Tracey Cheek posted an articleCryptocurrency in Aviation Escrow Transactions: Is It a Viable Option? see more
Cryptocurrency – Bitcoin, Ethereum, Ripple, among others – seems to be driving the plane in Financial Technology (FinTech) development these days, making many of us curious, confused, and wary. What is it? What are the benefits and risks? How and where can it be used? Is the use of cryptocurrency going to improve access and security in finance activities (which is the main purpose of FinTech) in the aviation industry? More importantly for us, what, if any, is the potential for use in aviation escrow transactions?
To begin, the technology that allowed for these virtual currencies to develop and is running everything behind the scenes, blockchain, has four main pillars. They include: a distributed ledger, a decentralized database, immutable records, and smart contracts (digital contracts of data agreed upon). These features are important to understanding how cryptocurrencies work and their viability, but we’re going to save any further discussion of blockchain technology and its own potential applications in aviation escrow for the next blog.
With this foundation, let’s answer the basics, without too great of detail: cryptocurrency (with the first and most notable being Bitcoin) is a digital currency using a decentralized, encrypted database in the Cloud (blockchain) which is essentially owned by all its participants. It is open to all, and anonymously, with access for everyone to view its immutable records (permanent and time stamped with each new transaction or alteration) but not retrospectively change.
Each of these aspects creates a high level of transparency in regard to the accuracy of records, but the possibility for illicit activity too. Cryptocurrencies are also subject to a high degree of exchange rate volatility. This is the ultimate crux for weighing the benefits and risks of using cryptocurrency in aviation escrow transactions.
Bitcoin specifically has seen significant rise in value over the past year and is accordingly gaining traction as a payment option. For the airlines, travel agencies, and charter companies who have already begun doing so, it makes sense given the nature of those transactions. Many have cited the ability for 24/7 transactions, faster processing times, cheaper fees (if any), and increased customer service as reasons for accepting cryptocurrency.
Some of these businesses have attempted to limit the exchange rate risk by adding a “buffer” when converting prices. Mitigating risk can also be done by immediately converting the cryptocurrency’s cash value into fiat currencies (legal tender backed by the government that issued it) through crypto trading platforms like Coinbase or BitPay. Partnering with these exchanges so payment can be accepted at the exact market value at the exact time of transaction is yet another option.
Given the huge difference between airfare sales and the process of transacting aircraft sales and purchases, does it make sense for aviation escrow companies to accept cryptocurrency in closing? The international scope of today’s business aircraft transactions makes this a difficult notion. With so many different parties involved in a transaction, often from different parts of the world, currency exchange is already an issue. Normally, foreign currency is exchanged BEFORE it enters into the escrow account so the entire transaction is handled in the same currency (often US dollars). Imagine trying to close a transaction sending US dollars to one party, Euros to another, and Pound Sterling to yet another. Imagine the headache and risk to the escrow agent to try and convert that money herself before sending to the respective parties.
Instead, the currency is processed through the banks on the way in and out of escrow so everyone involved in the transaction is on the same page when discussing costs and associated fees.
Cryptocurrency is no exception to this rule. If escrow is not keen to inject foreign currency into the transaction, then why would they suddenly allow Bitcoin to enter the fold. In order for that to work, all parties to the escrow agreement would have to agree to conduct the transaction in Bitcoin, and accept the associated risks with exchanging the currency on their own. Bitcoin (and other currencies like it) are not easily exchanged and have volatile values, so the idea of an entire transaction being conducted with Bitcoin is difficult to imagine.
Having said that, it is easier to imagine a buyer and seller individually dealing in cryptocurrency for the sale of a plane. Absent all other interested parties, a cryptocurrency “cash” transaction is much more conceivable. In the simplest of terms, it’s easy to imagine a buyer saying, “Hmm, I wonder if I can buy a plane with this Bitcoin I have?”. And the seller responding, “That’s an interesting idea, but I think I prefer cash, thank you”.
A few cases of large asset transactions using cryptocurrency for payment have been noted, specifically in real estate. If the seller can quickly liquidate the currency to avoid huge shifts in the market, then there is relatively minimal risk in the transaction. It is possible then that aircraft could be sold or purchased in the same way, effectively mitigating exchange rate risk. Jurisdictional factors need to be considered as well to avoid unnecessary fees. However, lack of regulation and integration currently remain deterrents. And the risk of exchanging the currency and recovering the cost of the plane is entirely on the seller.
The general consensus is that progress is being made in regard to the use of cryptocurrency in bigger markets with large asset transactions, such as the aviation escrow industry. The United States and others are beginning to develop regulations regarding cryptocurrency transactions, but for the near future it will remain a rapidly evolving legal environment. How and when any measures will be enforced is unknown.
Some experts believe the change to a more encompassing use of cryptocurrency in the aviation industry needs to begin with the airframe and engine manufacturers, who could attach the purchase price for an aircraft to a specific currency. It is assumed that the companies at the forefront of this cryptocurrency revolution will bear the cost of the unknowns, but also have a competitive edge and increased value in the market.
Since aviation escrow in particular has to consider all aspects of the aviation and financial industries, it is unlikely that the use of cryptocurrency will be a viable option until all the other ducks – education, regulation, integration – are in a row. However, there are a myriad of uses being discussed for blockchain technology in the aviation industry that could majorly streamline the transactional process, and possibly open the door for the use of cryptocurrency.
We’ll be discussing those possibilities in our next blog – “Blockchain in Aviation Escrow Transactions: What is the Potential?”
This article was originally published in Wright Brothers Aircraft Title's blog on March 27, 2019.
Tracey Cheek posted an articleRob Smith, President of Jet Aviation, talks about business success with Anthony Harrington. see more
AH: With trade war tariffs being bandied about, and with emerging economies currently wobbling, 2018 has not been without its problems. How has it been for Jet Aviation?
RS: We have had a great year so far. The outstanding event for us was obviously closing the Hawker Pacific deal and we announced the completion of that acquisition on May 2nd. The transaction itself is valued at $250 million and it adds 19 locations across Asia Pacific and the Middle East to our global network. 2018 brought us seven FBOs, 14 MRO facilities and over 400,000 square feet of hangar space, plus in excess of 800 additional employees. We are now several months into the integration process and that has been a very absorbing challenge. The deal was our largest acquisition ever. Their total revenues were about a third of the size of ours, so it was a huge deal for us. We also received authorization from GACA in Saudi Arabia to provide handling services at Prince Abdul Mohsin Bin Abdulaziz Regional Airport in Yanbu, the Kingdom of Saudi Arabia. Lastly, we are hoping to add an additional two FBO locations in Europe in the near future.
AH: How much overlap is there between your various facilities now you have added Hawker Pacific?
RS: One of the very few overlaps that we have is in Singapore, where we have six hangars on the campus between us, and the two sites are right next door to each other. By the end of the year we will have everything in Singapore badged as Jet Aviation. We are also rebranding our Australian FBOs to Jet Aviation in the first quarter of 2019 and will continue to review the other locations.
AH: The acquisition is obviously a huge leap forward for Jet Aviation. How much organic growth are you seeing on top of that?
RS: We are certainly seeing signs of growth. We’re building a new wide-body hangar at our Basel location. On top of this we have two expansion projects in the US, at our Van Nuys and Teterboro locations. These are two busy FBO locations for us so we are working to stay abreast of, or ahead of, the growth that we see coming in the industry.
AH: Everyone in the MRO field talks about how the shortage of top rate technicians and engineers is impacting the industry. Jet Aviation has an arm that specializes in providing skilled staff. What is demand like?
RS: There is certainly a very clear shortage of skilled folk in the sector, right across the board, including pilots and flight crews. However, our staffing business helps to support the industry by providing engineers or pilots and flight crew. And we are always recruiting heavily in that business to help support the industry.
AH: How is the completions side doing?
RS: One of the major highlights for us was that we were able to announce in the 2nd quarter of this year that we had secured our second Boeing 787 project for an undisclosed private individual. We have three wide body projects just finished or finishing up. We just re-delivered a Boeing 777 in mid-August and we have a second 777 nearing the final stages, plus an Airbus 330. We have orders in the pipeline for Airbus Neos and BBJ MAXs. We’re starting to see some of the narrow body aircraft that were gone from the market for a couple of years, and we are seeing those aircraft being adopted in the VVIP space as well, which is always interesting for completions houses. On another note, we have just been authorized by Airbus as a VIP completions center for the ACJ 350. We don’t have orders for this yet but we are poised and ready, just as with the Boeing 787.
AH: The completions space is fascinating but hugely demanding, as well as risky. How do you rate it?
RS. It is always an interesting space. We are having some great conversations with potential clients. The great thing about running a completions business is lining up the right level of work. You want to get the backlog as close to a perfect fit for your facilities as you can. You don’t want to bring in too much work, or too little, so it is a real balancing act. Completions can so easily swing between feast and famine, so you have to plan your work out carefully.
AH: What are you seeing on the 2020 mandates? Is that driving work for you?
RS: We have not had a whole lot of the ADS-B type work here, though we are qualified to do them. However, until we get our new hangar facility finished in Basel, we are pretty much jam packed as far as workload goes.
AH: That adds credence to the point that a lot of senior MRO people are making, namely that the industry is unlikely to have sufficient capacity to help all those folks who are delaying getting to grips with 2020 mandate work, when they all dash to get their aircraft completed in time…
RS: It is going to be a crunch, no doubt about it. Both ourselves and our competitors are urging operators and owners to book their aircraft in as early as they can. It will be a real rush from now to 2020 to get the work completed.
AH: What are you seeing by way of demand for connectivity upgrades?
RS: This is now a very interesting area. We have several solutions on connectivity that we offer clients. We recently had a 747 in our Basel facility for a Ka band installation and we are committed to developing the STCs for a variety of aircraft type installations. There is a very high demand for high throughput broadband connectivity in the market and we are working with suppliers to have full, seamless solutions available in all our locations. On all the services we offer, one of our key messages to industry is our independence. We don’t play favourites among the OEMs. We have our sister company, Gulfstream, but we also support all other OEMs in the industry.
This article was originally published in Business Aviation Magazine, August 2018.