KUALA LUMPUR (BLOOMBERG) – Malaysia’s aviation-safety downgrade makes Asia the region with the most markets where airlines are restricted from US airspace.

The US Federal Aviation Administration cut Malaysia to a Category 2 nation on Monday (Nov 11), banning the country’s carriers from setting up new flights to anywhere between New York and San Francisco.

It cited deficiencies by the nation’s civil aviation authority in areas ranging from technical expertise to record keeping.

Malaysia is the third Asian country now branded with such a stigma – the others being Bangladesh and Thailand – underscoring the challenges regulators face in keeping up with fast-growing demand for flying.

Costa Rica, Curacao and Ghana are the only other markets worldwide designated as Category 2. 

In the case of Thailand, it was downgraded to Category 2 in August 2015, before the red flag was lifted in late 2017. However, in February 2019, the US Federal Aviation Administration downgraded Thailand again. 

Indonesia was also similarly downgraded to a Category 2 nation in 2007. It took the country until August 2016 to be upgraded to Category 1 status. 

“The moment they hear Malaysia is Category 2 questionable safety, you have a lot of people start to wonder, ‘oh, I don’t want to fly with Malaysian carriers,'” said Mr Mohshin Aziz, an analyst at Maybank Investment Bank Bhd.

The FAA assessment is based on International Civil Aviation Organisation safety standards and focuses on the Civil Aviation Authority of Malaysia, not individual airlines.

It’s been used to ban flights from India, Vietnam and Indonesia – though those markets have been upgraded to Category 1 in recent years.

Malaysia now cannot open new routes to the US or code-share with American carriers.

It also means Malaysian aircraft will be more closely monitored at US airports, though only AirAsia X flies there – to Honolulu via Osaka.

The airline didn’t immediately respond to a request for comment.

AirAsia X rose 6 per cent in Kuala Lumpur on Tuesday, its biggest gain in three weeks.

The FAA’s designation could have far-reaching implications for a country that suffered through the 2014 disappearance of Malaysia Airlines Flight 370 and the downing of another flight over Ukraine.

Mr Mohshin said it could turn public perception of Malaysian carriers negative, hurt the maintenance business, undermine the ability of local pilots and engineers from getting hired overseas, and drive up insurance premiums and leasing rates.

That point was echoed by Mr Gerry Soejatman, a Jakarta-based aviation analyst, who also said the FAA’s decision could impact business travel as companies may restrict staff from flying Category 2 carriers.

In response to the downgrade, the Civil Aviation Authority of Malaysia said it “takes the FAA’s assessment constructively and has moved to make serious changes in its structure and operations”.

At an event in Jakarta on Tuesday, Malaysia’s deputy finance minister Amiruddin Hamzah said that the downgrade would be looked into, but it was unlikely to impact tourism, including increasing numbers coming to Malaysia for medical treatment.

Maybank’s Mohshin warned that the impact of a downgrade could be harder on Malaysia than neighbouring Thailand, where the balance of traffic is about 50-50 between local and foreign carriers, so the latter can take on some extra load.

Malaysia is more polarised, with domestic airlines commanding as much as 80 per cent of the market, he said.

“Whatever bad happens to the local Malaysian carriers, the foreign carriers couldn’t possibly offset,” he said.

It could be a while before Malaysia regains its Category 1 rating, if other examples in Asia are to go by, according to Sobie Aviation analyst Brendan Sobie.

“Restoring Category 1 takes time and a lot of work,” he wrote. “In some instances countries have achieved it in one year – for example India. But the most recent examples in South-east Asia (Philippines, Indonesia and Thailand) have been several years.”

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