Tourist arrivals in Thailand continued to decline in 2009, leaving the industry on track for an extremely poor performance on a full-year basis. Figures released by the Office of Tourism Development (OTD) show that tourist arrivals fell by 11.8% year-on-year (y-o-y) in the first three quarters of the year to 9.89mn, down from 11.2mn in the same period in 2008. Encouragingly however, the rate of decline had fallen since H109, when arrivals slumped by 16.2% y-o-y. In Q309 arrivals fell by only 1.2% y-o-y, to 3.29mn.

However, we are somewhat wary of assuming that this represents a return to Thailand's robust rate of arrivals growth. As with other Asian countries, tourist arrivals may well be starting to recover as the worst of the global economic downturn passes, but the Q3 figures, and particularly the forthcoming Q4 figures, are a low base for comparison in 2008. In late Q308 and much of Q408, political turmoil in Thailand, especially the closure by protestors of Suvarnabhumi International Airport in Bangkok in November 2008, meant tourist arrivals suffered and Q3-Q409 figures show a statistical rebound. As such, we expect the Q409 arrivals figures to show y-o-y growth but caution that this does not represent a swift recovery for the Thai tourism industry. On the contrary, we expect Thailand's tourist industry to lag the recovery in other major Asian tourist destinations as the political turmoil and concerns regarding swine flu continue to weigh on tourist arrivals.

Thailand's Spa Sector Potential
Amid the general industry decline, Thailand's spa sector received some good news in December 2009 when it was voted the region's spa capital of the year at the AsiaSpa Awards, indicative of the swift development of the country's spa industry. The first spa in the country was opened in 1992 and the number of spas has risen to 585, employing 11,240 people. The industry generated US$263mn in 2007. The spa industry benefits from Thailand's worldwide reputation as a centre for massages and beauty treatments, with many spas now attached to resorts that specifically offer spa-based holiday packages, which provide another incentive for tourists to visit Thailand rather than other countries in the region. Although the spa industry is likely to stagnate during the downturn, we expect the industry to be one of the sectors leading the recovery.

Nok Air Strengthens Links With Thai Airways
Thailand's airlines are continuing to perform relatively well despite the tourism slowdown. This is partly due to the resilience of domestic tourism, which has maintained passenger levels on domestic flights. The need to maintain these levels has encouraged closer links between the flag carrier Thai Airways and the smaller Nok Air, in which Thai Airways holds a 39% stake. From late 2009, Thai Airways is transferring some domestic routes to Nok Air, such as to Phitsanulok, Mae Hong Son and Khon Kaen. The airlines will also co-operate over scheduling, marketing and package holidays. The transfer of flights by Thai Airways is a vote of confidence in Nok Air, which returned to profit in Q408 following a restructuring programme. Nok Air hoped to post a full-year profit in 2009 and expects passenger numbers for the year to reach 2mn.

Special Focus: Thai Political Crisis
Thailand has experienced extreme political instability since the military coup in September 2006 that deposed former prime minister Thaksin Shinawatra. This appeared to briefly resolve the conflict between Thaksin supporters and opponents, which had spilled over into frequent protests and violence, particularly in Bangkok. However, subsequent elections returned Thailand to its pre-coup situation, with Thaksin supporters winning a majority under new leader Somchai Wongsawat, Thaksin's brother-in-law. The conflict reignited in 2008, with opposition to the government coalescing behind an umbrella group known as the People's Alliance for Democracy (PAD), led by Sondhi Limthongkul. The PAD have organised repeated anti-government protests, which worsened in H208 and became more violent. While this did not physically affect tourism, which is largely away from Bangkok on the coast, it further damaged Thailand's international reputation. Travel advisories issued by countries, including the US and the UK, warned against travelling to Thailand, providing a significant disincentive for potential tourists. The protests peaked with the occupation of Bangkok's Suvarnabhumi Airport on 26 November 2008, which left about 3,000 passengers stranded. No tourists were hurt in the protest, which was largely peaceful. The PAD protesters were demanding the resignation of Somchai, prompting rumours of a fresh coup. Somchai resigned on 2 December 2008. Abhisit Vejjajiva of the Democrat Party became prime minister on 17 December 2008 after winning a special parliamentary vote.

This airport protest will have a major negative effect on Thailand's tourism prospects. This was the first time that the industry had been directly targeted, and the protesters' use of this tactic suggests that they consider attacking the lucrative industry as a highly effective way of putting fiscal and political pressure on the government. Although protests calmed down in H209, the return of Thaksin to the region in late 2009, as an economic adviser to the Cambodian government, raised concerns about the potential renewal of social unrest, which would be a further disincentive to tourism in 2010.

Special Focus: Southern Insurgency Continues
Despite speculation that the tenure of the military government in 2006 might herald a shift in policy towards the disturbed southern region, little change was initiated. Since early 2004, the southern provinces of Yala, Pattani and Narathiwat have experienced bouts of significant unrest, which are often attributed to Islamist secessionists seeking to win independence for the region. This conflict has claimed more than 3,500 lives since 2004 and is characterised by the use of co-ordinated bombings and direct attacks on police and military bases.

Initial suggestions that the military government might attempt to open negotiations with insurgent groups – who are primarily seeking autonomy or independence – were abandoned as it became clear that neither side had any real incentive to begin talks. Instead, the military government followed the Thaksin administration's policy of launching security initiatives in the south as a means of shoring up domestic support. In June 2007, the military launched a programme of security sweeps on areas in Yala, Pattani and Narathiwat as part of Operation Defend the Southern Border. The security operation was intended to reduce violence in these areas ahead of the December elections. Although there have been some improvements, such as a decrease in bomb attacks on military patrols, the level of violence has not decreased significantly.

For some time we have warned of the possibility that militants could attempt to strike targets in Bangkok or key tourist areas to pressure the government, and there were widespread concerns that the Bangkok bomb attacks on December 31 2006 marked an escalation of the insurgency. However, no group has yet claimed responsibility for the attacks and there have been no further suggestions that the insurgency has spread. Also, targeting areas such as Bangkok or major tourist sites would be counterproductive for insurgents, since this would strengthen public opinion against the secessionist movement. Instead, insurgents are continuing to target areas in the south that are not major tourist destinations. This regional concentration of activity lends weight to argument that the southern insurgents were not responsible for the New Year's Eve bombings and should reduce fears of an expansion of the southern bombing campaign across the country in the medium term.

However, the strength of the insurgency remains a low-level threat and will continue to act as a drag on the performance of Thailand's tourism sector. Although the south is relatively tourist-free, heavily publicised bomb attacks in the south would have negative implications for the sector as a whole. In this regard, an attack in March 2008 demonstrated that the insurgents retain a strong military capability. A car bomb was set off outside the CS Pattani Hotel in the southern province of Pattani, where tourists and local politicians are frequent visitors. This may have been a response to the military government's crackdown on the insurgency in 2007, which has been maintained by the civilian government. The shift towards attacking commercial premises, as well as the more usual clashes between insurgents and security forces, may act as a further deterrent to potential visitors despite the south's relative unimportance to tourism.