just one of many intermediaries in the aviation value chain, each taking a cut. Few technological innovations have received as much interest in the world of finance in the past few years as blockchain. As claimed, it should leave no intermediaries.
BEAM spoke with Juan Ivan Martin, IATA’s Head of Innovation, during the IATA Global Media Day in Geneva and asked what relevance did blockchain have for the aviation world, and in particular, what benefits could airlines — and passengers — gain?
— Let’s talk what IATA’s blockchain programme is about?
— We are focusing on how could this technology be used to create spaces for our industry, to save money, provide a better service to our customers, simplify things. We started this investigation like “What if?”. So what if we could completely re-engineer things that we’ve been doing in a certain way for many years, if this technology brings some additional benefits. So namely, one of the benefits of blockchain is the promise it could provide trust without intermediaries. And it could create this central ledger for us instead of having your version of the truth and my version of the truth and we sync at some given time. Why wouldn’t we put everything in a central place which is trusted, and therefore a lot of things can be simplified?
For IATA in the Innovation department, we have two main use cases, one is the IATA Coin, that is an exercise of “what if we could create a supra-national industry owned cryptocurrency”. And this is the use case that we’ve been looking for some time. There’re two parts to answer that question: one is technological part, we’ve been testing it. Then it’s more the questions about compliance with regulatory frameworks, legal frameworks, taxation, treasury, revenue accountancy. All those other boxes need to be ticked. It’s not ready for worldwide rollout. IATA has this global footprint. IATA creates standards that can be rolled out for all our member airlines around the world. So this could be rolled out in certain countries but it’s not mature enough to be rolled out worldwide.
The second use case is a conceptual model that we call a travel blockchain. The travel blockchain is about a central repository of the journey of the passenger. So you leave your house and you take Uber, then you arrive at the airport and you go through a fast track and this is centrally registered in the system. You went to the lounge - noted, boarded – noted, you accessed the Wi-Fi on board – noted. So everything could be centrally reported. And if that could be true, then - you as passenger would have a seamless journey, because all the partners in the value chain can service you better because we know where you are. In case of a disruption we could be more agile.
— This is the vision.
— Does it mean ‘faster’?
— It is faster than the batch processes that we have today. The first business case of bitcoin is mostly about accelerating cashflow reducing intermediary costs, especially cross-border payments in real time worldwide. The second use case, the benefits are more around reducing the back-office workload and the friction between business partners, and enhancing the passenger experience. They’re linked, but we’re looking into them a bit separately.
— As far as I know Lufthansa and Air New Zealand are trying to implement blockchain. Do you work together with them?
— We do work together. With Lufthansa we had a few touch-points so we know what they’re doing. We talk to each other about the technologies that work or doesn’t work. We’re more than happy to see someone else’s going faster than others with innovation and technology. That’s very good. Because airlines compete. So it’s fair that they want to have a competitive advantage. But in other cases there’re benefits on finding something that can be standardized. We like to use this African quote — “If you want to go fast, go alone. But if you want to go far, go together.“ There’s another use case, it’s from S7 Airlines in Russia and they’re doing settlement also, with Alfa Bank. This is a very interesting use case.
— Can you provide more details so it’d be easier to understand?
— The IATA Coin was about could we enable real time cross-border payments? Today, most of the transactions are done through the existing rails of SWIFT and banks. There’s surely an opportunity to do it in a more efficient way. What if in the future a lot of things would be transacted in IATA Coins? What if you could buy your aircraft with IATA Coins? What if you could pay the fuel with IATA Coins? What if the interline agreements would be paid with IATA Coins ? And the value of this will be even greater, because you would send transactions in seconds, around the world. And this is the vision.
The pilot demonstrated to us that we’re capable of plugging that into the existing IATA systems. Demonstrations show that it works with some limitations that we can go over in a moment, so it’s not really real time, actual pace is quite a few minutes but it’s better than days. But there are all these limitations (around convertibility, for example). Our treasury group needs to understand how will we treat this? If you’re an accountant how do you record this? This is a wider [question]. A standard for all countries would be fantastic.
— It looks like the two major issues are — legal side and technology. Again, different countries are not on the same level technology-wise. European and African countries, for example.
— I think there’s something about that, the digital divide. Not everybody has access to the internet, right? Some countries will eventually be using these technologies to go faster and adopt. I have examples of Kenya with mobile financing service M-Pesa, where people just jumped to mobile. From an IATA perspective we’re not an IT company, so we’re not really looking into being the ones doing the calculations. We’ll find someone to do that. We’re focusing more in the next layer of services. If that works - what can we do with it? Underneath we’re monitoring and we see that there’re different initiatives to make this transaction faster and cheaper. So this is something that we need to look into, there’re many others, like Etherium for example.
— It’s about one hundred crypto-currencies now...
— Yeah, there’re many. Correct. I’ll probably see developments of private ones. Those are the public ones, like Dogecoin, Etherium but then we could create things like the IATA Coin, which will be more private. By permission. So you need to be invited to use them, not anyone can use them.
— Wouldn’t it be better if there is just one currency for all the airlines in the world?
— We’re in 170 countries with different currencies, and we’re moving money left and right, maybe not in the most efficient way. This is where I can see that it would be useful to create this concept [IATA Coin] where we can optimize international flows. This is what we’re trying to test, demonstrate and then with the conclusions we’re putting on a table for our member airlines to decide, is it worthwhile - give it a shot, or maybe banks or other existing players are going to capture that so we will capture part of these benefits without having to do it ourselves.
— That is a very good question. So. We started this investigation four years ago, and this was like magic. January 13, 2018, in a few weeks time, European Commission has a deadline to do PSD2 [Revised Payment Service Directive]. So PSD2 enables fast payments within Europe. There’re 3000 banks in Europe. According to the European Commission on the 13th January most European banks should have been enabling these fast payments. We could do payments real time. But when? According to KPMG, there are 76 countries around the world that are looking into implementing fast payments. So, probably this is a trend. SWIFT itself that has been the legacy provider to these banks, also looking to blockchain. So again, maybe the established players will use these technologies to enhance their portfolio, their services.
— Blockchain could be a catastrophe for some service companies: travel agencies, ticket aggregators etc. Is the threat real?
— I tend to separate two things. Just forget the technology. The human touch is something that is very difficult to replace. Blockchain artificial intelligence often are put as threats to jobs and players. Now there is value in having someone in the middle. As an example, if I use crypto-currencies, and I lose my private key, there’s no way I can retrieve my money. There’re real cases when people put a hundred dollars in a bitcoins and now they have millions and cannot access it. If you have an intermediary – bank, travel agency, whoever you can think of – you can go downstairs, show your ID, they probably invite you to a coffee, they will give you a new token. You will get access back to your system.
So there’re some visions of full dis-intermediation. I don’t believe this is valuable in all the cases. There is value in having someone in the middle, providing service, providing trust, and this human touch. The same goes with travel agencies. Great service, I mean, we love having have people in the middle solving things for us. Today you already have the option to go direct. A lot of people still using cooperations of travel agencies, because you have someone helping you all the way, doing things for you. I missed a plane, I need another one. They will rebook you, they will change your hotel and car rental, there’s value.
The blockchain reality of legacy airlines
July 2017, S7 Airlines and Alfa-Bank have launched project on flight ticket sales based on Ethereum blockchain. The introduction of Etherium-based platform made the business-process optimisation possible. The processing speed has risen from 14 days to the record 23 seconds. In a future, S7 Airlines might link new partners to the project. These can be airline-related companies — catering operators, fuel and ground-handling providers.
October 2017, Lufthansa Group has become a partner with a blockchain provider Switzerland-based start-up Winding Tree, according to Skift. At this stage, Lufthansa has simply agreed to participate in the pre-sale of of Winding Tree’s cryptocurrency Líf, which would then be used to finance a blockchain digital marketplace for travel. The idea that blockchain technology might one day revolutionize the travel industry has gained traction over the last year or two, but it remains very much in the experimental stage. What Lufthansa’s new partnership does is show how airlines and hotels might use the technology in the future to drastically reduce distribution costs.
November 2017, Air New Zealand announced its consideration of blockchain technology to enhance its distribution efforts. Although this is at a very preliminary stage, a spokesperson of Winding Tree, which hopes to build a blockchain-based distribution platform for airlines, said Air New Zealand plans to test integrating Winding Tree into the carrier’s proprietary passenger services system. The technology might be useful in providing a new way to power Air New Zealand’s baggage tracking, ancillary services, and distribution, Reuters reports.
Winding Tree is pitching its new platform as a business-to-business rather than business-to-consumer marketplace. In theory, wholesalers and global distribution systems would be the most impacted if this technology takes off, and then online travel agencies secondarily.
“B2B is key to adoption from the suppliers,” said Maksim Izmaylov, founder and chief executive of Winding Tree. “If no one is selling the inventory, suppliers have no financial motives to list their supply on the platform. So initially we are removing the likes of Amadeus and Travelport, and hope that Expedia and Priceline will see a lot of competition as the largest barrier to entry will be reduced — access to inventory”.