KNOCK-ON EFFECTS

The US FAA’s downgrade of Thailand’s airline industry will have serious repercussions

With tourists flocking to Thailand in record numbers this year—and Bangkok being the world’s second-most visited city after London—the nation’s aviation industry should be thriving. Instead, it’s getting downgraded—over safety concerns.

Flagship carrier Thai Airways serves 32 nations, 74 airports, and 19.1 million passengers a year, yet Thailand’s aviation industry “does not comply with International Civil Aviation Organization (ICAO) safety standards,” wrote the US Federal Aviation Administration (FAA) in a statement released this week (Dec. 1), “and has been assigned a Category 2 rating based on a reassessment of the country’s civil aviation authority.”

Previously Thailand had the FAA’s top rating, Category 1. It will now join Bangladesh, Ghana, Indonesia, and three other nations in the bottom rating, Category 2 (.xls file). The new rating, which could last for years, means there are serious problems, says the FAA:

The country either lacks laws or regulations necessary to oversee air carriers in accordance with minimum international standards, or its civil aviation authority—a body equivalent to the FAA for aviation safety matters—is deficient in one or more areas, such as technical expertise, trained personnel, record-keeping, or inspection procedures.

This means Thai carriers can’t launch new services to the US, though existing flights could continue. It is something of a moot point: Among the nation’s carriers, only Thai Airways has the long-haul aircraft capable of offering a trans-Pacific service to the US, and in October it axed its last US flight (to Los Angeles) due to intense competition.

But the ruling will likely produce knock-on effects that will be felt throughout Thailand’s already-weakened economy. The FAA’s influence is felt far outside of the US, and Thailand’s airline industry is heavily dependent on foreign travelers. Here’s where the repercussions could be felt:

A possible blacklist in Europe

Before the FAA ruling came one from the Montreal-based International Civil Aviation Organization (ICAO). It determined that Thailand did not meet its standards for regulating aviation businesses and granting air operator certificates. (Other nations with a red flag include Angola, Haiti, and Uruguay.) The ICAO’s ruling has no legal authority, but the international group’s decisions serve as a warning to airline regulators around the world that they should conduct their own inspections.

The European Aviation Safety Agency (EASA) will release the results of its own audit this month. The EASA, like many local airline regulators, often follows the FAA’s lead. Last year Europe contributed 6.1 million, or about 25%, of the total arrivals to Thailand last year.

A negative assessment by EASA would would have far-reaching effects on Thai Airways and Bangkok Airways, both of which are heavily reliant on the European market. For Thai Airways, which flies to 30 countries—including nine in Europe, where it serves 11 destinations—revenue generated from European routes accounts for a third (paywall) of the airline’s total.

“The implications from the possibility of a similar review from Europe would be disastrous to Thai carriers and tourism in the country,” Mario Hardy, CEO of the Pacific Asia Travel Association in Bangkok, told the Wall Street Journal.

The Tourism Authority of Thailand has warned that a ban on Thai-registered airlines could could cause a serious drop in the number of tourists visiting Thailand. Thai Airways has about a 60% market share on routes from Belgium, Denmark, Italy, Norway and Sweden, TAT governor Yuthasak Supasorn told the Bangkok Post. Airlines operating on routes between Europe and Thailand had 5.6 million seats a year. If Thai Airways was banned in Europe, the number of seats would drop to about 4 million.

Partners and codesharing

The downgrades may not stop there. “Even if no other civil aviation authorities take steps to blacklist Thai carriers, the resulting negative publicity and public concerns and speculation about safety standards may result in some airlines reducing or ending their commercial relationships with Thai carriers,” law firm Watson, Farley, and Williams wrote in a brief about the possibility of a EU/FAA downgrade earlier this year.

The FAA ruling also means that airlines based in Thailand will not be able to codeshare with US airlines, until safety standards are restored. “It will prevent them from expanding their codeshares with US carriers, such as Star Alliance partner United Airlines, but this is a relatively small market for them,” aviation specialist Ellis Taylor of Flightglobal told the BBC.

Codeshare arrangements between Thai and EU carriers could also be affected, depending on the ruling of the EASA (which unlike the ICAO and the FAA assesses the safety of individual carriers). “Should Europe turn around and place Thailand on its blacklist, that would have a much greater impact on Thai Airways, as it is quite reliant upon European traffic—and in turn so is much of the Thai tourism industry,” Taylor said.

Regional carrier Bangkok Airways has no direct flights to Europe (only Thai Airways does among the nation’s carriers), but it has six European codeshare partners that transfer significant numbers of their long-haul inbound passengers to its domestic and regional networks.

Thai airlines’ finances

Even without the rulings, many of Thailand’s airlines are struggling, despite Thailand being on pace for a record 30 million foreign visitors this year. As of the third quarter, Thai Airways, Thai AirAsia X, Nok Air, and NokScoot are unprofitable, according to the CAPA Centre for Aviation, a market research firm. (Bangkok Airways, which went public last year, is profitable.)

State-controlled Thai Airways’s woes include too much debt, an inability to fill seats, and price competition from full-service rivals including Emirates and budget airlines such as AirAsia, according to Bloomberg. Last year it posted a loss of 15.6 billion baht ($434 million)—the worst result since 2008—and its load factor fell to less than 70% for the first time in a decade.

A Reuters report in March showed Thai Airways had debt of $5.9 billion, the highest among Southeast Asian airlines. Meanwhile faced with a potential employee strike, the company’s nine top executives volunteered to have their wages cut by 10%. The airline has more than 25,000 employees.

Other Thai carriers are also heavily reliant on foreign passengers who may shun the airlines because of safety fears. In the case of Bangkok Airways, 43% of its available seats per kilometer are international, according to FinanceAsia, while Orient Thai specializes in international charter flights.

Thai tourism

Tourism is rare bright spot for Thailand’s moribund economy, where households are among the most indebted in Asia.

Last year travel and tourism directly supported 2.2 million jobs, and 5.4 million indirectly—or 14% of total employment—and accounted for 19.3% of Thailand’s GDP in total, according to the World Travel & Tourism Council. Tourism receipts were at $38.4 billion last year, according to the UN World Tourism Organization, down from $41.8 billion the previous year but still robust.

Thailand’s downgrade will do little to allay concerns about the viability and safety of many Southeast Asian airlines. The region’s airline sector underperforms compared to those in other regions, according to the CAPA Centre for Aviation, and as of the third quarter over half of the region’s carriers were unprofitable, including Philippines AirAsia, Malaysia AirAsia X, Tigerair Singapore, SIA Cargo, Scoot, Indonesia AirAsia X, and Indonesia AirAsia.

This week investigators announced their findings on the crash of Indonesian AirAsia flight QZ8501, which in December fell into the Java Sea on its way from Surabaya to Singapore, killing all 162 aboard. In addition to pilot error, according to investigators from Indonesia’s National Transportation Safety Committee, the crash was caused by a malfunction in a system controlling rudder movement. That same system had malfunctioned 23 times in the previous year.

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