Airline Coins
An entertaining feature of Bahrain International Airport* is a small exhibition of artifacts from the lost civilisation of Dilmun. These people and their home on Bahrain island may have been the basis for the Garden of Eden. More recently they inspired a water park with impressive winding slides (pictured below). Among the antiquities on display at the airport is a collection of seals (pictured above), which would have facilitated commerce and exchange along the Mesopotamia-Indus trade route.
* IATA: BAH, ICAO: OBBI
Like the ancient Dilmuns, today’s airlines need to ensure that they know who they are dealing with and that the means of exchange is valid, just like the old seals achieved. When tickets are sold straight to passengers the airline either collects the money directly from the credit card/mobile wallet’s bank. Sometimes airlines settle with travel agents or each other through IATA Clearing House or Airline Clearing House, since any airline will accept another’s tickets.
Generally speaking the currency of aviation is the US Dollar. But airlines in countries that are America’s enemies can use the “Neutral Unit of Conversion” instead, which converts helpfully to one Dollar. This was set up during the Cold War to keep Warsaw Pact carriers like Soviet Aeroflot and East German Interflug happy. It is also possible to deal and settle in the IMF’s Special Drawing Rights.
To the best of my knowledge it is not possible yet for airlines to settle in cryptocurrencies like Bitcoin, Tether and the jokey Dogecoin. But some travel agents will accept crypto from a passenger even when they issue a ticket priced in a regular currency. They then settle in the usual way.
But do airlines need their own coin? What could such an Airline Coin be used for and how might it work? Read on to find out more…
Airline Coins as payment for vendors
Over the last few weeks I have written about how airlines can make the most of blockchain technology, which makes cryptocurrencies possible, from a commercial perspective.
The first application I considered (see article) was using blockchain to introduce open-source, peer-to-peer competition in revenue optimisation. The idea is that different vendors will compete to find the best solutions for offers that can be sent to travel shoppers.
Since the necessary analytics are complex and wide-ranging I think it likely that this approach would lead to better outcomes and lower cost than airlines can achieve themselves, even if they start using advanced computation methods like artificial intelligence and machine learning.
In my vision airlines would reward the winning vendor only, although the criteria that determines whether or not a particular solution is the best still need to be defined. Just like how Bitcoins are mined by the computers who first solved the mathematics of specific transactions, Airline Coins could be issued to vendors finding the solution that the airline uses.
How Airline Coins should be allocated under this model remains to be determined. It could be by flight, by seat, by cabin, by passenger, by the complexity of the problem to be solved or something else. Maybe one of the readers of this article will be inspired to find the answer.
Airline Coins as a settlement mechanism for other carriers & suppliers
My second article applying blockchain to airline commercial considered whether tickets can be issued as non-fungible tokens (NFT, see article). I think it unlikely that blockchain will change the function of tickets from being a two-party contract for travel to something else, or change the sort of content that tickets contain.
But I did see potential benefits from an accounting and fraud perspective, to which I would add using Airline Coin as a mechanism for settling bills too. Airlines who issue tickets with more than one carrier involved, called interline in the trade, must buy flights from their partners at either commercial rates or specially agreed prices.
Up to four airlines can be involved in the sale of an interline ticket:
1. The ticket issuing carrier: the airline whose ticket number is used (BA’s for example is 125, Qatar Airways have 157 and American Airlines number 001) and who collects the revenue from the passenger – they earn a service charge, typically 9%
2. The fare owning carrier: the airline who published the fare used to price the itinerary – to the best of my knowledge they earn nothing, although I am not 100% sure
3. The marketing carrier: the airline whose name (actually a two-letter code) is in the flight number (e.g. BA125) – they can earn a marketing fee under a codeshare agreement
4. The operating carrier: the airline who hold the registration for the aircraft that carries the passenger – they are paid their share by the ticket issuing carrier under proratio rules, which determine who gets what proportion of the ticket price.
It is unusual for a ticket to have four different carriers associated outside of the oneworld, Star Alliance or Skyteam airline alliances.
Once such a ticket is used by a passenger the ticket issuing carrier will be billed by all the other airlines and have to divvy up the revenue according to their mutual agreements. This is done through one of the clearing houses. The process takes time and requires a complex audit. It is likely that Airline Coin could allow airlines to settle much more quickly, potentially in real time when a passenger checks in.
Airline Coin may also make the audit process less costly if a distributed ledger includes both the NFT tickets billed for and the Airline Coins paid. Since it is possible that once all the interline parties have been paid a ticket-issuing airline can pay out more revenue than they collected from a buyer, an Airline Coin and blockchain-driven process could highlight deals that need to be rewritten before they increase costs any further.
Airline Coins as a loyalty reward
Airline Revenue Economics often writes about loyalty (see this article for example). Loyalty businesses work by selling miles and points currency to both the airline operators and third-parties, who in turn distribute the currency to their own customers as a sales incentive.
Could Airline Coins become a substitute for miles and points? We will have to wait and see.
Open questions
There are many open questions about Airline Coin that I do not have answers to yet. These include (but are surely not limited to):
1. How is Airline Coin’s value determined?
2. What characteristics do wallets in which Airline Coins are held have, like who can own and trade them and the maximum or minimum amount that any one operator can have?
3. Who would issue the Airline Coins and would airlines have to pay for them?
4. Should IATA be involved?
5. Could Airline Coins be converted into any currency?
6. Can Airline Coins be confiscated by governments?
7. Should Airline Coins be associated with an international organisation like ICAO, which handles the fundamentals of air transport?
I hope that by reading this article you are ready to make a start figuring out what to do next, and I can help. Let me know if you would like a chat.
oliver AT ransonpricing DOT com
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