A few days ago, I realized I hadn’t been on a plane in over two months. I didn’t have any travel plans in the foreseeable future, and I couldn’t stop thinking about my Oneworld Emerald status just sitting there, doing nothing. That got me thinking about the current (sad) state of airline loyalty programs and how cool it would be if we could create value and liquidity in airline miles and airline loyalty programs through blockchain. Just a warning, I haven’t thought this through at all. This is just a 2 a.m. brain dump.
Modern airline companies, such as American Airlines, Cathay Pacific, and Japan Airlines, incentivize and lock in passengers through restrictive frequent flyer programs. Passengers receive a fare-dependent amount of reward “miles” or “points” for flying on ?the airline. These miles can be exchanged for award flights, hotel bookings, car rentals, and more.
Value & Liquidity of Airline Miles
In the current model, the value and liquidity of airlines miles is completely dependent on a central authority – the issuing airline. This, combined with the fact that the airline industry is a game of maximizing profit margins, occasionally at the cost of passenger comfort, has resulted in rapid devaluation of airline miles at all the major airlines.
For example, American Airlines’ AAdvantage miles devaluation in 2016 made it much more expensive to book award flights from North American to Asia – business class flights changed from 55,000 to 70,000 miles (+27%), while first class changed from 67,500 to 110,000 miles (+62%). This is an industry-wide phenomenon, and other major carriers like United Airlines, Cathay Pacific Airways, JAL, and Qatar Airways have followed suit with similar devaluations to their respective frequent flyer programs.
Airline Miles on the Blockchain
As I said earlier, the value of airline miles is dependent on the issuing airline and they have essentially zero liquidity outside a very specific purpose, but what if that wasn’t the case? Imagine a system where airline miles could be tokenized on the airline’s own blockchain. What kind of advantages and novel use cases would that bring?
This use case is fairly obvious. Airline miles should be able to function as currency onboard flights, but this is not the case for many airlines. For example, it’s not possible to use AAdvantage miles to purchase food onboard AA flights. While this use case doesn’t require a blockchain, it’s a basic example of giving more value and purchasing power to airline miles.
Open Market Trading
The real innovation comes when airline miles take on the form of a cryptocurrency, and can be traded on the open market. For the purposes of this post, let’s create a cryptocurrency token for DecryptoAir called DecryptoAirCoin (DAC). In this model, price discovery of DAC falls to the market, and can be determined by factors such as the frequent flyer perks of DecryptoAir, fiat and crypto trading pairs for DAC, staking incentives, and more.
In a survey performed by Skift, “only 16.8 percent of respondents said they always collect points when they fly.” Many casual flyers who fly two or three times a year simply don’t care about signing up for frequent flyer programs. The enrollment process is seen as convoluted, and flyers don’t place much value on the award miles. In a tokenized blockchain system, the dynamic of this situation would completely change. If flyers know they will be rewarded with a liquid asset like DAC , which can be sold to fiat, it gives them a much greater incentive to enroll in the frequent flyer program.
For casual flyers who don’t care about accumulating miles for other perks, the liquidity of an “airline mile token” can be seen as a cash DACk or discount on the flight. In my opinion, this is a win-win situation for both parties. If casual flyers know they can trade DAC to fiat after a flight, it’ll affect their booking biases for future flights. From the airline’s perspective, this discount doesn’t really affect it’s bottom line, as the liquidity and value of DAC is decided on the open market. Thus, the airline is able to create a better customer experience without spending any of their money by issuing award miles in the form of a valuable open market asset.
Frequent Flyer Status Through Staking
In blockchain economies, staking refers to holding tokens in a wallet, and contributing them to the network for utility purposes. In exchange, the staker is rewarded with a staking incentive – usually in the form of a percentage return of tokens. Occasionally, the number of staked tokens also gives the staker voting rights and other perks within the blockchain’s ecosystem.
In our DecryptoAir example, staking could be a way for flyers to earn different levels of frequent flyer status. Take a look at the reward incentives below.
- Bronze Tier: Stake 10,000DAC, 1%/year reward.
- Silver Tier: Stake 20,000DAC, 1.75%/year reward.
- Gold Tier: Stake 30,000DAC, 3%/year reward.
In this scenario, we are effectively tokenizing frequent flyer status, an intangible asset, by assigning a DAC value to each tier. This opens up a world of possibilities. For example, if I’m a “DecryptoAir Gold” who isn’t planning on flying for the next few months, I may choose to lend my DAC on the open market for a short term high interest rate. On the receiving end, if a casual flyer wants my frequent flyer perks for a short trip, he or she could borrow and stake my DAC tokens, and return them with interest after the trip. The beauty of this system is that the blockchain coupled with purpose-built smart contracts is able to keep track of all these transactions of value and identity. The scenario above would simply be impossible without blockchain and tokenization.
Blockchain is a promising technology, and the airline industry is ripe for innovation. The introduction of a valuable and liquid airline mile could have a huge impact on customer sentiment and happiness, and ultimately an airline’s bottom line.