Aircastle Limited
Aircastle LTD (Form: 10-Q, Received: 05/02/2013 17:13:33)
Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
  _______________________________________________________________
FORM 10-Q
  _______________________________________________________________
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2013

or

¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from            to            

Commission File number 001-32959
_______________________________________________________________
  AIRCASTLE LIMITED
(Exact name of registrant as specified in its charter)
  _______________________________________________________________
Bermuda
98-0444035
(State or other jurisdiction of
incorporation or organization)
(IRS Employer
Identification No.)
 
 
c/o Aircastle Advisor LLC
300 First Stamford Place, 5 th  Floor, Stamford, CT
06902
(Address of principal executive offices)
(Zip Code)
Registrant’s telephone number, including area code     (203) 504-1020
_______________________________________________________________
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES   þ     NO   ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    YES   þ     NO   ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer
þ
Accelerated filer
¨
Non-accelerated filer
o   (Do not check if a smaller reporting company)
Smaller reporting company
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    YES   ¨     NO   þ
As of April 24, 2013 , there were 68,460,299 outstanding shares of the registrant’s common shares, par value $0.01 per share.


Table of Contents

Aircastle Limited and Subsidiaries
Form 10-Q
Table of Contents
 
 
 
Page
No.
 
 
Item 1.
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
 
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.

2

Table of Contents

PART I. — FINANCIAL INFORMATION
Item 1.        Financial Statements
Aircastle Limited and Subsidiaries
Consolidated Balance Sheets
(Dollars in thousands, except share data)
 
 
December 31,
2012
 
March 31,
2013
 
 
 
(Unaudited)
ASSETS
 
 
 
Cash and cash equivalents
$
618,217

 
$
693,303

Accounts receivable
5,625

 
3,759

Restricted cash and cash equivalents
111,942

 
108,423

Restricted liquidity facility collateral
107,000

 
107,000

Flight equipment held for lease, net of accumulated depreciation of $1,305,064 and $1,307,959
4,662,661

 
4,544,773

Net investment in finance leases
119,951

 
129,701

Other assets
186,764

 
169,373

Total assets
$
5,812,160

 
$
5,756,332

 
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
LIABILITIES
 
 
 
Borrowings from secured financings (including borrowings of ACS Ireland VIEs of $207,926 and $196,207, respectively)
$
1,848,034

 
$
1,765,353

Borrowings from unsecured financings
1,750,642

 
1,750,613

Accounts payable, accrued expenses and other liabilities
108,593

 
113,949

Lease rentals received in advance
53,189

 
50,287

Liquidity facility
107,000

 
107,000

Security deposits
87,707

 
91,953

Maintenance payments
379,391

 
388,182

Fair value of derivative liabilities
61,978

 
56,947

Total liabilities
4,396,534

 
4,324,284

 
 
 
 
Commitments and Contingencies


 


 
 
 
 
SHAREHOLDERS’ EQUITY
 
 
 
Preference shares, $.01 par value, 50,000,000 shares authorized, no shares issued and outstanding


 


Common shares, $.01 par value, 250,000,000 shares authorized, 68,639,729 shares issued and outstanding at December 31, 2012; and 68,280,299 shares issued and outstanding at March 31, 2013
686

 
683

Additional paid-in capital
1,360,555

 
1,353,084

Retained earnings
180,675

 
192,471

Accumulated other comprehensive loss
(126,290
)
 
(114,190
)
Total shareholders’ equity
1,415,626

 
1,432,048

Total liabilities and shareholders’ equity
$
5,812,160

 
$
5,756,332


The accompanying notes are an integral part of these unaudited consolidated financial statements.

3


Aircastle Limited and Subsidiaries
Consolidated Statements of Income
(Dollars in thousands, except per share amounts)
(Unaudited)
 
 
Three Months Ended March 31,
 
2012
 
2013
Revenues:
 
 
 
Lease rental revenue
$
152,242

 
$
156,590

Finance lease revenue

 
3,884

Amortization of lease premiums, discounts and lease incentives
(1,598
)
 
(7,081
)
Maintenance revenue
12,647

 
16,866

Total lease revenue
163,291

 
170,259

Other revenue
1,624

 
5,930

Total revenues
164,915

 
176,189

 
 
 
 
Expenses:
 
 
 
Depreciation
64,514

 
69,900

Interest, net
48,981

 
59,152

Selling, general and administrative (including non-cash share based payment expense of $1,176 and $811 for the three months ended March 31, 2012 and 2013, respectively)
13,198

 
13,285

Impairment of Aircraft

 
6,199

Maintenance and other costs
2,774

 
3,412

Total expenses
129,467

 
151,948

 
 
 
 
Other income (expense):
 
 
 
Gain on sale of flight equipment
196

 
1,192

Other
(113
)
 
1,215

Total other income (expense)
83

 
2,407

 
 
 
 
Income from continuing operations before income taxes
35,531

 
26,648

Income tax provision
2,929

 
3,584

Net income
$
32,602

 
$
23,064

 
 
 
 
Earnings per common share — Basic:
 
 
 
Net income per share
$
0.45

 
$
0.34

 
 
 
 
Earnings per common share — Diluted:
 
 
 
Net income per share
$
0.45

 
$
0.34

 
 
 
 
Dividends declared per share
$
0.15

 
$
0.165


The accompanying notes are an integral part of these unaudited consolidated financial statements.

4


Aircastle Limited and Subsidiaries
Consolidated Statements of Comprehensive Income
(Dollars in thousands)
(Unaudited)
 
 
Three Months Ended March 31,
 
2012
 
2013
 
 
 
 
Net income
$
32,602

 
$
23,064

Other comprehensive income, net of tax:
 
 
 
Net change in fair value of derivatives, net of tax expense of $289 and $118 for the three months ended, March 31, 2012 and 2013, respectively
16,483

 
3,826

Net derivative loss reclassified into earnings
4,071

 
8,274

Other comprehensive income
20,554

 
12,100

Total comprehensive income
$
53,156

 
$
35,164


The accompanying notes are an integral part of these unaudited consolidated financial statements.

5


Aircastle Limited and Subsidiaries
Consolidated Statements of Cash Flows
(Dollars in thousands)
(Unaudited)
 
Three Months Ended March 31,
 
2012
 
2013
Cash flows from operating activities:
 
 
 
Net income
$
32,602

 
$
23,064

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation
64,514

 
69,900

Amortization of deferred financing costs
2,716

 
2,435

Amortization of net lease discounts and lease incentives
1,598

 
7,081

Deferred income taxes
1,377

 
2,194

Non-cash share based payment expense
1,176

 
811

Cash flow hedges reclassified into earnings
4,071

 
8,274

Ineffective portion of cash flow hedges
(1,519
)
 
128

Security deposits and maintenance payments included in earnings
(12,722
)
 
(23,259
)
Gain on sale of flight equipment
(196
)
 
(1,192
)
Impairment of aircraft

 
6,199

Other
57

 
(2,901
)
Changes in certain assets and liabilities:
 
 
 
Accounts receivable
(3,396
)
 
1,866

Restricted cash and cash equivalents related to operating activities
700

 

Other assets
(1,886
)
 
(95
)
Accounts payable, accrued expenses and other liabilities
(15,338
)
 
1,144

Lease rentals received in advance
(788
)
 
(2,902
)
Net cash provided by operating activities
72,966

 
92,747

Cash flows from investing activities:
 
 
 
Acquisition and improvement of flight equipment and lease incentives
(48,449
)
 
(4,157
)
Proceeds from sale of flight equipment
2,500

 
19,750

Restricted cash and cash equivalents related to sale of flight equipment
35,762

 
700

Aircraft purchase deposits and progress payments
(16,518
)
 
(3,869
)
Net investment in finance leases

 
(11,595
)
Collections on finance leases

 
1,845

Purchase of debt investment
(43,626
)
 

Principal repayments on debt investment

 
42,001

Other
(40
)
 
(695
)
Net cash used in investing activities
(70,371
)
 
43,980

Cash flows from financing activities:
 
 
 
Repurchase of shares
(1,469
)
 
(7,940
)
Securitization and term debt financing repayments
(63,257
)
 
(82,681
)
Deferred financing costs
(271
)
 
(441
)
Restricted secured liquidity facility collateral
2,700

 

Secured liquidity facility collateral
(2,700
)
 

Restricted cash and cash equivalents related to financing activities
25,684

 
2,819

Security deposits received
1,985

 
11,349

Security deposits returned
(1,495
)
 
(425
)
Maintenance payments received
30,275

 
34,142

Maintenance payments returned
(22,034
)
 
(7,196
)
Dividends paid
(10,865
)
 
(11,268
)
Net cash (used in) provided by financing activities
(41,447
)
 
(61,641
)
Net increase (decrease) in cash and cash equivalents
(38,852
)
 
75,086

Cash and cash equivalents at beginning of period
295,522

 
618,217

Cash and cash equivalents at end of period
$
256,670

 
$
693,303

Supplemental disclosures of cash flow information:
 
 
 
Cash paid for interest, net of capitalized interest
$
55,233

 
$
37,352

Cash paid for income taxes
$
1,432

 
$
344

Supplemental disclosures of non-cash investing activities:
 
 
 
Purchase deposits, advance lease rentals and security deposits assumed in asset acquisitions
$
1,138

 
$



The accompanying notes are an integral part of these unaudited consolidated financial statements.

6


Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
March 31, 2013



Note 1. Summary of Significant Accounting Policies
Organization and Basis of Presentation
Aircastle Limited (“Aircastle,” the “Company,” “we,” “us” or “our”) is a Bermuda exempted company that was incorporated on October 29, 2004 under the provisions of Section 14 of the Companies Act of 1981 of Bermuda. Aircastle’s business is investing in aviation assets, including leasing, managing and selling commercial jet aircraft to airlines throughout the world and investing in aircraft related debt investments.
Aircastle is a holding company that conducts its business through subsidiaries. Aircastle directly or indirectly owns all of the outstanding common shares of its subsidiaries. The consolidated financial statements presented are prepared in accordance with U.S. generally accepted accounting principles (“US GAAP”). We operate in a single segment.
The accompanying consolidated financial statements are unaudited and have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial reporting and, in our opinion, reflect all adjustments, including normal recurring items, which are necessary to present fairly the results for interim periods. Operating results for the periods presented are not necessarily indicative of the results that may be expected for the entire year. Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with US GAAP have been omitted in accordance with the rules and regulations of the SEC; however, we believe that the disclosures are adequate to make information presented not misleading. These financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012 .
The Company’s management has reviewed and evaluated all events or transactions for potential recognition and/or disclosure since the balance sheet date of March 31, 2013 through the date on which the consolidated financial statements included in this Form 10-Q were issued.

Principles of Consolidation
The consolidated financial statements include the accounts of Aircastle and all of its subsidiaries. Aircastle consolidates nine Variable Interest Entities (“VIEs”) of which Aircastle is the primary beneficiary. All intercompany transactions and balances have been eliminated in consolidation.
We consolidate VIEs in which we have determined that we are the primary beneficiary. We use judgment when deciding (a) whether an entity is subject to consolidation as a VIE, (b) who the variable interest holders are, (c) the potential expected losses and residual returns of the variable interest holders, and (d) which variable interest holder is the primary beneficiary. When determining which enterprise is the primary beneficiary, we consider (1) the entity’s purpose and design, (2) which variable interest holder has the power to direct the activities that most significantly impact the entity’s economic performance, and (3) the obligation to absorb losses of the entity or the right to receive benefits from the entity that could potentially be significant to the VIE. When certain events occur, we reconsider whether we are the primary beneficiary of VIEs. We do not reconsider whether we are a primary beneficiary solely because of operating losses incurred by an entity.
Effective January 1, 2013, the Company adopted Financial Accounting Standards Board (the "FASB") Accounting Standards Update ("ASU") 2013-02 (“ASU 2013-02”) Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income . This ASU requires that companies present reclassification adjustments for each component of accumulated other comprehensive income (“AOCI”) either on the face of the financial statements or in the notes, provided that all required information is presented in a single location. ASU 2013-02 is effective for interim and annual reporting periods beginning after December 15, 2012 and should be applied prospectively. The adoption of ASU 2013-02 did not have a material impact on the Company's consolidated financial statements.
Effective January 1, 2013, the Company adopted ASU 2011-11 (“ASU 2011-11”) Balance Sheet (Topic 210) Disclosures about Offsetting Assets and Liabilities . This ASU requires that companies disclose information to enable users of its financial statements to evaluate the effect or potential effect of netting arrangements on its financial position. ASU 2011-11 is effective for interim and annual reporting periods beginning on or after January 1, 2013 and should be applied retrospectively for all

7


Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
March 31, 2013



periods presented on the balance sheet. The adoption of ASU 2011-11 did not have a material impact on the Company's consolidated financial statements.

Risk and Uncertainties
In the normal course of business, Aircastle encounters several significant types of economic risk including credit, market, aviation industry and capital market risks. Credit risk is the risk of a lessee’s inability or unwillingness to make contractually required payments and to fulfill its other contractual obligations. Market risk reflects the change in the value of derivatives and financings due to changes in interest rate spreads or other market factors, including the value of collateral underlying derivatives and financings. Aviation industry risk is the risk of a downturn in the commercial aviation industry which could adversely impact a lessee’s ability to make payments, increase the risk of unscheduled lease terminations and depress lease rates and the value of the Company’s aircraft. Capital market risk is the risk that the Company is unable to obtain capital at reasonable rates to fund the growth of our business or to refinance existing debt facilities.

Use of Estimates
The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. While Aircastle believes that the estimates and related assumptions used in the preparation of the consolidated financial statements are appropriate, actual results could differ from those estimates.

Proposed Accounting Pronouncements
In August 2010, the FASB issued an exposure draft, “Leases” (the “Lease ED”), which would replace the existing guidance in the Accounting Standards Codification (“ASC”) 840 (“ASC 840”), Leases . In June 2012, the FASB decided that leases would be classified as either leases of property or leases of assets other than property. Leases of property will continue to use operating lease accounting. Leases of other than property would use the receivable residual approach. Under the receivable residual approach, a lease receivable would be recognized for the lessor's right to receive lease payments, a portion of the carrying amount of the underlying asset would be allocated between the right of use granted to the lessee and the lessor's residual value and profit or loss would only be recognized at commencement if it is reasonably assured. The FASB completed all of its deliberations and decided to re-expose the Lease ED in the first half of 2013. We anticipate that the final standard may have an effective date no earlier than 2016. When and if the proposed guidance becomes effective, it may have a significant impact on the Company's consolidated financial statements. Although we believe the presentation of our financial statements, and those of our lessees could change, we do not believe the accounting pronouncement will change the fundamental economic reasons for which the airlines lease aircraft. Therefore, we do not believe it will have a material impact on our business.

Note 2. Fair Value Measurements
Fair value measurements and disclosures require the use of valuation techniques to measure fair value that maximize the use of observable inputs and minimize use of unobservable inputs. These inputs are prioritized as follows:
Level 1: Observable inputs such as quoted prices in active markets for identical assets or liabilities.
Level 2: Inputs other than quoted prices included within Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities or market corroborated inputs.
Level 3: Unobservable inputs for which there is little or no market data and which require us to develop our own assumptions about how market participants price the asset or liability.


8


Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
March 31, 2013



The valuation techniques that may be used to measure fair value are as follows:
The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities.
The income approach uses valuation techniques to convert future amounts to a single present amount based on current market expectation about those future amounts.
The cost approach is based on the amount that currently would be required to replace the service capacity of an asset (replacement cost).
The following tables set forth our financial assets and liabilities as of December 31, 2012 and March 31, 2013 that we measured at fair value on a recurring basis by level within the fair value hierarchy. Assets and liabilities measured at fair value are classified in their entirety based on the lowest level of input that is significant to their fair value measurement. 
 
 
 
Fair Value Measurements at December 31, 2012 Using Fair Value Hierarchy
 
Fair Value as of December 31, 2012
 
Quoted Prices
In Active
Markets for
Identical
Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Valuation
Technique
Assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
618,217

 
$
618,217

 
$

 
$

 
Market
Restricted cash and cash equivalents
111,942

 
111,942

 

 

 
Market
Debt investments
$
40,388

 

 

 
$
40,388

 
Income
Total
$
770,547

 
$
730,159

 
$

 
$
40,388

 
 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
Derivative liabilities
$
61,978

 
$

 
$
61,978

 
$

 
Income
 
 
 
Fair Value Measurements at March 31, 2013 Using Fair Value Hierarchy
 
Fair Value as of March 31, 2013
 
Quoted Prices
In Active
Markets for
Identical
Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Valuation
Technique
Assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
693,303

 
$
693,303

 
$

 
$

 
Market
Restricted cash and cash equivalents
108,423

 
108,423

 

 

 
Market
Total
$
801,726

 
$
801,726

 
$

 
$

 
 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
Derivative liabilities
$
56,947

 
$

 
$
56,947

 
$

 
Income

Our cash and cash equivalents, along with our restricted cash and cash equivalents balances, consist largely of money market securities that are considered to be highly liquid and easily tradable. These securities are valued using inputs observable in active markets for identical securities and are therefore classified as Level 1 within our fair value hierarchy. Our interest rate derivatives included in Level 2 consist of United States dollar-denominated interest rate derivatives, and their fair values are determined by applying standard modeling techniques under the income approach to relevant market interest rates (cash rates, futures rates, swap rates) in effect at the period close to determine appropriate reset and discount rates and incorporates

9


Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
March 31, 2013



an assessment of the risk of non-performance by the interest rate derivative counterparty in valuing derivative assets and an evaluation of the Company’s credit risk in valuing derivative liabilities.
The following tables reflect the activity for the classes of our assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three months ended March 31, 2012 and 2013 , respectively:
 
Assets
 
Debt Investments
 
Three Months Ended March 31,
 
Three Months Ended March 31,
 
2012
 
2013
Balance at beginning of period

 
40,388

Total gains/(losses), net:
 
 
 
        Included in other revenue

 
1,613

Settlements

 
(42,001
)
Balance at end of period

 

 
 
 
 
 
Liabilities
 
 Derivative Liabilities
 
Three Months Ended March 31,
 
Three Months Ended March 31,
 
2012
 
2013
Balance at beginning of period
$
(56,229
)
 
$

Total gains/(losses), net:
 
 
 
Included in other income (expense)
(113
)
 

Included in interest expense
73

 

Included in other comprehensive income
5,327

 

Balance at end of period
$
(50,942
)
 
$


For the three months ended March 31, 2012 , we had no transfers into or out of Level 3 and we had no purchases, issuances, sales or settlements of Level 3 items. For the three months ended March 31, 2013 , we had no transfers into or out of Level 3. We settled the debt investment during three months ended March 31, 2013 .
We measure the fair value of certain assets and liabilities on a non-recurring basis, when US GAAP requires the application of fair value, including events or changes in circumstances that indicate that the carrying amounts of assets may not be recoverable. Assets subject to these measurements include aircraft. We record aircraft at fair value when we determine the carrying value may not be recoverable. Fair value measurements for aircraft impaired are based on an income approach that uses Level 3 inputs, which include our assumptions and appraisal data as to future cash proceeds from leasing and selling aircraft.
During the three months ended March 31, 2013 , we impaired two aircraft, one Airbus A319-100 aircraft and one Boeing 767-300ER aircraft, each of which was returned to us early by the respective lessee. The decision was made to part out these aircraft and the net book value of each was written down to the expected sale price. For these two aircraft, we recorded impairment charges totaling $6,199 and recorded maintenance revenue of $ 9,019 and other revenue of $764 during the three months ended March 31, 2013.
Our financial instruments, other than cash, consist principally of cash equivalents, restricted cash and cash equivalents, accounts receivable, accounts payable, amounts borrowed under financings and interest rate derivatives. The fair value of cash, cash equivalents, restricted cash and cash equivalents, accounts receivable and accounts payable approximates the carrying value of these financial instruments because of their short-term nature.

10


Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
March 31, 2013



The fair values of our securitizations which contain third party credit enhancements are estimated using a discounted cash flow analysis, based on our current incremental borrowing rates of borrowing arrangements that do not contain third party credit enhancements. The fair values of our ECA term financings and bank financings are estimated using a discounted cash flow analysis, based on our current incremental borrowing rates for similar types of borrowing arrangements. The fair value of our Senior Notes is estimated using quoted market prices.
 The carrying amounts and fair values of our financial instruments at December 31, 2012 and March 31, 2013 are as follows:
 
December 31, 2012
 
March 31, 2013
 
Carrying  Amount
of Asset
(Liability)
 
Fair Value
of Asset
(Liability)
 
Carrying  Amount
of Asset
(Liability)
 
Fair Value
of Asset
(Liability)
Securitizations and term debt financings
$
(1,082,368
)
 
$
(962,960
)
 
$
(1,016,112
)
 
$
(908,335
)
ECA term financings
(652,916
)
 
(671,966
)
 
(639,866
)
 
(657,864
)
Bank financings
(112,750
)
 
(116,272
)
 
(109,375
)
 
(112,497
)
Senior Notes
(1,750,642
)
 
(1,905,565
)
 
(1,750,613
)
 
(1,961,783
)
All of our financial instruments are classified as Level 2 with the exception of our Senior Notes, which are classified as Level 1.

Note 3. Lease Rental Revenues and Flight Equipment Held for Lease
Minimum future annual lease rentals contracted to be received under our existing operating leases of flight equipment at March 31, 2013 were as follows:
Year Ending December 31,
Amount
Remainder of 2013
$
436,196

2014
500,121

2015
438,924

2016
380,948

2017
269,145

Thereafter
682,456

Total
$
2,707,790

Geographic concentration of lease rental revenue earned from flight equipment held for lease was as follows:
 
Three Months Ended March 31,
Region
2012
 
2013
Europe
43
%
 
34
%
Asia and Pacific
28
%
 
37
%
North America
12
%
 
9
%
Latin America
6
%
 
9
%
Middle East and Africa
11
%
 
11
%
Total
100
%
 
100
%
The classification of regions in the tables above and in the table and discussion below is determined based on the principal location of the lessee of each aircraft.


11


Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
March 31, 2013



For the three months ended March 31, 2012 , one customer accounted for 10% of lease rental revenue and four additional customers accounted for a combined 26% of lease rental revenue. No other customer accounted for more than 5% of lease rental revenue.
For the three months ended March 31, 2013 , one customer accounted for 6% of lease rental revenue and two additional customers accounted for a combined 12% of lease rental revenue. No other customer accounted for more than 5% of lease rental revenue.
The following table sets forth revenue attributable to individual countries representing at least 10% of total revenue (including maintenance revenue) based on each lessee’s principal place of business:
 
Three Months Ended March 31,
 
2012
 
2013
Country
Revenue
 
Percent of
Total
Revenue
 
Number
of
Lessees
 
Revenue
 
Percent of
Total
Revenue
 
Number
of
Lessees
China
$
18,219

 
11
%
 
4

 
$
19,303

 
11
%
 
4

United States
27,513

 
17
%
 
5

 
17,919

 
10
%
 
6


Geographic concentration of net book value of flight equipment (includes net book value of flight equipment held for lease, net investment in finance leases and flight equipment held for sale) was as follows:
 
December 31, 2012
 
March 31, 2013
Region
Number
of
Aircraft
 
Net Book
Value %
 
Number
of
Aircraft
 
Net Book
Value %
Europe
68

 
35
%
 
64

 
33
%
Asia and Pacific
50

 
34
%
 
51

 
35
%
North America
17

 
10
%
 
16

 
9
%
Latin America
14

 
8
%
 
13

 
7
%
Middle East and Africa
8

 
12
%
 
8

 
13
%
Off-lease
2

(1)  
1
%
 
6

(2  
)  
3
%
Total
159

 
100
%
 
158

 
100
%
 

(1)
Includes one Boeing 767-300ER that was sold in the first quarter of 2013 and one Boeing 747-400BDSF aircraft for which we have a commitment for lease.
(2)
Includes one Airbus A330-200 for which we have a commitment for lease, one Airbus A319-100 for which we have a commitment for sale, one Boeing 767-300ER that was sold in the second quarter of 2013, one Boeing 747-400BDSF for which we have a commitment for lease and two Boeing 737-700 aircraft, one of which was delivered to a customer in Europe in the second quarter of 2013 and one of which is subject to a commitment for lease.

The following table sets forth net book value of flight equipment (includes net book value of flight equipment held for lease, net investment in finance leases and flight equipment held for sale) attributable to individual countries representing at least 10% of net book value of flight equipment based on each lessee’s principal place of business as of:
 
December 31, 2012
 
March 31, 2013
Country
Net Book
Value
 
Net Book
Value %
 
Number of
Lessees
 
Net Book
Value
 
Net Book
Value %
 
Number of
Lessees
China
$
515,194

 
11
%
 
4

 
$
508,695

 
11
%
 
4




12


Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
March 31, 2013



  At December 31, 2012 and March 31, 2013 , the amounts of lease incentive liabilities recorded in maintenance payments on the consolidated balance sheets were $15,587 and $15,488 , respectively.

Note 4. Net Investment in Finance Leases
At March 31, 2013 , our net investment in finance leases represents six aircraft leased to a customer in Germany and four aircraft leased to two customers in the United States. The following table lists the components of our net investment in finance leases at March 31, 2013 :
 
 
Amount
Total lease payments to be received
 
$
136,151

Less: Unearned income
 
(73,700
)
Estimated residual values of leased flight equipment (unguaranteed)
 
67,250

    Net investment in finance leases
 
$
129,701


At March 31, 2013 , minimum future lease payments on finance leases are as follows:
Year Ending December 31,
 
Amount
Remainder of 2013
 
$
18,577

2014
 
24,222

2015
 
24,222

2016
 
24,222

2017
 
23,307

2018
 
12,467

Thereafter
 
9,134

    Total
 
$
136,151


Note 5. Variable Interest Entities
Aircastle consolidates nine VIEs of which it is the primary beneficiary. The operating activities of these VIEs are limited to acquiring, owning, leasing, maintaining, operating and, under certain circumstances, selling the 22 aircraft discussed below.
Securitizations
In connection with Securitization No. 1, two of our subsidiaries, ACS Aircraft Finance Ireland plc (“ACS Ireland”) and ACS Aircraft Finance Bermuda Limited (“ACS Bermuda”) issued Class A-1 notes, and each has fully and unconditionally guaranteed the other’s obligations under the notes. In connection with Securitization No. 2, two of our subsidiaries, ACS Aircraft Finance Ireland 2 Limited (“ACS Ireland 2”) and ACS 2007-1 Limited (“ACS Bermuda 2”) issued Class A-1 notes and each has fully and unconditionally guaranteed the other’s obligations under the notes. ACS Bermuda and ACS Bermuda 2 are collectively referred to as the “ACS Bermuda Group.”
Aircastle is the primary beneficiary of ACS Ireland and ACS Ireland 2 (collectively, the “ACS Ireland VIEs”), as we have both the power to direct the activities of the VIEs that most significantly impact the economic performance of such VIEs and we bear the significant risk of loss and participate in gains through Class E-1 Securities. Although Aircastle has not guaranteed the ACS Ireland VIEs debt, Aircastle wholly owns the ACS Bermuda Group which has fully and unconditionally guaranteed the ACS Ireland VIEs obligations. The activity that most significantly impacts the economic


13


Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
March 31, 2013


performance is the leasing of aircraft. Aircastle Advisor (Ireland) Limited (Aircastle’s wholly owned subsidiary) is the remarketing servicer and is responsible for the leasing of the aircraft. An Irish charitable trust owns 95% of the common shares of the ACS Ireland VIEs. The Irish charitable trust’s risk is limited to its annual dividend of $2 per VIE. At March 31, 2013 , the assets of the two VIEs include 12 aircraft transferred into the VIEs at historical cost basis in connection with Securitization No. 1 and Securitization No. 2.
The combined assets of the ACS Ireland VIEs as of March 31, 2013 are $339,556 . The combined liabilities of the ACS Ireland VIEs, net of $72,068 Class E-1 Securities held by the Company, which is eliminated in consolidation, as of March 31, 2013 are $303,786 .

ECA Term Financings
Aircastle, through various subsidiaries, each of which is owned by a charitable trust (such entities, collectively the “Air Knight VIEs”), entered into eleven different twelve -year term loans, which are supported by guarantees from Compagnie Francaise d’ Assurance pour le Commerce Exterieur, (“COFACE”), the French government sponsored export credit agency (“ECA”). These loans provided for the financing for eleven new Airbus Model A330-200 aircraft. In June 2011, we repaid one of these loans from the proceeds of the sale of the related aircraft. At March 31, 2013 , Aircastle had ten outstanding term loans with guarantees from COFACE. We refer to these COFACE-supported financings as “ECA Term Financings.”
Aircastle is the primary beneficiary of the Air Knight VIEs, as we have the power to direct the activities of the VIEs that most significantly impact the economic performance of such VIEs and we bear the significant risk of loss and participate in gains through a finance lease. The activity that most significantly impacts the economic performance is the leasing of aircraft of which our wholly owned subsidiary is the servicer and is responsible for managing the relevant aircraft. There is a cross collateralization guarantee between the Air Knight VIEs. In addition, Aircastle guarantees the debt of the Air Knight VIEs.
The only assets that the Air Knight VIEs have on their books are financing leases that are eliminated in the consolidated financial statements and deferred financing costs. The related aircraft, with a net book value as of March 31, 2013 were $820,748 , are included in our flight equipment held for lease. The consolidated debt outstanding of the Air Knight VIEs as of March 31, 2013 is $639,866 .

Note 6. Secured and Unsecured Debt Financings
The outstanding amounts of our secured and unsecured term debt financings were as follows:

14


Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
March 31, 2013


 
At December 31, 2012
 
At March 31, 2013
Debt Obligation
Outstanding
Borrowings
 
Outstanding
Borrowings
 
Interest Rate (1)
 
Final Stated
Maturity (2)
Secured Debt Financings:
 
 
 
 
 
 
 
Securitization No. 1
$
309,505

 
$
276,880

 
0.47%
 
06/20/31
Securitization No. 2
772,863

 
739,232

 
0.51%
 
06/14/37
ECA Term Financings
652,916

 
639,866

 
1.99% to 3.96%
 
12/3/21 to 11/30//24
Bank Financings
112,750

 
109,375

 
4.22% to 4.57%
 
9/15/15 to 10/26/17
Total secured debt financings
1,848,034

 
1,765,353

 
 
 
 
 
 
 
 
 
 
 
 
Unsecured Debt Financings:
 
 
 
 
 
 
 
Senior Notes due 2017
500,000

 
500,000

 
6.75%
 
04/15/17
Senior Notes due 2018
450,642

 
450,613

 
9.75%
 
08/01/18
Senior Notes due 2019
500,000

 
500,000

 
6.250%
 
12/01/19
Senior Notes due 2020
300,000

 
300,000

 
7.625%
 
04/15/20
2012 Revolving Credit Facility

 

 
N/A
 
12/19/15
Total unsecured debt financings
1,750,642

 
1,750,613

 
 
 
 
 
 
 
 
 
 
 
 
Total secured and unsecured debt financings
$
3,598,676

 
$
3,515,966

 
 
 
 
 
(1)
Reflects the floating rate in effect at the applicable reset date plus the margin for Securitization No. 1, Securitization No. 2 and one of our ECA Term Financings. All other financings have a fixed rate.
(2)
For Securitizations No. 1 and No. 2, all cash flows available after expenses and interest are applied to debt amortization.

The following securitizations include liquidity facility commitments described in the table below: 
 
 
 
Available Liquidity
 
 
 
 
Facility
Liquidity Facility Provider
 
December 31,
2012
 
March 31,
2013
 
Unused
Fee
 
Interest Rate
on any Advances
Securitization No. 1
Crédit Agricole Corporate and Investment Bank
 
$
42,000

 
$
42,000

 
0.45%
 
1M Libor + 1.00
Securitization No. 2
HSH Nordbank AG
 
65,000

 
65,000

 
0.50%
 
1M Libor + 0.75
 

As of March 31, 2013 , we are in compliance with all applicable covenants in all of our financings.

Note 7. Dividends
The following table sets forth the quarterly dividends declared by our board of directors for the periods covered in this report: 
Declaration Date
Dividend
per Common
Share
 
Aggregate
Dividend
Amount
 
Record Date
 
Payment Date
February 17, 2012
$
0.150

 
$
10,865

 
February 29, 2012
 
March 15, 2012
May 2, 2012
$
0.150

 
$
10,847

 
May 31, 2012
 
June 15, 2012
August 1, 2012
$
0.150

 
$
10,464

 
August 31, 2012
 
September 14, 2012
November 5, 2012
$
0.165

 
$
11,493

 
November 30, 2012
 
December 14, 2012
February 18, 2013
$
0.165

 
$
11,268

 
March 4, 2013
 
March 15, 2013

15


Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
March 31, 2013



Note 8.  Shareholders' Equity
During January 2013, we repurchased 679,292 common shares at an aggregate cost of $8,579 including commissions. The remaining dollar value of common shares that may be purchased under the program approved by the Company's Board of Directors on November 5, 2012 is $30,000 .

Note 9. Earnings Per Share
We include all common shares granted under our incentive compensation plan which remain unvested (“restricted common shares”) and contain non-forfeitable rights to dividends or dividend equivalents, whether paid or unpaid (“participating securities”), in the number of shares outstanding in our basic earnings per share calculations using the two-class method. All of our restricted common shares are currently participating securities.
Under the two-class method, earnings per common share are computed by dividing the sum of distributed earnings allocated to common shareholders and undistributed earnings allocated to common shareholders by the weighted average number of common shares outstanding for the period. In applying the two-class method, distributed and undistributed earnings are allocated to both common shares and restricted common shares based on the total weighted average shares outstanding during the period as follows: 
 
Three Months Ended March 31,
 
2012
 
2013
Weighted-average shares:
 
 
 
Common shares outstanding
71,696,939

 
67,896,481

Restricted common shares
630,038

 
492,906

Total weighted-average shares
72,326,977

 
68,389,387

 
 
 
 
Percentage of weighted-average shares:
 
 
 
Common shares outstanding
99.13
%
 
99.28
%
Restricted common shares
0.87
%
 
0.72
%
Total
100.00
%
 
100.00
%

The calculations of both basic and diluted earnings per share are as follows: 

16


Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
March 31, 2013


 
Three Months Ended March 31,
 
2012
 
2013
Earnings (loss) per share – Basic:
 
 
 
Net income (loss)
$
32,602

 
$
23,064

Less: Distributed and undistributed earnings allocated to restricted common shares (a)
(284
)
 
(166
)
Earnings (loss) available to common shareholders – Basic
$
32,318

 
$
22,898

 
 
 
 
Weighted-average common shares outstanding – Basic
71,696,939

 
67,896,481

 
 
 
 
Earnings (loss) per common share – Basic
$
0.45

 
$
0.34

 
 
 
 
Earnings (loss) per share – Diluted:
 
 
 
Net income (loss)
$
32,602

 
$
23,064

Less: Distributed and undistributed earnings allocated to restricted common shares(a)
(284
)
 
(166
)
Earnings (loss) available to common shareholders – Diluted
$
32,318

 
$
22,898

 
 
 
 
Weighted-average common shares outstanding – Basic
71,696,939

 
67,896,481

Effect of dilutive shares (b)

 

Weighted-average common shares outstanding – Diluted
71,696,939

 
67,896,481

 
 
 
 
Earnings (loss) per common share – Diluted
$
0.45

 
$
0.34

 
(a)
For the three months ended March 31, 2012 and 2013 , distributed and undistributed earnings to restricted shares is 0.87% and 0.72% , respectively, of net income. The amount of restricted share forfeitures for all periods present is immaterial to the allocation of distributed and undistributed earnings.
(b)
For the three months ended March 31, 2012 and 2013 , we had no dilutive shares.


Note 10. Income Taxes
Income taxes have been provided for based upon the tax laws and rates in countries in which our operations are conducted and income is earned. The Company received an assurance from the Bermuda Minister of Finance that it would be exempted from local income, withholding and capital gains taxes until March 2035. Consequently, the provision for income taxes recorded relates to income earned by certain subsidiaries of the Company which are located in, or earn income in, jurisdictions that impose income taxes, primarily the United States and Ireland.
The sources of income (loss) from continuing operations before income taxes for the three months ended March 31, 2012 and 2013 were as follows: 
 
Three Months Ended March 31,
 
2012
 
2013
U.S. operations
$
324

 
$
405

Non-U.S. operations
35,207

 
26,243

Total
$
35,531

 
$
26,648


All of our aircraft-owning subsidiaries that are recognized as corporations for U.S. tax purposes are non-U.S. corporations. These non-U.S. subsidiaries generally earn income from sources outside the United States and typically are not subject to U.S. federal, state or local income taxes unless they operate within the U.S., in which case they may be

17


Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
March 31, 2013


subject to federal, state and local income taxes. We also have a U.S. based subsidiary which provides management services to our non-U.S. subsidiaries and is subject to U.S. federal, state and local income taxes.
The consolidated income tax expense for the three months ended March 31, 2012 and 2013 was determined based upon estimates of the Company's consolidated effective income tax rates for the years ending December 31, 2012 and 2013, respectively.
The Company's effective tax rate for the three months ended March 31, 2012 was 8.2% compared to 13.5% for the three months ended March 31, 2013 . Movements in the effective tax rates are due primarily to changes in the proportion of the Company's earnings in taxable and non-tax jurisdictions. Because the geographic mix of pre-tax profits and losses in interim periods may not be reflective of full year results, this distorts our interim period effective tax rate.
Differences between statutory income tax rates and our effective income tax rates applied to pre-tax income consisted of the following: 
 
Three Months Ended March 31,
 
2012
 
2013
Notional U.S. federal income tax expense (benefit) at the statutory rate
$
12,436

 
$
9,327

U.S. state and local income tax, net
24

 
34

Non-U.S. operations:
 
 
 
Bermuda
(8,632
)
 
(3,876
)
Ireland
(30
)
 
(901
)
Other
(920
)
 
(1,094
)
Non-deductible expenses in the U.S.
55

 
102

Other
(4
)
 
(7
)
Income tax provision (benefit)
$
2,929

 
$
3,585



















18


Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
March 31, 2013


Note 11. Interest, Net
The following table shows the components of interest, net: 
 
Three Months Ended March 31,
 
2012
 
2013
Interest on borrowings, net settlements on interest rate derivatives, and other liabilities
$
44,969

 
$
48,591

Hedge ineffectiveness (gains) losses
(1,519
)
 
128

Amortization of interest rate derivatives related to deferred losses
4,071

 
8,274

Amortization of deferred financing fees
2,716

 
2,435

Interest Expense
50,237

 
59,428

Less interest income
(171
)
 
(276
)
Less capitalized interest
(1,085
)
 

Interest, net
$
48,981

 
$
59,152


Note 12. Commitments and Contingencies
At March 31, 2013 , we had commitments to acquire five aircraft during the remainder of 2013 for $210,400 .

Note 13. Derivatives
The objective of our hedging policy is to adopt a risk averse position with respect to changes in interest rates. Accordingly, we have entered into a number of interest rate derivatives to hedge the current and expected future interest rate payments on our variable rate debt. Interest rate derivatives are agreements in which a series of interest rate cash flows are exchanged with a third party over a prescribed period. The notional amount on an interest rate derivative is not exchanged. Our interest rate derivatives typically provide that we make fixed rate payments and receive floating rate payments to convert our floating rate borrowings to fixed rate obligations to better match the largely fixed rate cash flows from our investments in flight equipment.

19


Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
March 31, 2013



We held the following interest rate derivatives as of March 31, 2013
 
Derivative Liabilities
Hedged Item
Current
Notional
Amount
 
Effective
Date
 
Maturity
Date
 
Future
Maximum
Notional
Amount
 
Floating
Rate
 
Fixed
Rate
 
Balance Sheet
Location
 
Fair
Value
Interest rate derivatives designated as cash flow hedges:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Securitization No. 1
$
233,605

 
Jun-06
 
Jun-16
 
$
233,605

 
1M LIBOR
+ 0.27%
 
5.78%
 
Fair value of
derivative
liabilities
 
$
33,397

Securitization No. 2
560,999

 
Jun-12
 
Jun-17
 
560,999

 
1M LIBOR
 
1.26%
to
1.28%
 
Fair value of
derivative
liabilities
 
10,404

Total interest rate derivatives designated as cash flow hedges
$
794,604

 
 
 
 
 
$
794,604

 
 
 
 
 
 
 
$
43,801

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest rate derivatives not designated as cash flow hedges:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Securitization No. 1
91,951

 
Jun-06
 
Jun-16
 
91,951

 
1M LIBOR + 0.27%
 
5.78%
 
Fair value of derivative liabilities
 
13,146

Total interest rate derivatives not designated as cash flow hedges
91,951

 
 
 
 
 
91,951

 
 
 
 
 
 
 
13,146

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total interest rate derivative liabilities
$
886,555

 
 
 
 
 
$
886,555

 
 
 
 
 
 
 
$
56,947

 

The weighted average interest pay rates of these derivatives at December 31, 2012 and March 31, 2013 were 2.91% and 2.93% , respectively.
For the three months ended March 31, 2013 , the amount of loss reclassified from accumulated other comprehensive income (“OCI”) into interest expense related to net interest settlements on active interest rate derivatives was $4,676 . The amount of loss expected to be reclassified from OCI into interest expense over the next 12 months related to net interest settlements on active interest rate derivatives is $16,975 .
Our interest rate derivatives involve counterparty credit risk. As of March 31, 2013 , our interest rate derivatives are held with the following counterparties: JP Morgan Chase Bank NA, Citibank Canada NA, and Wells Fargo Bank NA. All of our counterparties or guarantors of these counterparties are considered investment grade (senior unsecured ratings of Baa2 or above) by Moody’s Investors Service. All are also considered investment grade (long-term foreign issuer ratings of A- or above) by Standard and Poor’s. We do not anticipate that any of these counterparties will fail to meet their obligations.
In addition to the derivative liability above, another component of the fair value of our interest rate derivatives is accrued interest. As of March 31, 2013 , accrued interest payable included in accounts payable, accrued expenses, and other liabilities on our consolidated balance sheet was $985 related to interest rate derivatives designated as cash flow hedges and $230 related to interest rate derivatives not designated as cash flow hedges.
Following is the effect of interest rate derivatives on the statement of financial performance for the three months ended March 31, 2013





20


Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
March 31, 2013



Effective Portion
 
Ineffective Portion
Derivatives in
ASC 815
Cash Flow
Hedging
Relationships
 
Amount of
Gain or (Loss)
Recognized in
OCI on
Derivative
(a)
 
Location of
Gain or (Loss)
Reclassified from
Accumulated
OCI into Income
 
Amount of
Gain or (Loss)
Reclassified from
Accumulated
OCI into Income  (b)
 
Location of
Gain or (Loss)
Recognized in
Income on Derivative
 
Amount of
Gain or (Loss)
Recognized in
Income on
Derivative
(c)
Interest rate derivatives
 
$(725)
 
Interest expense
 
$(12,825)
 
Interest expense
 
$(128)
 
(a)
This represents the change in fair market value of our interest rate derivatives since year end, net of taxes, offset by the amount of actual cash paid related to the net settlements of the interest rate derivatives for the three months ended March 31, 2013 .
(b)
This represents the amount of actual cash paid, net of taxes, related to the net settlements of the interest rate derivatives for the three months ended March 31, 2013 plus any effective amortization of net deferred interest rate derivative losses.
(c)
This represents both realized and unrealized ineffectiveness incurred during the three months ended March 31, 2013 .
Derivatives Not Designated as Hedging Instruments under ASC 815
 
Location of Gain
or (Loss)
Recognized in Income
On Derivative
 
Amount of Gain
or (Loss)
Recognized in Income on
Derivative
Interest rate derivatives
 
Other income (expense)
 
$
1,215

On an ongoing basis, terminated swap notionals are evaluated against debt forecasts. To the extent that interest payments are deemed remote to occur, deferred gains or losses are accelerated into interest expense as applicable.
For the three months ended March 31, 2013 , the amount of deferred net loss reclassified from OCI into interest expense related to our terminated interest rate derivatives was $7,933 . The amount of deferred net loss expected to be reclassified from OCI into interest expense over the next 12 months related to our terminated interest rate derivatives is $27,759 of which $17,663 relates to Term Financing No. 1 interest rate derivatives terminated in 2012, $1,608 relates to Term Financing No. 1 derivatives terminated in 2008, $7,262 relates to ECA Term Financings for New A330 Aircraft and $1,227 relates to other financings.

For the three months ended March 31, 2013, the amount of effective deferred loss reclassified from OCI into interest expense related to our undesignated active interest rate derivative was $ 341 . The amount of effective deferred loss expected to be reclassified from OCI into interest expense over the next 12 months related to our undesignated active interest rate derivative under our Securitization No. 1 is $ 1,678 .
The following table summarizes amounts charged directly to the consolidated statement of income for the three months ended March 31, 2012 and 2013 , respectively, related to our interest rate derivatives:
 
Three Months Ended March 31,
 
2012
 
2013
Interest Expense:
 
 
 
Hedge ineffectiveness (gains) losses
$
(1,519
)
 
$
128

Amortization:
 
 
 
Amortization of loss of designated interest rate derivative

 
341

Amortization of deferred losses
4,071

 
7,933

Total Amortization
4,071

 
8,274

Total charged to interest expense
$
2,552

 
$
8,402

 
 
 
 
Other Income (Expense):
 
 
 
Mark to market (losses) gains on undesignated interest rate derivatives
$
(113
)
 
$
1,215

Total charged to other income (expense)
$
(113
)
 
$
1,215


21


Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
March 31, 2013



Note 14. Other Assets
The following table describes the principal components of other assets on our consolidated balance sheet as of:
 
December 31,
2012
 
March 31,
2013
Debt investments
$
40,388

 
$

Deferred debt issuance costs, net of amortization of $54,146 and $56,609, respectively
55,087

 
53,065

Deferred federal income tax asset
22,207

 
21,954

Lease incentives and lease premiums, net of amortization of $26,902 and $29,250, respectively
62,822

 
60,716

Flight equipment held for sale

 
18,650

Other assets
6,260

 
14,988

Total other assets
$
186,764

 
$
169,373

 

Note 15. Accounts Payable, Accrued Expenses and Other Liabilities
The following table describes the principal components of accounts payable, accrued expenses and other liabilities recorded on our consolidated balance sheet as of:
 
December 31,
2012
 
March 31,
2013
Accounts payable and accrued expenses
$
21,507

 
$
13,462

Deferred federal income tax liability
48,217

 
50,275

Accrued interest payable
38,273

 
49,538

Lease discounts, net of amortization of $7,328 and $7,546 respectively
596

 
674

Total accounts payable, accrued expenses and other liabilities
$
108,593

 
$
113,949


Note 16. Accumulated Other Comprehensive Income
The following table describes the principal components of accumulated other comprehensive income recorded on our consolidated balance sheet as of:
Changes in accumulated other comprehensive income by component (a)
March 31, 2013
Beginning balance
$
(126,290
)
 
 
  Amount recognized in other comprehensive income on derivatives, net of tax of $6
(725
)
  Amounts reclassified from accumulated other comprehensive income into income, net of tax of $125
12,825

Net current period other comprehensive income
12,100

 
 
Ending balance
$
(114,190
)

(a) All amounts are net of tax. Amounts in parentheses indicate debits.








22


Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
March 31, 2013



Reclassifications from accumulated other comprehensive income (a)
March 31, 2013
 
 
Losses on cash flow hedges
 
  Amount of effective amortization of net deferred interest rate derivative losses (b)
8,274

  Effective amount of net settlements of interest rate derivatives, net of tax of $125 (b)
4,551

Amount of loss reclassified from accumulated other comprehensive income into income (c)
12,825


(a) All amounts are net of tax.
(b) Included in interest expense.
(c) This represents the effective amounts of actual cash paid related to the net settlements of the interest rate derivatives plus any effective amortization of net deferred interest rate derivative losses (see Note 13. - Derivatives).



23


ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This management’s discussion and analysis of financial condition and results of operations contains forward-looking statements that involve risks, uncertainties and assumptions. You should read the following discussion in conjunction with our historical consolidated financial statements and the notes thereto appearing elsewhere in this report. The results of operations for the periods reflected herein are not necessarily indicative of results that may be expected for future periods, and our actual results may differ materially from those discussed in the forward-looking statements as a result of various factors, including but not limited to those described under “Risk Factors” and included in our Annual Report on Form 10-K for the year ended December 31, 2012 filed with the Securities and Exchange Commission (the “SEC”). Please see “Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995” for a discussion of the uncertainties, risks and assumptions associated with these statements. Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States, or US GAAP, and, unless otherwise indicated, the other financial information contained in this report has also been prepared in accordance with US GAAP. Unless otherwise indicated, all references to “dollars” and “$” in this report are to, and all monetary amounts in this report are presented in, U.S. dollars.
Certain items in this Quarterly Report on Form 10-Q (this “report”), and other information we provide from time to time, may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 including, but not necessarily limited to, statements relating to our ability to acquire, sell, lease or finance aircraft, raise capital, pay dividends, and increase revenues, earnings, EBITDA, Adjusted EBITDA and Adjusted Net Income and the global aviation industry and aircraft leasing sector. Words such as “anticipates,” “expects,” “intends,” “plans,” “projects,” “believes,” “may,” “will,” “would,” “could,” “should,” “seeks,” “estimates” and variations on these words and similar expressions are intended to identify such forward-looking statements. These statements are based on management’s current expectations and beliefs and are subject to a number of factors that could lead to actual results materially different from those described in the forward-looking statements; Aircastle can give no assurance that its expectations will be attained. Accordingly, you should not place undue reliance on any forward-looking statements contained in this report. Factors that could have a material adverse effect on our operations and future prospects or that could cause actual results to differ materially from Aircastle expectations include, but are not limited to, capital markets disruption or volatility which could adversely affect our continued ability to obtain additional capital to finance new investments or our working capital needs; government fiscal or tax policies, general economic and business conditions or other factors affecting demand for aircraft or aircraft values and lease rates; our continued ability to obtain favorable tax treatment in Bermuda, Ireland and other jurisdictions; our ability to pay dividends; high or volatile fuel prices, lack of access to capital, reduced load factors and/or reduced yields, operational disruptions caused by political unrest in North Africa, the Middle East or elsewhere, and other factors affecting the creditworthiness of our airline customers and their ability to continue to perform their obligations under our leases; termination payments on our interest rate hedges; and other risks detailed from time to time in Aircastle’s filings with the SEC, including as previously disclosed in Aircastle’s 2012 Annual Report on Form 10-K, and elsewhere in this report. In addition, new risks and uncertainties emerge from time to time, and it is not possible for Aircastle to predict or assess the impact of every factor that may cause its actual results to differ from those contained in any forward-looking statements. Such forward-looking statements speak only as of the date of this report. Aircastle Limited expressly disclaims any obligation to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in its expectations with regard thereto or change in events, conditions or circumstances on which any statement is based.

WEBSITE AND ACCESS TO COMPANY’S REPORTS
The Company’s Internet website can be found at www.aircastle.com. Our annual reports on Forms 10-K, quarterly reports on Forms 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (the "Exchange Act") are available free of charge through our website under “Investors — SEC Filings” as soon as reasonably practicable after they are electronically filed with, or furnished to, the SEC.
Statements and information concerning our status as a Passive Foreign Investment Company (“PFIC”) for U.S. taxpayers are also available free of charge through our website under “Investors — SEC Filings”.
Our Corporate Governance Guidelines, Code of Business Conduct and Ethics, and board of directors committee charters (including the charters of the Audit Committee, Compensation Committee, and Nominating and Corporate Governance Committee) are available free of charge through our website under “Investors — Corporate Governance”. In addition, our

24


Code of Ethics for the Chief Executive and Senior Financial Officers, which applies to our Chief Executive Officer, Chief Financial Officer, Chief Accounting Officer, Treasurer and Controller, is available in print, free of charge, to any shareholder upon request to Investor Relations, Aircastle Limited, c/o Aircastle Advisor LLC, 300 First Stamford Place, 5th Floor, Stamford, Connecticut 06902.
The information on the Company’s website is not part of, or incorporated by reference, into this report, or any other report we file with, or furnish to, the SEC.

OVERVIEW
We acquire, lease, and sell high-utility commercial jet aircraft. High-utility aircraft are generally modern, operationally efficient jets with many operators and long useful lives. As of March 31, 2013 , our portfolio consisted of 158 aircraft leased to 66 lessees located in 36 countries. Our aircraft fleet is managed by an experienced team based in the United States, Ireland and Singapore. Typically, our aircraft are subject to net leases whereby the lessee is generally responsible for maintaining the aircraft and paying operational, maintenance and insurance costs, although in a majority of cases, we are obligated to pay a portion of specified maintenance or modification costs. From time to time, we also make investments in other aviation assets, including debt investments secured by commercial jet aircraft. Our revenues and income from continuing operations for the three months ended March 31, 2013 were $176.2 million and $23.1 million, respectively.
The commercial jet aircraft market has grown 41% over the past 10 years. For the first three months of 2013, air traffic data demonstrated improvement in the passenger markets while the air cargo markets shrank. According to the International Air Transport Association, global passenger traffic increased by 5.9% while air cargo traffic, measured in freight ton kilometers, decreased 2.3% as compared to the same period in 2012. Increasing global economic activity together with a proliferation of air travel in emerging economies has driven the long-term growth in the commercial jet aircraft market. At the same time, the share of the world's commercial jet aircraft owned by leasing companies has expanded to 40% as compared to 25% ten years ago. However, aircraft trading volumes during 2012 were low and competition for aircraft investments, particularly newer, narrow-body aircraft, increased over the past year.
The overall financial environment has improved over the past two to three years and aircraft owners have generally benefited from the low interest rate environment. Particularly strong conditions in the debt capital markets have provided select borrowers with access to such markets attractively priced, flexible financing that gives them a competitive advantage over airlines and lessors that lack similar access. Moreover, traditional asset-based financing for aircraft from banks remains limited.
We plan to grow our business and profits over the long-term by continuing to employ the following elements of our fundamental business strategy:
Investing in additional commercial jet aircraft and other aviation assets when attractively priced opportunities and cost effective financing are available. We believe the large and growing aircraft market, together with ongoing fleet replacements, will provide significant acquisition opportunities. We regularly evaluate potential aircraft acquisitions and expect to continue our investment program through additional passenger and cargo aircraft purchases when attractively priced opportunities and cost effective financing are available.
Maintaining efficient access to financing from multiple sources. We finance our aircraft acquisitions using various long-term debt structures obtained through several different markets to obtain cost effective financing. In this regard, we believe having corporate credit ratings from Standard & Poor’s and Moody’s enables us to access a broader pool of capital than many of our peers, enhancing our competitiveness and ability to source attractive investment opportunities. This, in turn, will allow us to grow our business and profits.
Leveraging our efficient operating platform and strong operating track record. We believe our team's capabilities in the global aircraft leasing market place us in a favorable position to explore new income-generating activities and we intend to continue to focus our efforts in areas where we believe we have competitive advantages and on transactions that offer attractive risk/return profiles after taking into consideration available financing options.
Reinvesting a portion of the cash flows generated by our business in additional aviation assets and/or our own debt and equity securities. Aircraft have finite useful lives, but typically provide reliable cash flows. Our strategy is to reinvest a portion of our cash flows from operations and asset sales in our business to grow our asset base and earnings bases.

25


Selling assets when attractive opportunities arise and for portfolio management purposes.  We pursue asset sales as opportunities over the course of the business cycle with the aim of realizing profits and reinvesting proceeds where more accretive investments are available. We also use asset sales for portfolio management purposes such as reducing lessee specific concentrations and lowering residual value exposures to certain aircraft types and also to exit from an investment when a sale or part-out would provide the greatest expected cash flow for us.
We intend to pay quarterly dividends to our shareholders based on the company’s sustainable earnings levels; however, our ability to pay quarterly dividends will depend upon many factors, including those as previously disclosed in Aircastle’s 2012 Annual Report on Form 10-K. On February 18, 2013, our board of directors declared a regular quarterly dividend of $0.165 per common share, or an aggregate of $11.3 million, for the three months ended March 31, 2013, which was paid on March 15, 2013 to holders of record on March 4, 2013. These dividends may not be indicative of the amount of any future dividends.

Revenues
Our revenues are comprised primarily of operating lease rentals on flight equipment held for lease, revenue from retained maintenance payments related to lease expirations, lease termination payments, lease incentive amortization and interest recognized from finance leases.
Typically, our aircraft are subject to net operating leases whereby the lessee pays lease rentals and is generally responsible for maintaining the aircraft and paying operational, maintenance and insurance costs, although in a majority of cases we are obligated to pay a portion of specified maintenance or modification costs. Our aircraft lease agreements generally provide for the periodic payment of a fixed amount of rent over the life of the lease and the amount of the contracted rent will depend upon the type, age, specification and condition of the aircraft and market conditions at the time the lease is committed. The amount of rent we receive will depend on a number of factors, including the credit-worthiness of our lessees and the occurrence of delinquencies, restructurings and defaults. Our lease rental revenues are also affected by the extent to which aircraft are off-lease and our ability to remarket aircraft that are nearing the end of their leases in order to minimize their off-lease time. Our success in re-leasing aircraft is affected by market conditions relating to our aircraft and by general industry conditions and trends. An increase in the percentage of off-lease aircraft or a reduction in lease rates upon remarketing would negatively impact our revenues.
Under an operating lease, the lessee will be responsible for performing maintenance on the relevant aircraft and will typically be required to make payments to us for heavy maintenance, overhaul or replacement of certain high-value components of the aircraft. These maintenance payments are based on hours or cycles of utilization or on calendar time, depending upon the component, and would be made either monthly in arrears or at the end of the lease term. For maintenance payments made monthly in arrears during a lease term, we will typically be required to reimburse all or a portion of these payments to the lessee upon their completion of the relevant heavy maintenance, overhaul or parts replacement. We record maintenance payments paid by the lessee during a lease as accrued maintenance liabilities in recognition of our obligation in the lease to refund such payments, and therefore we do not recognize maintenance revenue during the lease. Maintenance revenue recognition would occur at the end of a lease, when we are able to determine the amount, if any, by which reserve payments received exceed the amount we are required under the lease to reimburse to the lessee for heavy maintenance, overhaul or parts replacement. The amount of maintenance revenue we recognize in any reporting period is inherently volatile and is dependent upon a number of factors, including the timing of lease expiries, including scheduled and unscheduled expiries, the timing of maintenance events and the utilization of the aircraft by the lessee.
Many of our leases contain provisions which may require us to pay a portion of the lessee’s costs for heavy maintenance, overhaul or replacement of certain high-value components. We account for these expected payments as lease incentives, which are amortized as a reduction of revenue over the life of the lease. We estimate the amount of our portion for such costs, typically for the first major maintenance event for the airframe, engines, landing gear and auxiliary power units, expected to be paid to the lessee based on assumed utilization of the related aircraft by the lessee, the anticipated cost of the maintenance event and the estimated amounts the lessee is responsible to pay.
This estimated lease incentive is not recognized as a lease incentive liability at the inception of the lease. We recognize the lease incentive as a reduction of lease revenue on a straight-line basis over the life of the lease, with the offset being recorded as a lease incentive liability which is included in maintenance payments on the balance sheet. The payment to the lessee for the lease incentive liability is first recorded against the lease incentive liability and any excess above the lease

26


incentive liability is recorded as a prepaid lease incentive asset which is included in other assets on the balance sheet and continues to amortize over the remaining life of the lease.

2013 Lease Expirations and Lease Placements
Scheduled lease expirations - placements: We started the year with 19 aircraft having scheduled lease expirations in 2013 and we have leased, extended or sold three of these aircraft. The remaining 16 aircraft that we are marketing for lease or sale represented 4.9% of our total net book value of flight equipment (including flight equipment held for lease, net investment in finance leases and flight equipment held for sale) at March 31, 2013.
Other placement activity: We also placed the following aircraft since the beginning of the year:
one Airbus Model A330-200 aircraft, one Boeing Model 747-400 converted freighter and one Boeing Model 737-700 aircraft for which we have lease commitments;
one Boeing Model 737-700 aircraft that we placed on lease;
two Boeing Model 767-300ER aircraft that we sold for part out; and
one Airbus Model A319-100 aircraft for which we a have commitment for a part out sale.

2014-2017 Lease Expirations and Lease Placements
Taking into account lease and sale commitments, we currently have the following number of aircraft with lease expirations scheduled in the period 2014-2017 representing the percentage of our net book value of flight equipment held for lease at March 31, 2013 specified below:
2014: 31 aircraft, representing 14%;
2015: 18 aircraft, representing 7%;
2016: 23 aircraft, representing 10%; and
2017: 25 aircraft, representing 20%.

Operating Expenses
Operating expenses are comprised of depreciation of flight equipment held for lease, interest expense, selling, general and administrative expenses, aircraft impairment charges and maintenance and other costs. Because our operating lease terms generally require the lessee to pay for operating, maintenance and insurance costs, our portion of maintenance and other costs relating to aircraft reflected in our statement of income primarily relates to expenses for unscheduled lease terminations.

Income Tax Provision
We have obtained an assurance from the Minister of Finance of Bermuda under the Exempted Undertakings Tax Protection Act 1966 that, in the event that any legislation is enacted in Bermuda imposing any tax computed on profits or income, or computed on any capital asset, gain or appreciation or any tax in the nature of estate duty or inheritance tax, such tax shall not, until March 2035, be applicable to us or to any of our operations or to our shares, debentures or other obligations except insofar as such tax applies to persons ordinarily resident in Bermuda or to any taxes payable by us in respect of real property owned or leased by us in Bermuda. Consequently, the provision for income taxes recorded relates to income earned by certain subsidiaries of the Company which are located in, or earn income in, jurisdictions that impose income taxes, primarily Ireland and the United States.
All of our aircraft-owning subsidiaries that are recognized as corporations for U.S. tax purposes are non-U.S. corporations. These non-U.S. subsidiaries generally earn income from sources outside the United States and typically are not subject to U.S. federal, state or local income taxes unless they operate within the U.S., in which case they may be subject to federal, state and local income taxes. We also have a U.S. based subsidiary which provides management services to our

27


non-U.S. subsidiaries and is subject to U.S. federal, state and local income taxes. In addition, those subsidiaries that are resident in Ireland are subject to Irish tax.

Acquisitions and Disposals
Thus far in 2013, we have acquired or committed to acquire ten aircraft for approximately $450 million.
During the first quarter of 2013, the aggregate sales price for flight equipment sold was $19.8 million, which resulted in a net gain of $1.2 million. We repaid debt associated with this flight equipment in the amount of $9.5 million.

The following table sets forth certain information with respect to the aircraft owned by us as of March 31, 2013:
AIRCASTLE AIRCRAFT INFORMATION (dollars in millions)
 
Owned
Aircraft as  of
March 31,  2013 (1)
Flight Equipment
$
4,693

Unencumbered Flight Equipment
2,059

Number of Aircraft
158

Number of Unencumbered Aircraft
72

Number of Lessees
66

Number of Countries
36

Weighted Average Age – Passenger (years) (2)
10.7

Weighted Average Age – Freighter (years) (2)
11.3

Weighted Average Age – Combined (years) (2)
10.9

Weighted Average Remaining Passenger Lease Term (years) (3)
4.6

Weighted Average Remaining Cargo Lease Term (years) (3)
5.3

Weighted Average Remaining Combined Lease Term (years) (3)
4.8

Weighted Average Fleet Utilization during the three months ended 4)
97
%
Portfolio Yield for the three months ended (5)
13.6
%
 
(1)
Calculated using net book value of flight equipment held for lease, net investment in finance leases and flight equipment held for sale at period end.
(2)
Weighted average age (years) by net book value.
(3)
Weighted average remaining lease term (years) by net book value.
(4)
Aircraft on-lease days as a percent of total days in period weighted by net book value, excluding aircraft in freighter conversion.
(5)
Lease rental revenue for the period as a percent of the average net book value of flight equipment held for lease for the period; quarterly information is annualized.

Our owned aircraft portfolio as of March 31, 2013 is listed in Exhibit 99.1 to this report.



28


PORTFOLIO DIVERSIFICATION
 
 
Owned Aircraft as  of
March 31, 2013
 
Number of
Aircraft
 
% of Net
Book  Value (1)
Aircraft Type
 
 
 
Passenger:
 
 
 
Narrowbody
93

 
37
%
Midbody
37

 
30
%
Widebody
2

 
4
%
Total Passenger
132

 
71
%
Freighter
26

 
29
%
Total
158

 
100
%
 
 
 
 
Manufacturer
 
 
 
Boeing
100

 
55
%
Airbus
54

 
43
%
Embraer
4

 
2
%
Total
158

 
100
%
 
 
 
 
Regional Diversification
 
 
 
Europe
64

 
33
%
Asia and Pacific
51

 
35
%
North America
16

 
9
%
Latin America
13

 
7
%
Middle East and Africa
8

 
13
%
Off-lease (2)
6

 
3
%
Total
158

 
100
%
 
(1) Calculated using net book value of flight equipment held for lease, net investment in finance leases and flight equipment held for sale at period end.
(2) Includes one Airbus A330-200 for which we have a commitment for lease, one Airbus A319-100 for which we have a commitment for sale, one Boeing 767-300ER that was sold in the second quarter of 2013, one Boeing 747-400BDSF for which we have a commitment for lease and two Boeing 737-700 aircraft, one of which was delivered to a customer in Europe in the second quarter of 2013 and one of which is subject to a commitment for lease.




29


Our largest customer represents less than 8% of the net book value of flight equipment held for lease (includes net book value of flight equipment held for lease and net investment in finance leases) at March 31, 2013 . Our top 15 customers for aircraft we owned at March 31, 2013, representing 67 aircraft and 57% of the net book value of flight equipment held for lease, are as follows:
Percent of Net Book Value
 
Customer
 
Country
 
Number of
Aircraft
Greater than 6% per customer
 
South African Airways
 
South Africa
 
4
 
 
Hainan Airlines Company
 
China
 
9
 
 
 
 
 
 
 
3% to 6% per customer
 
Emirates
 
United Arab Emirates
 
2
 
 
US Airways
 
USA
 
11
 
 
SriLankan Airlines
 
Sri Lanka
 
5
 
 
Airbridge Cargo (1)
 
Russia
 
2
 
 
Martinair (2)
 
Netherlands
 
4
 
 
Jet Airways
 
India
 
6
 
 
GOL (3)
 
Brazil
 
7
 
 
 
 
 
 
 
Less than 3% per customer
 
Garuda
 
Indonesia
 
3
 
 
Asiana Airlines
 
South Korea
 
2
 
 
Iberia Airlines
 
Spain
 
6
 
 
Cathay Pacific
 
Hong Kong
 
1
 
 
KLM (2)
 
Netherlands
 
1
 
 
Azul
 
Brazil
 
4
 
(1)
Guaranteed by Volga-Dnepr.
(2)
Martinair is a wholly owned subsidiary of KLM. If combined with KLM and two other affiliated customers, that represents 7% of flight equipment held for lease.
(3)
GOL has guaranteed the obligations of an affiliate, VRG Linhas Aereas.

Finance
We intend to fund new investments through cash on hand, cash flows from operations and potentially through medium- to longer-term financings on a secured or unsecured basis. We may repay all or a portion of such borrowings from time to time with the net proceeds from subsequent long-term debt financings, additional equity offerings or cash generated from operations and asset sales. Therefore, our ability to execute our business strategy, particularly the acquisition of additional commercial jet aircraft or other aviation assets, depends to a significant degree on our ability to obtain additional debt and equity capital on terms we deem attractive.
See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources.”


30

Table of Contents

RESULTS OF OPERATIONS
Comparison of the three months ended March 31, 2012 to the three months ended March 31, 2013 :
 
Three Months Ended
March 31,
 
2012
 
2013
 
(Dollars in thousands)
Revenues:
 
 
 
Lease rental revenue
$
152,242

 
$
156,590

     Finance lease revenue

 
3,884

Amortization of net lease premiums, discounts and lease incentives
(1,598
)
 
(7,081
)
Maintenance revenue
12,647

 
16,866

Total lease revenue
163,291

 
170,259

Other revenue
1,624

 
5,930

Total revenues
164,915

 
176,189

Expenses:
 
 
 
Depreciation
64,514

 
69,900

Interest, net
48,981

 
59,152

Selling, general and administrative
13,198

 
13,285

Impairment of aircraft

 
6,199

Maintenance and other costs
2,774

 
3,412

Total operating expenses
129,467

 
151,948

Other income (expense):
 
 
 
Gain on sale of flight equipment
196

 
1,192

Other income (expense)
(113
)
 
1,215

Total other income (expense)
83

 
2,407

Income from continuing operations before income taxes
35,531

 
26,648

Income tax provision
2,929

 
3,584

Net income
$
32,602

 
$
23,064


Revenues:
Total revenues increased by 6.8%, or $11.3 million for the three months ended March 31, 2013 as compared to the three months ended March 31, 2012 , primarily as a result of the following:
Lease rental revenue . The increase in lease rental revenue of $4.3 million for the three months ended March 31, 2013 as compared to the same period in 2012 was primarily the result of:
$22.0 million of revenue reflecting the full quarter impact of 17 aircraft purchased in 2012.
This increase was offset partially by a decrease in lease rental revenue of:
$6.5 million due to aircraft sales and disposals;
$6.4 million due to lease extensions and transitions at lower rentals; and
$4.8 million from the effect of lease terminations and other changes.

Finance lease revenue: For the three months ended March 31, 2013 , $3.9 million of interest income from finance leases was recognized. There was no interest income from finance leases recorded for the same period in 2012.


31


Amortization of net lease premiums, discounts and lease incentives.
 
Three Months Ended
March 31,
 
2012
 
2013
 
(Dollars in thousands)
Amortization of lease discounts
$
581

 
$
218

Amortization of lease premiums
(1,242
)
 
(1,942
)
Amortization of lease incentives
(937
)
 
(5,357
)
Amortization of net lease premiums, discounts and lease incentives
$
(1,598
)
 
$
(7,081
)
As more fully described above under “Revenues”, lease incentives represent our estimated portion of the lessee’s cost for heavy maintenance, overhaul or replacement of certain high-value components which is amortized over the life of the related lease. As we enter into new leases, the amortization of lease incentives generally increases and, conversely, if a related lease terminates, the related unused lease incentive liability will reduce the amortization of lease incentives. The increase in amortization of lease premiums of $0.7 million for the three months ended March 31, 2013 as compared to the same period in 2012 primarily resulted from additional amortization on nine aircraft purchased during 2012. The increase in amortization of lease incentives of $4.4 million was primarily attributable to the reversal of $4.3 million of lease incentive amortization in the first quarter of 2012 related to two unscheduled lease transitions, resulting in lower amortization of lease incentives for the three months ended March 31, 2012 as compared to the same period in 2013.

Maintenance revenue.
 
Three Months Ended March 31,
 
2012
 
2013
 
Dollars
(in  thousands)
 
Number of
Leases
 
Dollars
(in thousands)
 
Number of
Leases
Unscheduled lease terminations
$
9,859

 
2
 
$
16,866

 
6
Scheduled lease terminations
2,788

 
1
 

 
Maintenance revenue
$
12,647

 
3
 
$
16,866

 
6
Unscheduled lease terminations. For the