Aircastle Limited
Aircastle LTD (Form: 10-Q, Received: 05/05/2010 16:44:03)
Table of Contents

 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
     
þ   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2010
or
     
o   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
(State or other jurisdiction of incorporation or organization)
  98-0444035
(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  o
     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  o   NO  o
     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  o Accelerated filer  þ   Non-accelerated filer  o
(Do not check if a smaller reporting company)
Smaller reporting company  o
     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES  o   NO  þ
     As of May 1, 2010, there were 79,539,525 outstanding shares of the registrant’s common shares, par value $0.01 per share.
 
 

 


 

Aircastle Limited and Subsidiaries
Form 10-Q
Table of Contents
             
        Page
No.
 
PART I. — FINANCIAL INFORMATION
 
           
  Financial Statements        
 
           
 
  Consolidated Balance Sheets as of December 31, 2009 and March 31, 2010     3  
 
           
 
  Consolidated Statements of Income for the three months ended March 31, 2009 and 2010     4  
 
           
 
  Consolidated Statements of Cash Flows for the three months ended March 31, 2009 and 2010     5  
 
           
 
  Notes to Unaudited Consolidated Financial Statements     6  
 
           
  Management’s Discussion and Analysis of Financial Condition and Results of Operations     21  
 
           
  Quantitative and Qualitative Disclosures about Market Risk     41  
 
           
  Controls and Procedures     42  
 
           
PART II. — OTHER INFORMATION
 
           
  Legal Proceedings     43  
 
           
  Risk Factors     43  
 
           
  Unregistered Sales of Equity Securities and Use of Proceeds     43  
 
           
  Exhibits     43  
 
           
SIGNATURE     45  
  EX-31.1
  EX-31.2
  EX-32.1
  EX-32.2
  EX-99.1

 


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,     March 31,  
    2009     2010  
            (unaudited)  
ASSETS
               
Cash and cash equivalents
  $ 142,666     $ 121,600  
Accounts receivable
    2,941       3,196  
Restricted cash and cash equivalents
    207,834       230,019  
Restricted liquidity facility collateral
    81,000       80,000  
Flight equipment held for lease, net of accumulated depreciation of $586,537 and $640,544
    3,812,970       3,771,806  
Aircraft purchase deposits and progress payments
    141,144       176,034  
Leasehold improvements, furnishings and equipment, net of accumulated depreciation of $2,455 and $2,556
    802       701  
Other assets
    65,155       71,111  
 
           
Total assets
  $ 4,454,512     $ 4,454,467  
 
           
 
               
LIABILITIES AND SHAREHOLDERS’ EQUITY
               
LIABILITIES
               
Borrowings from securitizations and term debt financings (including borrowings of ACS Ireland VIEs of $331,856 and $327,701, respectively)
  $ 2,464,560     $ 2,426,631  
Accounts payable, accrued expenses and other liabilities
    60,392       57,422  
Dividends payable
    7,955       7,951  
Lease rentals received in advance
    34,381       30,167  
Liquidity facility
    81,000       80,000  
Security deposits
    82,533       81,255  
Maintenance payments
    253,175       285,118  
Fair value of derivative liabilities
    179,279       189,196  
 
           
Total liabilities
    3,163,275       3,157,740  
 
           
 
               
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, 79,550,421 shares issued and outstanding at December 31, 2009; and 79,503,885 shares issued and outstanding at March 31, 2010
    796       795  
Additional paid-in capital
    1,479,995       1,480,852  
Retained earnings
    70,294       81,222  
Accumulated other comprehensive loss
    (259,848 )     (266,142 )
 
           
Total shareholders’ equity
    1,291,237       1,296,727  
 
           
Total liabilities and shareholders’ equity
  $ 4,454,512     $ 4,454,467  
 
           
The accompanying notes are an integral part of these unaudited consolidated financial statements.

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Aircastle Limited and Subsidiaries
Consolidated Statements of Income
(Dollars in thousands, except per share amounts)
(Unaudited)
                 
    Three Months Ended  
    March 31,  
    2009     2010  
Revenues:
               
Lease rental revenue
  $ 125,994     $ 130,122  
Amortization of net lease discounts and lease incentives
    (1,117 )     (4,845 )
Maintenance revenue
    6,603       5,254  
 
           
Total lease rentals
    131,480       130,531  
Interest income
    633        
Other revenue
    25       30  
 
           
Total revenues
    132,138       130,561  
 
           
 
               
Expenses:
               
Depreciation
    51,561       54,145  
Interest, net
    43,411       40,959  
Selling, general and administrative (including non-cash share based payment expense of $1,658, and $1,782, respectively)
    11,095       11,673  
Maintenance and other costs
    5,776       2,200  
 
           
Total expenses
    111,843       108,977  
 
           
 
               
Other income (expense)
    92       (370 )
 
           
Total other income (expense)
    92       (370 )
 
           
 
               
Income from continuing operations before income taxes
    20,387       21,214  
Income tax provision
    1,916       2,335  
 
           
Net income
  $ 18,471     $ 18,879  
 
           
 
               
Earnings per common share — Basic
  $ 0.23     $ 0.24  
 
           
 
               
Earnings per common share — Diluted
  $ 0.23     $ 0.24  
 
           
 
               
Dividends declared per share
  $ 0.10     $ 0.10  
 
           
The accompanying notes are an integral part of these unaudited consolidated financial statements.

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Aircastle Limited and Subsidiaries
Consolidated Statements of Cash Flows
(Dollars in thousands)
(Unaudited)
                 
    Three Months Ended  
    March 31,  
    2009     2010  
Cash flows from operating activities:
               
Net income
  $ 18,471     $ 18,879  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation
    51,561       54,145  
Amortization of deferred financing costs
    2,533       2,804  
Amortization of net lease discounts and lease incentives
    1,117       4,845  
Deferred income taxes
    1,599       1,234  
Accretion of purchase discounts on debt investments
    (158 )      
Non-cash share based payment expense
    1,658       1,782  
Cash flow hedges reclassified into earnings
    4,949       2,304  
Ineffective portion of cash flow hedges
    (129 )     866  
Security deposits and maintenance payments included in earnings
    (3,451 )     (267 )
Other
    (518 )     370  
Changes in certain assets and liabilities:
               
Accounts receivable
    (171 )     (346 )
Restricted cash and cash equivalents
    5,086       (22,185 )
Other assets
    (1,548 )     (946 )
Accounts payable, accrued expenses and other liabilities
    (9,951 )     (9,309 )
Lease rentals received in advance
    (1,674 )     (2,464 )
 
           
Net cash provided by operating activities
    69,374       51,712  
 
           
 
               
Cash flows from investing activities:
               
Improvement of flight equipment and lease incentives
    (17,268 )     (10,136 )
Aircraft purchase deposits and progress payments
    (7,906 )     (39,551 )
Principal repayments on debt investments
    807        
Leasehold improvements, furnishings and equipment
    (82 )      
 
           
Net cash used in investing activities
    (24,449 )     (49,687 )
 
           
 
               
Cash flows from financing activities:
               
Repurchase of shares from directors and employees
    (247 )     (926 )
Securitization and term debt financing repayments
    (30,131 )     (37,929 )
Deferred financing costs
          (106 )
Restricted secured liquidity facility collateral
          1,000  
Secured liquidity facility collateral
          (1,000 )
Security deposits received
    6,950       2,413  
Security deposits returned
    (490 )     (3,868 )
Maintenance payments received
    15,584       31,186  
Maintenance payments returned
    (7,277 )     (5,906 )
Dividends paid
    (7,862 )     (7,955 )
 
           
Net cash used in financing activities
    (23,473 )     (23,091 )
 
           
 
               
Net increase (decrease) in cash and cash equivalents
    21,452       (21,066 )
Cash and cash equivalents at beginning of period
    80,947       142,666  
 
           
Cash and cash equivalents at end of period
  $ 102,399     $ 121,600  
 
           
 
               
Supplemental disclosures of cash flow information:
               
Cash paid for interest, net of capitalized interest
  $ 36,970     $ 35,114  
 
           
Cash paid for income taxes
  $ 1,448     $ 2,429  
 
           
 
               
Supplemental disclosures of non-cash financing activities:
               
Advance lease rentals converted to maintenance reserves
  $     $ 1,750  
 
           
The accompanying notes are an integral part of these unaudited consolidated financial statements

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Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
March 31, 2010
Note 1. Summary of Significant Accounting Policies
Organization
     Aircastle Limited (“Aircastle,” the “Company,” “we,” “us” or “our”) is a Bermuda exempted company that was incorporated on October 29, 2004 by Fortress Investment Group LLC and certain of its affiliates (together, the “Fortress Shareholders” or “Fortress”) 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.
Basis of Presentation
     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, 2009. 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, 2010 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 five 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.
Recent Accounting Pronouncements
     Effective January 1, 2010, the Company adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2009-17 (“ASU 2009-17”), Consolidations (Topic 810): Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities , which requires an enterprise to perform an analysis to determine whether the enterprise’s variable interest, or interests, give it a controlling financial interest in a variable

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Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
March 31, 2010
interest entity. The determination of whether a reporting entity is required to consolidate another entity is based on, among other things, the other entity’s purpose and design and the reporting entity’s ability to direct the activities of the other entity that most significantly impact the other entity’s economic performance. This ASU amends certain guidance for determining whether an entity is a variable interest entity and requires ongoing reassessments of whether an enterprise is the primary beneficiary of a variable interest entity. ASU 2009-17 requires a reporting entity to provide additional disclosures about its involvement with variable interest entities and any significant changes in risk exposure due to that involvement. The adoption of ASU 2009-17 did not have a material impact on the Company’s consolidated financial statements. See Note 4 — Variable Interest Entities.
     In January 2010, the FASB issued ASU 2010-06 (“ASU 2010-06”), Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements , which requires new disclosures (1) to disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and to describe the reasons for the transfers, and (2) in the reconciliation for fair value measurements using significant unobservable inputs (Level 3), to present separately information about purchases, sales issuances, and settlements on a gross basis rather than as one net number. ASU 2010-06 is effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The adoption of ASU 2010-06 did not have a material impact on our consolidated financial statements.
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.
     The valuation techniques that may be used to measure fair value are as follows:
    Market approach — Uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities.
 
    Income approach — Uses valuation techniques to convert future amounts to a single present amount based on current market expectation about those future amounts.
 
    Cost approach — 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, 2009 and March 31, 2010 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.

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Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
March 31, 2010
                                         
            Fair Value Measurements at December 31, 2009  
            Using Fair Value Hierarchy  
            Quoted                    
            Prices in                    
            Active     Significant              
    Fair Value     Markets for     Other     Significant        
    as of     Identical     Observable     Unobservable        
    December 31,     Assets     Inputs     Inputs     Valuation  
    2009     (Level 1)     (Level 2)     (Level 3)     Technique  
Assets:
                                       
Cash and cash equivalents
  $ 142,666     $ 142,666     $     $     Market
Restricted cash and cash equivalents
    207,834       207,834                 Market
 
                               
Total
  $ 350,500     $ 350,500     $     $          
 
                               
 
                                       
Liabilities:
                                       
Derivative liabilities
  $ 179,279     $     $ 140,372     $ 38,907     Income
 
                               
                                         
            Fair Value Measurements at March 31, 2010  
            Using Fair Value Hierarchy  
            Quoted                    
            Prices in                    
            Active     Significant              
    Fair Value     Markets for     Other     Significant        
    as of     Identical     Observable     Unobservable        
    March 31,     Assets     Inputs     Inputs     Valuation  
    2010     (Level 1)     (Level 2)     (Level 3)     Technique  
Assets:
                                       
Cash and cash equivalents
  $ 121,600     $ 121,600     $     $     Market
Restricted cash and cash equivalents
    230,019       230,019                 Market
 
                               
Total
  $ 351,619     $ 351,619     $     $          
 
                               
 
                                       
Liabilities:
                                       
Derivative liabilities
  $ 189,196     $     $ 144,156     $ 45,040     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 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.
     Our interest rate derivatives included in Level 3 consist of United States dollar denominated interest rate swaps on Term Financing No. 1 with a guaranteed notional balance. The guaranteed notional balance has an upper notional band that matches the hedged debt and a lower notional band. The notional balance is guaranteed to match the hedged debt balance if the debt balances decreases within the upper and lower notional band. The fair value of the interest rate derivative is determined based on the upper notional band using cash flows discounted at the relevant market interest rates in effect at the period close and incorporates 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 range of the guaranteed notional between the upper and lower band represents an option that may not be exercised independently of the debt notional and is therefore valued based on unobservable market inputs.

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Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
March 31, 2010
     The following table reflects 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, 2010:
         
    Derivative  
Three Months Ended March 31, 2010   Liabilities  
Balance as of December 31, 2009
  $ (38,907 )
Transfers into Level 3
     
Transfers out of Level 3
     
Total gains or (losses):
       
Included in interest income
     
Included in other income (expense)
    (139 )
Included in interest expense
    (51 )
Included in other comprehensive income
    (5,943 )
 
     
Balance as of March 31, 2010
  $ (45,040 )
 
     
     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 in impairment tests are based on an income approach that uses Level 3 inputs, which include the Company’s assumptions and appraisal data as to future cash proceeds from leasing and selling aircraft. No assets and liabilities were measured at fair value on a non-recurring basis for the three months ended March 31, 2010.
     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.
     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 term debt financings are estimated using a discounted cash flow analysis, based on our current incremental borrowing rates for similar types of borrowing arrangements.
     The carrying amounts and fair values of our financial instruments at December 31, 2009 and March 31, 2010 are as follows:
                                 
    December 31, 2009   March 31, 2010
    Carrying Amount   Fair Value   Carrying Amount   Fair Value
    of Asset   of Asset   of Asset   of Asset
    (Liability)   (Liability)   (Liability)   (Liability)
Securitizations and term debt financings
  $ (2,324,972 )   $ (2,037,718 )   $ (2,289,352 )   $ (2,050,697 )
ECA term financings
    (139,588 )     (140,984 )     (137,279 )     (140,700 )

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Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
March 31, 2010
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, 2010 were as follows:
         
Year Ending December 31,   Amount  
Remainder of 2010
  $ 378,291  
2011
    475,340  
2012
    414,452  
2013
    314,073  
2014
    239,082  
2015
    185,871  
Thereafter
    329,568  
 
     
Total
  $ 2,336,677  
 
     
     Geographic concentration of lease rental revenue earned from flight equipment held for lease was as follows:
                 
    Three Months Ended
    March 31,
Region   2009   2010
Europe
    45 %     45 %
Asia
    22 %     20 %
North America
    16 %     16 %
Latin America
    6 %     9 %
Middle East and Africa
    11 %     10 %
 
               
Total
    100 %     100 %
 
               
     The classification of regions in the tables above and the table and discussion below is determined based on the principal location of the lessee of each aircraft.
     For each of the three months ended March 31, 2009 and March 31, 2010, one customer accounted for 9% of lease rental revenue and two additional customers accounted for a combined 13% 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 based on each lessee’s principal place of business:
                                                 
    Three Months Ended March 31,
    2009   2010
                    Number                   Number
            Percent of Total   of           Percent of Total   of
Country   Revenue   Revenue   Lessees   Revenue   Revenue   Lessees
United States
  $ 16,789       13 %     3     $ 16,645       13 %     4  
Netherlands
    14,709       11 %     4       14,012       11 %     3  
China (a)
                      13,806       11 %     5  
 
(a)   Total revenue attributable to China was less than 10% for the three months ended March 31, 2009.

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Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
March 31, 2010
     Geographic concentration of net book value of flight equipment held for lease was as follows:
                                 
    December 31, 2009   March 31, 2010
    Number           Number    
    of   Net Book   of   Net Book
Region   Aircraft   Value %   Aircraft   Value %
Europe
    58       46 %     58       46 %
Asia
    30 (1)     20 %     30       20 %
North America
    15       12 %     15       12 %
Latin America
    10       9 %     10       9 %
Middle East and Africa
    13       12 %     12       12 %
Off-lease
    3 (2)     1 %     4 (3)     1 %
 
                               
Total
    129       100 %     129       100 %
 
                               
 
(1)   Includes one Boeing Model 737-400 aircraft which was being converted to freighter configuration and for which we have an executed lease with a carrier in Asia post-conversion and which we delivered in the first quarter of 2010.
 
(2)   Includes one Boeing Model 737-300 aircraft which was returned to us on a consensual early lease termination in the third quarter of 2009 which we are actively marketing for sale or lease and two Boeing Model 757-200 aircraft which were returned to us early on a consensual basis in the third quarter of 2009 for which we have an executed sale agreement with expected delivery dates in the second and third quarters of 2010.
 
(3)   Includes one Boeing Model 737-300 aircraft which was returned to us on a consensual early lease termination in the third quarter of 2009 which we are actively marketing for sale or lease, one Boeing Model 737-500 aircraft which was returned to us in late March 2010 and placed on lease to a new customer in early April 2010, and two Boeing Model 757-200 aircraft which were returned to us early on a consensual basis in the third quarter of 2009 for which we have an executed sale agreement with expected delivery dates in the second and third quarters of 2010.
     The following table sets forth net book value of flight equipment attributable to individual countries representing at least 10% of total assets based on each lessee’s principal place of business as of:
                                                 
    December 31, 2009   March 31, 2010
            Net Book   Number of           Net Book   Number of
Country   Net Book Value   Value %   Lessees   Net Book Value   Value %   Lessees
 
Netherlands
  $ 435,796       11 %     3     $ 429,377       11 %     3  
United States (a)
                      384,264       10 %     4  
 
(a)   The net book value of flight equipment attributable to the United States was less than 10% as of December 31, 2009.
     At December 31, 2009 and March 31, 2010, the amounts of lease incentive liabilities recorded in maintenance payments on the consolidated balance sheets were $14,859 and $20,257, respectively.
     At December 31, 2009 and March 31, 2010, the amounts of prepaid lease incentives, net of amortization, recorded in other assets on the consolidated balance sheets were $9,560 and $9,761 respectively.
Note 4. Variable Interest Entities
     As described in Note 1 — Summary of Significant Accounting Policies, effective January 1, 2010 ASU 2009-17 provided additional guidance for determining when to consolidate certain entities in which the investors do not have the characteristics of a controlling financial interest or the total equity investment at risk is not sufficient to permit the legal entity to finance its activities without additional subordinated financial support by any parties, including equity holders.
     Aircastle consolidates five VIEs of which it is the primary beneficiary. ACS Aircraft Finance Ireland plc (“ACS Ireland”), ACS Aircraft Finance Ireland 2 Limited (“ACS Ireland 2”), ACS Ireland 3 Limited (“ACS Ireland 3”), Air Knight 1 Leasing Limited (“Air Knight 1”) and Air Knight 2 Leasing Limited (“Air Knight 2”). The operating

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Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
March 31, 2010
activities of these VIEs are limited to acquiring, owning, leasing, maintaining, operating and, under certain circumstances, selling the seventeen aircraft.
Securitizations and Term Financing
     In connection with Securitization No. 1, two of our subsidiaries, ACS Ireland and ACS Aircraft Finance Bermuda Limited (“ACS Bermuda”) issued Class A-1 notes and each have fully and unconditionally guaranteed the other’s obligations under the notes. In connection with Securitization No. 2, two of our subsidiaries, ACS Ireland 2 and ACS 2007-1 Limited (“ACS Bermuda 2”) issued Class A-1 notes and each have fully and unconditionally guaranteed the other’s obligations under the notes. In connection with Term Financing No. 1, two of our subsidiaries, ACS Ireland 3 and ACS 2008-1 Limited (“ACS Bermuda 3”) entered into a seven year term debt facility and each have fully and unconditionally guaranteed the other’s obligations under the term debt facility. ACS Bermuda, ACS Bermuda 2 and ACS Bermuda 3 are collectively referred to as the “ACS Bermuda Group”. At March 31, 2010, the assets of the three VIEs include fifteen aircraft transferred into the VIEs at historical cost basis in connection with Securitization No. 1, Securitization No 2 and Term Financing No. 1.
     Aircastle is the primary beneficiary of ACS Ireland, ACS Ireland 2 and ACS Ireland 3 (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 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.
     The combined assets of the ACS Ireland VIEs as of March 31, 2010 are $490,279. The combined liabilities of the ACS Ireland VIEs, net of $96,016 Class E-1 Securities held by the Company which is eliminated in consolidation, as of March 31, 2010 are $431,847.
ECA Term Financings
     Air Knight 1 and Air Knight 2 (collectively, the “Air Knight VIEs”) entered into two different twelve-year term loans, one with Citibank International Plc and one with Calyon, both of which are supported by a guarantee from Compagnie Francaise d’Assurance pour le Commerce Exterieur, (“COFACE”), the French government sponsored export credit agency (“ECA”), for the financing of two new Airbus Model A330-200 aircrafts. The Air Knight VIEs are owned by a charitable trust. 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 Aircastle Advisor LLC (Aircastle’s wholly owned subsidiary) is the Servicer and is responsible for the leasing of the 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. The consolidated liabilities of the Air Knight VIEs as of March 31, 2010 are $146,807.

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Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
March 31, 2010
Note 5. Securitizations and Term Debt Financings
     The outstanding amounts of our securitizations, term debt financings and borrowings under our credit facilities were as follows:
                                 
    At        
    December 31,        
    2009     At March 31, 2010  
    Outstanding     Outstanding             Final Stated  
Debt Obligation   Borrowings     Borrowings     Interest Rate (1)     Maturity (2)  
Securitizations and Term Debt Financings:
                               
Securitization No. 1
  $ 436,091     $ 430,938       0.50 %     6/20/31  
Securitization No. 2
    1,061,566       1,050,978       0.49 %     6/14/37  
Term Financing No. 1
    708,710       696,485       1.98 %     5/02/15  
Term Financing No. 2
    118,605       110,951       2.91 %     9/23/13  
ECA Term Financings
    139,588       137,279     4.48% and 3.96%   5/27/21 and 12/03/21  
 
                           
Total
  $ 2,464,560     $ 2,426,631                  
 
                           
 
(1)   Reflects floating rate in effect at the applicable reset date except for the ECA Term Financings, which are fixed rate.
 
(2)   For Securitization No. 1, Securitization No. 2 and Term Financing No. 1, all cash flows available after expenses and interest will be applied to debt amortization, if the debt is not refinanced by June 2011, June 2012, and May 2013, respectively.
     The following securitizations and term debt financing structures include liquidity facility commitments described in the table below:
                                 
        Available Liquidity        
        December 31,   March 31,   Unused   Interest Rate
Facility   Liquidity Facility Provider   2009   2010   Fee   on any Advances
 
Securitization No. 1
  Calyon   $ 42,000     $ 42,000       0.45 %   1M Libor + 1.00%
Securitization No. 2
  HSH Nordbank AG (1)     79,617       78,823       0.50 %   1M Libor + 0.75%
Term Financing No. 1
  Calyon     14,174       13,930       0.60 %   1M Libor + 1.20%
 
(1)   Following a ratings downgrade with respect to the liquidity facility provider in May 2009, the liquidity facility was drawn and the proceeds, or permitted investments thereof, remain available to provide liquidity if required. Amounts drawn following a ratings downgrade with respect to the liquidity facility provider do not bear interest; however, net investment earnings will be paid to the liquidity facility provider and the unused fee continues to apply.
Term Financing No. 1
     A maintenance-adjusted appraisal of Term Financing No. 1 Portfolio must be completed each year before a date in early May by a specified appraiser. To determine the maintenance-adjusted values, the appraiser applies upward or downward adjustments of its “half-life” current market values for the aircraft in the Term Financing No. 1 Portfolio based upon the maintenance status of the airframe, engines, landing gear and auxiliary power unit (“APU”), and applies certain other upward or downward adjustments for equipment and capabilities and for utilization. Compliance with the loan to value ratio is measured each month by comparing the 75% minimum ratio against the most recently completed maintenance-adjusted appraised value, less 0.5% for each month since such appraisal was provided to the lenders, plus 75% of the cash maintenance reserve balance held on deposit for the Term Financing No. 1 Portfolio. Noncompliance with the loan to value ratio will require us to make supplemental principal payments but will not by itself result in a default under Term Financing No. 1.
     In March 2010, we completed the maintenance-adjusted appraisal for the Term Financing No. 1 Portfolio and determined that, based upon the appraiser’s current market values for the aircraft and the relevant maintenance adjustments, the 2010 appraisal indicated an April 2010 loan to value ratio of approximately 78% and therefore we do

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Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
March 31, 2010
not meet the loan to value requirement until supplemental principal payments are made. We estimate that approximately $20 million in supplemental principal payments will be required to be made over the next twelve months before any excess cash flow from Term Financing No. 1 is paid to us.
Note 6. Dividends
     On December 22, 2008, our board of directors declared a fourth quarter dividend of $0.10 per common share or an aggregate of $7,862, for the three months ended December 31, 2008, which was paid on January 15, 2009 to shareholders of record on December 31, 2008. On March 13, 2009, our board of directors declared a first quarter dividend of $0.10 per common share, or an aggregate of $7,923, for the three months ended March 31, 2009, which was paid on April 15, 2009 to shareholders of record on March 31, 2009.
     On December 14, 2009, our board of directors declared a fourth quarter dividend of $0.10 per common share or an aggregate of $7,955, for the three months ended December 31, 2009, which was paid on January 15, 2010 to shareholders of record on December 31, 2009. On March 12, 2010, our board of directors declared a first quarter dividend of $0.10 per common share, or an aggregate of $7,951, for the three months ended March 31, 2010, which was paid on April 15, 2010 to shareholders of record on March 31, 2010.
Note 7. 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 and diluted 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,  
    2009     2010  
Weighted-average shares:
               
Common shares outstanding
    77,941,201       78,415,702  
Restricted common shares
    1,282,208       1,237,988  
 
           
Total weighted-average shares
    79,223,409       79,653,690  
 
           
 
               
Percentage of weighted-average shares:
               
Common shares outstanding
    98.4 %     98.4 %
Restricted common shares
    1.6 %     1.6 %
 
           
Total
    100.0 %     100.0 %
 
           
     The calculations of both basic and diluted earnings per share are as follows:
                 
    Three Months Ended  
    March 31,  
    2009     2010  
Earnings per share — Basic:
               
Net income
  $ 18,471     $ 18,879  
Less: Distributed and undistributed earnings allocated to restricted common shares (a)
    (299 )     (293 )
 
           
Earnings available to common shareholders — Basic
  $ 18,172     $ 18,586  
 
           
 
               
Weighted-average common shares outstanding — Basic
    77,941,201       78,415,702  
 
           

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Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
March 31, 2010
                 
    Three Months Ended  
    March 31,  
    2009     2010  
 
               
Earnings per common share — Basic
  $ 0.23     $ 0.24  
 
           
 
               
Earnings per share — Diluted:
               
Net income
  $ 18,471     $ 18,879  
Less: Distributed and undistributed earnings allocated to restricted common shares
    (299 )     (293 )
 
           
Earnings available to common shareholders — Diluted
  $ 18,172     $ 18,586  
 
           
 
               
Weighted-average common shares outstanding — Basic
    77,941,201       78,415,702  
Effect of dilutive shares
    (b)     (b)
 
           
Weighted-average common shares outstanding — Diluted
    77,941,201       78,415,702  
 
           
 
               
Earnings per common share — Diluted
  $ 0.23     $ 0.24  
 
           
 
(a)   For the three months ended March 31, 2009 and 2010, distributed and undistributed earnings to restricted shares is 1.6% and 1.6%, 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, 2009 and 2010, we have no dilutive shares.
Note 8. 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 2016. 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 from continuing operations before income taxes for the three months ended March 31, 2009 and 2010 were as follows:
                 
    Three Months Ended  
    March 31,  
    2009     2010  
U.S. operations
  $ 457     $ 535  
Non-U.S. operations
    19,930       20,679  
 
           
Total
  $ 20,387     $ 21,214  
 
           
     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 non-U.S. subsidiaries and is subject to U.S. federal, state and local income taxes.

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Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
March 31, 2010
     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,  
    2009     2010  
Notional U.S. federal income tax expense at the statutory rate
  $ 7,135     $ 7,425  
U.S. state and local income tax, net
    23       31  
Non-U.S. operations
    (5,268 )     (5,970 )
Non-deductible expenses in the U.S.
    8       854  
Other
    18       (5 )
 
           
Provision for income taxes
  $ 1,916     $ 2,335  
 
           
Note 9. Comprehensive Income (Loss)
     Total comprehensive income (loss) includes net income, the changes in the fair value and the reclassification into earnings of amounts previously deferred relating to our derivative financial instruments which qualify for hedge accounting and the change in unrealized fair value of debt securities classified as available-for-sale. Total comprehensive income (loss) for the three months ended March 31, 2009 and 2010 was as follows:
                 
    Three Months Ended  
    March 31,  
    2009     2010  
Net income
  $ 18,471     $ 18,879  
Net change in fair value of derivatives, net of tax expense of $231 and $83, respectively
    13,972       (8,598 )
Derivative loss reclassified into earnings
    4,949       2,304  
Net change in unrealized fair value of debt investments
    (1,074 )      
 
           
Total comprehensive income
  $ 36,318     $ 12,585  
 
           
     The following table sets forth the components of accumulated other comprehensive income (loss), net of tax where applicable, at December 31, 2009 and March 31, 2010:
         
    Accumulated  
    Other  
    Comprehensive  
    Income (Loss)  
December 31, 2009, net of tax benefit of $3,057
  $ (259,848 )
Net change in fair value of derivatives, net of tax expense of $83
    (8,598 )
Derivative loss reclassified into earnings
    2,304  
 
     
March 31, 2010
  $ (266,142 )
 
     
Note 10. Commitments and Contingencies
     On June 20, 2007, we entered into an acquisition agreement (the “Airbus A330 Agreement”), under which we agreed to acquire new A330 aircraft (the “New A330 Aircraft”), from Airbus S.A.S. We currently have ten New A330 Aircraft remaining to be delivered, with two scheduled for delivery in 2010, seven in 2011 and one in 2012. During 2009, we acquired two New A330 Aircraft.
     Committed amounts to acquire, convert, and modify aircraft including, where applicable, our estimate of adjustments for configuration changes, engine acquisition costs, contractual price escalations and other adjustments, net of amounts already paid, are approximately $206,317 in 2010, $423,806 in 2011 and $60,345 in 2012.

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Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
March 31, 2010
Note 11. 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.
     We held the following interest rate derivatives as of March 31, 2010:
                                                                 
    Liability Derivatives  
                            Future                          
    Current                     Maximum                          
    Notional     Effective     Maturity     Notional     Floating     Fixed     Balance Sheet        
Hedged Item   Amount     Date     Date     Amount     Rate     Rate     Location     Fair Value  
Interest rate derivatives designated as cash flow hedges :
                                                               
Securitization No. 1
  $ 444,749     Jun-06   Jun-16   $ 444,749     1M LIBOR
+ 0.27%
    5.78 %   Fair value of
derivative
liabilities
  $ 54,068  
Securitization No. 2
    1,042,262     Jun-07   Jun-12     1,042,262     1M LIBOR     5.25% to
5.36%
    Fair value of
derivative
liabilities
    86,815  
Term Financing No. 1 (1)
    632,350     Jun-08   May-13     632,350     1M LIBOR     4.04 %   Fair value of
derivative
liabilities
    38,222  
Term Financing No. 1 (1)
        May-13   May-15     491,718     1M LIBOR     5.31 %   Fair value of
derivative
liabilities
    6,818  
 
                                                         
 
                                                               
Total interest rate derivatives designated as cash flow hedges
    2,119,361                       2,611,079                               185,923  
 
                                                         
 
                                                               
Interest rate derivatives not designated as cash flow hedges:
                                                               
Term Financing No. 2 (2)
    99,749     Oct-08   Sep-13     99,749     3M LIBOR     3.17 %   Fair value of
derivative
liabilities
    3,273  
 
                                                         
Total interest rate derivatives not designated as cash flow hedges
    99,749                       99,749                               3,273  
 
                                                         
 
                                                               
Total interest rate derivatives
  $ 2,219,110                     $ 2,710,828                             $ 189,196  
 
                                                         
 
(1)   The interest payments related to Term Financing No. 1 are being hedged by two consecutive interest rate derivatives. When the first matures in May 2013, the next becomes effective.
 
(2)   Although we entered into this interest rate derivative to hedge the variable rate interest payments in connection with Term Financing No. 2, it has not been designated as a hedge for accounting purposes.
     Our interest rate derivatives involve counterparty credit risk. As of March 31, 2010, our interest rate derivatives are held with the following counterparties: JP Morgan Chase Bank NA, Citibank Canada NA, HSH Nordbank AG and DVB Bank SE. All of our counterparties or guarantors of these counterparties are considered investment grade (senior unsecured ratings of A3 or above by Moody’s Investors Service and long-term foreign issuer ratings of BBB+ or above by Standard and Poor’s). As a result, we do not anticipate that any of these counterparties will fail to meet their obligations.

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Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
March 31, 2010
     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, 2010, accrued interest payable included in accounts payable, accrued expenses, and other liabilities on our consolidated balance sheet was $6,075 related to interest rate derivatives designated as cash flow hedges and $72 for interest rate derivatives not designated as cash flow hedges.
     Historically, the Company acquired its aircraft using short term credit facilities and equity. The short term credit facilities were refinanced by securitizations or term debt facilities secured by groups of aircraft. The Company completed two securitizations and two term financings during the period 2006 through 2008. The Company entered into interest rate derivatives to hedge interest payments on variable rate debt for acquired aircraft as well as aircraft that it expected to acquire within certain future periods. In conjunction with its financing strategy, the Company used interest rate derivatives for periods ranging from 5 to 10 years to fix the interest rates on the variable rate debt that it incurred to acquire aircraft in anticipation of the expected securitization or term debt re-financings.
     At the time of each re-financing, the initial interest rate derivatives were terminated and new interest rate derivatives were executed as required by each specific debt financing. At the time of each interest rate derivative termination, certain interest rate derivatives were in a gain position and others were in a loss position. Since the hedged interest payments for the variable rate debt associated with each terminated interest rate derivative were probable of occurring, the gain or loss was deferred in accumulated other comprehensive income (loss) and is being amortized into interest expense over the relevant period for each interest rate derivative.
     Prior to the securitizations and term debt financings, our interest rate derivatives typically required us to post cash collateral to the counterparty when the value of the interest rate derivative exceeded a defined threshold. When the interest rate derivatives were terminated and became part of a larger aircraft portfolio financing, there were no cash collateral posting requirements associated with the new interest rate derivative. As of March 31, 2010, we did not have any cash collateral pledged under our interest rate derivatives, nor do we have any existing agreements that require cash collateral postings.
     Following is the effect of interest rate derivatives on the statement of financial performance for the three months ended March 31, 2010:
                                         
Effective Portion   Ineffective Portion
    Amount of           Amount of        
Derivatives in   Gain or (Loss)   Location of   Gain or (Loss)       Amount of
ASC 815   Recognized in   Gain or (Loss)   Reclassified from   Location of   Gain or (Loss)
Cash Flow   OCI on   Reclassified from   Accumulated   Gain or (Loss)   Recognized in Income
Hedging   Derivative   Accumulated   OCI into Income   Recognized in   on Derivative
Relationships   (a)   OCI into Income   (b)   Income on Derivative   (c)
Interest rate derivatives
  $ (33,057 )   Interest expense   $ (26,316 ) (1)   Interest expense   $ (975 ) (1)
 
(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, 2010.
 
(b)   This represents the amount of actual cash paid, net of taxes, related to the net settlements of the interest rate derivatives for each month of the three months ended March 31, 2010 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, 2010.
 
(1)   Excludes accelerated deferred loss of $447 which was charged to interest expense during the three months ended March 31, 2010 as a result of changes in projected future debt related to Term Financing No. 1.

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Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
March 31, 2010
             
       
Derivatives Not   Location of Gain   Amount of Gain
Designated as   or (Loss)   or (Loss)
Hedging Instruments   Recognized in Income   Recognized in Income
under ASC 815   On Derivative   on Derivative
Interest rate derivatives.
  Other income (expense)   $ (370 )
     Generally, our interest rate derivatives are hedging current interest payments on debt and future interest payments on long-term debt. In the past, we have entered into forward-starting interest rate derivatives to hedge the anticipated interest payment on long-term financings. These interest rate derivatives were terminated and new, specifically tailored interest rate derivatives were entered into upon closing of the relevant long-term financing. We have also early terminated interest rate derivatives in an attempt to manage our exposure to collateral calls.
     The following table summarizes the deferred (gains) and losses and related amortization into interest expense for our terminated interest rate derivative contracts for the three months ended March 31, 2009 and 2010:
                                                                                 
                                                                            Amount of  
                                                                            Deferred  
                                                            Amount of Deferred     (Gain)  
                                                    Unamortized     (Gain) or Loss     or  
                                                    Deferred     Amortized     Loss  
                                                    (Gain)     (including Accelerated     Expected  
                                                    or     Amortization) into     to be  
    Original                                     Deferred     Loss     Interest Expense for     Amortized  
    Maximum                     Fixed             (Gain) or     at     the Three Months     over the  
    Notional     Effective     Maturity     Rate     Termination     Loss Upon     March 31,     Ended March 31,     Next Twelve  
Hedged Item   Amount     Date     Date     %     Date     Termination     2010     2009     2010     Months  
Securitization No. 1
  $ 400,000     Dec-05   Aug-10     4.61     Jun-06   $ (13,397 )   $ (1,102 )   $ (783 )   $ (745 )   $ (1,102 )
Securitization No. 1
    200,000     Dec-05   Dec-10     5.03     Jun-06     (2,541 )     (241 )     (94 )     (56 )     (241 )
Securitization No. 2
    500,000     Mar-06   Mar-11     5.07     Jun-07     (2,687 )     (625 )     (180 )     (173 )     (625 )
Securitization No. 2
    200,000     Jan-07   Aug-12     5.06     Jun-07     (1,850 )     (783 )     (93 )     (90 )     (345 )
Securitization No. 2
    410,000     Feb-07   Apr-17     5.14     Jun-07     (3,119 )     (1,916 )     (102 )     (94 )     (335 )
Term Financing No. 1
    150,000     Jul-07   Dec-17     5.14     Mar-08     15,281       10,909       527       492       1,882  
Term Financing No. 1
    440,000     Jun-07   Feb-13     4.88     Partial — Mar-08
Full — Jun-08
    26,281       14,494       1,535       1,434       5,486  
Term Financing No. 1
    248,000     Aug-07   May-13     5.33     Jun-08     9,888       5,388       569       979       1,832  
Term Financing No. 2
    55,000     May-08   Mar-14     5.41     Jun-08     2,380                          
Term Financing No. 2
    360,000     Jan-08   Feb-19     5.16     Partial — Jun-08
Full — Oct-08
    23,077       11,436       695       557       1,847  
Repurchase Agreement
    74,000     Feb-06   Jul-10     5.02     Feb-08     878                          
Repurchase Agreement
    5,000     Dec-05   Sep-09     4.94     Mar-08     144                          
Repurchase Agreement
    2,900     Jun-05   Mar-13     4.21     Jun-08     (19 )                        
ECA Term Financing and New A330 Aircraft future debt
    238,000     Jan-11   Apr-16     5.23     Dec-08     19,430       18,445       615              
New A330 Aircraft future debt and securitization
    231,000     Apr-10   Oct-15     5.17     Partial — Jun-08
Full — Dec-08
    15,310       12,437       674             1,224  
New A330 Aircraft future debt and securitization
    203,000     Jun-07   Jan-12     4.89     Dec-08     2,728 (1)           465              
New A330 Aircraft future debt and securitization
    238,000     Jul-11   Sep-16     5.27     Dec-08     17,254       15,969       1,121              
 
                                                                     
Total
                                          $ 109,038     $ 84,411     $ 4,949     $ 2,304     $ 9,623  
 
                                                                     
 
(1)   The deferred loss for this swap is related to the period prior to de-designation.
     The amount of loss expected to be reclassified from accumulated other comprehensive income (“OCI”) into interest expense over the next 12 months consists of net interest settlements on active interest rate derivatives disclosed above, in the amount of $90,762 and the amortization of deferred net losses in the amount of $9,623. For the three months ended March 31, 2010, the amount of loss reclassified from OCI into interest expense consisted of net interest

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Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
March 31, 2010
settlements on active interest rate derivatives in the amount of $24,989, and the amortization of deferred net losses (including accelerated amortization) in the amount of $2,304 as disclosed below.
     The following table summarizes amounts charged directly to the consolidated statement of income for the three months ended March 31, 2009 and 2010, respectively, related to our interest rate derivatives:
                 
    Three Months Ended  
    March 31,  
    2009     2010  
Interest Expense:
               
Hedge ineffectiveness (gains) losses (unrealized)
  $ (129 )   $ 867  
 
           
Amortization:
               
Accelerated amortization of deferred losses
    2,875       447  
Amortization of deferred losses
    2,074       1,857  
 
           
Total Amortization
    4,949       2,304  
 
           
 
               
Total charged to interest expense
  $ 4,820     $ 3,171  
 
           
 
               
Other Income (Expense):
               
Mark to market gains (losses) on undesignated interest rate derivatives
  $ 92     $ (370 )
 
           
Total charged to other income (expense)
  $ 92     $ (370 )
 
           
     The weighted average interest pay rates of these derivatives at December 31, 2009 and March 31, 2010 were 4.91% and 4.92% , respectively.
Note 12. Interest, Net
     The following table shows the components of interest, net:
                 
    Three Months Ended  
    March 31,  
    2009     2010  
Interest on borrowings, net settlements on interest rate derivatives, and other liabilities
  $ 36,770     $ 35,598  
Hedge ineffectiveness (gains) losses (unrealized)
    (129 )     867  
Amortization of interest rate derivatives related to deferred losses
    4,949       2,304  
Amortization of deferred financing fees
    2,533       2,804  
 
           
Interest Expense
    44,123       41,573  
Less interest income
    (441 )     (10 )
Less capitalized interest
    (271 )     (604 )
 
           
Interest, net
  $ 43,411     $ 40,959  
 
           

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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, 2009 filed with the Securities and Exchange Commission (the “SEC”). Our consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States, or US GAAP. 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 and lease aircraft, raise capital, pay dividends, and increase revenues, earnings and EBITDA 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 Limited 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 Limited’s expectations include, but are not limited to, prolonged capital markets disruption and volatility, which may adversely affect our continued ability to obtain additional capital to finance our working capital needs, our pre-delivery payment obligations and other aircraft acquisition commitments, our ability to extend or replace our existing financings, and the demand for and value of aircraft; our exposure to increased bank and counterparty risk caused by credit and capital markets disruptions; volatility in the value of our aircraft or in appraisals thereof, which may, among other things, result in increased principal payments under our term financings and reduce our cash flow available for investment or dividends; general economic conditions and business conditions affecting demand for aircraft 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 volcanic activity 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 Limited’s filings with the Securities and Exchange Commission, or the SEC, including “Risk Factors” as previously disclosed in Aircastle’s 2009 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 Form 10-K, quarterly reports on Form 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 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.
     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.

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OVERVIEW
     We are a global company that acquires leases and sells high-utility commercial jet aircraft to passenger and cargo airlines throughout the world. High-utility aircraft are generally modern, operationally efficient jets with a large operator base and long useful lives. As of March 31, 2010, our aircraft portfolio consisted of 129 aircraft and we had 59 lessees located in 33 countries. At March 31, 2010, the average age of the aircraft in our portfolio was 11.1 years and the average remaining lease term was 4.8 years, in each case weighted by net book value. Our revenues and income from continuing operations for the three months ended March 31, 2010 were $130.6 million and $21.2 million, respectively.
     Although current market conditions have improved compared to the conditions prevailing in 2009, the availability of equity and debt capital remains limited. We plan to grow our business and profits over the long term by continuing to employ our fundamental business strategy which includes:
  (1)   Selectively investing in additional commercial jet aircraft and other aviation assets when attractively priced opportunities and cost effective financing are available;
 
  (2)   Maintaining an efficient capital structure by using varying long-term debt structures to obtain cost effective financing and leveraging the efficient operating platform and strong track record we have established; and
 
  (3)   Reinvesting a portion of the cash flows generated by our business and from selective asset dispositions in additional aviation assets and/or our own debt and equity securities.
     We believe our team’s capabilities in the global leasing market for both passenger and cargo aircraft place us in a favorable position to explore new income-generating activities as capital becomes available for such activities. However, though we see some recent signs of improvement, the financing markets continue to have limited capacity, which may constrain our ability to undertake new transactions. As such, during the near term, we intend to continue to focus our efforts on investment opportunities that both tap commercial financing capacity where it is accessible on reasonable terms and also where there is potential availability of debt financing that benefits from government guarantees either from the European Export Credit Agencies, or ECAs, or from the Export-Import Bank of the United States, or EXIM. In any case, there can be no assurance that we will be able to access capital on a cost-effective basis, and a failure to do so could have a material adverse effect on our business, financial condition or results of operations.
     Thus far in 2010, air traffic data has continued to demonstrate improvement in both the passenger and cargo markets, with passenger and cargo traffic demand increasing by 8.6% and 27.8%, respectively, for the first three months of 2010 as compared to the same period in 2009, according to the International Air Transport Association. We are encouraged by the recent trends and believe that passenger and cargo traffic will likely continue to improve as the global economy recovery continues, and that demand for high-utility aircraft will strengthen as a result, although we are carefully monitoring our European customers in particular following the temporary closing of European airspace resulting from the eruption of the Eyjafjallajokull volcano. Going forward, we believe the market will be driven to a large extent by expansion in larger emerging markets and rising levels of per capita, air travel.
     We intend to pay regular quarterly dividends to our shareholders. On March 12, 2010, our board of directors declared a regular quarterly dividend of $0.10 per common share, or an aggregate of $8.0 million, for the three months ended March 31, 2010, which was paid on April 15, 2010 to holders of record on March 31, 2010. This dividend 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. In addition, we recognize revenue from retained maintenance payments related to lease expirations and lease termination payments.
     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,

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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.
2010 Lease Expirations and Lease Placements
    Scheduled lease expirations — placements. For our 19 aircraft originally having lease expirations in 2010, we have executed lease renewals, or commitments to lease or renew, with respect to 15 aircraft, we have signed sales agreements to sell two aircraft and we are actively remarketing the remaining two aircraft and are also remarketing an aircraft originally scheduled to expire in 2009 but delayed into 2010 by the existing customer. We estimate that for these 19 aircraft, excluding the two we expect to sell, the weighted average lease term for the new leases or renewals will be between 3.5 and 4.0 years with monthly lease rates that are approximately 30% to 35% percent lower than the previous rentals. The drop in lease rates for these placements reflects more challenging market conditions when these new leases or renewals were executed, as well as a comparatively stronger lease placement environment, on average, when the previous leases were put in place. Given more challenging market conditions, we generally continue to seek shorter lease terms for placements so as to allow for the opportunity to benefit more quickly from possible market improvements.
 
    Aircraft acquisitions — placements. We are scheduled to take delivery of two of the New A330 Aircraft in 2010, both in the second half of the year. We have executed lease agreements for both aircraft with an affiliate of the HNA Group, the parent company of Hainan Airlines. We currently have no other commitment to acquire aircraft in 2010.
2011 Lease Expirations and Lease Placements
    Scheduled lease expirations — placements. We have 13 aircraft with lease expirations scheduled in 2011. We have executed lease renewals, or commitments to lease or renew, with respect to three of these aircraft, and we have a signed sale agreement to sell one aircraft. We are actively remarketing the remaining nine aircraft.
 
    Aircraft acquisitions — placements. We are scheduled to take delivery of seven of the New A330 Aircraft in 2011. We executed a lease agreement for one of the New A330 Aircraft scheduled for delivery in 2011 with an affiliate of the HNA Group, and we executed lease agreements for six of the New A330 Aircraft scheduled for delivery in 2011 with South African Airways PTY LTD. We currently have no other commitment to acquire aircraft in 2011.
2012-2014 Lease Expirations and Lease Placements
    Scheduled lease expirations — placements. Taking into account lease and sale commitments, we currently have 72 aircraft with lease expirations scheduled in the period 2012-2014.
 
    Aircraft acquisitions — placements. We are scheduled to take delivery of one of the New A330 Aircraft in 2012and we are actively remarketing it. We currently have no other commitment to acquire aircraft in the period 2012-2014.
Operating Expenses
     Operating expenses are comprised of depreciation of flight equipment held for lease, interest expense, selling, general and administrative expenses, or SG&A, 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 has been nominal; however, to the extent our customers failed to pay operating, maintenance, insurance or transition costs, our portion of these expenses for unscheduled lease terminations reflected in our income statement increased significantly during 2009 as compared to prior years.

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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 28, 2016, 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 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 Dispositions
     On June 20, 2007, we entered into an acquisition agreement, which we refer to as the Airbus A330 Agreement, under which we agreed to acquire new A330 aircraft, which we refer to as the New A330 Aircraft, from Airbus S.A.S. During 2009, we acquired two New A330 Aircraft. We currently have ten New A330 Aircraft remaining to be delivered, with two scheduled for delivery in 2010, seven in 2011 and one in 2012.
     The following table sets forth certain information with respect to the aircraft owned by us as of March 31, 2010:
AIRCASTLE AIRCRAFT INFORMATION (Dollars in millions)
         
    Owned
    Aircraft as of
    March 31, 2010 (1)
Flight Equipment Held for Lease
  $ 3,772  
Number of Aircraft
    129  
Number of Lessees
    59  
Number of Countries
    33  
Weighted Average Age – Passenger (years) (2)
    11.3  
Weighted Average Age – Freighter (years) (2)
    10.5  
Weighted Average Age – Combined (years) (2)
    11.1  
Weighted Average Remaining Passenger Lease Term (years) (3)
    3.6  
Weighted Average Remaining Cargo Lease Term (years) (3)
    7.4  
Weighted Average Remaining Combined Lease Term (years) (3)
    4.8  
Weighted Average Fleet Utilization during First Quarter 2010 (4)
    98 %
 
(1)   Calculated using net book value as of March 31, 2010.
 
(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.

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PORTFOLIO DIVERSIFICATION
                 
    Owned Aircraft as of  
    March 31, 2010  
    Number of     % of Net  
    Aircraft     Book Value  
Aircraft Type
               
Passenger:
               
Narrowbody
    83       44 %
Midbody
    24       25 %
Widebody
    1       2 %
 
           
Total Passenger
    108       71 %
Freighter
    21       29 %
 
           
Total
    129       100 %
 
           
 
               
Manufacturer
               
Boeing
    86       64 %
Airbus
    43       36 %
 
           
Total
    129       100 %
 
           
 
               
Regional Diversification
               
Europe
    58       46 %
Asia
    30       20 %
North America
    15       12 %
Latin America
    10       9 %
Middle East and Africa
    12       12 %
Off-lease (1)
    4       1 %
 
           
Total
    129       100 %
 
           
 
(1)   Includes one Boeing Model 737-300 aircraft which was returned to us on a consensual early lease termination in the third quarter of 2009 which we are actively marketing for sale or lease, one Boeing Model 737-500 aircraft which was returned to us in late March 2010 and placed on lease to a new customer in early April 2010, and two Boeing Model 757-200 aircraft which were returned to us early on a consensual basis in the third quarter of 2009 for which we have an executed sale agreement with expected delivery dates in the second and third quarters of 2010.
     Our largest customer represents less than 8% of the net book value of flight equipment held for lease at March 31, 2010. Our top 15 customers for aircraft we owned at March 31, 2010, representing 56 aircraft and 61% of the net book value of flight equipment held for lease, are as follows:
                 
            Number of
Percent of Net Book Value   Customer   Country   Aircraft
Greater than 6% per customer
  Martinair (1)   Netherlands     5  
 
  Emirates   United Arab Emirates     2  
 
  US Airways   USA     8  
 
               
3% to 6% per customer
  Avianca   Colombia     2  
 
  China Eastern Airlines (2)   China     8  
 
  Iberia Airlines   Spain     6  
 
  GOL (3)   Brazil     6  
 
  Airbridge Cargo (4)   Russia     1  
 
  KLM (1)   Netherlands     1  
 
  World Airways   USA     2  
 
               
Less than 3% per customer
  Swiss International Air Lines   Switzerland     2  
 
  Icelandair (5)   Iceland     5  
 
  Korean Air   South Korea     2  
 
  Cimber-Sterling   Denmark     4  
 
  SriLankan Airlines   Sri Lanka     2  

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(1)   Martinair is a wholly owned subsidiary of KLM. Although KLM does not guarantee Martinair’s obligations under the relevant lease, if combined, the two, together with another affiliated customer, represent 11% of flight equipment held for lease.
 
(2)   Includes the aircraft leased to Shanghai Airlines, which was recently acquired by China Eastern Airlines. China Eastern Airlines does not guarantee the obligations of the aircraft we lease to Shanghai Airlines.
 
(3)   GOL has guaranteed the obligations of an affiliate, VRG Linhas Aereas, and accordingly, the two are shown combined in the above table.
 
(4)   Guaranteed by Volga-Dnepr.
 
(5)   Icelandair Group hf, the parent company of Icelandair, has guaranteed the obligations of an affiliate, SmartLynx, and accordingly, the two are shown combined in the above table.
     Our owned aircraft portfolio as of March 31, 2010 is listed in Exhibit 99.1 to this report. Approximately 88% of the total aircraft and 87% of the freighters we owned as of March 31, 2010 are what we consider to be the most current technology for the relevant airframe and engine type and airframe size, as listed under the headings “Latest Generation Narrowbody Aircraft,” “Latest Generation Midbody Aircraft,” “Latest Generation Widebody Aircraft” and “Latest Generation Widebody Freighter Aircraft” in Exhibit 99.1 to this report.
Finance
     Our debt financing arrangements are typically secured by aircraft and related operating leases, and in the case of our securitizations and pooled aircraft term financings, the financing parties have limited recourse to Aircastle Limited. While such financing has historically been available on reasonable terms given the loan to value profile we have pursued, the recent financial markets turmoil has reduced the availability of both debt and equity capital. Though financing market conditions have recovered recently and we expect them to continue to improve in time, current market conditions remain difficult, and we are presently taking a cautious approach to incremental financing and with respect to refinancing risk, which may constrain our ability to undertake new transactions. During the near term, we intend to focus our efforts on investment opportunities that both tap commercial financial capacity where it is accessible on reasonable terms and also where there is potential availability of debt financing that benefit from government guarantees either from the ECAs or from EXIM.
     To the extent that we acquire additional aircraft directly, we intend to fund such investments through medium to longer-term financings and cash on hand. 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. 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.

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RESULTS OF OPERATIONS
Comparison of the three months ended March 31, 2009 to the three months ended March 31, 2010:
                 
    Three Months Ended  
    March 31,  
    2009     2010  
    (Dollars in thousands)  
Revenues:
               
Lease rental revenue
  $ 125,994     $ 130,122  
Amortization of net lease discounts and lease incentives
    (1,117 )     (4,845 )
Maintenance revenue
    6,603       5,254  
 
           
Total lease rentals
    131,480       130,531  
Interest income
    633        
Other revenue
    25       30  
 
           
Total revenues
    132,138       130,561  
 
           
 
               
Expenses:
               
Depreciation
    51,561       54,145  
Interest, net
    43,411       40,959  
Selling, general and administrative
    11,095       11,673  
Maintenance and other costs
    5,776       2,200  
 
           
Total operating expenses
    111,843       108,977  
 
           
 
               
Other income (expense):
               
Other income (expense)
    92       (370 )
 
           
Total other income (expense)
    92       (370 )
 
           
 
               
Income from continuing operations before income taxes
    20,387       21,214  
Income tax provision
    1,916       2,335  
 
           
Net income
  $ 18,471     $ 18,879  
 
           
Revenues:
     Total revenues decreased by 1% or $1.6 million for the three months ended March 31, 2010 as compared to the three months ended March 31, 2009, primarily as a result of the following:
      Lease rental revenue . The increase in lease rental revenue of $4.1 million for the three months ended March 31, 2010 as compared to the same period in 2009 was primarily the result of increases of:
    $4.9 million of revenue from two new aircraft purchased in 2009; and
 
    $3.8 million of revenue as a result of lease transitions.
     These increases were offset partially by a decrease in revenue of:
    $3.5 million of revenue due to lower floating rate lease rentals and lease extensions; and
 
    $1.1 million of revenue due to three aircraft sold during 2009.
      Amortization of net lease discounts and lease incentives. The increase in amortization of net lease discounts and lease incentives of $3.7 million for the three months ended March 31, 2010 as compared to the same period in 2009 results from an increase in amortization of lease incentives of $2.8 million for 18 aircraft transitions during 2009 and a decrease in amortization of net lease discounts of $0.9 million.
      Maintenance revenue . The decrease in maintenance revenue of $1.3 million is the result of $1.2 million of higher maintenance revenue from scheduled lease terminations ($4.6 million in the three months ended March 31, 2010 as compared to $3.4 million in the three months ended March 31, 2009) and $2.5 million of lower maintenance revenue from early terminations of leases ($0.7 million in the three months ended March 31, 2010 as compared to $3.2 million in the three months ended March 31, 2009).

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      Interest income. The decrease in interest income of $0.6 million was due primarily to the sale of our debt investments in the third and fourth quarters of 2009.
Operating Expenses:
     Total operating expenses decreased by 3% or $2.9 million for the three months ended March 31, 2010 as compared to the three months ended March 31, 2009 primarily as a result of the following:
      Depreciation expense increased by $2.6 million for the three months ended March 31, 2010 over the same period in 2009. The net increase is primarily the result of:
    a $2.3 million increase in depreciation for capitalized aircraft improvements; and
 
    a $1.4 million increase in depreciation for two new aircraft acquired in 2009;
     These increases were offset partially by:
    a $1.1 million decrease in depreciation for aircraft sold.
      Interest, net consisted of the following:
                 
    Three Months Ended  
    March 31,  
    2009     2010  
    (Dollars in thousands)  
Interest on borrowings, net settlements on interest rate derivatives, and other liabilities
  $ 36,770     $ 35,598  
Hedge ineffectiveness (gains) losses (unrealized)
    (129 )     867  
Amortization of interest rate derivatives related to deferred losses
    4,949       2,304  
Amortization of deferred financing fees
    2,533       2,804  
 
           
Interest Expense
    44,123       41,573  
Less interest income
    (441 )     (10 )
Less capitalized interest
    (271 )     (604 )
 
           
Interest, net
  $ 43,411     $ 40,959  
 
           
     Interest, net decreased by $2.5 million, or 6%, over the three months ended March 31, 2009. The net decrease is primarily a result of:
    a $1.2 million decrease in interest expense on our borrowings primarily due to a lower average cost of borrowing compared to the same period in 2009; and
 
    a $2.6 million decrease in amortization of deferred losses on interest rate derivatives primarily due to:
    a $2.3 million decrease related to accelerated amortization of deferred losses from terminated interest rate derivatives for borrowings that we no longer anticipate making (i.e., that are no longer probable of occurring) as a result of a lower forecasted debt financings; and
 
    a $0.3 million decrease related to amortization of deferred losses on terminated interest rate derivatives for borrowings we anticipate making in the future (i.e., that are probable of occurring). The deferred losses are amortized into interest expense as the interest payments being hedged occur.
     These decreases were offset partially by:
    a $0.4 million decrease in interest income earned on our cash balances reflecting significantly lower interest rates during the first quarter of 2010 compared to the same period in 2009; and
 
    a $1.0 million increase in losses from measured hedge ineffectiveness.
      Selling, general and administrative expenses, or SG&A, for the three months ended March 31, 2010 increased slightly over the same period in 2009 due primarily to higher personnel costs. Non-cash share based expense was $1.7 million and $1.8 million for the three months ended March 31, 2009 and 2010, respectively.

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      Maintenance and other costs were $2.2 million for the three months ended March 31, 2010, a decrease of $3.6 million over the same period in 2009. The net decrease is primarily a result of:
    a $2.7 million decrease in aircraft maintenance and other transitions costs primarily relating to unscheduled lease terminations for eight aircraft returned to us in the fourth quarter of 2008; and
 
    a $1.0 million decrease in aircraft maintenance and other transitions costs relating to unscheduled and scheduled lease terminations in 2009.
Other income (expense):
     Total other expense for the three months ended March 31, 2010 was $0.4 million as compared to $0.1 million of income for the same period in 2009. The change is primarily a result of $0.5 million lower mark-to-market adjustments on our undesignated interest rate derivatives.
Income Tax Provision
     Our provision for income taxes for the three months ended March 31, 2009 and 2010 was $1.9 million and $2.3 million, respectively. Income taxes have been provided based on the applicable tax laws and rates of those countries in which operations are conducted and income is earned, primarily Ireland and the United States. The increase in our income tax provision of approximately $0.4 million for the three months ended March 31, 2010 as compared to the same period in 2009, was attributable to an increase in operating income subject to tax in the U.S. and an increase in tax expense related to the vesting of stock awards, partially offset by a decrease in operating income subject to tax in Ireland.
     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 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.
     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 2016. 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.
Other comprehensive income:
     Other comprehensive income was $12.6 million for the three months ended March 31, 2010, a decrease of $23.7 million over the $36.3 million of other comprehensive income for the three months ended March 31, 2009. The decrease in other comprehensive income is primarily a result of:
    a $22.6 million decrease in deferred losses resulting from a decrease in the net change in the fair value of outstanding interest rate derivatives qualifying for and designated as cash flow hedges due in part to a decreases in the 1-Month LIBOR rates during the period. 1-Month LIBOR rates as of March 31, 2010 and 2009 were 0.25% and 0.50% respectively; and
 
    a $2.6 million decrease in amortization into earnings of deferred net losses primarily due to accelerated amortization from terminated interest rate derivatives in the first quarter of 2009.
     These decreases in other comprehensive income were offset partially by:
    a $1.1 million increase in the fair value of debt investments as a result of the sale of our remaining debt investments in the fourth quarter of 2009; and

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    a $0.4 million increase in net income.
     The amount of loss expected to be reclassified from accumulated other comprehensive income into interest expense over the next 12 months consists of net interest settlements on active interest rate derivatives in the amount of $90.8 million and the amortization of deferred net losses from terminated interest rate derivatives in the amount of $9.6 million. See “Liquidity and Capital Resources — Hedging” below for more information on deferred net losses as related to terminated interest rate derivatives.
RECENT ACCOUNTING PRONOUNCEMENTS
     Effective January 1, 2010, the Company adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2009-17 (“ASU 2009-17”), Consolidations (Topic 810): Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities, which requires an enterprise to perform an analysis to determine whether the enterprise’s variable interest, or interests, give it a controlling financial interest in a variable interest entity. The determination of whether a reporting entity is required to consolidate another entity is based on, among other things, the other entity’s purpose and design and the reporting entity’s ability to direct the activities of the other entity that most significantly impact the other entity’s economic performance. This ASU amends certain guidance for determining whether an entity is a variable interest entity and requires ongoing reassessments of whether an enterprise is the primary beneficiary of a variable interest entity. ASU 2009-17 requires a reporting entity to provide additional disclosures about its involvement with variable interest entities and any significant changes in risk exposure due to that involvement. The adoption of ASU 2009-17 did not have a material impact on the Company’s consolidated financial statements.
     In January 2010, the FASB issued ASU 2010-06 (“ASU 2010-06”), Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements , which requires new disclosures (1) to disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and to describe the reasons for the transfers , and (2) in the reconciliation for fair value measurements using significant unobservable inputs (Level 3), to present separately information about purchases, sales issuances, and settlements on a gross basis rather than as one net number. ASU 2010-06 is effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward to activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The adoption of ASU 2010-06 did not have a material impact on our consolidated financial statements.
LIQUIDITY AND CAPITAL RESOURCES
     Our primary sources of liquidity currently are cash on hand, cash generated by our aircraft leasing operations and loans secured by new aircraft we acquire. Our business is very capital intensive, requiring significant investments in order to expand our fleet during periods of growth and investments in maintenance and improvements on our existing portfolio. Our business also generates a significant amount of cash from operations, primarily from lease rental revenue and maintenance revenue. These sources have historically provided liquidity for these investments and for other uses, including the payment of dividends to our shareholders. In the past, we have also met our liquidity and capital resource needs by utilizing several sources, including:
    lines of credit, our securitizations, term financings and, more recently, secured borrowings supported by export credit agencies for new aircraft acquisitions;
 
    public offerings of common shares; and
 
    asset sales.
     While the financing structures for our securitizations and certain of our term financings include liquidity facilities, these liquidity facilities are primarily designed to provide short-term liquidity to enable the financing vehicles to remain current on principal and interest payments during periods when the relevant entities incur substantial unanticipated expenditures. Because these facilities have priority in the payment waterfall and therefore must be repaid quickly, and because we do not anticipate being required to draw on these facilities to cover operating expenses, we do not view these liquidity facilities as an important source of liquidity for us.
     During the three months ended March 31, 2010, we funded $38.8 million of pre-delivery payments (including buyer furnished equipment) on our New A330 Aircraft.
     For the remainder of 2010, we expect to fund approximately $206.3 million of total payments for our New A330 Aircraft, comprising both pre-delivery and delivery payments to Airbus S.A.S. and buyer furnished equipment suppliers. For the two New A330 Aircraft being delivered in 2010 (see Purchase Obligations in “Contractual Obligations” below) we expect to debt finance 75% to 85% of the total cost of these aircraft upon delivery. After

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taking into consideration pre-delivery and buyer furnished equipment payments and the anticipated debt financing, we expect to receive an aggregate of $25.0 million to $35.0 million in net cash upon delivery of these two New A330 Aircraft.
     In addition, as of March 31, 2010, we expect capital expenditures and lessee maintenance payment draws on our aircraft portfolio during 2010 to be approximately $100.0 million to $110.0 million, excluding purchase obligation payments, and we expect maintenance collections from lessees on our owned aircraft portfolio to be approximately equal to the expected expenditures and draws over the next twelve months. There can be no assurance that the capital expenditures, our contributions to maintenance events and lessee maintenance payment draws described above will not be greater than expected or that our expected maintenance payment collections or disbursements will equal our current estimates.
     We completed our annual appraisal for Term Financing No. 1 and determined that we did not meet the loan to value requirement and consequently, we anticipate that we will be obliged to make approximately $20 million in supplemental principal payments in 2010 under Term Financing No. 1 in addition to scheduled principal payments. To the extent that supplemental principal payments are required, availability of excess cash flow for other purposes will be reduced.
     We believe that cash on hand, funds generated from operations, maintenance payments received from lessees, proceeds from contracted aircraft sales and funds we expect to borrow upon delivery of the New A330 Aircraft we acquire in future periods, including borrowings under export credit agency-supported loan facilities, will be sufficient to satisfy our liquidity and capital resource needs over the next twelve months. Our liquidity and capital resource needs include pre-delivery payments under the Airbus A330 Agreement, payments for buyer furnished equipment, payments due at delivery of the New A330 Aircraft, required and supplemental principal payments we anticipate being required to make under Term Financing No. 1, expected capital expenditures, lessee maintenance payment draws and lease incentives over the next twelve months. Potential asset sales and a pre-delivery payment financing facility may provide additional sources of liquidity as well.
Cash Flows
                 
    Three Months Ended  
    March 31,  
    2009     2010  
    (Dollars in thousands)  
Net cash flow provided by operating activities
  $ 69,374     $ 51,712  
Net cash flow used in investing activities
    (24,449 )     (49,687 )
Net cash flow used in financing activities
    (23,473 )     (23,091 )
      Operating Activities:
     Cash flow from operations was $69.4 million and $51.7 million for the three months ended March 31, 2009 and March 31, 2010, respectively. The decrease in cash flow from operations of approximately $17.7 million for the three months ended March 31, 2010 versus the same period in 2009, was primarily a result of:
    a $27.3 million increase in restricted cash reflecting increased maintenance payments and security deposits received and an increase in restricted cash for anticipated expenditures related to our aircraft.
     These decreases were offset partially by:
    a $4.1 million increase in cash received for lease rentals;
 
    a $1.8 million increase in cash received for maintenance revenue; and
 
    a $1.9 million decrease in cash payments for interest.

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Investing Activities:
     Cash used in investing activities was $24.4 million and $49.7 million for the three months ended March 31, 2009 and March 31, 2010, respectively. The increase in cash flow used in investing activities of $25.2 million for the three months ended March 31, 2010 versus the same period in 2009, was primarily a result of:
    $31.6 million in increased purchase deposits under our Airbus A330 Agreement and aircraft undergoing freighter conversion; and
 
    $0.8 million lower proceeds from the sale of and principal repayments on our debt investments.
     These increases were offset partially by:
    a $7.1 million decrease in the acquisition and improvement of flight equipment.
      Financing Activities:
     Cash used in financing activities was $23.5 million for the three months ended March 31, 2009 as compared to a net use of cash of $23.1 million for the three months ended March 31, 2010. The net decrease in cash flow used in financing activities of $0.4 million for the three months ended March 31, 2010 versus the same period in 2009 was a result of:
    $7.8 million of higher financing repayments; and
 
    $7.9 million of lower security deposits received net of deposits returned.
          The outflows were offset partially by:
    $17.0 million of higher maintenance payments received net of maintenance payments returned.
Debt Obligations
     The following table provides a summary of our securitizations and term financing facilities at March 31, 2010:
                                         
                                    Final
            Outstanding   Number of   Interest   Stated
Debt Obligation   Collateral   Borrowing (1)   Aircraft   Rate (2)   Maturity (3)
            (Dollars in thousands)                        
Securitization No. 1  
Interests in aircraft leases, beneficial interests in aircraft owning entities and related interests
  $ 430,938       33       0.50 %     6/20/31  
       
 
                               
Securitization No. 2  
Interests in aircraft leases, beneficial interests in aircraft owning entities and related interests
    1,050,978       57       0.49 %     6/14/37  
       
 
                               
Term Financing No. 1  
Interests in aircraft leases, beneficial interests in aircraft owning entities and related interests
    696,485       28       1.98 %     5/02/15  
       
 
                               
Term Financing No. 2  
Interests in aircraft leases, beneficial interests in aircraft owning entities and related interests
    110,951       8       2.91 %     9/23/13  
       
 
                               
ECA Term Financings  
Interests in aircraft leases, beneficial interests in aircraft leasing entities and related interests
    137,279       2     4.48% and 3.96%   5/27/21 and 12/03/21
       
 
                             
Total  
 
  $ 2,426,631                          
       
 
                             
 
(1)   Outstanding borrowing amount equals committed borrowing amount at March 31, 2010.
 
(2)   Reflects floating rate in effect at the most recent applicable reset date, except for the ECA Term Financings which are fixed rate.
 
(3)   For Securitization No. 1, Securitization No. 2 and Term Financing No. 1, all cash flows available after expenses and interest will be applied to debt amortization, if the debt is not refinanced by June 2011, June 2012, and May 2013, respectively.

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     The following securitizations and term debt financing structures include liquidity facility commitments described in the table below:
                                         
            Available Liquidity        
            December 31,   March 31,   Unused   Interest Rate
Facility   Liquidity Facility Provider   2009   2010   Fee   on any Advances
            (Dollars in thousands)                
Securitization No. 1  
Calyon
  $ 42,000     $ 42,000       0.45 %   1M Libor + 1.00%
Securitization No. 2  
HSH Nordbank AG (1)
    79,617       78,823       0.50 %   1M Libor + 0.75%
Term Financing No. 1  
Calyon
    14,174       13,930       0.60 %   1M Libor + 1.20%
 
(1)   Following a ratings downgrade with respect to the liquidity facility provider in May 2009, the liquidity facility was drawn and the proceeds, or permitted investments thereof, remain available to provide liquidity if required. Amounts drawn following a ratings downgrade with respect to the liquidity facility provider do not bear interest; however, net investment earnings will be paid to the liquidity facility provider and the unused fee continues to apply.
Term Financing No. 1
     A maintenance-adjusted appraisal of Term Financing No. 1 Portfolio must be completed each year before a date in early May by a specified appraiser. To determine the maintenance-adjusted values, the appraiser applies upward or downward adjustments of its “half-life” current market values for the aircraft in the Term Financing No. 1 Portfolio based upon the maintenance status of the airframe, engines, landing gear and auxiliary power unit, or APU, and applies certain other upward or downward adjustments for equipment and capabilities and for utilization. Compliance with the loan to value ratio is measured each month by comparing the 75% minimum ratio against the most recently completed maintenance-adjusted appraised value, less 0.5% for each month since such appraisal was provided to the lenders, plus 75% of the cash maintenance reserve balance held on deposit for the Term Financing No. 1 Portfolio. Noncompliance with the loan to value ratio will require us to make supplemental principal payments but will not by itself result in a default under Term Financing No. 1.
     In March 2010, we completed the maintenance-adjusted appraisal for the Term Financing No. 1 Portfolio and determined that, based upon the appraiser’s current market values for the aircraft and the relevant maintenance adjustments, the 2010 appraisal indicated an April 2010 loan to value ratio of approximately 78% and therefore we do not meet the loan to value requirement until supplemental principal payments are made. We estimate that approximately $20 million in supplemental principal payments will be required to be made during 2010 before any excess cash flow from Term Financing No. 1 is paid to us.
Contractual Obligations
     Our contractual obligations consist of principal and interest payments on variable rate liabilities, interest payments on interest rate derivatives, purchase obligations under the Airbus A330 Agreement, obligations under our freighter conversion contracts and rent payments pursuant to our office leases. Total contractual obligations decreased from $3.69 billion at December 31, 2009 to approximately $3.58 billion at March 31, 2010 due primarily to:
    principal and interest payments made under our securitizations and term financings; and
 
    lower variable interest rates and payments made under our purchase obligations.

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     The following table presents our actual contractual obligations and their payment due dates as of March 31, 2010.
                                         
    Payments Due By Period as of March 31, 2010  
            Less than                     More than  
Contractual Obligations   Total     1 year     1-3 years     3-5 years     5 years  
            (Dollars in thousands)          
Principal payments:
                                       
Securitization No. 1 (1)
  $ 430,938     $ 21,238     $ 163,587     $ 187,513     $ 58,600  
Securitization No. 2 (2)
    1,050,978       59,238       196,946       343,372       451,422  
Term Financing No. 1 (3)
    696,485       68,417       78,283       185,839       363,946  
Term Financing No. 2 (4)
    110,951       31,881       65,905       13,165        
ECA Term Financings (5)
    137,279       9,449       20,170       22,012       85,648  
 
                             
Total principal payments
    2,426,631       190,223       524,891       751,901       959,616  
 
                             
 
                                       
Interest payments:
                                       
Interest payments on debt obligations (6)
    130,357       29,085       49,430       34,961       16,881  
Interest payments on interest rate derivatives (7)
    326,395       100,551       145,203       64,018       16,623  
 
                             
Total interest payments
    456,752       129,636       194,633       98,979       33,504  
 
                             
 
                                       
Office leases (8)
    3,712       1,132       1,985       366       229  
Purchase obligations (9)
    690,468       284,067       406,401              
 
                             
Total
  $ 3,577,563     $ 605,058     $ 1,127,910     $ 851,246     $ 993,349  
 
                             
 
(1)   Includes principal payments based on amortization schedules through October 2015 that require the securitization cash flows be applied to the outstanding principal balance of the indebtedness so that the loan to assumed aircraft values are held constant through June 2011, after which all excess cash flow is required to reduce the principal balances of the indebtedness.
 
(2)   Includes principal payments based on amortization schedules through February 2018 that require the securitization cash flows be applied to the outstanding principal balance of the indebtedness so that the loan to assumed aircraft values are held constant through June 2012, after which all excess cash flow is required to reduce the principal balances of the indebtedness. The Less than 1 year commitments include repayment of $16.3 million and the 1-3 years commitments include repayments of $7.3 million related to contracted sales for two aircraft in 2010 and one aircraft in 2011.
 
(3)   Includes scheduled principal payments through May 2013, after which all excess cash flow is required to reduce the principal balances of the indebtedness until maturity in May 2015. The figure in the Less than 1 year commitments includes approximately $20 million of supplemental principal payments that we expect to make based on the results of the 2010 annual appraisal for this portfolio.
 
(4)   Includes principal payments equal to 85% of the estimated cash flow remaining after the payment of expenses, fees, interest and amounts owing to interest rate hedge providers.
 
(5)   Includes scheduled principal based upon fixed rate, 12 year, fully amortizing loans.
 
(6)   Future interest payments on variable rate, LIBOR-based debt obligations are estimated using the interest rate in effect at March 31, 2010.
 
(7)   Future interest payments on derivative financial instruments are estimated using the spread between the floating interest rates and the fixed interest rates in effect at March 31, 2010.
 
(8)   Represents contractual payment obligations for our office leases in Stamford, Connecticut; Dublin, Ireland and Singapore.
 
(9)   At March 31, 2010, we had aircraft purchase agreements including the acquisition of 10 New A330 Aircraft from Airbus. For the two New A330 Aircraft being delivered in 2010, we expect to debt finance 75% to 85% of the total cost of these aircraft upon delivery. After taking into consideration pre-delivery and buyer furnished equipment payments and the anticipated debt financing, we expect to receive an aggregate of $25.0 million to $35.0 million in net cash upon delivery.
Capital Expenditures
     We make capital expenditures from time to time in connection with improvements made to our aircraft. These expenditures include the cost of major overhauls necessary to place an aircraft in service and modifications made at the request of lessees. For the three months ended March 31, 2009 and 2010, we incurred a total of $17.3 million and $10.1 million, respectively, of capital expenditures (including lease incentives) related to the acquisition and improvement of aircraft.
     As of March 31, 2010, the weighted average age (by net book value) of our aircraft was approximately 11.1 years. In general, the costs of operating an aircraft, including maintenance expenditures, increase with the age of the aircraft. Under our leases, the lessee is primarily responsible for maintaining the aircraft. We may incur additional maintenance

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and modification costs in the future in the event we are required to remarket an aircraft or a lessee fails to meet its maintenance obligations under the lease agreement. At March 31, 2010, we had $285.1 million of maintenance reserves as a liability on our balance sheet. These maintenance reserves are paid by the lessee to provide for future maintenance events. Provided a lessee performs scheduled maintenance of the aircraft, we are required to reimburse the lessee for scheduled maintenance payments. In certain cases, we are also required to make lessor contributions, in excess of amounts a lessee may have paid, towards the costs of maintenance events performed by or on behalf of the lessee.
     Actual maintenance payments to us by lessees in the future may be less than projected as a result of a number of factors, including defaults by the lessees. Maintenance reserves may not cover the entire amount of actual maintenance expenses incurred and, where these expenses are not otherwise covered by the lessees, there can be no assurance that our operational cash flow and maintenance reserves will be sufficient to fund maintenance requirements, particularly as our aircraft age.
Off-Balance Sheet Arrangements
     We did not have any off-balance sheet arrangements as of March 31, 2010.
Foreign Currency Risk and Foreign Operations
     At March 31, 2010, all of our leases are payable to us in U.S. dollars. However, we incur Euro and Singapore dollar-denominated expenses in connection with our subsidiary in Ireland and branch office in Singapore. As of March 31, 2010, 11 of our 75 employees were based in Ireland and three employees were based in Singapore. For the three months ended March 31, 2010, expenses, such as payroll and office costs, denominated in currencies other than the U.S. dollar aggregated approximately $1.9 million in U.S. dollar equivalents and represented approximately 16% of total selling, general and administrative expenses. Our international operations are a significant component of our business strategy and permit us to more effectively source new aircraft, service the aircraft we own and maintain contact with our lessees. Therefore, it is likely that our international operations and our exposure to foreign currency risk will increase over time. Although we have not yet entered into foreign currency hedges because our exposure to date has not been significant, if our foreign currency exposure increases we may enter into hedging transactions in the future to mitigate this risk. For the three months ended March 31, 2009 and 2010, we incurred insignificant net gains and losses on foreign currency transactions.
Hedging
     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.

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We held the following interest rate derivatives as of March 31, 2010:
                                                                 
    Liability Derivatives  
                            Future                          
    Current                     Maximum                          
    Notional     Effective     Maturity     Notional     Floating     Fixed     Balance Sheet        
Hedged Item   Amount     Date     Date     Amount     Rate     Rate     Location     Fair Value  
    (Dollars in thousands)  
Interest rate derivatives designated as cash flow hedges :
                                                               
 
                                                  Fair value of        
 
                                  1M LIBOR           derivative        
Securitization No. 1
  $ 444,749     Jun-06   Jun-16   $ 444,749       + 0.27%       5.78 %   liabilities   $ 54,068  
 
                                                  Fair value of        
 
                                              derivative        
Securitization No. 2
    1,042,262     Jun-07   Jun-12     1,042,262     1M LIBOR     5.25% to 5.36 %   liabilities     86,815  
 
                                                  Fair value of        
 
                                                  derivative        
Term Financing No. 1 (1)
    632,350     Jun-08   May-13     632,350     1M LIBOR     4.04 %   liabilities     38,222  
 
                                                  Fair value of        
 
                                                  derivative        
Term Financing No. 1 (1)
        May-13   May-15     491,718     1M LIBOR     5.31 %   liabilities     6,818  
 
                                                             
 
                                                           
Total interest rate derivatives designated as cash flow hedges
    2,119,361                       2,611,079                               185,923  
 
                                                         
 
                                                               
Interest rate derivatives not designated as cash flow hedges:
                                                               
 
                                                  Fair value of        
 
                                                  derivative        
Term Financing No. 2 (2)
    99,749     Oct-08   Sep-13     99,749     3M LIBOR     3.17 %   liabilities     3,273  
 
                                                         
Total interest rate derivatives not designated as cash flow hedges
    99,749                       99,749                               3,273  
 
                                                         
Total interest rate derivatives
  $ 2,219,110                     $ 2,710,828                             $ 189,196  
 
                                                         
 
(1)   The interest payments related to Term Financing No. 1 are being hedged by two consecutive interest rate derivatives. When the first matures in May 2013, the next becomes effective.
 
(2)   Although we entered into this interest rate derivative to hedge the variable rate interest payments in connection with Term Financing No. 2, it has not been designated as a hedge for accounting purposes.
     Our interest rate derivatives involve counterparty credit risk. As of March 31, 2010, our interest rate derivatives are held with the following counterparties: JP Morgan Chase Bank NA, Citibank Canada NA, HSH Nordbank AG and DVB Bank SE. All of our counterparties or guarantors of these counterparties are considered investment grade (senior unsecured ratings of A3 or above by Moody’s Investors Service and long-term foreign issuer ratings of BBB+ or above by Standard and Poor’s). As a result, 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, 2010, accrued interest payable included in accounts payable, accrued expenses, and other liabilities on our consolidated balance sheet was $6.1 million related to interest rate derivatives designated as cash flow hedges and $72 thousand for interest rate derivatives not designated as cash flow hedges.
     Historically, the Company acquired its aircraft using short term credit facilities and equity. The short term credit facilities were refinanced by securitizations or term debt facilities secured by groups of aircraft. The Company completed two securitizations and two term financings during the period 2006 through 2008. The Company entered into interest rate derivatives to hedge interest payments on variable rate debt for acquired aircraft as well as aircraft that it expected to acquire within certain future periods. In conjunction with its financing strategy, the Company used interest rate derivatives for periods ranging from 5 to 10 years to fix the interest rates on the variable rate debt that it incurred to acquire aircraft in anticipation of the expected securitization or term debt re-financings.

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     At the time of each re-financing, the initial interest rate derivatives were terminated and new interest rate derivatives were executed as required by each specific debt financing. At the time of each interest rate derivative termination, certain interest rate derivatives were in a gain position and others were in a loss position. Since the hedged interest payments for the variable rate debt associated with each terminated interest rate derivative were probable of occurring, the gain or loss was deferred in accumulated other comprehensive income (loss) and is being amortized into interest expense over the relevant period for each interest rate derivative.
     Prior to the securitizations and term debt financings, our interest rate derivatives typically required us to post cash collateral to the counterparty when the value of the interest rate derivative exceeded a defined threshold. When the interest rate derivatives were terminated and became part of a larger aircraft portfolio financing, there were no cash collateral posting requirements associated with the new interest rate derivative. As of March 31, 2010, we did not have any cash collateral pledged under our interest rate derivatives, nor do we have any existing agreements that require cash collateral postings.
     Generally, our interest rate derivatives are hedging current interest payments on debt and future interest payments on long-term debt. In the past, we have entered into forward-starting interest rate derivatives to hedge the anticipated interest payment on long-term financings. These interest rate derivatives were terminated and new, specifically tailored interest rate derivatives were entered into upon closing of the relevant long-term financing. We have also early terminated interest rate derivatives in an attempt to manage our exposure to collateral calls.
     The following table summarizes the deferred (gains) and losses and related amortization into interest expense for our terminated interest rate derivative contracts for the three months ended March 31, 2009 and 2010:
                                                                                 
                                                            Amount of Deferred        
                                                            (Gain) or Loss        
                                                            Amortized (including     Amount of  
                                                    Unamortized     Accelerated     Deferred  
                                                    Deferred     Amortization) into     (Gain) or Loss  
    Original                                     Deferred     (Gain) or Loss     Interest Expense for     Expected to be  
    Maximum                     Fixed             (Gain) or     at     the Three Months     Amortized  
    Notional     Effective     Maturity     Rate     Termination     Loss Upon     March 31,     Ended March 31,     over the Next  
Hedged Item   Amount     Date     Date     %     Date     Termination     2010     2009     2010     Twelve Months  
    (Dollars in Thousands)
Securitization No. 1
  $ 400,000     Dec-05   Aug-10     4.61     Jun-06   $ (13,397 )   $ (1,102 )   $ (783 )   $ (745 )   $ (1,102 )
Securitization No. 1
    200,000     Dec-05   Dec-10     5.03     Jun-06     (2,541 )     (241 )     (94 )     (56 )     (241 )
Securitization No. 2
    500,000     Mar-06   Mar-11     5.07     Jun-07     (2,687 )     (625 )     (180 )     (173 )     (625 )
Securitization No. 2
    200,000     Jan-07   Aug-12     5.06     Jun-07     (1,850 )     (783 )     (93 )     (90 )     (345 )
Securitization No. 2
    410,000     Feb-07   Apr-17     5.14     Jun-07     (3,119 )     (1,916 )     (102 )     (94 )     (335 )
Term Financing No. 1
    150,000     Jul-07   Dec-17     5.14     Mar-08     15,281       10,909       527       492       1,882  
Term Financing No. 1
    440,000     Jun-07   Feb-13     4.88     Partial — Mar-08
Full — Jun-08
    26,281       14,494       1,535       1,434       5,486  
Term Financing No. 1
    248,000     Aug-07   May-13     5.33     Jun-08     9,888       5,388       569       979       1,832  
Term Financing No. 2
    55,000     May-08   Mar-14     5.41     Jun-08     2,380                          
Term Financing No. 2
    360,000     Jan-08   Feb-19     5.16     Partial — Jun-08
Full — Oct-08
    23,077       11,436       695       557       1,847  
Repurchase Agreement
    74,000     Feb-06   Jul-10     5.02     Feb-08     878                          
Repurchase Agreement
    5,000     Dec-05   Sep-09     4.94     Mar-08     144                          
Repurchase Agreement
    2,900     Jun-05   Mar-13     4.21     Jun-08     (19 )                        
ECA Term Financing and New A330 Aircraft future debt
    238,000     Jan-11   Apr-16     5.23     Dec-08     19,430       18,445       615              
New A330 Aircraft future debt and securitization
    231,000     Apr-10   Oct-15     5.17     Partial — Jun-08
Full — Dec-08
    15,310       12,437       674             1,224  
New A330 Aircraft future debt and securitization
    203,000     Jun-07   Jan-12     4.89     Dec-08     2,728 (1)           465              
New A330 Aircraft future debt and securitization
    238,000     Jul-11   Sep-16     5.27     Dec-08     17,254       15,969       1,121              
 
                                                                     
Total
                                          $ 109,038     $ 84,411     $ 4,949     $ 2,304     $ 9,623  
 
                                                                     
 
(1)   The deferred loss for this swap is related to the period prior to de-designation.

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     The amount of loss expected to be reclassified from accumulated other comprehensive income, or OCI, into interest expense over the next 12 months consists of net interest settlements on active interest rate derivatives disclosed above, in the amount of $90.8 million and the amortization of deferred net losses in the amount of $9.6 million. For the year ended December 31, 2009, the amount of loss reclassified from OCI into interest expense consisted of net interest settlements on active interest rate derivatives in the amount of $25.0 million, and the amortization of deferred net losses (including accelerated amortization) in the amount of $2.3 million as disclosed below.
     The weighted average interest pay rates of these derivatives at December 31, 2009 and March 31, 2010 were 4.91% and 4.92%, respectively.
     The following table summarizes amounts charged directly to the consolidated statement of income for the three months ended March 31, 2009 and 2010, respectively, related to our interest rate derivatives:
                 
    Three Months Ended  
    March 31,  
    2009     2010  
    (Dollars in thousands)  
Interest Expense:
               
Hedge ineffectiveness (gains) losses (unrealized)
  $ (129 )   $ 867  
 
           
Amortization:
               
Accelerated amortization of deferred losses
    2,875       447  
Amortization of deferred losses
    2,074       1,857  
 
           
Total Amortization
    4,949       2,304  
 
           
Total charged to interest expense
  $ 4,820     $ 3,171  
 
           
 
               
Other Income (Expense):
               
Mark to market gains (losses) on undesignated interest rate derivatives
  $ 92     $ (370 )
 
           
Total charged to other income (expense)
  $ 92     $ (370 )
 
           
Management’s Use of EBITDA
     We define EBITDA as income (loss) from continuing operations before income taxes, interest expense, and depreciation and amortization. We use EBITDA to assess our consolidated financial and operating performance, and we believe this non-US GAAP measure is helpful in identifying trends in our performance.
     This measure provides an assessment of controllable expenses and affords management the ability to make decisions which are expected to facilitate meeting current financial goals as well as achieving optimal financial performance. It provides an indicator for management to determine if adjustments to current spending decisions are needed.
     EBITDA provides us with a measure of operating performance because it assists us in comparing our operating performance on a consistent basis as it removes the impact of our capital structure (primarily interest charges on our outstanding debt) and asset base (primarily depreciation and amortization) from our operating results. Accordingly, this metric measures our financial performance based on operational factors that management can impact in the short-term, namely the cost structure, or expenses, of the organization. EBITDA is one of the metrics used by senior management and the board of directors to review the consolidated financial performance of our business.

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     The table below shows the reconciliation of net income to EBITDA for the three months ended March 31, 2009 and 2010, respectively.
                 
    Three Months Ended  
    March 31,  
    2009     2010  
    (Dollars in thousands)
Net income
  $ 18,471     $ 18,879  
Depreciation
    51,561       54,145  
Amortization of net lease discounts and lease incentives
    1,117       4,845  
Interest, net
    43,411       40,959  
Income tax provision
    1,916       2,335  
 
           
EBITDA
  $ 116,476     $ 121,163  
 
           
Management’s Use of Adjusted Net Income and Adjusted Net Income plus Depreciation and Amortization
     Management believes that Adjusted Net Income (“ANI”) and Adjusted Net Income plus Depreciation and Amortization (“ANIDA”), when viewed in conjunction with the Company’s results under US GAAP and the below reconciliation, provide useful information about operating and period-over-period performance, and provide additional information that is useful for evaluating the underlying operating performance of our business without regard to periodic reporting elements related to interest rate derivative accounting and gains or losses related to flight equipment and debt investments. Additionally, management believes that ANIDA provides investors with an additional metric to enhance their understanding of the factors and trends affecting our ongoing cash earnings from which capital investments are made, debt is serviced, and dividends are paid.
     The table below shows the reconciliation of net income to ANI and ANIDA for the three months ended March 31, 2009 and 2010, respectively.
                 
    Three Months Ended  
    March 31,  
    2009     2010  
    (Dollars in thousands)
 
               
Net income
  $ 18,471     $ 18,879  
Ineffective portion and termination of hedges (1)
    2,746       1,314  
Mark to market of interest rate derivative contracts (2)
    (92 )     370  
 
           
Adjusted net income
    21,125       20,563  
Depreciation
    51,561       54,145  
Amortization of net lease discounts and lease incentives
    1,117       4,845  
 
           
Adjusted net income plus depreciation and amortization
  $ 73,803     $ 79,553  
 
           
 
(1)   Included in Interest, net.
 
(2)   Included in Other income (expense).
                 
    Three Months Ended  
    March 31,  
    2009     2010  
Weighted-average shares:
               
Common shares outstanding
    77,941,201       78,415,702  
Restricted common shares
    1,282,208       1,237,988  
 
           
Total weighted-average shares
    79,223,409       79,653,690  
 
           
                 
    Three Months Ended  
    March 31,  
    2009     2010  
Percentage of weighted-average shares:
               
Common shares outstanding
    98.38 %     98.45 %
Restricted common shares
    1.62 %     1.55 %
 
           
Total
    100.00 %     100.00 %
 
           

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    Three Months Ended
    March 31,
    2009   2010
Weighted-average common shares outstanding — Basic and Diluted (b)
    77,941,201       78,415,702  
 
               
                 
    Three Months Ended  
    March 31,  
    2009     2010  
    (Dollars in thousands,  
    except per share amounts)
Adjusted net income allocation:
               
Adjusted net income
  $ 21,125     $ 20,563  
Less: Distributed and undistributed earnings allocated to restricted common shares (a)
    (342 )     (320 )
 
           
Adjusted net income allocable to common shares — Basic and Diluted
  $ 20,783     $ 20,243  
 
           
 
               
Adjusted net income per common share — Basic
  $ 0.27     $ 0.26  
 
           
Adjusted net income per common share — Diluted
  $ 0.27     $ 0.26  
 
           
                 
    Three Months Ended  
    March 31,  
    2009     2010  
    (Dollars in thousands,  
    except per share amounts)
Adjusted net income plus depreciation and amortization allocation:
               
Adjusted net income plus depreciation and amortization
  $ 73,803     $ 79,553  
Less: Distributed and undistributed earnings allocated to restricted common shares (a)
    (1,194 )     (1,236 )
 
           
Adjusted net income plus depreciation and amortization allocable to common shares — Basic and Diluted
  $ 72,609     $ 78,317  
 
           
 
               
Adjusted net income plus depreciation and amortization per common share — Basic
  $ 0.93     $ 1.00  
 
           
Adjusted net income plus depreciation and amortization per common share — Diluted
  $ 0.93     $ 1.00  
 
           
 
(a)   For the three months ended March 31, 2009 and 2010, distributed and undistributed earnings to restricted shares is 1.62% and 1.56%, 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, 2009 and 2010, we have no dilutive shares.
Limitations of EBITDA, ANI and ANIDA
     An investor or potential investor may find EBITDA, ANI and ANIDA important measures in evaluating our performance, results of operations and financial position. We use these non-US GAAP measures to supplement our US GAAP results in order to provide a more complete understanding of the factors and trends affecting our business.
     EBITDA, ANI and ANIDA have limitations as analytical tools and should not be viewed in isolation or as substitutes for US GAAP measures of earnings. Material limitations in making the adjustments to our earnings to calculate EBITDA, ANI and ANIDA, and using these non-US GAAP measures as compared to US GAAP net income, income from continuing operations and cash flows provided by or used in operations, include:
    depreciation and amortization, though not directly affecting our current cash position, represent the wear and tear and/or reduction in value of our aircraft, which affects the aircraft’s availability for use and may be indicative of future needs for capital expenditures;
 
    the cash portion of income tax (benefit) provision generally represents charges (gains), which may significantly affect our financial results;
 
    elements of our interest rate derivative accounting may be used to evaluate the effectiveness of our hedging policy; and

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    gains and losses from asset sales, which may not reflect the overall financial return of the asset, may be an indicator of the current value of our portfolio of assets.
     EBITDA, ANI, and ANIDA are not alternatives to net income, income from operations or cash flows provided by or used in operations as calculated and presented in accordance with US GAAP. You should not rely on these non-US GAAP measures as a substitute for any such US GAAP financial measure. We strongly urge you to review the reconciliations to US GAAP net income, along with our consolidated financial statements included elsewhere in this Quarterly Report. We also strongly urge you to not rely on any single financial measure to evaluate our business. In addition, because EBITDA, ANI and ANIDA are not measures of financial performance under US GAAP and are susceptible to varying calculations, EBITDA, ANI and ANIDA, as presented in this Quarterly Report, may differ from and may not be comparable to similarly titled measures used by other companies.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
     Interest rate risk is the exposure to loss resulting from changes in the level of interest rates and the spread between different interest rates. These risks are highly sensitive to many factors, including U.S. monetary and tax policies, U.S. and international economic factors and other factors beyond our control. We are exposed to changes in the level of interest rates and to changes in the relationship or spread between interest rates. Our primary interest rate exposures relate to our lease agreements, floating rate debt obligations and interest rate derivatives. Rent payments under our aircraft lease agreements typically do not vary during the term of the lease according to changes in interest rates. However, our borrowing agreements generally require payments based on a variable interest rate index, such as LIBOR. Therefore, to the extent our borrowing costs are not fixed, increases in interest rates may reduce our net income by increasing the cost of our debt without any corresponding increase in rents or cash flow from our securities.
     Changes in interest rates may also impact our net book value as our interest rate derivatives are periodically marked-to-market through shareholders’ equity. Generally, we are exposed to loss on our fixed pay interest rate derivatives to the extent interest rates decrease below their contractual fixed rate.
     The relationship between spreads on derivative instruments may vary from time to time, resulting in a net aggregate book value increase or decrease. Changes in the general level of interest rates can also affect our ability to acquire new investments and our ability to realize gains from the settlement of such assets.
Sensitivity Analysis
     The following discussion about the potential effects of changes in interest rates is based on a sensitivity analysis, which models the effects of hypothetical interest rate shifts on our financial condition and results of operations. We changed our interest rate risk disclosure to an alternative that provides a more meaningful analysis of our interest rate risk. Although we believe a sensitivity analysis provides the most meaningful analysis permitted by the rules and regulations of the SEC, it is constrained by several factors, including the necessity to conduct the analysis based on a single point in time and by the inability to include the extraordinarily complex market reactions that normally would arise from the market shifts modeled. Although the following results of a sensitivity analysis for changes in interest rates may have some limited use as a benchmark, they should not be viewed as a forecast. This forward-looking disclosure also is selective in nature and addresses only the potential minimum contracted rental and interest expense impacts on our financial instruments and our four variable rate leases and, in particular, does not address the mark-to-market impact on our interest rate derivatives. It also does not include a variety of other potential factors that could affect our business as a result of changes in interest rates.
     A hypothetical 100-basis point increase/decrease in our variable interest rates would increase/decrease the minimum contracted rentals on our portfolio as of March 31, 2010 by $1.1 million and $0.8 million, respectively, over the next twelve months. As of March 31, 2010, a hypothetical 100-basis point increase/decrease in our variable interest rate on our borrowings would result in an interest expense increase/decrease of $0.7 million and $0.4 million, respectively, net of amounts received from our interest rate derivatives, over the next twelve months.

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Item 4. Controls and Procedures
Management’s Evaluation of Disclosure Controls and Procedures
     The term “disclosure controls and procedures” is defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, or the Exchange Act. This term refers to the controls and procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the SEC and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer, or CEO, and Chief Financial Officer, or CFO, as appropriate, to allow timely decisions regarding required disclosure. An evaluation was performed under the supervision and with the participation of the Company’s management, including the CEO, and CFO, of the effectiveness of the Company’s disclosure controls and procedures as of March 31, 2010. Based on that evaluation, the Company’s management, including the CEO and CFO, concluded that the Company’s disclosure controls and procedures were effective as of March 31, 2010.
Changes in Internal Control over Financial Reporting
     There were no changes in the Company’s internal control over financial reporting that occurred during the quarter ended March 31, 2010 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II. — OTHER INFORMATION
Item 1. Legal Proceedings
     The Company is not a party to any material legal or adverse regulatory proceedings.
Item 1A. Risk Factors
     There have been no material changes to the disclosure related to the risk factors described in our Annual Report on Form 10-K filed with the SEC for the year ended December 31, 2009.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
     During the first quarter of 2010, we purchased shares of our Common Stock as follows:
                                 
                            Maximum  
                    Total Number of     Number of  
    Total     Average     Shares Purchased     Shares that may yet  
    Number     Price     as Part of Publicly     be Purchased under  
    of Shares     Paid     Announced Plans or     the Plans or  
Period   Purchased (a)     per Share     Programs (b)     Programs (b)  
January
    93,978     $ 9.85     N/A     N/A  
February
              N/A     N/A  
March
              N/A     N/A  
 
                           
Total
    93,978     $ 9.85     N/A     N/A  
 
                           
 
(a)   Our Compensation Committee approved the repurchase of common shares pursuant to an irrevocable election made under the Amended and Restated Aircastle Limited 2005 Equity and Incentive Plan, in satisfaction of minimum tax withholding obligations associated with the vesting of restricted common shares during the first quarter of 2010.
 
(b)   The Company does not participate in any Publicly Announced Plans or Programs.
Item 6. Exhibits
     
Exhibit No.   Description of Exhibit
3.1
  Memorandum of Association†
 
   
3.2
  Bye-laws†
 
   
4.1
  Specimen Share Certificate†
 
   
4.2
  Amended and Restated Shareholders Agreement among Aircastle Limited and Fortress Investment Fund III LP, Fortress Investment Fund III (Fund B) LP, Fortress Investment Fund III (Fund C) LP, Fortress Investment Fund III (Fund D) L.P., Fortress Investment Fund III (Fund E) LP, Fortress Investment Fund III (Coinvestment Fund A) LP, Fortress Investment Fund III (Coinvestment Fund B) LP, Fortress Investment Fund III (Coinvestment Fund C) LP, Fortress Investment Fund III (Coinvestment Fund D) L.P., Drawbridge Special Opportunities Fund LP, Drawbridge Special Opportunities Fund Ltd. and Drawbridge Global Macro Master Fund Ltd.†
 
   
31.1
  Certification by the Chief Executive Officer pursuant to Section 302 of the Sarbanes Oxley Act of 2002 ∆
 
   
31.2
  Certification by the Chief Financial Officer pursuant to Section 302 of the Sarbanes Oxley Act of 2002 ∆
 
   
32.1
  Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 ∆

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Exhibit No.   Description of Exhibit
32.2
  Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 ∆
 
   
99.1
  Owned Aircraft Portfolio at March 31, 2010 ∆
 
  Incorporated by reference to the Company’s registration statement on Form S-1, filed with the SEC on June 2, 2006, as amended on July 10, 2006, July 25, 2006 and August 2, 2006.
 
  Filed herewith.

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SIGNATURE
     Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Dated: May 5, 2010
         
  AIRCASTLE LIMITED
(Registrant)
 
 
  By:   /s/ Aaron Dahlke    
    Aaron Dahlke   
    Chief Accounting Officer and Authorized Officer   
 

45

Exhibit 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Ron Wainshal, certify that:
  1.   I have reviewed this quarterly report on Form 10-Q of Aircastle Limited;
 
  2.   Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
  3.   Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
  4.   The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
  a.   Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
  b.   Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
  c.   Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
  d.   Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
  5.   The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
  a.   All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
  b.   Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: May 5, 2010
     
/s/ Ron Wainshal      
Ron Wainshal     
Chief Executive Officer     
 

 

Exhibit 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Michael Inglese, certify that:
  1.   I have reviewed this quarterly report on Form 10-Q of Aircastle Limited;
 
  2.   Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
  3.   Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
  4.   The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
  a.   Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
  b.   Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
  c.   Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
  d.   Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
  5.   The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
  a.   All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
  b.   Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: May 5, 2010
     
/s/ Michael Inglese      
Michael Inglese     
Chief Financial Officer     
 

 

Exhibit 32.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
     In connection with the Quarterly Report on Form 10-Q of Aircastle Limited (the “Company”) for the three months ended March 31, 2010, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Ron Wainshal, as Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
  (1)   The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
 
  (2)   The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
     A signed original of this written statement required by section 906 has been provided to Aircastle Limited and will be retained by Aircastle Limited and furnished to the Securities and Exchange Commission or its staff upon request.
     
/s/ Ron Wainshal      
Name: Ron Wainshal     
Title: Chief Executive Officer
Date: May 5, 2010
   
 

 

Exhibit 32.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED
PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
     In connection with the Quarterly Report on Form 10-Q of Aircastle Limited (the “Company”) for the three months ended March 31, 2010, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Michael Inglese, as Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:
  (1)   The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
 
  (2)   The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
     A signed original of this written statement required by section 906 has been provided to Aircastle Limited and will be retained by Aircastle Limited and furnished to the Securities and Exchange Commission or its staff upon request.
     
/s/ Michael Inglese      
Name: Michael Inglese     
Title: Chief Financial Officer
Date: May 5, 2010
   
 

 

Exhibit 99.1
Owned Aircraft Portfolio at March 31, 2010 is as follows:
                         
            Manufacturer   Date of    
Aircraft Group   Aircraft Type   Engine Type   Serial Number   Manufacture   Financing
Latest Generation Narrowbody Aircraft
  A319-100   CFM56-5B6/2P     1048     Jul-99   Securitization No. 2
 
  A319-100   CFM56-5B6/2P     1086     Sep-99   Securitization No. 2
 
  A319-100   CFM56-5B6/2P     1124     Nov-99   Securitization No. 2
 
  A319-100   CFM56-5B6/2P     1160     Jan-00   Securitization No. 1
 
  A319-100   CFM56-5B6/2P     1336     Oct-00   Securitization No. 1
 
  A319-100   CFM56-5B6/2P     1388     Dec-00   Securitization No. 1
 
  A320-200   V2527-A5     667     Apr-97   Securitization No. 1
 
  A320-200   V2527-A5     739     Nov-97   Securitization No. 1
 
  A320-200   V2527-A5     743     Nov-97   Securitization No. 1
 
  A320-200   V2527-A5     758     Jan-98   Securitization No. 1
 
  A320-200   CFM56-5B4/P     967     Apr-99   Securitization No. 1
 
  A320-200   V2527-A5     990     May-99   Securitization No. 2
 
  A320-200   CFM56-5B4/P     1041     Jul-99   Securitization No. 2
 
  A320-200   CFM56-5B4/P     1047     Aug-99   Term Financing No. 1
 
  A320-200   CFM56-5B4/2P     1054     Sep-99   Securitization No. 2
 
  A320-200   CFM56-5B4/P     1059     Aug-99   Term Financing No. 1
 
  A320-200   CFM56-5B4/P     1067     Sep-99   Term Financing No. 1
 
  A320-200   CFM56-5B4/2P     1081     Oct-99   Securitization No. 2
 
  A320-200   CFM56-5B4/P     1099     Oct-99   Term Financing No. 1
 
  A320-200   CFM56-5B4/P     1101     Nov-99   Term Financing No. 1
 
  A320-200   CFM56-5B4/P     1119     Dec-99   Term Financing No. 1
 
  A320-200   CFM56-5B4/P     1316     Oct-00   Securitization No. 2
 
  A320-200   CFM56-5B4/P     1345     Nov-00   Securitization No. 2
 
  A320-200   CFM56-5B4/2P     1370     Jan-01   Securitization No. 2
 
  A320-200   V2527-A5     2524     Sep-05   Securitization No. 2
 
  A320-200   V2527-A5     2564     Oct-05   Securitization No. 2
 
  A321-200   CFM56-5B3/P     1006     Apr-99   Securitization No. 2
 
  A321-200   CFM56-5B3/2P     1012     Apr-99   Securitization No. 2
 
  737-700   CFM56-7B22     28008     Feb-99   Securitization No. 2
 
  737-700   CFM56-7B22     28009     Mar-99   Securitization No. 2
 
  737-700   CFM56-7B22     28010     Oct-99   Securitization No. 2
 
  737-700   CFM56-7B22     28013     Oct-00   Term Financing No. 1
 
  737-700   CFM56-7B22     28014     Feb-01   Term Financing No. 1
 
  737-700   CFM56-7B22     28015     Feb-01   Securitization No. 2
 
  737-700   CFM56-7B22     29045     Dec-98   Securitization No. 2
 
  737-700   CFM56-7B22     29046     Jan-99   Securitization No. 2
 
  737-700   CFM56-7B22     29078     Apr-99   Securitization No. 1
 
  737-800   CFM56-7B26     28056     May-99   Securitization No. 1
 
  737-800   CFM56-7B26     28213     Jun-98   Securitization No. 2
 
  737-800   CFM56-7B26     28220     Feb-99   Securitization No. 1
 
  737-800   CFM56-7B27     28227     Jan-00   Securitization No. 1
 
  737-800   CFM56-7B27     28231     May-00   Term Financing No. 1
 
  737-800   CFM56-7B26     28381     May-99   Securitization No. 1
 
  737-800   CFM56-7B26     28384     Nov-99   Securitization No. 1
 
  737-800   CFM56-7B26     29036     Dec-98   Securitization No. 2
 
  737-800   CFM56-7B26     29037     Jan-99   Securitization No. 2
 
  737-800   CFM56-7B26     29329     Mar-99   Securitization No. 2
 
  737-800   CFM56-7B27     29345     May-02   Term Financing No. 1
 
  737-800   CFM56-7B24     29916     Mar-99   Term Financing No. 1
 
  737-800   CFM56-7B24     29917     Jun-99   Term Financing No. 1
 
  737-800   CFM56-7B24     29918     Jun-99   Term Financing No. 1
 
  737-800   CFM56-7B24     29919     Aug-99   Term Financing No. 1
 
  737-800   CFM56-7B24     29920     Sep-99   Term Financing No. 1
 
  737-800   CFM56-7B24     30230     Jan-00   Securitization No. 2
 
  737-800   CFM56-7B27     30296     Feb-05   Term Financing No. 1

 


 

                         
            Manufacturer   Date of    
Aircraft Group   Aircraft Type   Engine Type   Serial Number   Manufacture   Financing
Classic Narrowbody Aircraft
  A320-200   CFM56-5A1/F     138     Jan-91   Term Financing No. 2
 
  A320-200   CFM56-5A1/F     148     Feb-91   Term Financing No. 2
 
  737-300   CFM56-3B1     23173     Apr-85   Securitization No. 2
 
  737-300   CFM56-3B2     24570     Jan-90   Securitization No. 2
 
  737-300   CFM56-3C1     24669     Aug-90   Securitization No. 1
 
  737-300   CFM56-3C1     24672     Sep-90   Securitization No. 1
 
  737-400   CFM56-3C1     24644     Oct-90   Securitization No. 2
 
  737-400   CFM56-3C1     25147     May-91   Securitization No. 1
 
  737-400   CFM56-3C1     26280     Mar-92   Securitization No. 1
 
  737-400   CFM56-3C1     27001     Jul-92   Securitization No. 1
 
  737-400   CFM56-3C1     27003     Jul-92   Securitization No. 1
 
  737-400   CFM56-3C1     27094     Feb-93   Securitization No. 1
 
  737-400   CFM56-3C1     27826     Feb-95   Securitization No. 2
 
  737-400   CFM56-3C1     28038     May-96   Securitization No. 2
 
  737-400   CFM56-3C1     28867     Apr-97   Securitization No. 2
 
  737-500   CFM56-3C1     27425     Sep-95   Securitization No. 2
 
  757-200   PW2040     24738     Apr-90   Securitization No. 2
 
  757-200   PW2040     24747     Apr-90   Securitization No. 2
 
  757-200   PW2040     24748     May-90   Securitization No. 2
 
  757-200   RB211-535E4     24838     Aug-90   Securitization No. 2
 
  757-200   PW2037     27152     Jun-93   Term Financing No. 1
 
  757-200   PW2037     27183     Sep-93   Term Financing No. 1
 
  757-200   RB211-535E4     27201     Mar-94   Securitization No. 2
 
  757-200   PW2040     27203     Nov-94   N/A
 
  757-200   RB211-535E4     27244     Mar-94   Securitization No. 2
 
  757-200   RB211-535E4     27245     Jul-94   Securitization No. 2
 
  757-200   PW2037     27342     Aug-94   Term Financing No. 1
 
  757-200   PW2037     27681     Jul-95   Term Financing No. 1
 
                       
Latest Generation Midbody Aircraft
  A330-200   Trent 772B     313     Jan-00   Securitization No. 2
 
  A330-200   PW4168A     324     Feb-00   Term Financing No. 1
 
  A330-200   PW4168A     343     Jun-00   Securitization No. 1
 
  A330-200   Trent 772B     1016     May-09   ECA Term Financing
 
  A330-200   Trent 772B     1073     Dec-09   ECA Term Financing
 
  A330-300   CF6-80E1A2     86     Jul-95   Term Financing No. 1
 
  A330-300   PW4168A     171     Apr-97   Securitization No. 2
 
  A330-300   PW4168A     337     May-00   Securitization No. 2
 
  A330-300   PW4168A     342     Jun-00   Securitization No. 2
 
  A330-300   PW4168A     368     Nov-00   Term Financing No. 1
 
  A330-300   PW4168A     370     Dec-00   Securitization No. 1
 
  A330-300   PW4168A     375     Jan-01   Securitization No. 1
 
  767-200ER   CF6-80C2B2     24894     Nov-90   Securitization No. 1
 
  767-300ER   CF6-80C2B6     24084     May-88   Securitization No. 2
 
  767-300ER   PW4060-1C     24541     Aug-89   Securitization No. 2
 
  767-300ER   CF6-80C2B6F     24844     Aug-90   Securitization No. 1
 
  767-300ER   PW4062-3     24849     Sep-90   Securitization No. 2
 
  767-300ER   PW4060-1     24952     Mar-91   Term Financing No. 2
 
  767-300ER   PW4060-1     25000     Aug-91   Term Financing No. 2
 
  767-300ER   CF6-80C2B6F     25076     May-91   Term Financing No. 2
 
  767-300ER   CF6-80C2B6F     25117     May-91   Term Financing No. 2
 
  767-300ER   PW4060     25365     Oct-91   Securitization No. 1
 
  767-300ER   PW4060-3     25587     Feb-96   Securitization No. 2
 
  767-300ER   CF6-80C2B6     28656     May-97   Securitization No. 1
 
                       
Latest Generation Widebody Aircraft
  777-200ER   Trent 892B-17     28414     May-98   Securitization No. 2

 


 

                         
            Manufacturer   Date of    
Aircraft Group   Aircraft Type   Engine Type   Serial Number   Manufacture   Financing
Latest Generation Widebody Freighter Aircraft
  747-400BCF   PW4056-3     24061     Mar-89   Securitization No. 2
 
  747-400BCF   PW4056-3     24066     Jun-90   Term Financing No. 1
 
  747-400BCF   PW4056-3     24226     Sep-90   Term Financing No. 1
 
  747-400BCF   PW4056-3     24975     Feb-91   Securitization No. 2
 
  747-400BCF   PW4056-3     27137     Aug-93   Term Financing No. 2
 
  747-400BDSF   PW4056-1C     25700     May-93   Term Financing No. 1
 
  747-400BDSF   PW4056-1C     25702     Nov-93   Term Financing No. 2
 
  747-400ERF   CF6-80C2B5F     35233     Jan-07   Securitization No. 2
 
  747-400ERF   CF6-80C2B5F     35235     Jul-07   Securitization No. 2
 
  747-400ERF   CF6-80C2B5F     35236     Feb-08   Term Financing No. 1
 
  747-400ERF   CF6-80C2B5F     35237     Apr-08   Term Financing No. 1
 
                       
Classic Freighter Aircraft
  A310-300F   CF6-80C2A2     502     Aug-89   Securitization No. 1
 
  737-300QC   CFM56-3C1     23835     Nov-87   Securitization No. 1
 
  737-300QC   CFM56-3C1     23836     Feb-88   Securitization No. 1
 
  737-300QC   CFM56-3C1     23837     Mar-88   Securitization No. 1
 
  737-300QC   CFM56-3C1     24283     Feb-89   Securitization No. 1
 
  737-400SF   CFM56-3C1     29032     Nov-97   Securitization No. 2
 
  737-400SF   CFM56-3C1     29033     Dec-97   Securitization No. 2
 
  737-400SF   CFM56-3C1     29034     Mar-98   Securitization No. 2
 
  737-400SF   CFM56-3C1     29035     Jun-98   Securitization No. 2
 
  MD11-SF   PW4462-3     48445     Apr-91   Securitization No. 2