Hong Kong Budget 2017-2018

Hong Kong will gain if aviation leasing takes off, but firms must give back to the community

Albert Cheng says tax incentives are a welcome move towards making Hong Kong an aviation leasing centre, but firms that benefit must be made aware of the need to invest in talents locally

PUBLISHED : Thursday, 01 June, 2017, 5:21pm
UPDATED : Thursday, 01 June, 2017, 6:09pm

The latest government budget includes an initiative to offer tax breaks so that aircraft financing companies are drawn to use Hong Kong as their business domicile. As Financial Secretary Paul Chan Mo-po said: “Such a concession will attract aircraft leasing companies to develop their business in Hong Kong, thereby creating job opportunities for the financial and aviation industries.”

The benefits for Hong Kong in becoming a centre for aviation leasing are obvious and considerable. According to Boeing Capital, over the next two decades China alone will need about 6,000 new aircraft, valued at more than ­HK$6 trillion, with about a third expected to be financed through leasing. Also, Airbus has forecast global passenger traffic to grow at an annual average rate of 4.9 per cent a year from 2013 to 2032.

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The move will also complement official efforts to boost travels in the “meetings, incentives, conferences and events” sector, especially with new convention and exhibition venues set to be created to meet a projected shortfall of 130,000 square metres by 2028.

Nevertheless, the budgetary incentive as it now stands is only half-baked, hardly adequate to enable Hong Kong to compete with Dublin and Singapore in this lucrative but competitive emerging market.

At present, profits from an aircraft leasing business in Hong Kong attract tax at the standard rate of 16.5 per cent, which is set to be halved, to 8.25 per cent. And for lessors who meet certain criteria, the tax payable could be effectively slashed to 1.65 per cent of net profit.

All these look appealing on paper. Officials are positive that once the tax breaks are in place, the aircraft leasing industry will take off. Their optimism is based largely on the success story of wine imports. Once levies were removed, the wine trade flourished. But the aircraft industry is far more complicated.

Two local conglomerates now dominate the Hong Kong aircraft leasing scene. The Cheng family, which controls Chow Tai Fook Enterprises and New World Development, last year partnered with US leasing giant Aviation Capital to launch Bauhinia Aviation Capital. The new joint venture plans to spend an initial HK$2 billion to purchase about 50 planes.

Late last year, Cheung Kong Property Holdings, controlled by the tycoon Li Ka-shing, agreed to pay ­HK$7.6 billion to buy an aircraft leasing unit from CK Hutchison, another firm owned by him. The unit, CK Capital, owned a fleet of 43 planes at the time.

So companies seem ready to spend on acquiring hardware. However, sources familiar with the industry said the two leasing operators remain reluctant to invest in any sophisticated computer systems to help them manage their growing fleet. Such systems are critical to making Hong Kong an aircraft leasing hub.

City officials will need to make those who stand to gain the most from the breaks feel obliged to invest in their software and human resources

The lessors in Hong Kong are also said to lack the engineering expertise to check and refit delivered planes. As the number of aircraft they buy are often too small to be given priority, they usually have to buy from others who place bulk purchase orders with key manufacturers. Some of the aircraft they get are even from the second-hand market, and may thus need to be remodelled to fit their particular needs.

Hong Kong’s aircraft lessors currently have to rely on foreign help for these highly specialised jobs. That is hardly conducive to creating jobs for Hongkongers. The leasing companies set to benefit from tax breaks owe it to Hong Kong to invest in and build in-house engineering teams.

Tax incentives will benefit the leasing sector. But to maximise benefits to the wider community, ways must be found to improve the industry’s eco-system so that companies can become truly rooted in Hong Kong.

City officials will need to make those who stand to gain the most from the breaks feel obliged to invest in their software and human resources. These may take the form of fine details for lessors to qualify for the tax benefits, or tacit political persuasion.

Otherwise, all the tax money foregone under the initiative will just fill the pockets of the owners of leasing operations, their aircraft suppliers and foreign professional service contractors. Reducing tax rates is the easy part. The real challenge for the government is to ensure that companies invest in their talents locally.

Albert Cheng is the past chairman of the aircraft division of the Hong Kong Institution of Engineers. taipan@albertcheng.hk