Rich pickings in aircraft leasing hub

money-glitz | 12 Feb 2018

Considering the peculiar nature of the industry, Hong Kong Aircraft Leasing and Aviation Finance Association president Stanley Hui Hon-Chung, says employees are generally well-paid with some executives even remunerated more than the chief of an airline, who makes several million dollars a year.

"The 20 major lessors each has only around 100 direct employees. They are paid a base salary plus bonus," says the former chief executive of the Airport Authority Hong Kong, who has four decades of experience in aviation. "Aircraft leasing is an industry that offers high-value positions."

Hui first approached aircraft leasing in the 1990s when Cathay Pacific Airways (0293) acquired stakes in Dragonair, now known as Cathay Dragon, and sought to expand the fleet.

Although the industry involves some financial and engineering skills, he says it is not "rocket science." As such, Hui says it is not necessary to have degree programs specializing in the subjects as is the case in Ireland.

For several decades, Ireland and Singapore have been hubs of global aircraft leasing and financing, which is estimated to be worth more than US$140 billion (HK$1.09 trillion) a year.

The industry requires engineers to maintain the conditions of aircraft, do spot checks, manage aircraft maintenance reserves, and prepare documentation. It is a global business that needs common law, accounting, and tax service experts.

"Hong Kong has the required people, who only need some conversion exposure and participation in the aircraft leasing industry. It is not that difficult to learn."

Hui cites BOC Aviation (2588) managing director and chief executive Robert Martin, a veteran in the business, as an example. Martin was a banker.

He reveals that the association has been promoting aircraft leasing in local universities to encourage them to launch an introductory course on the industry.

The Hong Kong government has halved the profits tax rate to 8.25 percent for aircraft leasing activities. Combined with other tax concessions, the effective tax rate is about 3-4 percent.

In comparison, Ireland has a tax rate of 12.5 percent, that of Singapore is 5 or 10 percent. But Hui says that with tax depreciation allowance offered to new lessors, their tax rates are almost zero.

Hui suggests that Hong Kong should take reference from Ireland, which requires companies to have board meetings and special decisions made there.

"Most airlines own 60-80 percent of aircraft in their fleet. The rest is mainly from lessors. But aircraft offered by lessors can easily account for 40-50 percent."

He believes this is due to further fleet expansion. Lessors can buy aircraft from airlines and then lease back.

More opportunities are also expected from Asia where airlines in emerging markets tend to order more in one go to secure greater discounts from manufacturers and they can have the lessor pay for the planes.

"Sometimes airlines may even be able to gain by selling the aircraft at higher prices to lessors, which would think that it is financially viable," Hui says.

"With aircraft lessors, there is more flexibility for airlines. For instance, after using some aircraft for 8-12 years, airlines could choose to rent some new ones, while some other airlines do not mind taking older ones at lower costs."

The 'One Belt One Road' initiative even encourages countries to expand their airlines to facilitate people and goods flow. Hui stresses that it is strategically important for Hong Kong and China to promote the aircraft leasing platform of the city.

The Hong Kong government estimates that it can gain 18 percent of the global market share in 20 years, financing 3,240 aircraft for over HK$700 billion, directly employing 1,640 staff, and creating 13,700 indirect jobs.

The related profits tax would exceed HK$10 billion, and over HK$430 billion would be added to the gross domestic product.

"Many aircraft lessors have their business in Ireland and Singapore. It is unrealistic for them to move the headquarters. However, lessors may consider having new aircraft registered in Hong Kong to enjoy the tax benefits," Hui says.

BOC Aviation, which has more than 300 aircraft, has once said it is too big to move away from Singapore.

Hui says that many aircraft lessors such as CALC (1848) have offices in Hong Kong and some of their businesses are done here.

Although there are also aircraft lessors in mainland China, Hui says they mainly serve the domestic market due to forex controls, making sales and lease back difficult and there are legal limitations, too. He stresses lessors in Hong Kong face the international market.

Hui believes that more investment products for institutional investors could be generated from aircraft leasing such as asset-backed securities. There are even investment products for retail investors in some countries.

There are also syndicated loans in aircraft leasing, but lead arrangers are usually banks in the United States and Europe. Hui hopes local financial institutions can play a bigger role in the future.

"Hong Kong is a real international financial and aviation center with 7 million population while Ireland only has 4 million people. We also have a market with transparency. There's no reason why we can't develop aircraft leasing business well."

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