Electronic systems continue to transform the airline industry, bringing savings, efficiency gains and-an increase in fraud. The potential to "earn" big money quickly in a multi-million-dollar business like the airline industry has already bred fraudulent activities in the shape of bogus spare parts, false maintenance records and fictitious frequent flyer accounts. Now the widespread use of electronic payment and distribution systems is likely to make matters worse.
When banks moved wholesale to computerised sales and other systems a decade ago, one unwanted result was an upsurge in electronic fraud. Now airlines are moving down the same road.
"The introduction of electronic banking brought a major rise in fraud as cheats moved to exploit loopholes in computer systems," says Steve Rucker, executive managing director of international risk management and investigations company Kroll Associates. "It's hard to quantify the problem with precision, but there's no doubt that fraud has increased significantly.
"As the aviation industry increasingly relies on electronic systems for ticketing, payments and other operations, a comparable rise in fraud can be anticipated in this industry too. The security and integrity of computer and telecommunications systems will become increasingly crucial to a company's ability to defeat fraud."
Pierre Briant, manager of ticketing and revenue protection services at the International Air Transport Association (IATA), agrees. "The widespread use of credit cards and computerised ticketing systems has created new opportunities for fraudsters," he says. "The more open we are with our customers, the greater the scope for fraud."
IATA has tried to quantify the problem - but with difficulty. According to data supplied by member airlines on detected frauds, losses are running at about $275 million a year. The data is divided into 20 categories of fraud, of which ticketing fraud is the biggest.
"But we are not satisfied with the data," says Briant. "It may well be that ticketing fraud looms large simply because it's easier for us to obtain figures for that particular area. We know it's just the tip of the iceberg."
One hypothetical IATA scenario assumes that one ticket in every four flights has been obtained fraudulently. On that basis, industry losses would be $1.5 billion a year. "The true figure probably lies somewhere between that scenario and our more modest figures of actual detected frauds," says Briant.
Whatever the figure, stolen airline tickets have become big business. Organised networks of thieves routinely break into travel agencies and steal blank airline ticket stock. They fill the blanks with authentic airline codes and flight information to give the appearance of a legitimate ticket. The tickets are then sold either through the black market or to the unsuspecting discount hunter through classified adverts.
Amazingly, although the 11-digit codes of stolen airline ticket stock are routinely made available to airlines in the form of a massive data bank, few carriers take the trouble to check for stolen tickets at check-in. As a result, many passengers are able to board the aircraft and travel with a stolen ticket, at a huge cost to the airlines.
Some of this apparent complacency may be because airlines, in the USA in particular, have been known to bill the travel agents whose ticket stock was used, for the cost of the stolen airline travel. Travel agents are required to keep blank ticket stock locked in a secure place, but many do not realise their value and fail to do so.
However, some airlines have tackled ticket fraud head-on by adopting new machine-readable travel documents and technology. Such a system is PAX Reader, developed by software house AIT. This has enabled British Airways to virtually eliminate ticket fraud by scanning the data on an airline ticket at check-in and instantly verifying it against the industry list of stolen tickets.
IATA's approach to the fraud problem has changed in recent years. Previous efforts have focused on specific frauds and ways of preventing recurrence. Now the emphasis is on "identifying trends, better understanding systems and identifying loopholes", says Briant.
With this new approach has come a greater stress on multi-disciplinary teamwork involving closer collaboration with outside organisations. The change was underlined last June when IATA staged a highly successful Revenue Protection Forum. As well as speakers from within the industry, such as Fred Koch, security director at Continental, those addressing the conference included the head of security at accountants KPMG (which assists IATA in preparing its annual fraud loss surveys) and specialists from computer giants IBM and Unisys.
Topics reviewed included fraud involving cargo, baggage and ticketing, and the vexed question of so-called internal fraud, in which companies fall prey to the activities of their own employees. The Forum set up two working groups, covering credit card fraud and so-called "frequent-flyer fraud" in which the fraudster steals frequent-flyer points to obtain free flights. One variant is for airline staff to open fictitious accounts to which frequent-flyer points are attributed.
Ticketing is far from the only area subject to fraud. Aircraft deals, too, can be prey. Melvyn Simson of London-based aircraft trader Avco Simson says outright criminal fraud is rare in the aviation world, "but deception of one sort or another, aimed at gaining a business advantage, is commonplace, though rarely publicised."
Without naming names, Simson cites the case of a company that bought a batch of used jet aircraft from "a most respected airline" only to discover after delivery that "several airworthiness directives documented as being incorporated months and years before had not in fact been carried out".
Aircraft dealing
Another example involved an airline that agreed to buy a new aircraft, only to discover a year later, on the delivery date, that it was a "white tail" which had been built several years before the purchase contract. That case was resolved by a compensation agreement.
Simson warns that contract terminology can be a minefield for the unwary. "Terms like 'as is, where is' and 'without warranty or representations that the aircraft is fit for the purpose' mean that the buyer rarely, if ever, has recourse to the seller after delivery, whatever the defect," he says.
Often, operational demands mean that contracts are negotiated with such urgency that "important items are missed, such as documentation which correctly reflects an aircraft's maintenance status", says Simson.
Counterfeiting spares is a form of fraud that can hit operational safety. The problem is thought to be more common in the former Soviet Union and South-East Asia, and mainly affects smaller operators whose internal control systems are less sophisticated.
David Sisson, president of AirLiance Materials, the Chicago-based spares company formed last year by Lufthansa, United Airlines and Air Canada, says the problem of bogus spares could be avoided by the rigorous application of controls.
"We demand complete documentation for each item, ranging from manufacturers' certifications to purchase and sale information," he says. "We insist on knowing who bought something and when-we need to be able to read the record all the way back to birth."
In Sisson's experience, the problem is relatively rare. "In 25 years in the business, I've only come across one case of outright fraud where spares were accompanied by completely false documentation."
Edward Pieniazek, a director of London-based Airclaims, which provides information and consulting services to the aviation insurance, finance and airline industries, says it is hard to assess the true scale of the fraud problem.
"The potential is everywhere, in all facets of aviation, from aircraft trading and leasing through to insurance claims and airline operations," he says. "It's the large amounts of money involved which capture the interest of certain people. In every aspect of aviation, one might find 'inefficiencies' in the control of procedures or processes which generate an environment that allows such problems to exist."
A key Airclaims service is to "endeavour to make our clients aware of the pitfalls before they find them the hard way", says Pieniazek.
Kroll Associates also stresses that prevention is far better than cure. "It's a cliché, but it's never been more true," says executive managing director Steve Rucker. "It's so much easier and, in the long run, far cheaper to ensure the effective operation of control mechanisms than it is to clear up the mess afterwards."
Kroll, which is based in New York and has more than 30 offices worldwide, has worked on several major cases involving aviation industry fraud but cannot discuss them in detail. "It has certain peculiar characteristics but, in the final analysis, it is similar to fraud affecting other economic and financial sectors," says Rucker.
Source: Airline Business
