Soaring to new heights in the Greater Bay Area: Opportunities and market potentials for the aviation industry Content 1. Strengths of the aviation industry in the Greater Bay Area 3 from a macro perspective 2. Optimise airport infrastructures to scale the development of the industry 5 3. Cultivate growth of related industries through marketisation of 9 4. Achieve efficient allocation of aviation resources through a comprehensive 12 transportation system 5. Logistics capacity as a growth enabler for aviation leasing 14 Conclusion 17 Contact us 18

Soaring to new heights in the Greater Bay Area: Opportunities and market potentials for the aviation industry 2 1. Strengths of the aviation industry in the Greater Bay Area from a macro perspective

Soaring to new heights in the Greater Bay Area: Opportunities and market potentials for the aviation industry 3 1. Strengths of the aviation industry in the GBA from a macro perspective

In February 2019, the Central Committee of the The Greater Bay Area is a hub that integrates Communist Party of and the State Council manufacturing, technology and financial services – officially published the “Outline Development Plan for incorporating the strategic positioning of the other three the --Macao Greater Bay Area”. global Bay Areas. The Guangdong province has been a It stated clearly the national-level strategic plan for major manufacturing cluster since China’s economic developing the Guangdong-Hong Kong-Macao Greater reform and opening-up, with Dongguan and Foshan Bay Area (hereinafter referred to as Greater Bay Area renowned for being the centre of world-class or GBA for short), with the aim to position it as one of manufacturing “world’s factory” in particular. the world’s top four bay areas comparable to Greater New York, San Francisco Bay Area and Greater Tokyo is now a leading global technology and Area. internet industry, while Hong Kong and Macao earned their fame respectively as a world-renowned financial With a total area of ​​56,000 km2, GBA is home to a centre and the “Las Vegas of the East”. With Hong population of over 70 million from nine municipalities Kong and Macao located at the forefront and governed and two Special Administrative Regions. In 2018, the under the “One Country, Two Systems” principle, 9+2 region’s GDP exceeded RMB 10 trillion, making it the city cluster of Greater Bay Area will enjoy huge potential largest and most dynamic economic region in China in fostering its developments. and the world. We believe that high mobility of the population and free flow of capital and goods are essential to the development of an economy. Hence, an efficient transportation system is crucial in facilitating economic growth. And in the modern era, aviation is an integral part of a leading-edge transportation systems.

GDP of the Greater Bay Area in 2018 (100 million yuan)

Zhaoqing 2,202 22,859

Foshan Dongguan 9,936 8,279

Jiangmen Huizhou 2,900 4,103

Zhongshan Shenzhen 3,633 24,222

Zhuhai Hong Kong 2,915 24,006

Macau 3,607

Source：CEIC、National Bureau of Statistics，PwC

Soaring to new heights in the Greater Bay Area: Opportunities and market potentials for the aviation industry 4 2. Optimise airport infrastructures to scale the development of the industry

Soaring to new heights in the Greater Bay Area: Opportunities and market potentials for the aviation industry 5 2. Optimise airport infrastructures to scale the development of the industry

Currently, there are ten civil airports in operation in the Airports in Zhanjiang, Foshan, Huizhou, Jieyang, and GBA. Of those, Hong Kong International Airport, Meizhou are also in the midst of rapid development. Guangzhou Baiyun International Airport and Shenzhen There are numerous projects in the pipeline such as the Bao’an International Airport together form an Third Runway Passenger Building of the Hong Kong international aviation hubs boasting a combined International Airport, the opening of T2 at Guangzhou passenger traffic of nearly 200 million and cargo of over Baiyun International Airport and T3 expansion plan, 8 million tonnes in 2018. Hong Kong International commissioning of T2 at Baiyun Airport and the planning Airport is particularly outstanding, with air traffic of 70 of T3, as well as the construction of Yuexi International million passengers (ranked eighth) and 5.12 million Airport. The developments of the civil aviation tonnes of cargos ranked first in the world. Driven by a infrastructures are moving at speed and reaching new strong demand, there is a huge potential for the heights. development of the aviation industry in the GBA. Air Meanwhile, with the support of government traffic passengers and freight demands in the GBA are departments in fostering logistics, ports, business estimated to reach 233 million passengers and 10 services, manufacturing, and other relevant industries million tonnes, respectively, by 2020. and functions, the GBA has seen an effective boost in The three major international airport hubs serve as its economic development and further acceleration in global gateways, playing a leading role in the overall the connectivity and mobility of its population, capital development of airport infrastructure in the GBA. Macao and goods. The GBA is expected to become China’s International Airport and Jinwan Airport have largest cluster of air transport and aviation industry in reached the level of “ten-millions transportation”. the near future.

Top 10 airports by number of passengers

Number of passengers 2018 120,000,000 Number of passengers 2017 9.0 Number of passengers year-on-year growth 8.0 100,000,000 7.0 80,000,000 6.0 5.0 60,000,000 4.0 40,000,000 3.0 2.0 20,000,000 1.0 0 0.0

Source：2018 Statistical Bulletin of Civil Aviation Industry Development, CEIC

Soaring to new heights in the Greater Bay Area: Opportunities and market potentials for the aviation industry 6 2018 Top 10 airports by air traffic movements

700,000 5.0 600,000 4.5 4.0 500,000 3.5 400,000 3.0 2.5 300,000 2.0 200,000 1.5 1.0 100,000 0.5 0 0.0

Air traffic movements 2018 Air traffic movements 2017 起降架次Air trafficyear movements-on-year growth year-on-year growth

Source: 2018 Statistical Bulletin of Civil Aviation Industry Development, CEIC

2018 Top 10 airports by cargoes and airmails throughput（Tonnes）

6,000,000 Cargoes and airmails throughput (Tonnes) 2018 10.0 Cargoes and airmails throughput (Tonnes) 2017 8.0 5,000,000 Cargoes and airmails throughput (Tonnes) year-on-year growth 6.0 4,000,000 4.0 3,000,000 2.0 2,000,000 0.0

1,000,000 -2.0

0 -4.0

Source: 2018 Statistical Bulletin of Civil Aviation Industry Development

Soaring to new heights in the Greater Bay Area: Opportunities and market potentials for the aviation industry 7 Guangdong province spans over 800 km from east to west, with Guangzhou-Shenzhen-Hong Kong located at its centre measuring a distance of about 400km to the east, west and north border of the province. The decentralised locations of small and medium-sized airports alleviate to some degree the pressure of domestic flights on the three international airport hubs. It also creates a conducive atmosphere for the growth of regional airlines. Currently, the small and medium-sized airports in the GBA have a relatively lower usage rate and lack the presence of domestic flag carriers. With the government’s tremendous support in employing ARJ21 regional carriers, the GBA is well- poised to nurture the growth of the regional aviation market.

Absolute GDP per capita (Yuan)

2018

2017

2016

2015

2014

2013

0 10,000 20,000 30,000 40,000 50,000 60,000 70,000 80,000 90,000

PwC’s point of view

Local governments and regulatory authorities must join hands to optimise the policy environment continuously The aviation development in the GBA requires local policy support and effective regulation that are specific to local needs. Local governments at all levels, industrial and commercial management authorities, financial and taxation departments, and civil aviation authorities all contribute a direct impact on the industry. A strong regulatory system is critical to the development of civil aviation services, which underpin public safety and national security. As one of the driving forces for the local economic growth, the fiscal and commercial policies should be directed to promote a high degree of economic vibrancy for the industry. The policy environment should continue to evolve and mature through exploration and experimenting in tandem with the overall economic development.

来源：2018年民航机场生产统计公报

Soaring to new heights in the Greater Bay Area: Opportunities and market potentials for the aviation industry 8 3. Cultivate growth of related industries through marketisation of airlines

Soaring to new heights in the Greater Bay Area: Opportunities and market potentials for the aviation industry 9 3. Cultivate growth of related industries through marketisation of airlines

In line with the positioning and functions of the airport In order to supplement the large-scale public air hubs, the three leading airports in the Greater Bay Area transportation, the operational volume of business jets are home to some internationally renowned flag and helicopters is considerable in the GBA. Well-known carriers, including , China Southern general aviation companies such as BAA Jet Airlines and with an extensive Management and CITIC Offshore Helicopter are both network of worldwide routes. based in Shenzhen. The robust economic foundation of the region has brought concrete demand for, it is In response to a diversified customer base and market predicted that business private flights. As such, Hong segmentation, air transport services in the GBA are Kong, Macao and Shenzhen are key aviation nodes for becoming more market-oriented. We see that , domestic and international business routes. , and HNA Group have penetrated the most destinations in the GBA, further Airlines typically operate in capital and technology- enriching the route coverage connecting the GBA and intensive industry, with a long operations chain and domestic destinations. Through code-sharing practices, many complementary businesses. The numerous alliance can fully utilise their logistics resources. airlines in the GBA and their development will drive The privately-owned is based in growth in the region through many ways. First, it will Shenzhen and connected to international destinations; gather passenger flow and cargo logistics to address has successfully established itself in a more the demand in transportation and thus create fragmented low-cost airline market in just a few years. consumption. Secondly, there will be more investment SF Airlines and Longhao Airlines have become an icon and financing opportunities to enhance capital flow. of private-owned cargo airlines. The flag carrier airlines Also, it will create employment opportunities in different in GBA altogether own a fleet of aircrafts of more than fields and improve the technical skills of the workforce; 1,200. and lastly, it will promote the development of related services and manufacturing.

Number of airline routes from Hong Kong Airport to Mainland China in 2018

There are 53 routes from Hong Kong Airport to Mainland. The specific route destinations are as follows:

Beijing Jinjiang Kaohsiung Meixian Wuyishan Xiamen Datong Xian Dunhuang Xuzhou Fuzhou Qingdao Yancheng Guangzhou Yangzhou Shanghai / Hongqiao Shanghai / Pudong Shijiazhuang Yuncheng Taichung Zhangjiajie Tainan Zhanjiang Hualien Taipei Source:Jinan https://www.hongkongairport.com/iwovTaiyuan-resources/file/airport-authority/publications/annual-and-interim- reports/tc/18_19/AR1819_Chi_Airlines-and-Destinations.pdf

Soaring to new heights in the Greater Bay Area: Opportunities and market potentials for the aviation industry 10 Passenger and cargo throughput at Hong Kong International Airport in 2018

Departure & Passenger Traffic Air Cargo landing

74,359,829 427,766 units 5017,854 tons person

Region: Hong Kong Special Administrative Region of China Frequency: Year-end December Source: Civil Aviation Department

PwC’s point of view：

Collaboration of flag carrier airlines will optimise the allocation of aviation resources The three major airport hubs in GBA are internationally renowned. Each flag carrier may compete with each other, yet it is inevitable they build an in-depth collaboration within the industry. International and domestic intermodal transportation calls for stronger collaboration between airlines to achieve higher efficiency and convenience. The increase in passenger and cargo capacity will be essential to the economic growth of the GBA as well as the business expansion of the airlines.

Soaring to new heights in the Greater Bay Area: Opportunities and market potentials for the aviation industry 11 4. Achieve efficient allocation of aviation resources through a comprehensive transportation system

Soaring to new heights in the Greater Bay Area: Opportunities and market potentials for the aviation industry 12 4. Achieve efficient allocation of aviation resources through a comprehensive transportation system

Hong Kong International Airport has the most The building of joint aviation hubs can enhance international destinations among the three major airport occupation rate and utilisation of flights, thereby hubs in the Greater Bay Area, while Guangzhou Baiyun avoiding duplication of international and domestic International Airport and Bao’an International Airport routes run by individual each flag carrier airlines. The have a route network essentially covering the entire most optimal aviation resource allocation can be country. Under the overall development plan of the realised with the coordinated, centralised planning of Greater Bay Area, the collaboration and coordination land-air-water transportation resources within the GBA. between the three airport hubs will further enhance the connectivity between China and the rest of the world. Highways and cross-sea traffic form an extensive land The continuous development of the transportation transportation system that connects different townships, system in the GBA through highways, high-speed rail, cities and provinces in the GBA, enabling direct cross- shipping, cross-sea traffic ways, aviation and ferries border bus services to and from the three airport hubs. also foster connections between cities and add to the The expanding coverage of high-speed rails and rail convenience of transportation in the region. Passenger transits, coupled with the innovative use of juxtaposed and cargo flow can be effectively directed to border controls will improve the efficiency of land-air international destinations through airports in Hong Kong, transportation and enhance the development of a Shenzhen, and Macao, while channeling more comprehensive transportation system. international arrivals to Mainland China via the GBA aviation hub. Hong Kong will strengthen its role as an international gateway; Baiyun and Bao'an Airports can capitalise on their high domestic coverage to cater to routes going to broader destinations in China.

2018 high-speed rail mileage in Guangdong Province

The total mileage of high-speed rail The total operation mileage of hit 2025 km, with an average annual Guangdong Railway reached increase of 23.1% since it started 4,630km in 2018, 8.3 times that of operations in 2009. 1949.

Source: http://www.gd.gov.cn/zwgk/sjfb/sjkx/content/post_2600703.html

PwC’s point of view：

Accelerate the development of a comprehensive transportation system to seamlessly connect the GBA aviation network Since its economic reform and opening-up 40 years ago, China’s general aviation industry is still in its initial stage. Given the fierce competition in the global aviation industry, it is imperative to create a high-speed transportation network system – with a seamless connection between destinations and zero-distance transfers as a foundation to further integrate the general aviation industry into the GBA transportation system. The "Key Construction Project Plan in Guangdong Province 2019" passed by Guangdong Province recently has mandated measures with immediate impact, including investment of more than RMB 10 billion in nine general aviation projects. The General Aviation Network will promote high-quality development of air transport in the GBA, making it one of the most competitive transportation networks in the area.

Soaring to new heights in the Greater Bay Area: Opportunities and market potentials for the aviation industry 13 5. Logistics capacity as a growth enabler for aviation leasing

Soaring to new heights in the Greater Bay Area: Opportunities and market potentials for the aviation industry 14 5. Logistics capacity as a growth enabler for aviation leasing

According to the statistics from the Civil Aviation Guangzhou Nansha Free Trade Zone has an Administration, airlines in Mainland China (excluding outstanding track record in the Greater Bay Area Hong Kong, Macao and Taiwan) purchased a total of bonded aircraft leasing industry. More than 120 426 aircrafts in 2018, of which 72 were bought by China commercial aircrafts and massive bonded aviation Southern Airlines and 13 by Shenzhen Airlines. In materials were bought in the Guangzhou Nansha FTZ addition, five passenger aircrafts went to Donghai within 5 years.. Airlines and 9 Air, and 11 cargo aircrafts to SF and Longhao. The figures show that 23% of the total new The aircraft leasing industry in Nanshan took off at a fleets are snapped up by airlines in the Greater Bay much later time in 2015 compared to other domestic Area. bonded airplane leasing markets such as Dongjiang in Tianjin, Shanghai and Xiamen. Yet it has demonstrated Aircrafts are the core operating assets of airlines and success through innovation by leveraging the export account for their largest proportion of capital oriented economy of the GBA and tax bond advantages. investment. In order to maintain the timeliness of fleet The government of Nansha District has engaged replacement and ease the pressure of capital flow, customs, foreign administration, finance, taxation and aircraft leasing has been widely adopted by domestic other management units to co-create a friendly airlines. At present, the lease penetration rate of China's business environment featuring a series of supportive commercial fleet is close to the world average of 40%. measures to attract and support aircraft leasing From the asset owner’s perspective, commercial aircraft businesses. has a high degree of global liquidity – priced and traded in USD, with a stable lease return and a high value The Aircraft Leasing Tax Regime in Hong Kong was preservation rate. Therefore aviation leasing has introduced in 2017 providing some of the world's best attracted investors from different backgrounds tax advantages for the development of cross-border worldwide. With the incentive of FTZ / FTA tax and aircraft leasing. Hong Kong as an international financial business policies in the China Free Trade Zone, the centre also contributes to the development of the bonded aircraft leasing industry has flourished since aviation industry in the Greater Bay Area. In the first half 2008. Under the special bonded supervision system of of 2019, the cross-border aircraft financing structure “domestic customs clearance”, airlines benefit greatly was implemented in the Nansha Free Trade Zone, from relieved pressure on taxation for airlines and successfully connecting overseas lessors with the hence encouraged the development of the aviation domestic free trade zone through Hong Kong. Domestic leasing industry. airlines also acquire foreign logistics capacity through leasing while enjoying tax concessions in Guangdong and Hong Kong. In addition, homebased airlines in the Greater Bay Area, in their capacity as aircraft operators, also play a decisive role in the development of the aircraft leasing industry. The respective authories in Guangdong and Hong Kong are committed to researching on innovative policy breakthroughs to support the long-term sustainable growth of the aviation industry.

Boeing forecast commercial aircraft demand of more than 40,000 new planes for the next 20 years, with China taking 20% of the pie. As a leading region of the country’s economic growth, the GBA is also the headquarters of many large airlines and hence occupying a leading market share of the aviation capacity.

Soaring to new heights in the Greater Bay Area: Opportunities and market potentials for the aviation industry 15 Seize the opportunities of growing aviation cluster and invest in aviation leasing in GBA

PwC’s point of view

From the investor’s perspective, seizing market opportunity creates competitive advantages. The aviation leasing tax systems in Nansha and Hong Kong are well constructed, bringing innovation to the cross-border aviation leasing business. GBA entered into the aviation leasing business much later than Ireland and Dongjiang in Tianjin and yet it is showing a promising growth in the business. Investment entities such as aircraft leasing companies, aviation industry funds, aircraft investment banks, and asset management companies will benefit from a competitive tax regime and accessibility to global trading brought by the GBA.

Soaring to new heights in the Greater Bay Area: Opportunities and market potentials for the aviation industry 16 Conclusion

As an integrated hub of manufacturing, China has enormous market opportunities and technology and financial services, the aviation favourable policy environment. With the industry in the GBA shows capability, strategic planning of the GBA, we believe there competitiveness as well as a global network. will be huge potential in the coming years in the The industry has huge sustainable potential and areas of airport infrastructure, transportation essential qualities under the economic system, aviation leasing and logistic capacity. foundation of the Greater Bay Area – ten With continuous improvement in resources airports, more than ten flag carrier airlines, over utilization, the industry is bracing for a brand a thousand aircrafts, and a population of over new chapter in the history of aviation 70 million with a GDP per capita exceeding development. USD20,000. The Outline Development Plan for the Guangdong-Hong Kong-Macao Greater Bay Area emphasises concrete strategies to develop the aviation industry, such as enhancing air traffic management capacity, promoting multimodal transport code sharing and developing cross-border helicopter services. The further expansion of domestic and international aviation networks would be crucial.

Soaring to new heights in the Greater Bay Area: Opportunities and market potentials for the aviation industry 17 Contact us

Thomas Leung Elton Yeung Mainland China and Hong Kong Strategy and Innovation Leader Managing Partner PwC China PwC China +86 (10) 6533 8008 / +86 (10) 6533 2838 / +852 2289 8008 +852 2289 8288 [email protected] [email protected]

Johnny Lau Loretta Fong Chief Consultant Greater Bay Area Taskforce PwC Hong Kong Hong Kong Customer Relationship Partner +852 2289 5670 PwC Hong Kong [email protected] +852 2289 1314 [email protected]

Clarence Leung Victor Cui Partner Senior Manager PwC Hong Kong PwC China +852 2289 3599 +86 755 8261 8875 [email protected] [email protected]

Soaring to new heights in the Greater Bay Area: Opportunities and market potentials for the aviation industry 18 Soaring to new heights in the Greater Bay Area: Opportunities and market potentials for the aviation industry This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors. © 2020 PricewaterhouseCoopers Limited. All rights reserved. PwC refers to the Hong Kong member firm, and may sometimes refer to the PwC Soaringnetwork. to Eachnew heights member in the firm Greater is a Bayseparate Area: legal entity. Please see www.pwc.com/structure for further details. PMS-000752 Opportunities and market potentials for the aviation industry