By enabling ticket trading, NFTickets help airlines solve three big difficulties in the traditional air travel marketplace
The ancient settlement of Colchester is probably England’s oldest town. It’s market charter was granted by King Henry II in AD 1189 but trade had bustled for hundreds of years before. Like all market towns, Colchester brings together local traders and shoppers to buy and sell. Since traders are physically close to each other consumers can easily compare the wares for sale and their prices, while traders can watch to see what sells well and adjust their orders for next time.
Well-functioning markets like Colchester’s are said by economists to be ‘efficient’, meaning that it is hard to see how any one buyer or seller could be made better off without another being made worse off. Prices are transparent, search costs are low and there is plenty of choice, but not so much choice that sellers cannot cover their costs and have to go out of business.
The market for air travel is intensely competitive and seats are remarkably affordable, given the tricky technical challenges of safe and reliable flight. But the market also suffers three frictions that mean it may be inefficient – not quite as good as it could be.
TravelX is building Travel Xchange, a secondary market where consumers can buy and sell air tickets, to resolve these frictions. Read on to find out how…
Confidence and paranoia
The first issue is that many buyers, particularly business travellers, are not always certain that they actually need to travel. But they do know that there are only a limited number of seats on each plane and if they do not buy now they may not be able to buy later. Seats may be affordable but they are not cheap – an unwanted air ticket wastes a lot of money.
Airlines meanwhile are reluctant to let buyers take a refund because they know that if a passenger cancels at the last minute the seat may fly unused and wasted, or ‘spoiled’ as they say in the trade. Overbooking, where airlines expect some people to miss the flight and sell more seats than they have, offsets some but not all of the risk.
The result is that refundable tickets are much more expensive than the rest, so a traveller buying such a ticket offsets the risk that they will not fly with another risk that if they do the price will be much more than they would have paid otherwise.
Add these together and there will be some people who would like to buy plane tickets but in the end do not.
The market fails to serve some of the demand – an inefficiency.
The second friction is that many buyers, particularly leisure travellers, are price sensitive at the time of purchase and sometimes paranoid about spending money on flights that could be used for hotels, meals or other experiences instead.
This is because of psychology. When people buy a ticket the pain of sitting in a 16.9 inch wide seat or enduring a six hour middle-of-the-night connection is two months away but the pain of spending money for comfy travel is immediate. The human brain is programmed to avoid pain today so some people buy flights that are far from their preferred options for a small or even trivial saving.
When the time comes to actually fly travellers find the experience dismal. There might be better options available, but only if the passenger buys an expensive new ticket or spends a lot of money changing their old one.
The market does not give people what they want – a second inefficiency.
Spill and spoil
The final driver of inefficiency is that figuring out how much to charge for each seat at each point in time is inexact, difficult and expensive. Airlines call this process revenue management and try to raise as much revenue as possible from their flight schedule.
The idea is that since a schedule is committed roughly a year in advance, most of the airlines costs are fixed in the short term. At that point, the more revenue an airline raises the more profit it will earn.
Most of the time there are no clearly correct answers to the questions revenue managers need to ask. Questions like what should fare levels be, how often should the airline have a sale and when should prices go up or down.
To make things even more complicated, each team in the airline has competing priorities and different views of the world, which can lead to ineffective compromises. At the simplest level possible, keeping prices low will ensure that as many seats as possible are sold and the cost of each sale should be low too. This minimises the cost of spoiling seats.
But the lower prices are, the more likely it is that some passengers would have paid more and the airline could have earned more from the same seat. Airlines describe this as spilling revenue.
Airlines do their best to balance spill and spoil, but it is never possible to get it exactly right.
The market fails to set the best possible prices – the third inefficiency.
Transferable NFTickets resolve inefficiencies
TravelX has created methods allowing airlines to sell tickets as non-fungible tokens, NFTickets for short (see article).
NFTickets use blockchain to keep a comprehensive record about the airlines who originally made seats available and any changes made since the time of purchase. This means that people can trade the tickets safe in the knowledge that they are buying and selling genuine travel services. Travel Xchange is a marketplace where these trades can be made.
TravelX co-founder Facundo Diaz said “TravelX is creating the NFTicket ecosystem so that everyone can build new services and solutions on top. This is not just a platform, it is vital industry infrastructure that innovative airlines and agents can build hundreds or thousands of new solutions on top. Travel Xchange is the first of these platforms.”
Allowing NFTickets to be sold on Travel Xchange helps resolve the three efficiencies mentioned above.
1. The market fails to serve some of the demand
Tradable tickets have resale value, reducing the risk of purchase for buyers who are not yet sure whether or not they really need to fly. Customers in this group are likely to buy more seats than before, boosting demand and helping airlines by reducing the cost of seats being spoiled.
2. The market does not give people what they want
As the time of travel approaches, some travellers may begin to care more about their travel experience than they did when they first bought the ticket. When tickets offering a smoother ride are available for trading, the travellers will be able to upgrade their experience much more easily than in the current ticketing environment.
As a result more travellers are likely to upgrade, which has two benefits for airlines. First, the airlines receive a 10% share of the fare difference. Also, passengers who enjoy their flight more than they expect may be more likely to book in the future, increasing the lifetime value of passengers and the airline’s future demand.
3. The market fails to set the best possible prices
Airline revenue management teams who analyse the record of changes made in the blockchain will access a rich stream of data not available today. This will help them make better forecasts and set prices more effectively in the future, reducing both the cost of seats going unsold and the cost of revenue spilled.
Trades made in the secondary market will also help airlines understand which of their customers really start to care more about the travel experience as a flight becomes imminent. These customers can be offered new deals and products proactively, which will help the airline raise revenue too.
Travel Xchange offers three other benefits too.
1. Since it will be easy for consumers to amend their travel themselves by using Travel Xchange, there will be less pressure on call centres and less need for consumers to wait in long telephone queues. With NFTickets, servicing tickets will become less costly for both airlines and passengers.
2. TravelX is building Travel Xchange to be fully compatible with industry trends in respect of retailing and offer management, powered by the New Distribution Capability (NDC) communications standard. With NFTickets passengers using Travel Xchange will be able to mix and match exactly what they want from the range of travel services available. Consumer choice will improve and prices will become even more transparent.
3. The data generated by trading will help uncover demand trends that are hard to spot today. Airlines using this rich stream of data will be able to fine tune their schedules, commercial strategies and even launch new destinations with less risk than ever before.
TravelX co-founder Facundo Diaz said “our end goal is to allow all the players in a complex industry to align their interests. This is not about creating a new system of a new company, this is about inviting everybody to join in sharing our vision of where airline ticketing is going.”
Are you ready to join us?
To make all this happen we are building a free-to-join and open-to-all community of travel industry colleagues and stakeholders. This community is brand new and we will start by posting articles just like this to keep you informed of all the key issues relevant to NFT in travel.
We will be covering all the related issues in technology, economics and travel industry processes with thought-provoking analysis, industry comment and where possible a little bit of humour.
We figure that everybody in the commercial and financial side of the travel industry is an NFT in travel stakeholder. Whether you work at an airline or a hotel, a distribution or technology platform, or a manufacturer or an OEM we would love to welcome you.
Coming up later will be round-table discussions, working groups and special events to help us help your business get what you need from this exciting new technology. Our written articles are available to all, but please be sure to sign up with your official travel industry e-mail to get full access to discussions, working groups and events.
