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Inside the blockchain coup at the heart of the travel industry

Posted: 19 September 2019 5:28 pm
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Dozens of airlines and hotel brands are joining forces to retake their industry with blockchain.

There are two kinds of travel: the kind where everything goes right and the kind where everything goes wrong.

It's only on that second type of trip – where you find yourself running between different agents and company representatives, none of whom can solve the issue at hand – that most travellers get to experience the fragmented underbelly of today's travel industry.

But for a company like an airline thast wants to sell actual products in the space, or for a startup trying to build some new travel tech, that morass is a constant pain.

Terminal illness

The diagram below, stolen from Wikimedia commons, maps out roughly what the current global distribution system (GDS) for airlines looks like. A GDS is essentially the core system through which airlines make their seats available for sale through third parties such as travel agents, and through which you can book international flights across multiple legs on different airlines.

In the tightest of nutshells, a GDS is a marketplace where airlines and other providers sell their goods wholesale, which travel agents and other providers can assemble and package for the end consumer.

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This diagram is obviously a bit oversimplified because you can't fit every travel agent and airline in the world into it. But you can fit every major GDS. There are only three major international GDS systems, plus some smaller, region-specific ones.

So if you're a tech startup trying to serve airlines, or an airline trying to serve customers, you will typically have to go through the existing GDSes. And by some accounts, the existing GDSes are exactly as good as you'd expect from a system first devised in the 1960s and dominated by a literal handful of entities for its entire existence, all of which have their own commercial interests and the means to stonewall emerging competitors.

The problem doesn't just afflict tech startups, though, and it's not just the GDS. The nature of the problem is similar whether you're talking about flights, hotels or cruises. The companies that provide the actual inventory – the seats and rooms being sold – typically have to go through the same chain of aging, oligopolistic systems to reach their customers.

Have you ever been so annoyed by a legacy system, that you devised an entirely new industry-wide paradigm specifically to make sure no one ever has to touch it again?

Getting away from it all

Winding Tree is a blockchain travel tech project, born directly from the founder's experiences in the broken travel industry.

"This all started with two of my co-founders," explained Winding Tree co-founder and COO Pedro Anderson. "They had done a travel startup out of Y-Combinator years ago and they were working right at the crossroads of hotel and airline distribution. When an airplane would arrive late, and they needed to put all the passengers into hotel rooms, it was still a very manual process where everyone was calling around... they created an automated way to do that."

Creating that automated system (Roomstorm, founded in 2013), meant getting down and dirty with the GDSes and other entrenched intermediaries.

It's actually very backwards, but they have a monopoly.

"You had to use these legacy systems that were holding the industry back by decades, right?" Anderson said. "Those legacy systems that sit in the middle, they have so much power, not because they're good at technology, not because they're the most modern and efficient business, but simply because they sit in the middle and control the inventory in space. Everyone thinks that competing with the current incumbent middleman is impossible because of some kind of power they have with marketing or with technology, but it's not the case."

"You have a system that is not better and is not technologically advanced. It's actually very backwards, but they have a monopoly, or an oligopoly... no one has a choice."

Anderson's is not an isolated opinion. Airlines have been openly trying to throw off the GDS yoke for years now.

In 2015, Lufthansa (now a Winding Tree partner) broke new ground by adding a surcharge to GDS bookings, because processing a booking made through a GDS was several times more expensive than a booking made directly with Lufthansa.

"We believe the market is ready for this change... somebody's got to do it," Lufthansa CCO Jens Bischof said at the time.

"I think it's a brave step and I commend [Lufthansa] for it," said Etihad (now also a Winding Tree partner) CEO James Hogan.

When asked whether it would do the same, Air France-KLM's (now also a Winding Tree partner) CEO at the time Alexandre de Juniac simply said that the company still had two more years left on its current GDS contract, so it couldn't even if it wanted.

"For an airline to say they won't work with a GDS is very hard," Anderson noted. "The only ones that have done it successfully are the low-cost carriers... Southwestern in the US is a good example, and Ryanair in Europe. And in Asia, you have AirAsia, which is really good. But it only works with a low-cost model where you're absolutely the cheapest in the market, not necessarily the best, and then people will come to you just because you have the lowest price."

"But for the traditional airlines, or you're going transatlantic and all that kind of stuff, they have to use the distribution systems. There's no other way for them to sell. They've tried, and it's been very hard."

In-flight entertainment

Back at Roomstorm, the team had started exploring this new problem of entrenched middlemen in the travel industry and devised a theoretical solution.

"Max [Winding Tree CEO Maksim Izymalov] had this idea for creating an open and decentralised – we didn't call it decentralised at the time – open marketplace, where any travel company could list their inventory without any kind of intermediation," Anderson recalled. "It would be modern state-of-the-art technology that anybody can go and build on and then access inventory itself... He asked me if I would come on board and help them do that."

"My question at the time was what would stop us from becoming one of those legacy systems? ... An old dinosaur that holds everybody back and starts charging an arm and a leg in commission fees and everything? Because that's what companies naturally do as they gain power, especially when you're at a crossroad."

"That's when we stumbled onto blockchain. We started researching monopoly-proof technologies and a way to create a censorship-resistant marketplace, and naturally, that kind of research led to blockchain."

"This is before the ICO hype," Anderson explained. "This was like 2015, 2016. So it was a pretty exciting technology to come across at that time. That's when I came on board. We decided to launch it and we published a manifesto. We had over a thousand responses from travel professionals saying this had to happen, the travel industry is broken, it needs to be fixed and all that."

VCs were like... 'We love it all, except for this whole censorship-resistant piece.'

"After that, we started to try to raise funding, and we found that this whole decentralised model – where you're not charging a fee and you have no ability to change the rules later on or dictate who's listed and who's not the way GDS does today – was very at odds with the traditional VC model."

"VCs were like, 'Hey we love this, we love what you guys are doing... we love it all, except for this whole censorship-resistant piece. I mean, we have to be able to charge fees and change the rules and choose who comes in.'"

"We had to turn them down."

Hence the ICO.

In late 2017, the Winding Tree LIF token ICO reached its $5 million soft cap in three hours, and its $10 million hard cap in under a week. Utility-wise, the Winding Tree LIF token functions as a kind of self-policing force for the Winding Tree ecosystem, to keep things ticking in the absence of managing authority. Participation on Winding Tree requires one to stake token holdings, which can then be automatically slashed if someone misbehaves on the network.

"We kind of bootstrapped first – built it out – and then turned to the community, and we were able to raise the funding we needed to kick this off," Anderson said. "And we've been building ever since."

Prepare for landing

The travel industry is caught in a strange loop, where the companies actually providing the products being sold – flights and hotel rooms – feel like they're getting edged out of their own market.

Our airline's earnings have been compromised over time.

"Until now, the percentage of revenue generated from the sale of flight tickets by our airlines has continuously decreased," lamented the Lufthansa CEO in 2015. "While other service and system partners in the value chain are recording increasing margins and returns, our airline's earnings have been compromised over time, even though they are the actual providers of flight services."

Lufthansa was spending "three-digit million euros" on GDSes per year, with the benefits of that spending mostly going to other partners in the value chain.

Beyond GDSes, a similar trend can be found with the largest online travel agencies (OTAs).

Consider hotels: In recent years, the total number of tourist arrivals globally is increasing by some 5-7% per year. But the hotel industry's annual growth from 2014 to 2019 was only 1%. Meanwhile, in the world of major OTAs, combined annual revenue grew by 11% from 2017-2018, with 79% of the OTA revenue being controlled by just two companies – Expedia and Booking.

Rising costs are predominantly absorbed on the hotel's end, and they need those OTAs more than the OTAs need any individual hotel. This has given the biggest players a tight grip over the global hotel supply. The dynamic is one where neither individual hotels, nor newcomers, can meaningfully shake up the system without a complete paradigm shift.

"I've talked to the founder of HotelTonight, Sam Shanks, and he said marketing was the easy part," Anderson noted. "The hard part was getting access to inventory. And that's why... they only have, I think, like, 30,000 hotels on the platform. If you compare that to some of the bigger OTAs like Expedia and Priceline, they have, I think, upwards of millions. So it's kind of this monopoly on who has access to the inventory, which reeks of that anti-trust era in the early 20s."

It should come as no surprise that Winding Tree has found a huge amount of popular support for its blockchain revolution from airlines, hotels and other travel businesses.

Passenger manifest

In no particular order, a non-comprehensive list of Winding Tree's aviation partners includes Swiss Air, Air New Zealand, Air France, Etihad, Lufthansa, Air Canada, Brussels Airline, Swissport and Eurowings, while its hotel partners include Nordic Choice, Airport Hotel Basel, Citizen M and others. Its technology partners are equally numerous. In addition to its existing partners, over 200 travel organizations are on Winding Tree's list of early adopters, ready and willing to work on integration into Winding Tree as early as possible.

"With Winding Tree, I've had more of an influx of inbound folks coming in and saying 'Hey we want to work with you' than anything else I've ever done in my life," Anderson said. "There's a lot of interest from the industry, there's a lot of support."

The problem with the travel space is that it's not a very attractive place for developers.

In October 2018, Winding Tree organised its first industry roundtable with partner airlines – which may have felt just a teeny bit like plotting a coup against the GDSes – and since then there has been a slew of hackathons, with travel industry developers from all kinds of companies stretching their legs on Winding Tree.

These hackathons are deceptively important for a couple of reasons.

Firstly, because open development is quite foreign to the travel industry. This is a side effect of the industry being long-reliant on middlemen like GDSes to act as "translators" between companies in the space. There's no incentive to share developments for mutual benefit and all improvements tend to get siloed away and jealously guarded. This creates a vicious cycle of sorts, which cripples innovation further across the entire industry.

And secondly, because it presents an excellent opportunity to explore what you can actually do with something like Winding Tree, as no one's entirely sure yet.

Here Swissport asks how to track baggage on a blockchain, and there Air France-KLM devises a way of adapting Winding Tree's hotel architecture for flights. Here IBS ponders a scheme for using the LIF token as a shared standard loyalty reward across the travel industry, and there Etihad creates a system that lets travellers book accommodation and activities in Abu Dhabi mid-flight.

That last one actually won the last Winding Tree hackathon in Lisbon.

"Of course, selling holiday packages is more profitable than purely offering flights, and we also see an advantage for our customers of being able to seamlessly book a hotel midway through their journey," a team Etihad representative said to Finder.

And it's just a matter of time before blockchain helps smarten up the travel industry, they added.

"Unfortunately, because the travel industry is made of so many independent players, it will take longer to establish collectives willing to work together than in other sectors. It’s important that airlines and other travel companies support companies like Winding Tree so that they become big enough to make an impact," team Etihad said.

For business or pleasure

It's also worth noting that those hackathons are fun, especially for airline developers who are used to being railroaded on outdated systems. Being fun is also one of their main purposes, Anderson pointed out, because they show developers working in the travel industry that yes, the grass really is greener on the other side.

"A lot of airlines have, like, innovation hubs or a place where they have a bunch of tech folks trying to do stuff," he said. "But there's very little that can be done when you're basically bound to an old railroad system, right?"

"The problem with the travel space is that it's not a very attractive place for developers. It's a lot of old school systems," Anderson continued. "This exciting $7 trillion industry that was previously uninteresting and unappealing to anybody in the tech space is now opening up for developers because it's becoming an open and innovative environment... that is already appealing to developers – being able to enter the travel space, which wasn't possible before."

Where to?

So, if Winding Tree achieves liftoff and becomes a new open, decentralised industry standard, how will that change the industry?

First of all, what will happen to the existing middlemen?

"I don't see them disappearing overnight," Anderson said. "They have a lot of accumulated inventory – a lot of connections and contracts tied into place. But a lot of airlines and hotels also have old habits... They haven't done tech for so long – they've been dependent on these middle companies for so long – that for a lot of them it's very hard to operate outside of that. It's like a crutch."

"It won't happen overnight, but definitely the rules are changing and we're already seeing that... in the long haul, they would adapt to the Winding Tree model rather than just disappear, because they provide value in other areas. They do some other tech beyond just the access to inventory."

It also stands to change things for travellers, although it's difficult to say exactly how.

When you travel, you're not seeing 21st-century technology.

One perspective is that once airlines have to compete for the same body of customers across the same level playing field, prices will start dominating traveller choices even more and result in a race to the bottom. Another is that once you replace those intermediaries with the Winding Tree platform, you'll simply have a whole lot of savings that can just be passed onto customers.

But Anderson sees it going the other way. At the end of the day, Winding Tree might do more to raise quality than cut costs, he suggests. It will target all the in-between elements of travel.

"Especially in the early days, a lot of people were asking 'So does this just mean cheaper travel? No fees for the supplier?' Not necessarily. Because right now, the way that the industry runs it's so nickel and dime that quality is not a question anymore. If you talk to people about the travel experience, it's one of the only things that we pay pretty high sums of money for, get a terrible experience, and almost don't mind, right?"

"We bundle like sardines into a plane and get pushed around like cattle. And then you come out and you're like, 'Oh cool, I just spent 2,000 bucks flying to Australia' and you're perfectly cool with it. You just accept it because it's the way it is, right?"

"It's because quality has to take a backseat, because of all these other challenges. What we want to do is eliminate those other challenges, so that with the money they're saving on the tech in the middle, they could direct that to improving the quality of service. Some of them might choose to put it at price, but that's not the goal. The goal is to provide a level of quality and innovation that makes the travel experience really intuitive and flowing and beautiful."

"Because the biggest thing is that that you're when you travel, you're not seeing 21st-century technology. That's not what you're using. If you think of the booking experience, it's the same way it was 20 years ago. If you look at other technologies, like how the way Amazon works and Netflix and everything. It's completely different than it was 20 years ago. But travel is one of the few that is not."

"What we're changing is bringing that travel experience into the 21st century."



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Disclosure: The author holds BNB and BTC at the time of writing.

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