Aleks Popovich, IATA Senior Vice President, Financial and Distribution Services, explores the potential benefits for the airline industry if blockchain was implemented
Few technological innovations have received as much interest in the world of finance in the past few years as blockchain.
But what relevance does it have for the aviation world, and in particular, what benefits could airlines—and passengers—gain?
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.
IATA’s financial settlement systems handle around $400 billion per year. Of that, around $7.7bn goes in banking fees
Each member of that chain is taking a profit margin; one that is often higher than the airlines, who take on most of the risk, and until recently were struggling to offer a return to investors.
Financial institutions (banks, card schemes, etc.) that participate in the financial transactions involved in the aviation chain take less risk, and yet retain higher margins.
IATA’s financial settlement systems handle around $400 billion per year. Of that, around $7.7bn goes in banking fees.
While 7.7 of 400 may not seem like a huge percentage, $7.7 billion is more than 20% of the estimated net profit of the entire global airline industry in 2016 ($34.8 billion).
IATA has begun looking at how a blockchain payments system could work for airlines
So the potential benefits of the industry reclaiming much of that money is significant. Blockchain may offer the possibility to do that, with less dependence on some intermediaries.
Under the guidance of the IATA Financial Committee, IATA has therefore begun looking at how a blockchain payments system could work for airlines.
It has set up a pilot scheme, but worldwide roll-out is hampered because the global regulatory framework has not been updated to meet the requirements of these new distributed ledger systems.
A distributed ledger is the heart of how blockchain works. Instead of relying on a single entity (such as a bank) and holding multiple ledgers between the different involved parties exchanging money, blockchain distributes the ledger among a wider group of parties.
Implementing blockchain requires a complete change of philosophy as well as a change of technology
Any and all of this wider group can then review the ledger and verify that the payment, the payee and the receiver are trustworthy.
Apart from reducing the cost, other benefits include far greater speed, resilience, and protection from fraud, since the parties involved in the transaction are no longer relying on a single third party as an intermediary.
Undertaking such a transformational innovation of our industry on this scale would require two things: more resources, and more willingness to take on risk.
Implementing blockchain requires a complete change of philosophy as well as a change of technology. Previous financial technologies have reconfigured the shop-front.
By contrast, blockchain is a complete revolution in the back-office. And airlines, typically, do not do revolutions.
IATA is looking to be either a first mover, or certainly a fast follower, in this area
They are by nature risk-averse, and rightly so, as it is a business dominated by safety as its number one priority.
But while safety-first must always be the mantra when it comes to operating aircraft, it need not necessarily be the case when improving financial systems.
This is where IATA can help, by effectively managing some of the risk and developing a blockchain system on behalf of its members. As such, IATA is looking to be either a first mover, or certainly a fast follower, in this area.
Giving airlines back control of their finances will not be easy, but as regulations evolve to catch up with the pace of technology and business expectations, the opportunities to rebalance the value chain in favor of those carrying the most risk will emerge.
The importance of this cannot be overstated. Airlines have only exceeded the cost of capital in returns to investors three times in history.
If the industry is to be able to invest in new aircraft, open new routes and offer a better travel experience, it must achieve sustained financial health.
In other words, rebalancing the value chain to create a stronger industry means even passengers who never hear the words ‘distributed ledger’ will end up benefitting from the new kid on the block.
This article forms part of a series examining the challenges and opportunities facing the airline industry between now and 2035. These issues are explored in-depth in the ‘Future of the Airline Industry 2035’ report from IATA and the School of International Futures. For more information go to www.iata.org/flying2future