Bits & blocks

Bitcoin, the electronic currency, relies on blockchain and other technologies for its fundamentals, including its security, so the two are often linked together. Indeed, the moment you start talking about blockchain as a technology, everyone uses the example of bitcoin. This somewhat confuses the matter, because the primary emerging benefit of blockchain for aviation purposes isn’t in purchasing tickets — it’s in reducing intermediaries that maintain the databases that form the backbone of airline operations.

Blockchain’s first immediate applications are likely to be the way airlines manage sales in the future.

“Take travel distribution,” which, Xavier Lagardère, head of distribution for the Lufthansa Group hub airlines, tells Australian Aviation, is “a very layered, legacy-based IT landscape, with players who have been historically able to extract quite some margin, and quite some dollars from the value chain that holds a stronghold. And take blockchain, with the promise of a secure, value-based, decentralised transaction network. Those two things are conceptually completely opposite. The business aspiration, the long-term, is indeed to be able to offer a travel ecosystem that is not as reliant on those Intermediaries.”

“A blockchain is a database, and the key feature of that database is that no one person or organisation controls it,” Maksim Izmaylov, founder and chief executive of Winding Tree, a nonprofit corporation working with the Lufthansa Group and Air New Zealand (among others) on applying the technology to airlines, tells Australian Aviation.

“In the travel industry,” Izmaylov says, “there are a few points of centralisation. They are security holes and they are bottlenecks. When you decentralise those central parties that are hoarders of the data today, you’ll solve a whole number of problems.”

The decentralisation occurs by creating distributed ledgers that are encrypted stored in a blockchain, which can be replicated infinitely to create multiple sources of the same truth, providing redundancy and visibility of the encrypted chain. The idea of a distributed ledger is intended, in the aviation context, to replace proprietary ledgers that are used as databases: global distribution systems that manage ticket inventory, for example.

“Today,” Izmaylov highlights, “in the airline industry there are virtually two or three companies that can help you distribute your inventory. Of course, they are enjoying tremendously the quality of that marketplace being oligopolistic.”

‘Blockchain has the potential to trigger huge innovation in travel.’ AVI GOLAN

This oligopoly comes with a number of disadvantages, the first being cost. There’s a substantial amount of money to be made in running a system on which many airlines rely, representing a large costcutting opportunity. Another disadvantage is that the proprietary and incumbent natures of the systems mean that there is little impetus to invest in new technologies, so many of the databases are old and do not interface properly with modern systems. They also create barriers to entry, especially for innovation, reducing the ability of smaller startups in particular to create new applications for airline data.

Other disadvantages include security, because a single operator of a database is inherently less secure than a distributed one.

Of the three primary threats of this type, let’s call the first threat type the Equifax threat, after the US credit rating agency where millions of individuals’ personal information was leaked owing to not being adequately secured and then penetrated.

The second threat is where a single actor inside an organisation leaks information, intentionally or not: let’s call this the Snowden threat, after the former CIA contractor who leaked intelligence information.

The third threat is where a single point of truth in a single system with anything less than 100 per cent uptime or reliability causes problems when it goes down. Let’s call this the Amadeus threat, since many passengers will recall being stranded when that supplier of airline operational functionality went offline earlier in 2017.

Blockchain helps solve the problems and reduce the threats of the status quo by creating multiple, encrypted copies of the database ledger

A blockchain, simply, is a sequence of pieces of data (the block) encrypted via a complex process called hashing, and containing a connection to the previous block in the sequence (the chain).

Any one block in the sequence cannot be changed without recompiling the rest of the chain in sequence, which is impractical because of the computing resources required. Algorithms in the blockchain when it is created (often referred to in certain contexts as a “smart contract”) ensure that this resource demand is futureproofed for newer, faster or more powerful processors.

As the length of the chain increases, it becomes more expensive in processing terms for any malicious actor to try to change an earlier block and recompile the rest of the chain. In addition, “The algorithm adjusts in such a way that each computation of that proof of work will take about 10 minutes on average,” Izmaylov Explains.

“The algorithm adjusts so it doesn’t matter: you can have a much, much better machine – and theoretically in a couple of years we’ll have machines that will be two times as fast as today’s machines – and it will still take ten Minutes.”

That 10 minutes is calculated “via the algorithm, so basically the complexity of that computation will be constantly adjusted, completely automatically,” Izmaylov says.

The network also provides security because the consensus on the “true” chain is taken from all holders of the blockchain, so that a malicious actor would need to first recompute and then distribute a changed chain to more than 50 per cent of the network.

This “51 per cent” attack requires, Izmaylov notes, “51 per cent of the hashing power, 51 per cent of the computational power. That’s what you need in order to change the future truth. So, where the public permission is blockchain, such as Bitcoin or Experia for example, you will never be able to change the state of the database that’s already been written into the ledger. It will be computationally unfeasible.”

That assumption is based on the idea that the blockchain is distributed among multiple hosts, either as a private or public blockchain. In the aviation context, it could be a network of airlines and supplier companies that maintain whole or partial copies of a private blockchain. Essentially, if a group of airlines all have encrypted copies of their combined ticket distribution databases, passengers can buy tickets without the need for the airlines to use (and pay) a company that maintains a global distribution System.

But the security benefits of a significantly more scaled system – and a public one – are greater: the larger the number of sources of the “true” blockchain, and the longer the chain, the more impractical it becomes for a malicious actor to take it over. This is a complex matter for airlines and indeed their regulators, which will need to be persuaded that the benefits of a public, rather than private, blockchain measure up.

Yet, as SITA’s White Paper on Flightchain, a test of a flight status blockchain project it ran with Heathrow, airline group IAG, plus Miami and Geneva airports later in the test, says, “A private permissioned blockchain still needs governance and operational oversight. Simply because it is distributed and decentralised does not mean it is self-managing. It is important to choose a governance model/organisation that does not compromise the integrity of the Blockchain.”

Says SITA, “A distributed system is resilient by nature. But while we can say the network as a whole holds a single version of the truth, for an individual node we can only say ‘it holds a single version of the truth, Eventually’.”

Moreover, SITA underscores the need for active management of the blockchain from the very start. “Smart contracts are programs that can update the state of data on the blockchain and are a key element to most enterprise blockchain use cases. Smart contracts can be complicated to define, update, redeploy and get all participants into sync again. Strong lifecycle management is required.”

“Smart contracts have no legal status,” SITA concludes, yet provides a glimmer on the future horizon when it suggests that, “however, industry standards could be encoded in smart Contracts”.

For an in-depth discussion of how the economics of blockchain function, the MIT Sloan School Working Paper 5191-16, “Some Simple Economics of the Blockchain” by Christian Catalini and Joshua Gans, is available online.

The algorithm adjusts so it doesn’t matter.’ MAKSIM IZMAYLOV

Early adopter airlines are searching for the building blocks of blockchain — and complementary technologies

“While we are still exploring its benefits, blockchain may offer a streamlined way to retail airfares and ancillary products alongside our current channels. In removing complexity from the sales chain, customers benefit from reduced transactional costs, and airlines benefit from swift and secure sharing of information,” says Air New Zealand’s Golan.

Part of reducing that complexity involves reducing the number of intermediaries between passengers looking to buy tickets and the airlines that want to sell them, while still providing opportunities for innovative ways to do so. Distributed APIs — application programming interface, simply defined as sets of definitions and standards that allow developers to create new uses for an airline’s systems and data — are part of the picture.

“Lufthansa Group has engaged in the development of APIs, for instance supporting IATA NDC [the airline body’s New Distribution Capability standard], to offer a direct access to its offers to customers and distribution partners”, explains Markus Binkert, senior vice president of distribution & revenue management at the Lufthansa Group.

“By integrating these APIs with Winding Tree’s public blockchain, Lufthansa Group enables all innovative partners who develop cutting-edge travel applications to access these offers via a decentralised and intermediate-free travel Marketplace.”

Lufthansa’s Lagardère tells Australian Aviation that the group is “looking at fostering a future landscape where there are fewer intermediaries, or at least intermediaries that bring value and not only cost, and blockchain is a perfect forward looking instrument to doing that.”

It’s not, Lagardère says, “only with consumers direct, because the users, the apps’ creators, they could very well be travel agencies, or online travel agencies, who have a value add for the customer and ones who will present the tickets over the network.”

“I’m not able now to say, it’s going to be that specific app or that specific app, looking like this or like that,” Lagardère concludes.

“We take a more fundamental approach. What’s fundamental, actually, in this approach, is that we’re talking about the public blockchain. It’s not about saying, we’re going to do a blockchain experiment within our private systems and we’re going to learn the technology of blockchain. Here we are of course learning the technology of blockchain, but we’re also applying the concept of blockchain to travel distribution. What shape that takes, I think it’s also going to be a byproduct of the users that join us to experiment on the platform. I think we’re going to see first usages, at least in a proof of concept mode, in the course of next year.”

Yet caution and understanding are vital. SITA, in one of the learning points from its recent White Paper, highlights that “it is still early days in the technology lifecycle for blockchain. A blockchain can be complex to set up and manage, especially when compared to point and click cloud services like AWS or Azure. Look for ‘blockchain-asa- service’ offerings, and beware of vendor claims around maturity. Either ensure you have correct skill-sets, or use ‘blockchain‑as-a-service’ offerings or simply wait until the technology Matures.”

Airlines have not traditionally been strong in the integrated information technology sector, with few of the promises made about big data’s applications to commercial aviation yet fulfilled. Blockchain, like any IT tool, will only be as useful if its wielders know how to use it

Airlines start accepting bitcoin, but remain focused on offline currency

Bitcoin, the often tumultuous digital currency, is the best known example of a blockchain in action, and aviation is at the forefront of engaging with this technology too. In contrast with the disintermediation strategy of using the blockchain to aim for direct engagement with passengers, early bitcoin adopters among airlines and private jet operators have largely been using companies specialising in the cryptocurrency to enable payment and immediately transfer it into dollars, yen, and so on. This “bitcoin-as-aservice” allows airlines to familiarise themselves with some of the issues in a low-risk way.

Japanese airline Peach, a low-cost subsidiary of ANA, has been working with BITPoint Japan to provide the ability to purchase tickets using bitcoin, using the BITPoint Pay application on Peach’s backend and in the passenger’s smartphone, which reads a QR 2D barcode and transfers the bitcoin equivalent in yen to Peach’s account.

“Our alliance includes the BITPoint payment for the tickets,” Chiharu Hayashi, a director of BITPoint Japan, tells Australian Aviation, but highlights that, in addition, “after a customer arrives in Japan, they go shopping and go to restaurants, and they can pay through bitcoin. What we can say is: travel with only bitcoin” is a reality for BITPoint Japan’s customers.

Using the BITPoint Pay app, travellers store the currency in a virtual wallet on their smartphone for payments while in Japan, which are typically made using the QR codes that are commonly used within the country.

When purchasing a ticket using bitcoin, the process is similar to a normal payment process, with a few key exceptions, including the use of the BITPoint Pay app.

“Peach shows the QR code, and the traveller scans the QR code and sends it via bitcoin to Peach wallet,” Hayashi says. “Then, at BITPoint Japan, we will sell the bitcoin and exchange it to yen. We transfer the Japanese yen to Peach’s account. It means that Peach doesn’t have to care about the fluctuation risk of the bitcoin.”

Indeed, not having to monitor, hedge or provide for fluctuations of bitcoin to various national and international currencies is a benefit for airlines, and is a key part of the partnership between Peach and BITPoint Japan — as well as seemingly every other airline or private jet outfit that accepts bitcoin.

Once they’re in Japan, Hayashi says, the benefit for passengers is that “they don’t have to bring their own cash. They don’t have to exchange their cash. They just bring their mobile phone with bitcoin. As you know, the recent price trend of bitcoin is going up, so most of the bitcoin holders have unrealised profit, so travellers can use their unrealised profit for travel.”

On Peach’s part, Hayashi says, “at this moment, Peach just sells cheap [airline] tickets to the customer. They would like to have a customer database through bitcoin payment. They are going to create their own wallet, which is Peach wallet.”

When passengers make payments at restaurants, souvenir shops, or other destinations, Peach can then mine that information for loyalty purposes, including, Hayashi suggests, direct email marketing.

Passengers are even paying for private jet flights with Bitcoin, says Privatefly cofounder and marketing director Carol Cork. “Part of the philosophy of our business, really, was to make booking a private jet or private charter flights all over the world much quicker, much easier and much faster to access. When we launched the business, we were looking at how to digitalise private jet booking, and that was involving the user experience, the customers, and also for the operators and the supply side of the business as well.”

“Bitcoin was very much, at the beginning, a customer demand-led initiative,” Cork says. “We’d been closely following Bitcoin ourselves, with our finance director, and I think it was at the end of 2013 we started to receive requests from flights to accept it. We have a platform called Trustpilot, a verified review system, and you can see on there we had customers saying, ‘Oh, if only you accepted bitcoin.’

“Our ongoing aim is to make choosing, buying, paying for private charter flights as fast, efficient and with as much choice as possible for the customer. So that was a logical addition for us, to look at payment options and to see how we could potentially bring paying by Bitcoin into the payment options that we already offered.”

In addition, Cork notes, “one of the major benefits was that Bitcoin payments are very fast, very flexible and they’re not subject to banking hours. We look at everything from how fast people are booking, the lead times between an inquiry and a booking, what time of day they’re booking. We know that [banking] time lag is not only a hassle factor, but it also can be a major factor whether someone comes and books a private flight or not. It’s how easy and quick we make it for someone to book, and part of that booking is obviously the payment process, so the more we can open up the options to allow people to make it faster and easier to pay, then the better.”