I know, I know. A lot of people are excited about blockchain, but nobody really seems to know why. It’s supposed to revolutionize the world… and be awesome… and fix everything… and… I dunno, cure cancer? Few people can explain it, and those who can have trouble explaining why it matters in many specific industries. Now that Hahn Air has issued the first blockchain ticket, I’m going to take a stab at this. Wish me luck.
I was actually supposed to be the first passenger on a blockchain-issued ticket, but I had to back out due to an illness and lengthy mechanical delay combining to overwhelm my ability to function. (I may write up that experience later.) I feel awful about that, and the only way I know to even try to make it up to them is to write this up and see if I can make sense of it all.
[Disclosure: Hahn Air paid for my transport, but they are getting their money back since I didn’t go.]
Let’s start with what blockchain isn’t. It is NOT Bitcoin. Blockchain’s first rockstar application was powering Bitcoin, and many people conflate the two. But blockchain is just the technology that allowed Bitcoin to work. Blockchain should have broader applications, but before we can even talk about that, we need to discuss what exactly it is.
The Frequently-Used Bank Example
For those who prefer video, I found this explainer sent to me by Hahn Air to be pretty useful:
But let me try to put this in my own words. The point of blockchain is to facilitate transactions without needing a big, central intermediary to validate and record the transactions. Banks seem to be the most popular way to explain this, and I don’t disagree with that, so let’s do yet another example of how this will disrupt banking.
If you needed to send someone money, that nearly always goes through a bank or something like Western Union. There was a big company in the middle that validated transactions, made sure the money was there to be sent, and handled the move. If each party used different banks, you might need two of these that talked to each other. Today, you might use Paypal/Venmo or Zelle or something else, but the idea is the same.
Here’s an example. Let’s pretend I’m sending money to Lorenzo Lamas. (He probably needs it.)
Me: Hello, Cranky Bank. Please send $50 to Lorenzo Lamas.
Cranky Bank to Me: Ok, bro. We will now record this in our ledger, so your account will be debited $50. We will tell his bank.
Cranky Bank to The Bank of Lorenzo Lamas: Hello, Lamas Bank. Cranky wants to give your client $50. He has the money. We’ll send it to you. Go ahead and give it to him.
The Bank of Lorenzo Lamas to My Bank: Cool beans. We’ll do it. Send us that money.
The Bank of Lorenzo Lamas to Lorenzo Lamas: Hey man, someone pities you. We are recording a credit of $50 in your account in our ledger.
Lorenzo Lamas: Thanks! Now I can eat tonight.
This is fine, but it’s a lot of back-and-forth, and it takes some time for the money to get settled between banks. Technology has sped things up, but it is still quite the gauntlet to pass through. It can also be slow, especially for larger transactions where the banks aren’t willing to just take another bank’s word for it. It can takes days for it to be confirmed and properly deposited.
The idea of blockchain is to untangle that mess and speed up the process. If I want to send Lorenzo Lamas $50, I should be able to do that without these back-and-forth relationships and save all those costly bank fees. That’s where blockchain comes in.
You’re probably in about the same place I was when looking into this. This image seems to accurately represent what was going on in my brain, but I couldn’t figure out where the chains came in.
Let’s try it this way. If you actually visualize a bunch of blocks connected by chains, then this may help. (Seriously.)
My desire to send $50 to Lorenzo Lamas would be proposed as a block in this chain of transactions; it’s an entry in the ledger for all you accountants out there. But you can’t just add a block because you feel like it. That would be way too easy to hack and distort. I could pretend to be Lorenzo Lamas and send myself a block of $10,000,000 even though we all know he doesn’t have it.
Instead, these blocks are validated by computers that are networked from all around the globe. This network has tasks that must be completed electronically to verify in multiple places that this block represents a real transaction. How this works is entirely beyond my level of understanding, but once it is verified, it is added to the chain and etched in stone. You can’t change a block. When Lorenzo Lamas makes his comeback and can afford to send my $50 back, it would just add a new block to the chain. This is standard accounting. You don’t delete transactions that have happened. You just add to the record.
Ok, ok, so why is this better than a bank just doing it? Ah, yes, well, there are three real benefits here.
- You can eliminate the middle-men — or at least make the barriers-of-entry lower for new, more-efficient middle-men — so it should reduce friction and costs.
- You speed up the transaction settlement time with near-instant verification of accuracy via multiple checks and balances.
- You decentralize the transaction so it should be harder (but of course, not impossible) for hackers to screw this up for you… at least for now. You know hackers will eventually do magic and figure out ways.
These are all good benefits. Banks may adopt this — and already have via Ripple, for example — simply so they can reduce their own costs of doing business and remain the intermediary, but they may be tempted not to pass these cost savings along. (I still pay $25 a month for ACH so I can send business payments and a lot more if I send a wire. Something tells me that my bank doesn’t care.) But disruptors can come in and build systems that bypass these banks. Either the banks find ways to compete (as they were forced to with Zelle thanks to Venmo and others) or they die. So, hooray!
How Does This Relate to Travel?
This is where I always get hung up. I understand when it’s a consumer-to-consumer application why this matters. You can dis-intermediate without harming the integrity of the system. But if you’re buying a ticket from an airline, then the airline isn’t an intermediary in the same sense. It has technology it uses to handle the purchase, but it’s still just a bunch of people interacting with one airline. Maybe it’ll find that blockchain is a better technology to use for that purpose, but that’s hardly revolutionary. And it’s not really newsworthy either. So why is the The New York Times even covering this? I think I’ve been missing the point.
Think about this with an example. Here in the US, a travel agent may want to sell a ticket on Lao Skyway Airlines from Vientiane to Luang Prabang, an increasingly-popular route with travelers these days. But a small airline like Lao Skyway doesn’t have the infrastructure to sell electronically through travel agents all around the world, and it doesn’t want to develop it, at least not yet. It would have to join ARC and BSP, two large entities that facilitate the settlement of payments, and connect its systems to distribution systems. I don’t know the dynamics of how these systems make money, but they have costs, and they have to pay for them somehow. Sure, Lao Skyway has a website, but payment issues across countries remain. If you’ve ever had your credit card rejected while trying to buy things on a foreign company’s website, you know what I mean. Today, Hahn Air enables Lao Skyway to sell tickets to travel agents by acting as this central intermediary to help them.
Blockchain may be ideal for something like this. It may not be person-to-person, but it is person-to-smallish business. It’s not clear if this is the future for Hahn Air. As Frederick Nowotny, Head of Sales Engineering for Hahn Air, said in the press release “… Our goal is to investigate and monitor the opportunities this technology holds for travel distribution, even if widespread acceptance is still a vision of the future.” Hahn Air is just trying to stay ahead of the game so that it can be the disruptor and not the disrupted if this proves to be a breakthrough.
This technology could be bad news for ARC and BSP, or it could be something they adopt. But if it works as expected, it either forces ARC and BSP to become more efficient and less costly, or it opens the door for Hahn Air or other, potentially even more efficient competitors that haven’t even been born yet to improve this process and make it more accessible (not to mention, cheaper).
In the end, if you want to buy that ticket on Lao Skyway, blockchain should remove transaction costs from the equation while increasing processing speed, improving accuracy, and reducing the threat of being hacked. In this case, that last piece of the puzzle isn’t really the most pressing issue. It’s the rest that are most appealing.
I’ve Solved the World’s Problems
Does that make it more clear? If so, please call me up and explain it to me. I’m still not entirely there. In fact, I’m trying to get a call with the head of Winding Tree, Hahn Air’s partner in this. Hopefully that will allow me to write a second, more knowledgeable post. For now, however, I still can see how there is opportunity out there, in theory.
The ability for blockchain to be able to accurately and efficiently connect many parties to many other parties is what will make it a winner. It’s not about connecting people to a single airline or anything so simple. I’m still not completely sold on what transactions will prove to be the breakthrough for the airline industry. There will be plenty of failures, I expect. For now, however, it’s the wild west, and Hahn Air has saddled up. This will be fun to watch as the industry tries to figure it all out.
Take the concept of a single, immutable record of transactions and expand it to:
Interline settlement (both revenue and tax)
Partially used airline services (tickets, bags, meals, any airline service). This has particular applicability during service disruptions, keeping a master record of what services were consumed/delivered and which were not, so passengers can be refunded/compensated and service providers (3rd Party) can be compensated
It’s another tool in the tool belt of technology to solve longstanding airline business problems. Is it the right one? Who knows.
What a brilliant analogy. Thank you.
It’s a slight tangent to the piece but Americans really do get screwed by their banks. The cost of sending money from bank to bank is absurdly high. In the UK you can always send the equivalent of $15,000 for your account (and most banks offer up to $125,000) to another bank account for free. And it reaches them usually within 20 minutes. Wild that the most advanced economy has a terrible banking infrastructure..
I was just checking my bank: here in The Netherlands it’s a maximum of €250,000 per day within the EU (and a couple of other countries) for free. Outside this area it’s €50.000 (+ applicable fees). Last transfer I did to Spain got there within 10 seconds.
It may depend on the bank in the US. I use Bank of America as well as a local credit union and have no issues transferring money between them – all I needed to do was enter the routing number and account number so the bank website remembers the account and I’m good to go. I’ll have to see if they state any limits/day but I haven’t seen any, and they don’t charge anything either. The biggest issue I’ve found in the US is that to facilitate these transaction you need to have the routing number and account number for the accounts involved, which is more complex than if you have just an email address or phone number to send money to. That’s where things like Venmo and especially Apple Pay really shine – simple sending of money that you can easily transfer to a bank account or (in the case of Apple Pay) keep in your electronic wallet for future transactions.
In my mind, the more exciting thing will be once this is used to settle interline transactions between airlines. For too long, there have been huge seams when you’re traveling between airlines and with the current restrictions on foreign ownership, etc. having many carriers is going to be the reality.
Very interesting… what applications do you see this being applied in US aviation if any?
As for Lorenzo Lamas, don’t kick a man when he’s down. Also remember he is the son of Arlene Doll (cant recall the correct spelling though.)
SEAN – Well that’s the million dollar question. I’m talking to the head of Winding Tree today and will see what he thinks.
To the extent this has a natural application in the aviation world, it’s where stakes are large, not small. Buying an airline ticket is not generally a matter of life or death.
But safety/parts/aircraft records is a matter of life and death. So perhaps that might be a better application, where it’s very important to verify the history of parts (for instance) back to birth.
Great point on using blockchain to track the chain of custody for parts.
To airplane parts, I’ll add medications / pharmaceuticals. Both airplane parts and medications are frequently counterfeited, and both have deadly consequences when counterfeits are used. Blockchain could help greatly with both.
Can you do a post on Hahn Air. The website looks interesting
Jeremy – That Travel Weekly article I linked to is pretty good. Maybe one day I’ll write them up. Fascinating company.
Hope you consulted with a defamation lawyer before you posted this…the plaintiff doesn’t have to win to make your life a living hell…
Can we not show Steve some respect ?
I don’t like it when people use ‘cancer’ to try to be funny. No, it won’t cure cancer. I wish it would because I have it and don’t find it amusing.
Somebody will get offended by anything these days.
Nesting fail. This was meant for Steve.
No Bob, he is absolutely correct, the word cancer does not fit into this forum, think of others .
I think in your quest to find the missing incentive you need to take a step back and look at what these intermediaries actually provide. Once that was the role of a common broker making it practical to deal with a large number of partners. But the Internet has made that role unnecessary. It is entirely possible to reach your final business partners directly without any such intermediaries. I believe early Ryanair is great proof.
But even Ryanair couldn’t entirely skip intermediaries and needed to rely on credit card companies. The reason is a second role of these intermediaries: they provide trust. This goes both ways: the credit card company lets the airline trust that whoever bought the ticket meant it and wasn’t just blocking seats for fun or nefarious reasons, and it gives the customer if not trust that they get on the plane then at least the trust that there is a good chance that they will get their money back if they don’t. The intermediaries in the traditional airline industry play a similar role when the other side isn’t private individuals but travel agencies. Essentially these intermediaries are powerful enough that they can bully everyone to play ball – and act as a kind of insurance if someone doesn’t.
Blockchain is trying to do is what all tech startups do: replace a social construct with technology. They want to replace intermediaries providing trust with a mathematical proof of trust. (This is probably also where these claims of “100 % secure” come from: if you can mathematically proof the trustworthiness of someone, that must be an absolute.) Every statement made by someone is written down and all these statements are chained together in such a way that any changes in the statements break the chain and can be detected.
This neatly solves the trust issue in a crypto currency. If you promise to pay me five credits, all I need is a statement in the blockchain that you did. I can track down via the blockchain whether you actually had those five credits in the first place. This works, because the total amount of credits is constant. If you claim you have five credits, you have to have received them via some other transaction stored on the blockchain (and so on).
This doesn’t work anymore with real things. If, say, you want to use a blockchain to prove that you gave me an apple, then a representation of that apple had to enter the blockchain somewhere – apple’s don’t just exist, they are produced. And the apple’s representation also needs to be removed from the blockchain once it gets eaten. There is no way to prove that that representation was entered rightfully and has been removed when appropriate without some outside knowledge – without additional trust.
A more realistic example: If you use a blockchain in shipping, you can store a bill of loading for a container on a blockchain. But you can’t be sure that the other party actually put into the container what they said they would. You could ask for a third party inspector to also sign that bill, but how do you know that the inspector isn’t in on the game? You need to trust the inspector – who becomes kind of an intermediary. He could also just have emailed you the bill in the first place and you gain nothing.
So, I can enter the fact of the issuance of a ticket into a blockchain. But that only means that: someone issued a ticket to someone else. Does the issuer actually have access to an airplane or any intention to offer that flight? Did the customer ever intend to actually pay for the ticket? Who knows. Do only advantage over the airline just sending me a booking number in an email after I promised to pay seems to be that we both have a proof that we did that little charade.
I seems to me that the benefits often cited for blockchain applications are really stemming from the fact that someone is redesigning a legacy system. Putting the word blockchain on the box may help getting that done. But likely it could also have been done it.
Martin – Thanks for writing this out. I did speak with the head of Winding Tree today, and I’m going to see if I can turn that into a future post.
But they really are trying to get this digital reputation thing to matter.
They have this ORG.ID thing which they call a “decentralized business registry.” While I don’t know how this works, I assume the idea is that anyone can put together a legitimate block talking about whether the company delivered, whether it stole your money, etc. Then it would build this up into an unchangeable record of how the company operates. So you don’t need to trust the BBB intermediary and can instead trust this. Do we need this? Well, that’s the billion dollar question.
Blockchain = An immutable record of something to make people feel smart.
Bitcoin = Making people who feel smart lose money, immutably.
Master both of these concepts and you too will realize that the application of blockchain has a fairly limited use case for now. I am glad the IBM and others have invested in creating the infrastructure for this but it’s usefulness is very, very limited – which usually limits it to gimmicks and c-suiters trying to sound smart.
Could Southwest look to have all of the lineage of all of their parts used on 737’s tracked this way? Sure. After the find the records for the maintenance they may not have been doing previously, then they will get around to it.
I can’t wait for my next blockchain fee from Delta.
For interline ticketing (and NDC/OneOrder as we get there), blockchain offers very interesting possibilities. What if all interline tickets weren’t stored in individual airline e-ticket databases, but rather one shared blockchain, where you could only access/decrypt tickets involving your airline? E-ticket status updates would be sent here, as well as any other commercial information airlines share back and forth (bagtag messaging, etc.).
This would mean everyone was pulling from the same database, as opposed to trying to be “in sync” with all of their partner airlines. This would create a single source of truth, as opposed to relying on a few different reservation systems and a few different e-ticket databases, and a BSP/ARC, maybe a GDS – all just to sell and settle a single ticket.
POI……I recently ran into Lorenzo Lamas in a KFC in Fort Lee, NJ, late at night. He is now working as a helicopter pilot for a charter company working out of Teterboro Airport. We talked for a bit, he told me about his myriad financial issues and how he cant get much entertainment work, and the fact that his ex playboy bunny wife/partner/girlfriend ran off with his son.