04 March 2017

Secretary for Transport & Housing Prof Anthony Cheung

Air transport directly contributes some 2.5 to 3% of Hong Kong’s GDP but this has not included the indirect and induced value added of aviation-related and non-aviation businesses at the airport.

Thanks to our unique geographical location and the excellent connectivity of our airport, Hong Kong can reach all of Asia's major markets within four hours of flying time and half the world's population within just five hours. We take great pride in our role as the "super-connector" between the Mainland of China and the rest of the world.

Currently, the Hong Kong International Airport hosts more than 100 airlines. We have over 1,100 flights every day, connecting to some 190 international destinations, including some 40 on Mainland China. The Hong Kong International Airport has been the busiest cargo hub of the world for six consecutive years, and is also the third busiest international passenger airport. In 2016, it handled over 70 million passengers and 4.5 million tonnes of cargo.

To cope with the ever-increasing air traffic demand, we have embarked on a three-runway system project, comprising the third runway, a new concourse and other supporting facilities. This eight-year project has commenced works last August. When the three-runway system is fully commissioned, the Hong Kong International Airport's handling capacity will leapfrog to handle about 100 million passengers and nine million tonnes of cargo a year.

In the meantime, our Airport Authority has also been proactively investing in various expansion and upgrading works and service enhancement under the current two-runway system, including a new Midfield Concourse with 20 parking stands and state-of-the-arts facilities, and expansion of existing terminal buildings. A new Hong Kong International Aviation Academy has been set up, and customer services are enhanced by new IT applications.

All these point to one important vision: to enhance the competitiveness of Hong Kong as an international aviation hub.

Diversification - new opportunities

As we move forward in enhancing our airport infrastructure, including a new SkyCity which will be an integrated retail, dining and entertainment complex on the airport island, we are also devoting more efforts to growing and diversifying Hong Kong’s aviation services. Promoting aircraft leasing business in Hong Kong is a case in point.

Apart from being a major aviation hub, Hong Kong is also one of the top financial centres in the world. So why has Hong Kong not partaken in aircraft leasing business worldwide thus far? I can only admit that for too long attention was confined to the infrastructure. The present Administration is, for the first time, putting aviation services high on the Government agenda. We consider Hong Kong has both the strength and opportunity to go into offshore aircraft leasing business.

The Government has earlier invited the Working Group on Transportation under the Economic Development Commission to conduct an in-depth analysis on the business potential. I am very pleased that Sir CK Chow, the Convenor of the Working Group, is here with us today. Sir CK's another official capacity is the Chairman of the Hong Kong Exchanges and Clearing Limited. He will share with you his insight when he speaks in a little while.

Global environment

Civil aviation is a long-term growth business. According to the Market Outlook published by Boeing, over the next 20 years, global aviation passengers are expected to increase at about five per cent per annum while passengers in the Asia Pacific region at about six per cent per annum. The number of new aircraft delivered worldwide and in the Asia Pacific are estimated at over 39,000 and 15,000 respectively. Hence, we are talking about trillions of US dollars in value.

According to the analysis conducted by the industry, the proportion of new aircraft being financed by leasing has reached more than 30%. Such proportion is expected to grow further to about 40% by 2020. Globally, demand for financing aircraft purchase is forecast to increase steadily at compound annual growth rate of nearly seven per cent (6.7%), with over US$120 billion (or 96 billion British pounds) financial requirement in 2016.

China opportunities

The rapid development of China's aviation industry has triggered great growth in aircraft demand to service its domestic and international services. The industry forecasts that between 2012 and 2032, Mainland China airlines will need nearly 6,000 new aircrafts. That represents over 40% of the forecasted delivery to the Asia Pacific region. In terms of value, it is estimated to be some US$780 billion (or 630 billion British pounds). These are huge amounts and they mean big business.

Hong Kong advantage

Up to now, there isn't a strong presence of aircraft leasing business in Hong Kong. Some comment that our profits tax rate, at 16.5%, is relatively higher. In addition, according to the prevailing tax rules of Hong Kong, depreciation allowances are denied for offshore leasing activities. We know these could be disincentives to aircraft lessors.

Hong Kong possesses many favourable conditions necessary to thriving as an aviation financing hub in Asia: the rule of law, sophisticated legal services, a level playing field, robust financial services infrastructure with a wide variety of financial products, a mature banking system with effective and transparent regulations, excellent aviation infrastructure and a strong pool of talents in both the financial services and aviation sectors, just to name some.

Our proximity to the Mainland of China and the already very strong business ties with Mainland companies constitute our added advantage. We have the Closer Economic Partnership Arrangement, or CEPA which is essentially a free-trade agreement signed between Hong Kong and the Mainland, giving us the first-mover advantages in capturing the Mainland market. Also, as most of you may be glad to know, the withholding tax rate between Hong Kong and Mainland China has been lowered since December 2015 to 5%, which, as far as I know, is better than those enjoyed by those existing aircraft leasing hubs.

Now the challenge for us is: how can we make the best use of our strengths, as mentioned above, to develop Hong Kong’s aircraft leasing business?

Dedicated tax regime

With input from the Working Group on Transportation and industry stakeholders, we are proposing a dedicated tax regime for offshore aircraft leasing in Hong Kong with two key features.

First: the tax rate. We propose to cut the current profits tax rates by half, meaning from 16.5% to 8.25%, for qualifying profits of eligible aircraft lessors and aircraft leasing managers.

Second: the taxable amount. We propose that only 20% of the rentals derived from qualifying offshore aircraft leasing activities will be chargeable to profits tax after deducting allowable expenses.

Under this proposed regime, the effective tax rate for offshore aircraft leasing activities in Hong Kong will be down to around 4.3%. Leveraging on the ample liquidity in our banking system, dynamic debt and capital markets and a large pool of investor capital, we are confident that Hong Kong can be developed into a competitive market for aircraft leasing business.

We have just completed all the internal procedures in relation to the legislative exercise for the proposed dedicated tax regime. The necessary amendment bill will be gazetted next week, to be formally tabled at the Legislative Council shortly afterwards.

So far our proposal has received overwhelming support from our aviation and financial industries. The formation of the Hong Kong Aircraft Leasing & Aviation Finance Association is testimony of the keen industry interests we have. In addition, legislators across the political spectrum have expressed strong support to the initiative. Subject to the passage of the amendment bill, we aim to implement the new tax regime within the 2017-18 financial year.

Secretary for Transport & Housing Prof Anthony Cheung gave these remarks at a luncheon seminar in London on March 3.