Expanding Airline Loyalty Programs

Using Blockchain Technologies

Dr. Pavel Kravchenko, Co-founder & CEO at Distributed Lab, cryptographer and PhD in Information Security
Dr. Artem Boyarchuk, PhD, associate professor of National Aerospace University

Distributed Lab
THE PURPOSE
The white paper intends to describe how airlines can use digitization (tokenization) process to
improve existing operations’ model, simplify cross-partner interoperability and set up new revenue
streams for their loyalty programs. This document provides a detailed description of the benefits of
loyalty program tokenization from a business and an IT perspective. This document is intended to:

Analyze existing problems and challenges in existing loyalty programs;

Explore how tokenization can boost airline loyalty programs;
Expand on advantages of tokenized loyalty programs;
Present the TokenD solution for the tokenization of loyalty programs.

CONTENT
The purpose ……………………………………………………………………………………
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Introduction ………………………………………………………………………….………....
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Tokenization as a way forward ………………………………………………………………….

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Airline loyalty programs – state-of-the-art …………………………………………………..

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Market challenges ………………………………………………………………………………..

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Ongoing initiatives on digitalization …………………………………………………………

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The new posibilities for airline loyalty programs ………………………………………………

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Our approach ..……………………………………………………………………………………

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Innovative software solutions will use blockchain …………………………………………….

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Typical requests from airlines (study) …………………………………………………………..

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Requirements by loyalty program member ……………………………………………………….

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Summary …………………………………………………………………………………………..
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About us ……………………………………………………………………………………………
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Learn more ………………………………………………………………………………………..

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Sources ……………………………………………………………………………………………
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INTRODUCTION
Airline loyalty programs could be significantly improved through the process called Tokenization
which brings decreasing costs, duration and risks while building digital ecosystems by monetization
of internal digital assets (points, status, pre-sale access, elite services etc), simplifying
cross-partner interoperability, assuring real-time audit. This will lead to setting up substantial
revenue streams for loyalty program owner as well as increasing customers’ commitment to the
particular airline.

Traditional loyalty programs have certain obvious limitations:

Complicated signup process;

Necessity to bring loyalty cards to the airport;
Chances to lose a card;
Accumulation of a certain amount of miles before spending them;
Lengthy process of claiming miles in case on non-registering card on check-in.

Digitization (tokenization) of airline loyalty programmes aimed on solving described challenges and
delivering substantial benefits both for the loyalty program owner and for its end-customers.

TOKENIZATION AS A WAY FORWARD

Tokenization is the process of the digital transformation of asset accounting and management
systems to represent each asset by a digital token. Tokenization increases the liquidity of
assets and removes frictions to trade. It has nothing to do with the creation of cryptocurrencies.
Accounts are managed by cryptographic keys. Tokenization activities are performed according to
local regulations.

Tokenization offers a wide range of advantages for loyalty accounting systems:

Full transparency to the loyalty points creation, distribution, trading and redeeming
process by building an auditable record of transaction activity that cannot be forged
or altered;

Full control over transaction history with a high level of security;

Increased liquidity as a result of reduced trading frictions;

Easy and quick integration with third-party merchants (hotels, car rentals, luxury
shops, etc).

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AIRLINE LOYALTY PROGRAMS – STATE-OF-THE-ART
When frequent flyer programs were launched about 40 years ago, their initial structures focused
almost exclusively on the program’s best customers. The inclusion of hotel and car rental programs
in the early 1980s increased opportunities for a greater number of members to earn miles, but it
was the wide-scale adoption of miles as a currency by credit cards that pushed these programs
into “all flyers” programs. Airline loyalty has since morphed into a complicated business, with a
greater number of status tiers and benefits, partnerships that let members earn and redeem miles
in more ways, and ever-evolving travel rules and restrictions.

Various mileage services are actively used globally as rewarding benefits that are used as loyalty
programs to the customers who purchased or used arlines services. A number of points (miles)
recently issued by airlines have been evolving into the ‘new currency' by combining with electronic
payment solutions for building a profitable ecosystem.

The ratio of the users with one or more mileages loyalty programmes in US/Canada and Asia-
Pacific region: 84% in the USA, 85% in Canada [4], 83% in Australia, 61% in China, 79% in Japan,
78% in Malaysia, 84% in New Zealand, 69% in Singapore, 84% in Vietnam, 49% in Hong Kong,
73% in India, 77% in ROK, 70% in Philippine, 60% in Taiwan, 63% in Thailand [5].

Based on the ratio in terms of total population, a total number of people who are using mileage and
point program is approximately 1,41bn in major Asia-Pacific countries such as USA, Canada,
Australia, China, Japan, Malaysia, New Zealand, Singapore, Hong Kong, Vietnam, India,
Philippines, Taiwan, Thailand and South Korea. There are an estimated US$500bn of points &
miles in circulation and over 3.8 billion loyalty accounts in the US alone [Table 1]. In this massive,
global loyalty industry, small efficiencies gains can deliver multi-million dollar benefits.

Usage Air Mileage Usage Credit Card Mileage Usage

Division Users(persons)
Rate Users(persons) Rate Users(persons) Rate

Australia 20,000,000 84 9,000,000 37 12,000,000 49

China 877,000,000 62 N/A N/A N/A N/A

Japan 101,000,000 80 N/A N/A N/A N/A

Malaysia 25,000,000 77 3,000,000 12 15,000,000 60

New Zealand 4,000,000 84 1,000,000 25 2,000,000 47

Singapore 4,000,000 69 N/A N/A 3,800,000 67

Vietnam 81,000,000 84 21,000,000 26 29,600,000 37

USA 274,000,000 84 94,000,000 29 55,000,000 17

Canada 31,000,000 85 5,000,000 14 6,900,000 19

*Number of the users and usage rates are the numbers that are proportional to the total number of population of each country. *Sourse: Nielsen, 2016

Table 1. Status of world airline and credit card mileage users

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 Figure 1. Award flights as share of Figure 2. Availability of redemptions, %
evenue passenger miles, %

The study, which was done for NextAdvisor.com by YouGov, surveyed 2,232 adult clients of
different airline loyalty programmes, March 21-22 2018 [5].

The resultats show that:

54% 35% 36% 47% 33%

of frequent flyer don’t know how don't know how of hotel loyalty don't know how
program members many miles they to redeem their program members to redeem their
surveyed find their have in their mileage rewards surveyed don’t points
frequent flyer programs accounts know their point
confusing totals

Confusion about the rewards programs, NextAdvisor says, may be the reason why 40% of frequent
flyer members surveyed and 42% of hotel program members surveyed have let miles or points
expire. In comparison, 25% of credit card reward program users have let points expire.

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Total loyalty programs’ user growth has slowed to 15 percent over a two-year period ending 2016,
down from 26 percent in the prior similar period [4]. More than half of loyalty memberships in the
U.S. are inactive, and about 30 percent of consumers have abandoned a program without ever
redeeming a point or a mile.

A Nomura Research Institute estimated the performances in 2014 and forecasted performance up
to 2022 for the "Minimum Annually Issued Amount", which converted all the points and mileages
issued by major companies for a year into cash. The minimum issued mileage in 2014 was
estimated at $ 7,69 billion. The annual amount of Point and Mileage issued will reach
approximately $ 11 billion in 2022.

Perhaps the biggest change in recent years was the shift to revenue-based models that calculate
points and status based on money spent rather than distance flown, or a combination of both.
Today, loyalty programs are extremely profitable for airlines. Recent research from financial
services company Stifel found that airlines are earning upwards of 50% of their income from selling
miles to credit card companies.

At the same time, despite great business opportunities for airlines, something has been suddenly
lost — a focus on the customer. While airlines have done a good job at optimizing their loyalty
programs, in many cases, it’s been to the detriment of their program members. In fact, the loyalty
Report 2018 found that the percentage of award flights as a share of revenue passenger miles has
declined by 2% since 2012 and the availability of redemptions was decreased by 8% for the last 6
years [Figure 1, Figure 2].

MARKET CHALLENGES

Here are some key reasons for loyalty members’ growing discontent:

ABSENCE OF REAL-TIME TRANSACTION UPDATES

Real-time transaction updates often lead to gaps that loyalty providers currently have in
their balance sheets as points must be deferred until redemption (leaving them with high
balance sheet liability).

LOAD FACTORS REMALN HIGH, PRESSURLING AWARD TRAVEL

Capacity-cutting by major airlines has led to fewer seats available for award travel — a
major mileage program perk. In 2017, U.S. load factors were in the 80% range, which
remains close to all-time highs. This has led to a shortage of the most desired tickets and
to escalating award-ticket prices.

THE CONTINUED DEVALUATION OF MILES

With earning structures and award redemption values now changing constantly, frequent
flyers find it difficult to maintain their knowledge of how to best use the program and
protect the value they have earned. Carriers have changed their award pricing numerous

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times, making seats and upgrades more expensive — especially for desirable flights and
times. These changes are often driven by economic decisions, with little regard for
customers’ needs.

LOW USER INVOLVEMENT

According to the Bond loyalty Report, where 280 loyalty programs across all industries are
described, in 2017, only 50% of all members were active. Notably, one-fifth of these 50
percent had never redeemed their rewards. The first and foremost reason for these
inefficiencies is the lack of comfortable systems across loyalty and rewards programs,
which confuses customers. Customers get fed up with them, or forget, often deleting apps
and leaving loyalty cards in cupboards and drawers.
Therefore, challenges and pain points for airlines and their partner retailers are high
management costs associated with traditional loyalty schemes, difficulties in establishing,
operating, and securing loyalty points programs, low redemption rate of earned
loyalty points.

HIGH OPERATIONAL COST

Additionally, most loyalty programs must go through the banking system (due to tracking,
reporting and transparency requirements), which results in increased operational costs of
running the programs. With a single source of truth for all stakeholders, the
disintermediation of such services becomes a potential solution.

FREE TRAVEL IS NO LONGER FREE

Program rules and pricing changes have driven significant costs into award travel. With
airport surcharge fees, taxes, baggage fees, and flight-change fees, those “free” trips can
end up costing members hundreds of dollars [Figure 3].

Figure 3. Costs structure of an award flight

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 ABSENCE OF REAL-TIME TRANSACTION UPDATES
Available loyalty programs often expose providers with high management and
intermediation costs. The need of customers for one-stop services requires integration of
different actors (airlines, hotels, car rentals) and depends on online travel agencies as
intermediaries. An ecosystem in which partners can cooperate and interchange loyalty
points directly would reduce the need for such intermediation [Figure 4].

Figure 4. An ecosystem of airline loyalty partners

ONGOING INITIATIVES ON DIGITALIZATION

To overcome the described challenges and improve customers’ satisfaction some airlines have
already started to explore the different options of digitalization of their mileage programs.

Singapore Airlines recently started using KrisPay, a digital wallet built on a blockchain that
securely turns miles into cryptocurrency that can be used with merchant partners (https://
www.singaporeair.com/en_UK/sg/media-centre/press-release/article/?q=en_UK/20 18/
JulySeptember/ne2518-180724&affc=ebefbc33-8d3d-406c-8d34-d4da90e35cee);

Emirates processes its Skyward loyalty program transactions with ride-hailing app
Careem on the new, tokenized platform (https://paxex.aero/2019/03/ emirates-skywards-
oyyal- bring-blockchain-oyalty-to-life).

According to the estimation of Autonomous Research LLC, within five to ten years, 5 percent of
U.S. adults will use crypto loyalty points, and the annual issuance of related tokens should reach
$3.6 billion. The estimations confirm the fact that within 10 to 20 years, 15 percent of Americans
are likely to use digital loyalty points.

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Tokenizing assets has the benefit of easing the accounting and reconciliation allowing transactions
to be recorded and updated in real-time giving customers a number of options for instant
redemptions. It also prevents digital assets from being double spent, e.g. a compensation voucher
given to a passenger should not be spent more than once.

Benefits of tokenized miles:

easy converting using vendors’ existing acceptance infrastructure;

quick tracking and management;
collecting more data to make better decisions about services;
optimization around the customer’s time and comfort.

THE NEW POSIBILITIES FOR AIRLINE LOYALTY PROGRAMS

To differentiate their programs and enhance member satisfaction, airlines need to focus less on
digital and human customer experience opportunities. Thanks to tokenization mechanisms these
options can include but not limited to [Figure 5]:

Introducing dynamic pricing for redemption seats. By varying how many miles a client
must redeem for a route, airlines can direct them to less full flights, with a lower risk
of displacement;

Wide range of pre-boarding instant redemption options such as lounge access (with lower
prices during off-peak times), speed-boarding priority, confirmed immediately through the
loyalty app, last minute cabin upgrades;

Pleasing customer with an onboard menu of redemption choices;

Airplane Luxury
rental goods shop

Hotel Airline-loyalty Lounge

owner

Figure 5. Fast integration of new merchants

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 Effective resource allocation (i.e. access to restaurants at off-peak times via promotional
bookings etc);

Fast integration of luxury-goods firms, especially newer ones since they have very high
margins and want to maintain price integrity;

Providing flexible redemption options, since airlines are willing to accept a low price for
seats that would otherwise go unsold [Figure 6]. Airlines should work with hotels or hotel
intermediaries to give passengers access to great rates by focusing on unsold rooms.

Figure 6. Unsold business class seats

OUR APPROACH
Tokenized loyalty programs go way beyond the classic plastic cards approach and take businesses
to the next level of customer interaction without intermediaries (banks, travel and car rental
agencies), compromising privacy, or competitiveness. For consumers juggling an array of loyalty
programs, tokenization could provide instant redemption for loyalty points on a single platform.
With only one “wallet” for points, consumers would not face existing limitations and can simplify
getting and redeem points for the program’s options.

INNOVATIVE SOFTWARE SOLUTIONS WILL USE BLOCKCHAIN

Blockchain is the method of storage and synchronization of data between independent
participants. In our case, they are shops airlines, lounges, etc that need to have the same, real-
time information about the passenger. Obviously, blockchain can’t be just turned on via button
click, a solution should be made. TokenD from Distributed Lab was developed with the goal of
reducing costs, time and risk while launching innovating solutions. TokenD allows the loyalty owner
to create its own tailored solution for the tokenized loyalty points with the necessary set of features
in the digital wallet. The program owner receives its own white-label infrastructure for loyalty,
consisting of user wallets, user management, administrative interface, payment gateways and
internal exchange that implement features listed below.

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TYPICAL REQUESTS FROM AIRLINES (STUDY)
Monetizing internal digital assets – selling points, status, pre-sale access, Telite services;
Creating a deeper relationship with members across every single touch point along the
travel ribbon — pre-flight, pre-boarding, in flight, at the destination, and post-flight;
Easy embrace the new currencies of loyalty (by repurposing and monetizing existing
assets or imagining new customer experience treatments that can be unitized);
Interaction of data collected from loyalty programs with airlines’ digital assistants,
chatbots, and other in-airport robot assistants to personalize members’ experience and
improving customer satisfaction;
Implementing Pay-to-Play loyalty schemes for setting up substantial revenue
streams by providing richer, more tailored, and highly relevant content and experiences
for their members;
Increasing commitment to the brand (as paying members want to extract value
from the brand).

REQUIREMENTS BY LOYALTY PROGRAM MEMBER

Using one loyalty app for all multi-partner rewards;
Enjoying easier tracking and redemption of points and rewards;
Fast connecting with new loyalty accounts;
Instant converting points at partner merchants for everyday spending.

And obviously the solution should be reliable, secure, and allow integrations with legacy systems
(CRM, LMS).

SUMMARY
Loyalty programs are one of the most effective approaches to increasing revenue and inspiring
customer loyalty. Besides collecting miles and earning free flights, airline loyalty programs provide
benefits like quick check-in and last-minute upgrades, using additional flight amenities, exchanging
miles for vacation and event packages, trading points for subscriptions, merchandise,
technology, etc.

Tokenization means building real-time, secure and easily auditable accounting system for airline
loyalty that increases customer involvement (frequency of purchase, basket size, customer
lifetime) is the natural way of evolution of asset management system. On a business level
presence of these features result in increased liquidity of assets, instant audit, simplified operations
and investment attractiveness of a business.

Thanks to tokenization of loyalty programs, airlines can use technology and loyalty data to better
know a customer’s individual needs along their travel journey. Furthermore, data and technology
can empower frontline employees to recognize and personalize the member experience. For
airlines that embrace new loyalty mechanics and technologies, and put a true focus on their loyalty
program members, the sky is the limit.

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ABOUT US
National Aerospace University (KhAI), Ukraine is a recognized leader in aerospace engineering
education and research in Ukraine, acting as an international research hub for the newest R&D
developments in aviation design, construction, production and maintenance. KhAI is a member of
the European Group of Aeronautics and Space Universities (PEGASUS), European Aeronautic
Science Network (EASN), International Association of Aviation and Aerospace Education
(ALICANTO), interacts with international stakeholders such as ICAO, IATA, ACI. Experts of the
university Center for Innovation Development have a track record in implementing research-
intensive projects with European and Asian counterparts in order to boost the research excellence
and innovation capacity in aircraft design and production, rocket-space engineering, light-weight
structures, computer systems and cybersecurity.

Distributed Lab is a blockchain expertise center aimed at the creation of a financial internet that
uses open, a uniform protocol that facilitates trade and value transfer.

TokenD is an enterprise framework for assets digitization (tokenization) which aims at decreasing
costs, duration and risks of building digital ecosystems.

LEARN MORE
http://tokend.io

SOURCES
1. Deep Shift Technology Tipping Points and Societal Impact. (September 2015) Global Agenda
Council on the Future of Software & Society. Survey Report. World Economic Forum.

2. Blockchain in Aviation. Exploring the fundamentals, use cases, and industry initiatives.
Whitepaper. International Air Transport Association (IATA) 2018.

3. Blockchain in Aeronautics & Aviation – Ready for Take-Off? PricewaterhouseCoopers 2019.

4. 2017 COLLOQUY Loyalty Census Report.
5. Forbes Survey: Majority Of Americans Confused By Airline Frequent Flyer Programs. https://
www.forbes.com/sites/garystoller/2018/04/16/most-americans-confused-by-airline-frequent-f
lyer-programs/#2d0b1a976d47

6. Nielsen Digital Consumer Database 2018.

7. Charting a New Course for Airline Loyalty. Bond Brand Loyalty Report 2018.

8. Kravchenko, P.; Haidashenko, D. An effective approach to asset tokenization. Predictable

process of a digital transformation using blockchain platform. TokenD Whitepaper, DistributedLab.

9. Digitizing loyalty programs. Solution Brief, 2019

© Copyright 2019 Sakor LTD. Available under CC BY 4.0 license. The information contained herein is subject to change without notice.
The only warranties for Sakor LTD products and services are set forth in the express warranty statements accompanying such products
and services. Nothing herein should be construed as constituting an additional warranty. Sakor LTD shall not be liable for technical or
editorial errors or omissions contained herein. WPTDEALPUBTLTY003PKAB, June 2019

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