17 Oct 2023
Invest in the Skies - Tokenization of Aviation Assets
Discover the Future of Aviation Investment with Tokenization. Learn how tokenizing aviation assets on the blockchain can revolutionize the industry, offering fractional ownership, cost-efficiency, and new revenue streams. Explore the potential of blockchain technology in aviation.
Tokenization is the representation of a physical asset on the blockchain. Tokenization of a real world asset transforms its ownership and other rights into digital assets. When a physical asset is tokenized, a digital (virtual) security is being created which is linked to the underlying asset. Almost all real world assets one can imagine can be tokenized – famous artworks, real estate, intellectual property rights, US Treasury Bills, and commodities among others.
Tokenization is not just a nice feature of modern investment landscape which the blockchain technology made possible. It provides several benefits:
- Tokenization makes markets more liquid by lowering or eliminating entirely barriers to entry. Due to tokenization, you can invest in a fractionalized artwork by a 16th century Italian artist or a part of a villa in Spain.
- It lowers transaction costs by disintermediating tangible assets markets. Cutting middlemen results in more cost-efficiency trading.
- Tokenization makes otherwise opaque markets transparent because it is all done on blockchain.
Investing in the skies is hard. In fact, a report of a reputable “Big Four” accounting firm states that investing in aviation assets can expose investors to more diverse risks “than investing in most other products or industries.” One of the most challenging issues is regulatory requirements. That aircraft is a mobile asset means that at some point it can land in jurisdictions with “uncertain tax and legal implications.”
High maintenance and operational costs are another issue. Operating aviation assets can be very costly. Expenses of the industry include but are not limited to fuel prices, maintenance costs, pilot salaries, and insurance fees. Like any other market, aviation has its own set of risks which makes the industry volatile. The market is affected by fuel prices, travel trends and economic conditions. A significant unexpected global event, such as COVID-19 can negatively impact the industry.
Tokenization of aviation assets solves these problems. By tokenizing and fractionalizing physical aviation assets, it will reduce costs for retail investors and will establish a more efficient and liquid market. There have already been several attempts to tokenize different aviation assets, e.g., private jets, airline seats, loyalty points and rewards.
Some aviation assets with the potential of tokenization:
- Commercial and cargo planes
- Private jets
- Leasing rights
- Loyalty points & rewards
Aircraft tokenization is turning physical planes into digital security tokens which represent the fractional ownership of the physical item. Besides the advantages for investors mentioned above, airlines also can benefit from tokenization to ease their financial burden. Airplanes are a costly investment. A quick glance at almighty Google reveals that the price of the cheapest new Boeing aircraft is around 90 million dollars, and fees exceeding $100 million are not unheard of which means a significant initial investment even for the ultra-rich.
iRA Blocks is a company with the ambition to transform the way people invest in physical assets. It is a platform with plans of tokenizing and fractionalizing high-value assets, including real estate, luxury items, aviation assets, and maritime assets, which used to be available only to high net worth individuals.
At the time of writing, there is only 1 tokenized aircraft on the platform. To invest in an asset you have to buy the platform’s native token, iRB.
There also have been some initiatives to tokenize not whole airplanes but core equipment such as aircraft engines. Although not as pricey as airplanes themselves, engine price can also be taxing for would-be owners. If you, for any reason, want to buy GE90, the “heart” powering a Boeing 777 plane, you would have to pay $30 million.
Many of us have experienced frustration when we had to cancel our flight but couldn’t reassign the ticket to another person or sell it. Well, this soon can be history. Argentine low-cost Flybondi claims that it is the first airline to offer tokenized air tickets or “NFTickets”. The technological solution has been developed with TravelX and built on the Algorand blockchain which is used not only for ticketing technology but also for the secondary NFT marketplace. Tokenization of an airline ticket makes it possible to resell or transfer the ticket to another person. The benefit for airlines is that it will result in cost-efficient customer service and generate revenue from the sale of NFTickets in the secondary market.
TravelX, the company behind this advanced ticketing technology, claims that they are in negotiations with more than 60 airlines all over the world to adopt NFTickets. In case of success, the tokenization of airline seats will positively impact the air travel industry by offering passengers more flexibility.
If you ever dreamed of owning a private jet, Jetshare makes your dream to be partially (or should I say “fractionally”?) realized. Jetshare, founded by RJ Aleksandrs, a professional pilot, and a consultant in the aviation industry, is a protocol offering fractional ownership shares in training and private jets. Built on Binance Smart Chain, Jetshare allows purchase and sale of NFTs which represent real world jets and planes. The planes will be insured and stored in one of the protocol’s hangars. NFT holders will also be able to earn income through the sale and the lease of airplanes to aviation training schools or charter businesses. Other than NFTs backed by physical planes, there are Aviator flight hour smart NFTs as well. These NFTs give their holders the right to trade their flight hours, which is one of the benefits of Jetshare Gold membership. Other benefits of joining Jetshare include private jet charters at a discount and free flying lessons.
Airline loyalty programs, also called frequent flier programs, were designed to incentivize their customers. The scheme works simply – passengers will accrue points for miles they traveled. The more you fly, the more points or rewards you’ll accrue. Passengers typically have several options to redeem their loyalty points. These options include but are not limited to:
- Extra baggage allowance;
- Priority booking;
- Allowing passengers to pass through Fast Track service;
- Upgrade of flight classes.
When it comes to airlines, airBaltic can be considered one of the most innovative companies. For the support of the progressive nature of the airline we can mention the fact that Bitcoin has been accepted for the purchase of tickets since 2014. In 2021, the airline announced that it will mint NFTs related to its aircraft and destinations. These NFTs didn’t have any utility. Last year, the company decided to mint a collection of 10,000 NFTs called Planies which would offer several benefits to its holders.
However, airBaltic intends to go one step further with the mint of Planies. Unlike traditional loyalty rewards, benefits associated with these NFTs are available for trading in the secondary market. This means that the program is not only for frequent flyers but for everyone who is ready to pay for a Planie. “We also want it to be attractive to someone in Shanghai or New York who will maybe never fly us. If they know they can sell their points or account to someone else, that creates the value”, says airBaltic CEO Martin Gauss. A user will accrue points every day for holding an NFT which can then be redeemed for a free ticket or a voucher or other benefits.
Each Planie is a unique combination generated from 180 traits which include wings, engines, and mouths among others. Planies are available on OpenSea with 6174 NFTs on the platform at the time of writing.
Though it is a novel and interesting idea to tokenize loyalty programs into NFTs, it is far from the wide adoption by travelers. Just looking at analytics of Planies on OpenSea reveals a lackluster performance of these items despite what Gauss claimed that there is “a high interest in our initial NFTs.” The charts show that during the last 90 days a maximum of two items have been sold on any given day while most days went without any trade. Whether this is due to bearish sentiment in crypto market or to the lack of interest in planes specifically is hard to say.
Why do I include an abandoned project in this article? Well, first, not doing it and writing only about current successful projects and protocols would imply seeing DeFi through rose-tinted glasses. DeFi is new and not without risks and failures, and we should accept it as it is. Second, I like the idea of the protocol.
Almost all issues related to air involve complications, especially legal and regulatory ones. One of these is granting airspace rights to drone services providers. The problem is that the law is not crystal clear in airspace rights in the US, and in other countries for that matter. Although Federal Aviation Administration, the largest transportation agency of the U.S. government regulating all aspects of civil aviation, “has exclusive authority to regulate aviation safety at any altitude”, the issue of flight at low altitudes is not unambiguous. The agency cannot force private property owners to offer their unused airspace for compensation. FAA website clearly states that “commercial drone operators are required to get permission from the FAA before flying in controlled airspace.” But in practice these issues are delegated to local authorities who don’t know what to do with airspace rights over private properties.
So, if you are a drone service provider, it is very likely eventually you will fly your drones at low altitudes over private properties the owners of which haven’t granted you permission. Along the course of the flight there can be hundreds of properties that should approve your use of airspace in the vicinity of these properties. Seems like an insurmountable problem. Enter Aero Token, the protocol with the mission of “Enabling the Drone Superhighway Using the Blockchain.” The protocol was built to provide a technological and legal solution to the problem of drone flights. What Aero Token did is to let commercial drone operators know that they grant permission for the use of airspace over their properties.
The idea is not novel. Airports should and do get avigation easements – the right to use some parts of another person’s land in particular situations – because landings and takeoffs happen at low altitudes. It was the execution, i.e., the use of blockchain technology, that was innovative. The legal basis of the protocol was Revocable Avigation Easements which enabled whereby hosts (property owners) granted access – which was revocable and temporary – to qualified drone operators using AERO Network. Though this particular idea failed, I believe the blockchain technology has an enormous potential to provide infrastructure for low-altitude commercial drone operations.
Tokenization will eventually propagate through to all industries. This is the way real world assets will be integrated to blockchain, and how DeFi will be mainstream. Aviation is one industry which will be transformed by tokenized securities. Since aviation assets can be quite costly, fractionalization will make them more accessible to investors. It will delegate legal and regulatory challenges, which can be intimidating for a retail investor, to the tokenization platforms. For the operators in the industry, such as airlines and drone service providers it can mean reduced costs and additional sources of income.
Disclaimer: Nothing on this site should be construed as a financial investment recommendation. It’s important to understand that investing is a high-risk activity. Investments expose money to potential loss.