Travelling has never been easier or more essential. An increasingly global economy means that on average, and across the various continents, business travel accounts for 72.6% of all travel while leisure travel accounts for 27.4%. It’s grown into a $7.6 trillion industry (including indirect services such as accommodation, car rental etc.). Despite this, less than 20% of the world’s population has ever been on a flight. Can the blockchain disrupt the travel industry to make it more inclusive?
Travelling on a Budget? You Are Paying More Than You Should
Booking a flight, a hotel, a rental car, and all sorts of other travel extras is a very simple process today. Most of us don’t know or, let’s be honest, simply don’t care about what’s happening in the background that makes it possible for us to compare thousands of flight options and accommodation availability around the world at the drop of a hat.
But if you knew that’s it’s these background processes that are adding a premium to your booking, would you be interested to find out a bit more about what’s happening behind the scenes?
How Does Travel Distribution Work?
Although the Internet laid the foundation for modern travel booking, it’s because of networks called GDS (or Global Distribution System) that makes it possible for travel agencies to compare and find the best option for individual travelers in a matter of seconds.
Simply put, a GDS is an online network that connects suppliers (airlines, hotels, car rental companies, etc.) with distributors (travel agencies).
It takes the inventory from suppliers, such as seats on an airplane, and makes it available to distributors. To do this the GDS network will have direct access to the airline reservation system through a contract.
When travel agents book a seat, that information gets passed to the airline reservation system in real time so that another travel agent connected to the network can’t book the same seat.
The same GDS network will have access to many supplier reservation systems like car rentals, cruise ships, and hotels, enabling travelers to plan and book an entire trip from a singular platform.
But, of course, it doesn’t come without a cost.
GDS Commission and Fees
A GDS will typically charge a supplier a fee for being connected to its network. The fee structure will in most cases work like a commission where the GDS charges the supplier a certain amount per booking made through the GDS network.
[bctt tweet=”The cost to airlines can be 20 times higher selling through indirect channels such as a GDS, than when selling directly to customers.”]
In fact, airlines paid an estimated $7 billion in GDS fees back in 2012.
So why do travel suppliers put up with it?
The Rent-Seeking Business Model
They don’t really have another choice. The travel industry is highly competitive, and if a travel supplier wants to stay afloat they can’t afford to cut off that exposure to the international market that a Global Distribution System provides.
In 2011, American Airlines attempted to bypass GDS systems. The result was a $50 million reduction in revenue in a single quarter!
This brings us to the rent-seeking business model. Generally, it has a negative connotation and The Economic Times defined it as, “When a firm uses its resources to procure an unwarranted monetary gain from external elements, be it directly or indirectly, without giving anything in return to them or the society, it is termed as rent-seeking.”
This is a very accurate way of describing how traditional GDS networks take advantage of the travel industry.
They initially use their own resources to reap economic gains from travel providers. Once they’ve done this, they hold the travel platforms at ransom by basically saying, “If you don’t pay the fees to be part of our network, we’ll block you from coming up in booking searches on our platform.” That means the thousands of travel agents who are logged into the network won’t get you as a travel option for their customers.
What Does the Travel Distribution Playing Field Look Like?
The travel industry provides a massive playing field for participants. In 2016 the industry generated $7.6 trillion (more than 10% of the global GDP) and provided 1 out of every 10 jobs in the world.
Saying that, only three companies control 99% of the travel distribution market; Amadeus, Sabre, and Travelport.
On the surface, the travel industry might look very competitive, but the truth is that whenever you make a booking, chances are that it will go through one of these three companies who take in a handsome percentage of supplier profit along the way.
This kind of influence in any industry is bad for business. Their dominance means that they have the power to force travel suppliers into cooperation (as we’ve seen with American Airlines), and it also makes the barrier to entry impossibly high. New industry players can’t compete with this kind of market dominance.
High barrier to entry means low industry competition which means unavoidably high fees.
Why Is Traveling So Unnecessarily Expensive?
The short answer is middlemen. Middlemen increase the length of transaction flows, adding margin on top of margin at each point in the chain. At the end of the flow sits the consumer, who’s got no choice but to swallow all the added costs.
[bctt tweet=”Middlemen increase the length of transaction flows while the consumer got no choice but to swallow all the added costs.”]
GDS-middlemen can take as much as 20% of the profit from travel suppliers. In order to counteract this, airlines, hotels, and car rental companies have to inevitably raise their fees.
Higher fees mean more expensive bookings for the customer.
Also, in an effort to bypass GDS networks, many airlines started to a levy a fee for bookings made through a GDS network. The Lufthansa Group announced in 2015 that they will be charging booking agents a €16 surcharge for every reservation they make through distribution channels. The group includes Swiss International Airlines, Austrian Airlines, and Brussels Airlines.
Travel agents will unfortunately not swallow these extra fees but will, again, pass these on to the customer.
More than half of travel bookings go through GDS networks so these added fees are mostly unavoidable, making travelling unnecessarily expensive.
Can Decentralization at the Distribution Level Make Traveling Cheaper?
The industry in its current state leaves a lot to be desired. There are many opportunities for improvement, specifically when looking at the people that the industry is supposed to serve: the customer.
How Can Travel Distribution Become Better?
Before we can take a look at how the distribution level in travelling can be improved, we need to determine what the optimal solution needs to achieve.
What would the ideal business model for traveling look like?
Beneficial to every industry player
The model should prohibit some sectors within the industry to be able to take advantage of the resources of another sector without having to “return the favor” back to them or to the wider community (rent-seeking should be impossible).
Lower barrier to entry
Reducing the entry barrier will increase competition which will make sure the industry performs to the highest standards having first-class service providers and encouraging innovation.
More profitable for suppliers
If suppliers have to cut costs at every corner just to stay in business, it will affect the quality of services provided to customers. Suppliers need to be able to make a profit in a healthy, competitive ecosystem, without being held ransom by the all empowering third-parties that add no value to the supply chain.
Lower distribution costs
Distribution networks need to be placed in a position where they can be held accountable for their actions and business practices. This includes how they treat suppliers and the fees that they levy.
Cheaper for consumers
Finally, the ideal business model should make sure that the biggest benefits go to the customer, and that includes not making it unnecessarily expensive by passing on profit margins to the cost of traveling.
Decentralizing the Marketplace
Most of the above benefits can be realized by moving the travel distribution sector onto a blockchain network. This will achieve one important feat: decentralizing the industry and removing the need for costly middlemen.
A decentralized ecosystem would be far removed from the traditional business models we are used to seeing.
So what would look like it and how would it operate?
The governance model
Most blockchain based projects have a unique digital token issued to users that come with certain functionalities available to holders.
One of these functionalities will be the ability to vote on important matters pertaining to the network, such as distribution fees. Without a centralized authority running the ecosystem, governance is achieved through a democratic voting process involving all token holders. As voters are also token holders they will tend to act in the best interest of the network. The better the network performs, the more likely the value of the token will increase.
[bctt tweet=”Without a centralized authority running the ecosystem, governance is achieved through a democratic voting process involving all token holders.”]
The economic model
Instead of working with traditional fiat currencies, travel distribution on the Blockchain will depend on the networks unique cryptocurrency. These tokens are the basis of the economic model and the fuel that drives all transactions on the network. Benefits include:
- Low transaction costs – It’s a permissionless system so there are no middlemen required to oversee the validity, legality, or accuracy of the transactions. This means very low transactional costs.
- Cheap international payments – No foreign exchange as all users are working with the same global currency.
- Low settlement costs – Leveraging smart contracts for increased automation means reduced payer verification costs.
- Secure transactions – Blockchain technology cryptographically hashes data and stores transactional information on a network of computers around the world. It makes it almost impossible for anyone to gain unauthorized access.
The technological model
A decentralized network will provide a base for suppliers and sellers to tap into a secure travel marketplace where consumer-facing sellers (travel agents) can buy inventory directly from the travel suppliers.
Blockchain technology facilitates an open source platform with a low barrier to entry where small market entrants can compete against big industry players with their own solutions, leaving it up to the suppliers to choose which market solution works best for them.
Choice brings increased competition and innovation, and suppliers will also no longer be held captive by a small number of companies that monopolize the market segment.
Even though multiple sellers and suppliers can connect to the same decentralized distribution channel, availability will be updated in real time (so no double bookings) while smart contract capabilities will ensure the accuracy of all transactions and data flows.
What Does The Ideal Candidate Look Like?
The ideal candidate will adopt the business model above to create value and not just consume resources from travel suppliers, especially in the following areas:
- User experience – Interacting with system solutions should be frictionless, and access should be open source to encourage adoption from both suppliers and customers. Therefore, a simple UI should be built on top of the blockchain protocol in order to facilitate both aspects.
- Fees – Fees should be minimal for both suppliers looking to access the distribution platform as well as for transactions taking place on the network. This will benefit all parties at both ends of the market.
- Security features – Transactions and the transfer of data should be secure and incorruptible. We’ve seen many instances of modern centralized platforms being breached with devastating consequences. And the travel distribution industry is not immune to this as well.
Sabre confirmed last year that their reservations systems were breached, giving unauthorized access to thousands of customers’ personal information connected to their system.
- Partnerships – This is probably the first point of call. Partnerships with suppliers (such as airlines) and sellers (such as travel agents) are essential. There needs to be some backing from these parties before the platform even launches, otherwise there will be no marketplace for customers to buy from.
What Can Stop Innovation From Gaining Traction in The Marketplace?
Travel supplier adoption
The core functionality of a travel distribution network is one that gives customers choice. This choice comes from the large database of suppliers listed with a particular system and enables the customer to choose the right option for them. If travel suppliers don’t use the platform, it won’t become a reliable alternative to traditional distribution networks.
The two barriers here are technical difficulty and trust.
The blockchain is not an easy concept to understand in general, and it is part of the reason that we’ve not seen widespread adoption yet. For a blockchain-based travel distribution solution to work, it will have to employ a user-friendly interface so that it’s easy for everyone to use (not just the technically abled).
It will also be a completely new system so user education will be required in order to gain the trust of new customers.
Existing GDS companies
As we discussed earlier, the travel distribution market is dominated by a small group of players. For startups to get a foothold in the market, they will need access to some of the data that these power players possess through years of working with hotels, airlines, and other travel suppliers. The problem is why would they do it if it means losing their monopoly over the industry? This is potentially where regulators have to step in.
Suppliers and customers will have to accept extreme currency volatility when deciding to use decentralized platforms. This will hinder both supplier and end-user adoption.
Are There Any Promising Blockchain-Based Projects With the Potential to Truly Disrupt?
For any blockchain-based project to make its way into the market they not only need to overcome the inefficiencies of current players in the industry but also the potential restrictions with the blockchain itself.
There are a number of projects launching into the market, and these startups have the potential to disrupt different segments of the market to some extent.
Travel Coin is a self-sufficient Blockchain with a focus on travel ticketing systems capable of seamless adaptation into the real world.
The Travel Coin ecosystem handles the sale of travel tickets between the ticket holder (or supplier) and the traveler through smart contract technology on a native blockchain. Its decentralized applications also facilitates easy-integration with third-party ticketing systems through numerous customizable fields.
Token holders can use the TRV coin to book traveling tickets for daily travel as well as bigger trips. At 1%, fees are significantly lower than the markups charged by traditional ticketing vendors, which can range between 20% and 30%. The company also has big aspirations to apply their ecosystem to future modes of travel such as space flight, self-driving cars, and drones.
They’ve got a good social media presence across all the major platforms, including Twitter, Facebook, and LinkedIn. However, there’s not a lot of chatter from the community and posts about the company are not up to date.
Travel Chain is a decentralized platform for data exchange in the travel market where users submit their personal information and receive a benefit from it.
Uses an open source blockchain managed by all market players. The application has a strong focus on putting data back into the control of users, allowing customers to decide what data they want to share and in what format.
The Travel Token is the fuel that drives this ecosystem, and it will help holders to make smarter traveling decisions by compensating them for sharing their data with suppliers, ensuring they receive custom-designed offers in accordance with their personal preferences.
Winding Tree is a decentralized travel distribution platform with the goal of making traveling cheaper for both customers and suppliers by removing expensive, centralized middlemen (i.e. GDS’s).
The platform is built on top of an open source blockchain platform that gives sellers cheap access to supplier inventory. By cutting out the expensive middlemen, sellers can buy directly from suppliers through a single marketplace with zero distribution fees. Interactions are performed automatically through preprogrammed smart contracts to make it as trustless as possible.
Any holder of the Lif token can get access to the decentralized distribution platform, which significantly reduces the barrier of entry for new players. It also allows suppliers to distribute their own inventory directly to the seller without the need for intermediaries. All of this culminates in a faster and cheaper travel booking experience for the customer.
Which Project Has the Biggest Potential to REALLY Disrupt?
To answer this we can compare each project against the ideal candidate parameters and see how they stack up.
|Travel Coin||User-friendly interface.||1% fees||Blockchain capabilities make transactions and data transfer safe and incorruptible.||No mention of existing partnerships, only that they will integrate “with major industry partners in Q2 2018.”|
|Travel Chain||Customer facing application.||Fee structure looks to be complicated with 40 different parameters.||Blockchain capabilities make transactions and data transfer safe and incorruptible.||Partnerships with minor travel related companies such as Izi Travel, Tourister, and Tvil.|
|Winding Tree||B2B interface only.||Zero distribution fees, but minor transaction fees will still apply.||Blockchain capabilities make transactions and data transfer safe and incorruptible.||Big partnerships with major travel companies including Lufthansa, Air New Zealand, and Nordic Choice Hotels.|
Not one of the projects is perfect, and each of them has the potential to create disruptions to some extent in the individual market segments that they are targeting.
However, Winding Tree is the one to watch as it stands out for the following reasons:
- Big-name partnerships.
- A lot of media coverage.
- Their target market segment (i.e. travel distribution systems) has come under a lot of fire from the different industry participants and is in dire need of an innovative solution.
With that said, the GDS market segment is highly monopolized and it will be difficult for any organization to dethrone these industry giants, even more so for a startup based on unfamiliar blockchain technology.
So the potential is there in theory, but we’ll have to wait and see if the real-world application will live up to the promise. Want to push the innovation further? Spread the word with a share or a tweet: