Aircastle Limited
Aircastle LTD (Form: 10-Q, Received: 05/09/2008 17:28:32)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

[X]   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2008

or

[ ]   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                to    

Commission File number 001-32959

AIRCASTLE LIMITED

(Exact name of registrant as specified in its charter)


Bermuda 98-0444035
(State or other jurisdiction of
incorporation or organization)
(IRS Employer
Identification No.)
c/o Aircastle Advisor LLC
300 First Stamford Place, 5 th Floor,
Stamford, CT
06902
(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code    ( 203) 504-1020

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES    [X]         NO    [ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of ‘‘large accelerated filer,’’ ‘‘accelerated filer’’ and ‘‘smaller reporting company’’ in Rule 12b-2 of the Exchange Act.


Large Accelerated Filer [X] Accelerated Filer [ ]
Non-accelerated filer [ ]  (Do not check if a smaller reporting company) Smaller reporting company [ ]

Indicate by check mark whether the registrant is a shell company (as defined in rule 12b-2 of the Exchange Act).    YES    [ ]         NO    [X]

As of May 2, 2008, there were 78,559,976 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  
Item 1. Financial Statements  
  Consolidated Balance Sheets as of December 31, 2007 and March 31, 2008 3
  Consolidated Statements of Income for the three months ended
March 31, 2007 and 2008
4
  Consolidated Statements of Cash Flows for the three months ended
March 31, 2007 and 2008
5
  Notes to Unaudited Consolidated Financial Statements 6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 19
Item 3. Quantitative and Qualitative Disclosures about Market Risk 40
Item 4. Controls and Procedures 42
Part II. — Other Information  
Item 1. Legal Proceedings 43
Item 1A. Risk Factors 43
Item 6. Exhibits 44
  Signature 46




PART I. — FINANCIAL INFORMATION

Item 1.    Financial Statements

Aircastle Limited and Subsidiaries
Consolidated Balance Sheets
(Dollars in thousands, except share data)


  December 31,
2007
March 31, 2008
    (unaudited)
ASSETS    
Cash and cash equivalents $ 13,546 $ 17,351
Accounts receivable 4,957 5,899
Debt investments 113,015 22,374
Restricted cash and cash equivalents 161,317 179,289
Flight equipment held for lease, net of accumulated depreciation of
$189,737 and $237,708
3,807,116 3,980,634
Aircraft purchase deposits and progress payments 245,331 170,638
Leasehold improvements, furnishings and equipment, net of accumulated depreciation of $1,335 and $1,526 1,391 1,390
Other assets 80,969 122,648
Total assets $ 4,427,642 $ 4,500,223
 
LIABILITIES AND SHAREHOLDERS’ EQUITY    
LIABILITIES    
Borrowings under credit facilities $ 798,186 $ 981,592
Borrowings from securitizations 1,677,736 1,662,044
Accounts payable, accrued expenses and other liabilities 65,967 73,302
Dividends payable 55,004 19,640
Lease rentals received in advance 31,016 26,669
Repurchase agreements 67,744 2,283
Security deposits 74,661 72,398
Maintenance payments 208,363 230,585
Fair value of derivative liabilities 154,388 248,365
Total liabilities 3,133,065 3,316,878
 
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, 78,574,657 shares issued and outstanding at December 31, 2007; and 78,559,976 shares issued and outstanding at March 31, 2008 786 786
Additional paid-in capital 1,468,140 1,468,840
Dividends in excess of earnings (48,960 )   (36,963 )  
Accumulated other comprehensive loss (125,389 )   (249,318 )  
Total shareholders’ equity 1,294,577 1,183,345
Total liabilities and shareholders’ equity $ 4,427,642 $ 4,500,223

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

3





Aircastle Limited and Subsidiaries
Consolidated Statements of Income
(Dollars in thousands, except per share amounts)
(Unaudited)


  Three Months Ended
March 31,
2007 2008
Revenues:    
Lease rentals $ 67,358 $ 133,627
Interest income 2,588 1,291
Other revenue 58 38
Total revenues 70,004 134,956
Expenses:    
Depreciation 21,633 48,215
Interest, net 16,730 41,011
Selling, general and administrative (including non-cash share based payment expense of $1,258 and $1,598, respectively) 8,497 11,489
Other expenses 382 890
Total expenses 47,242 101,605
Income from continuing operations before income taxes 22,762 33,351
Income tax provision 1,905 1,714
Income from continuing operations 20,857 31,637
Earnings from discontinued operations, net of income taxes 684
Net income  $ 21,541 $ 31,637
 
Basic earnings per share:    
Income from continuing operations $ 0.35 $ 0.41
Earnings from discontinued operations, net of income taxes 0.01
Net income per share $ 0.36 $ 0.41
 
Diluted earnings per share:    
Income from continuing operations $ 0.35 $ 0.41
Earnings from discontinued operations, net of income taxes 0.01
Net income per share $ 0.36 $ 0.41
 
Dividends declared per share $ 0.50 $ 0.25

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

4





Aircastle Limited and Subsidiaries
Consolidated Statements of Cash Flows
(Dollars in thousands)
(Unaudited)


  Three Months Ended
March 31,
2007 2008
Cash flows from Operating activities:    
Net income $ 21,541 $ 31,637
Adjustments to reconcile net income to net cash provided by operating activities (inclusive of amounts related to discontinued operations)    
Depreciation 22,394 48,162
Amortization of deferred financing costs 1,514 2,584
Amortization of lease premiums and discounts, and other related lease items (1,701 )   (2,713 )  
Deferred income taxes 1,892 1,061
Accretion of purchase discounts on debt investments (208 )   (149 )  
Non-cash share based payment expense 1,258 1,598
Cash flow hedges reclassified into earnings (1,007 )   (139 )  
Ineffective portion of cash flow hedges 42 1,998
Loss on sale of investments 245
Changes in certain assets and liabilities:    
Accounts receivable 4,180 (942 )  
Restricted cash and cash equivalents (15,373 )   (17,972 )  
Other assets (458 )   574
Accounts payable, accrued expenses and other liabilities (5,056 )   (2,081 )  
Payable to affiliates (185 )  
Lease rentals received in advance 2,976 (4,347 )  
Security deposits and maintenance payments 28,525 19,959
Net cash provided by operating activities 60,519 79,290
Cash flows from investing activities:    
Acquisition and improvement of flight equipment (446,390 )   (117,027 )  
Aircraft purchase deposits and progress payments (8,600 )   (5,312 )  
Purchase of debt investments (15,251 )  
Proceeds from sale of debt investments 65,335
Principal repayments on debt investments 12,664 11,224
Margin call payments on derivatives and repurchase agreements (5,660 )   (198,882 )  
Margin call receipts on derivatives and repurchase agreements 158,244
Leasehold improvements, furnishings and equipment (190 )  
Net cash used in investing activities (463,237 )   (86,608 )  
Cash flows from financing activities:    
Issuance of common shares in public offerings, net 493,056
Repurchase of shares from directors and employees (210 )   (898 )  
Securitization repayments (5,400 )   (15,692 )  
Deferred financing costs (1,227 )   (2,571 )  
Credit facility borrowings 486,584 325,608
Credit facility repayments (552,961 )   (142,202 )  
Proceeds from repurchase agreements 140
Principal repayments on repurchase agreement (3,790 )   (65,461 )  
Payments for terminated cash flow hedges (32,657 )  
Dividends paid (22,584 )   (55,004 )  
Net cash provided by financing activities 393,608 11,123
Net decrease in cash and cash equivalents (9,110 )   3,805
Cash and cash equivalents at beginning of period 58,118 13,546
Cash and cash equivalents at end of period $ 49,008 $ 17,351

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

5





Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
March 31, 2008

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 funds managed by affiliates of 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 acquiring, managing and leasing commercial jet aircraft to airlines throughout the world and investing in aircraft related debt investments.

Pursuant to a Shareholders Agreement executed November 24, 2004, the Fortress Shareholders committed to contribute $400,000 in initial equity to Aircastle. As of December 31, 2005, the Fortress Shareholders had completed making their initial $400,000 cash capital contribution. In conjunction with the second follow-on public offering of our common shares completed in October 2007, certain Fortress Shareholders sold 11,000,000 secondary common shares in the public offering.

Basis of Presentation

Aircastle is a holding company that conducts its business through subsidiaries. Aircastle owns, directly or indirectly, all of the outstanding common shares or economic ownership interest of its subsidiaries. The consolidated financial statements presented are prepared in accordance with U.S. generally accepted accounting principles (‘‘GAAP’’).

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 condensed financial statements prepared in accordance with 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, 2007.

Effective January 1, 2008, the Company adopted Financial Accountings Standards Board (‘‘FASB’’) Statement of Accounting Standards (‘‘SFAS’’) No. 159, The Fair Value Option for Financial Assets and Financial Liabilities , including an amendment of FASB Statement No. 115, Accounting for Certain Investments in Debt and Equity Securities , which permits an entity to measure certain eligible financial assets and financial liabilities at fair value that are not currently measured at fair value. The company did not elect to measure any additional financial instruments at fair value for its financial assets and liabilities existing at January 1, 2008 and did not elect the fair value option on financial assets and liabilities transacted in the three months ended March 31, 2008. Therefore, the adoption of SFAS No. 159 had no impact on the Company’s consolidated financial statements.

Also effective January 1, 2008, the Company adopted SFAS No. 157, Fair Value Measurements (See Note 2 — Fair Value Measurements). This pronouncement defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. In February 2008, the FASB issued FASB Staff Position No. 157-2 (‘‘FSP No. 157-2’’) which defers the effective date of SFAS No. 157 for nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in an entity’s financial statements on a recurring basis (at least

6





Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
March 31, 2008

annually). FSP No. 157-2 will apply to fiscal years beginning after November 15, 2008, and interim periods within those fiscal years. We are currently evaluating the requirements of the deferred provisions of this statement and have not determined the impact, if any, that adoption of the deferred provisions will have on our consolidated financial statements.

Principles of Consolidation

The consolidated financial statements include the accounts of Aircastle and all of its subsidiaries. Aircastle consolidates two Variable Interest Entities in accordance with FASB Interpretation No. 46, Consolidation of Variable Interest Entities (‘‘FIN 46’’) of which Aircastle is the primary beneficiary. All intercompany transactions and balances have been eliminated in consolidation.

Recent Accounting Pronouncements

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activities , (‘‘SFAS No. 161’’). SFAS No. 161 is intended to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand their effects on an entity’s financial position, financial performance, and cash flows. SFAS No. 161 is effective for financial statements issued for fiscal years beginning after November 15, 2008. We do not expect the adoption of SFAS No. 161 to have a material effect on our consolidated financial statements.

Note 2.    Fair Value Measurements

As described in Note 1 — Summary of Significant Account Policies, we adopted SFAS No. 157, Fair Value Measurements for financial assets and liabilities as of January 1, 2008. This standard defines fair value, provides a consistent framework for measuring fair value and expands certain disclosures. SFAS No. 157 clarifies that fair value is an exit price, representing the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market in an orderly transaction between market participants on the measurement date. SFAS No. 157 requires 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 table sets forth our financial assets and liabilities as of March 31, 2008 that we measured at fair value on a recurring basis by level within the fair value hierarchy. As required by

7





Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
March 31, 2008

SFAS No. 157, assets and liabilities measured at fair value are classified in their entirety based on the lowest level of input that is significant to their fair value measurement.


  Fair Value As
Of March 31,
2008
Fair Value Measurements at March 31, 2008
Using Fair Value Hierarchy
  Level 1 Level 2 Level 3 Valuation
Technique
Assets:          
Debt investments $ 22,374 $ 3,012 $ 19,362 $ Market/Income
Liabilities:          
Derivative liabilities $ 248,365 $ $ 248,365 $ Income

Our debt investments included within Level 1 are valued based on quoted market prices in active markets. When quoted prices in an active market are not available, fair values are estimated by using discounted cash flow methodologies, where the inputs to those models are based on observable market inputs of similar securities in active markets. Our derivatives consist of United States dollar denominated interest rate swaps, and their fair values are determined using cash flows discounted at relevant market interest rates in effect at the period close.

There were no assets and liabilities measured at fair value on a nonrecurring basis.

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 at March 31, 2008 were as follows:


Year Ending December 31, Amount
Remainder of 2008 $ 392,578
2009 490,528
2010 429,441
2011 362,746
2012 298,491
2013 200,471
Thereafter 406,613
Total $ 2,580,868

Geographic concentration of lease rental revenue earned from flight equipment held for lease was as follows:


  Three Months Ended
March 31,
Region 2007 2008
Europe 43 %   45 %  
Asia 25 %   26 %  
North America 22 %   12 %  
Latin America 5 %   8 %  
Middle East and Africa 5 %   9 %  
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.

8





Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
March 31, 2008

For the three months ended March 31, 2007, one customer accounted for 17% of lease rental revenue and three additional customers accounted for a combined 22% of lease rental revenue. No other customer accounted for more than 4% of lease rental revenue. For the three months ended March 31, 2008, one customer accounted for 8% of lease rental revenue and three additional customers accounted for a combined 15% of lease rental revenue. No other customer accounted for more than 4% of lease rental revenue.

Geographic concentration of net book value of flight equipment held for lease was as follows:


  December 31, 2007 March 31, 2008
Region Number of
Aircraft
Net Book
Value %
Number of
Aircraft
Net Book
Value %
Europe (1) 65 47 %   64 45 %  
Asia 35 27 %   35 25 %  
North America (1) 13 10 %   14 11 %  
Latin America 12 7 %   12 7 %  
Middle East and Africa 8 9 %   10 12 %  
Off-lease (2) %   1 %  
Total 133 100 %   136 100 %  
(1) At December 31, 2007, includes one Boeing Model 747-400 aircraft in Europe and one Boeing Model 747-400 aircraft in North America which were being converted to freighter configuration for which we have an executed lease post-conversion with a carrier in each of these geographic regions.
(2) As of April 11, 2008, we had executed a lease for this aircraft, which we expect to commence in the second quarter of 2008.

At December 31, 2007 and March 31, 2008, lease acquisition costs included in other assets on the consolidated balance sheets were $417 and $394, respectively. Prepaid lease incentive costs included in other assets on the consolidated balance sheets were $586 at both December 31, 2007 and March 31, 2008.

Note 4.    Debt Investments

In February 2008, we sold two of our debt investments for $65,335, plus accrued interest. We repaid the outstanding balance of $52,303, plus accrued interest, under the related repurchase agreement. Additionally, we terminated the related interest rate swap and paid breakage fees and accrued interest of approximately $1,040.

In 2007, we acquired a loan secured by a commercial jet aircraft that was classified as held to maturity. The loan had an outstanding balance of $13,567 at maturity, which we believe approximated its fair value.

As of March 31, 2008, all of our debt investments classified as available-for-sale were U.S. corporate obligations. These debt obligations are interests in pools of loans and are collateralized by interests in commercial aircraft of which $3,012 are senior tranches and $19,362 are subordinated to other debt related to such aircraft. Our debt investments had net unrealized gain positions relative to their net book values, which aggregated to $10,833 and $10,414 at December 31, 2007 and March 31, 2008, respectively.

At March 31, 2008 one of our debt investments has a stated maturity in 2010. One of our debt investments has a stated maturity in 2017. Our other two debt investments have remaining terms to

9





Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
March 31, 2008

stated maturity in excess of 10 years after March 31, 2008. All of our debt investments provide for the periodic payment of both principal and interest and are subject to prepayment and/or acceleration depending on certain events, including the sale of the underlying collateral aircraft and events of default. Therefore, the actual maturity of our debt investments may be less than the stated maturities.

Note 5.    Securitizations and Borrowings under Credit Facilities

The outstanding amounts of our securitizations and borrowings under our credit facilities were as follows:


  At
December 31,
2007
At March 31, 2008
Debt Obligation Outstanding
Borrowings
Outstanding
Borrowings
Interest Rate (1) Final Stated
Maturity
Securitizations:        
Securitization No. 1 $ 527,397 $ 521,725 1 M LIBOR + .27% = 3.09% 6/20/31
Securitization No. 2 1,150,339 1,140,319 1 M LIBOR + .26% = 3.32% 6/14/37
Total Securitizations 1,677,736 1,662,044    
Credit Facilities:        
Revolving Credit Facility (2) 10,000 1 M LIBOR + 2.00% = 4.56% 12/11/08
Amended Credit Facility No. 2 (3) 734,059 846,373 1 M LIBOR + 1.25% = 4.07% 12/15/08
2008-A Credit Facility (4) 93,294 1 M LIBOR + 1.50% = 4.32% 8/04/08
747 PDP Credit Facility (5) 64,127 31,925 1 M LIBOR + 1.00% = 3.82% 4/10/08
Total Credit Facilities 798,186 981,592    
Total $ 2,475,922 $ 2,643,636    
(1) London Interbank Offered Rate, or ‘‘LIBOR’’, in effect at the applicable reset date.
(2) On March 20, 2008, the parties to the Revolving Credit Facility entered into a fourth amendment to the Revolving Credit Facility, extending the Stated Termination Date (as defined therein) to December 11, 2008, and reducing the commitments of the lenders to make loans thereunder, or the Revolving Commitments, from $250,000 to $150,000. The Revolving Commitments are further reduced to $100,000 on June 30, 2008, $80,000 on August 31, 2008, $60,000 on September 30, 2008 and $40,000 on October 31, 2008, with final maturity on December 11, 2008.
(3) On March 20, 2008, the parties to Amended Credit Facility No. 2 entered into an amendment reducing the commitments of the lenders to make loans thereunder from $1,000,000 to $500,000, on any future date after which the loans outstanding under Amended Credit Facility No. 2 fall below $500,000.
(4) On February 5, 2008, we entered into a senior secured credit agreement with two banks, or the 2008-A Credit Agreement, which we refer to as the 2008-A Credit Facility. The 2008-A Credit Facility provides for loans in an aggregate amount of up to $300,000, with borrowings under this credit facility being used to finance a portion of the purchase price of certain aircraft. Loans under the 2008-A Credit Facility mature on August 4, 2008 or, if the borrower exercises its extension option, which we refer to as the Extension Option, then the maturity date will be October 29, 2008.
(5) On April 10, 2008, we paid the remaining balance of $31,925.

10





Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
March 31, 2008

Credit Facilities

Revolving Credit Facility

On March 20, 2008, the parties to the Revolving Credit Facility entered into a fourth amendment to the Revolving Credit Facility (the ‘‘2006-B Fourth Amendment’’), extending the Stated Termination Date (as defined therein) to December 11, 2008, and reducing the commitments of the lenders to make loans thereunder (the ‘‘Revolving Commitments’’) from $250,000 to $150,000. The Revolving Commitments are further reduced to $100,000 on June 30, 2008, $80,000 on August 31, 2008, $60,000 on September 30, 2008 and $40,000 on October 31, 2008, with final maturity on December 11, 2008. The 2006-B Fourth Amendment also amends the Revolving Credit Facility so that Bear Stearns Corporate Lending Inc. will have no further Revolving Commitments or loans outstanding under the Revolving Credit Facility, with JPMorgan Chase Bank, N.A. and Citicorp North America, Inc. each funding one-half of the Revolving Commitments and the outstanding loans from the date of the 2006-B Fourth Amendment. The applicable margin on LIBOR-based loans under the Revolving Credit Facility increased to 200 basis points, and the remaining lenders under the Revolving Credit Facility received an up-front fee equal to 25 basis points of the $150,000 committed amount of the facility.

At March 31, 2008, there were $10,000 in outstanding loans and $5,954 of letters of credit outstanding under the Revolving Credit Facility. The interest rate, including margin, applicable to loans under the Revolving Credit Facility at March 31, 2008 was 4.56%. We expect to modify or replace our Revolving Credit Facility before its current maturity of December 11, 2008.

Amended Credit Facility No. 2

On March 20, 2008, the parties to Amended Credit Facility No. 2 entered into an amendment to Amended Credit Facility No. 2 reducing the commitments of the lenders to make loans thereunder from $1,000,000 to $500,000, on any future date after which the loans outstanding under Amended Credit Facility No. 2 fall below $500,000.

At March 31, 2008, we had borrowings of $846,373 related to 36 aircraft under our Amended Credit Facility No. 2. During the second quarter of 2008, we plan to refinance a majority of these aircraft, as well as three additional aircraft that we expect to acquire during the first half of 2008, with long-term financing using a cost effective debt structure such as a non-recourse securitization or similar bank market financing. We believe that similar bank market financing would be available in a single, diversified portfolio transaction structured like a securitization or would also be available in a series of smaller financings. In addition, we expect to extend, modify or replace Amended Credit Facility No. 2 with a similar aircraft acquisition facility before its current maturity of December 15, 2008. (See Note 15 — Subsequent Events.)

2008-A Credit Facility

On February 5, 2008, we entered into a senior secured credit agreement with two banks which we refer to as the ‘‘2008-A Credit Facility’’. The 2008-A Credit Facility provides for loans in an aggregate amount of up to $300,000, with borrowings under this credit facility being used to finance a portion of the purchase price of certain aircraft.

Loans under the 2008-A Credit Facility mature on August 4, 2008 or, if the borrower exercises its extension option, which we refer to as the Extension Option, then the maturity date will be October 29, 2008, the outside maturity date following the initial closing of our ACS 2008-1 Credit Facility. (See Note 15 — Subsequent Events.) We refer to the period from August 4, 2008 to October 29, 2008 as the Extension Period.

11





Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
March 31, 2008

Borrowings under the 2008-A Credit Facility bear interest (a) in the case of loans with an interest rate based on the applicable base rate (the ‘‘ABR’’), the ABR plus an applicable margin of 0.50% per annum, increasing to 1.50% per annum during the Extension Period or (b) in the case of loans with an interest rate based on the euro dollar rate (the ‘‘EDR’’), the EDR plus an applicable margin of 1.50% per annum, increasing to 2.50% per annum during the Extension Period. Additionally, we are subject to a 0.25% per annum fee, increasing to 0.375% per annum fee during the Extension Period, on any unused portion of the total committed facility.  We are also required to pay customary agency fees. The interest rate, including margin, applicable to loans under the 2008-A Credit Facility at March 31, 2008 was 4.32%. As of March 31, 2008, the outstanding borrowings were $93,294.

747 PDP Credit Facility

On July 26, 2007, we made an accelerated payment to the relevant Guggenheim Aviation Investment Fund LP (‘‘GAIF’’) seller under our acquisition agreement with GAIF (the ‘‘GAIF Acquisition Agreement’’) for three Boeing Model 747-400ERF aircraft in the amount of $106,668 and assumed a pre-delivery payment credit facility related to such 747-400ERF aircraft (the ‘‘Accelerated ERF Aircraft’’), which we refer to as the ‘‘747 PDP Credit Facility’’. The total outstanding amount of borrowings assumed under the 747 PDP Credit Facility was $95,926.  On July 30, 2007, we took delivery of the first Accelerated ERF Aircraft and paid down $31,799 under the 747 PDP Credit Facility. On February 11, 2008, we took delivery of the second Accelerated ERF Aircraft and paid down $32,202 under the 747 PDP Credit Facility. Borrowings under this facility were used to finance progress payments made to Boeing during the manufacturing of the aircraft and bear interest at one-month LIBOR plus 1.00% per annum, which at March 31, 2008 was 3.82%. The facility matured upon the delivery of the third and final Accelerated ERF aircraft on April 10, 2008 when we paid the remaining balance of $31,925. As of March 31, 2008, the outstanding borrowings were $31,925. (See Note 15 — Subsequent Events.)

Note 6.    Repurchase Agreements

The outstanding amounts of our repurchase agreements were as follows:


  At
December 31,
2007
At March 31, 2008
Debt Obligation Outstanding
Borrowings
Outstanding
Borrowings
Interest Rate (1) Final Stated
Maturity
Repurchase Agreement (2) $ 60,282 $ 1 M LIBOR + .50% = N/A
Repurchase Agreement (3) 4,972 1 M LIBOR + .75% = N/A
Repurchase Agreement 2,490 2,283 1 M LIBOR +  .50% = 3.18% 6/28/08
Total Repurchase Agreements $ 67,744 $ 2,283    
(1) LIBOR in effect at the applicable reset date.
(2) In February 2008, we sold the underlying debt investments for $65,335 plus accrued interest and paid the outstanding amount under this repurchase agreement of $52,303 plus accrued interest. Additionally, we terminated the related interest rate swap and paid breakage fees and accrued interest of approximately $1,040.
(3) In March 2008, we elected not to refinance this purchase agreement upon its maturity on March 15, 2008 and repaid the outstanding balance.

12





Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
March 31, 2008

We enter into repurchase agreements to fund a portion of the purchase price of certain of our debt investments (See Note 4 — Debt Investments). At December 31, 2007 and March 31, 2008 the repurchase agreements are secured by liens on the debt investments with a fair value of $85,173 and $1,561, respectively.

Note 7.    Dividends

On March 14, 2007, our board of directors declared a first quarter dividend of $0.50 per common share or an aggregate of $33,634, for the three months ended March 31, 2007, which was paid on April 13, 2007 to shareholders of record on March 30, 2007.

On March 24, 2008, our board of directors declared a first quarter dividend of $0.25 per common share, or an aggregate of $19,640, for the three months ended March 31, 2008, which was paid on April 15, 2008 to shareholders of record on March 31, 2008.

Note 8.    Earnings Per Share

Aircastle is required to present both basic and diluted earnings (loss) per share (‘‘EPS’’). Basic EPS is calculated by dividing net income (loss) by the weighted average number of common shares outstanding during each period. The weighted average shares outstanding exclude our unvested shares for purposes of Basic EPS. Diluted EPS is calculated by dividing net income (loss) by the weighted average number of common shares outstanding during the period while also giving effect to all potentially dilutive common shares that were outstanding during the period based on the treasury stock method.

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


  Three Months Ended
March 31,
  2007 2008
Numerator    
Income from continuing operations $ 20,857 $ 31,637
Earnings from discontinued operations, net of income taxes 684
Net income $ 21,541 $ 31,637
Denominator    
Weighted-average shares used to compute basic earnings per share 58,864,054 77,719,986
Effect of dilutive restricted shares 291,573 (a )  
Weighted-average shares outstanding and dilutive securities used to compute diluted earnings per share 59,155,627 77,719,986
Basic earnings per share:    
Income from continuing operations $ 0.35 $ 0.41
Earnings from discontinued operations, net of income taxes 0.01
Net income per share $ 0.36 $ 0.41
Diluted earnings per share:    
Income from continuing operations $ 0.35 $ 0.41
Earnings from discontinued operations, net of income taxes 0.01
Net income per share $ 0.36 $ 0.41
(a) For the three months ended March 31, 2008, based on the treasury stock method, we had 913,912 anti-dilutive common share equivalents resulting from unvested restrictive shares.

13





Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
March 31, 2008

Note 9.    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, 2007 and 2008 were as follows:


  Three Months Ended
March 31,
  2007 2008
U.S. operations $ 445 $ 635
Non-U.S. operations 22,317 32,716
Total $ 22,762 $ 33,351

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 therefore typically are not subject to U.S. federal, state or local income taxes. However, certain of these non-U.S. subsidiaries own aircraft that operate to, from or within the U.S. and therefore 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.

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,
  2007 2008
Notional U.S. federal income tax expense at the statutory rate $ 7,967 $ 11,672
    U.S. state and local income tax, net 50 27
    Non-U.S. operations (6,135 )   (9,984 )  
    Non-deductible expenses in the U.S. 14 8
    Other 9 (9 )  
Provision for income taxes $ 1,905 $ 1,714

Note 10.     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 in accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities , and the change in unrealized appreciation of debt securities classified as available-for-sale. Total comprehensive income (loss) for the three months ended March 31, 2007 and 2008 was as follows:

14





Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
March 31, 2008


  Three Months Ended
March 31,
  2007 2008
Net income $ 21,541 $ 31,637
Net change in fair value of derivatives, net of tax benefit of $0 and $1,264, respectively (11,498 )   (123,371 )  
Derivative gain reclassified into earnings (1,007 )   (139 )  
Net change in unrealized depreciation of debt investments 464 (419 )  
Total comprehensive income (loss) $ 9,500 $ (92,292 )  

The following table sets forth the components of accumulated other comprehensive income (loss), net of tax where applicable, at December 31, 2007 and March 31, 2008:


  Fair Value of
Derivatives (1)
Unrealized
Appreciation
Debt Securities
Accumulated
Other
Comprehensive
Income (Loss)
December 31, 2007 $ (136,222 )   $ 10,833 $ (125,389 )  
Net change in fair value of derivatives, net of tax benefit of $1,264 (123,371 )   (123,371 )  
Derivative gain reclassified into earnings (139 )   (139 )  
Net change in unrealized depreciation of debt investments (419 )   (419 )  
March 31, 2008 $ (259,732 )   $ 10,414 $ (249,318 )  
(1) Net of tax benefit of $1,928 at December 31, 2007.

Note 11.    Commitments and Contingencies

In the first quarter of 2008, we completed the purchase of two aircraft under the GAIF Acquisition Agreement, and removed an aircraft, from the GAIF Acquisition Agreement, reducing the total number of aircraft to be acquired to 35. As of March 31, 2008, we have completed the acquisition of 30 of the aircraft for $1,228,353. We completed the purchase of one Boeing Model 747-400ERF aircraft in April 2008. The remaining aircraft we will acquire under the GAIF Acquisition Agreement are scheduled to be delivered to us through February 2009.

On June 20, 2007, Aircastle entered into an acquisition agreement (the ‘‘Airbus A330 Agreement’’) with Airbus SAS (‘‘Airbus’’) under which we agreed to acquire fifteen new Airbus Model A330-200 aircraft (the ‘‘New A330 Aircraft’’). Five of the aircraft we will acquire under the Airbus A330 Agreement are scheduled to be delivered in 2010, with the remainder to be delivered in 2011. Pre-delivery payments for each aircraft are payable to Airbus and are refundable to us only in limited circumstances. We agreed to separate arrangements with Rolls-Royce PLC and Pratt & Whitney pursuant to which we committed to acquire aircraft engines for the New A330 Aircraft. As of March 31, 2008, we have made $56,029 in deposits and progress payments to Airbus. Under limited circumstances, we have the right to change certain delivery positions from A330-200 freighter configuration aircraft to A330-200 passenger configuration aircraft.

At March 31, 2008, we had letters of intent or purchase agreements to acquire 20 aircraft for an estimated purchase price of $1,357,831, comprised of the fifteen New A330 Aircraft and the balance of the aircraft to be delivered under the GAIF Acquisition Agreement. The purchase price of certain of the aircraft under these letters of intent or purchase agreements, other than the Airbus A330

15





Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
March 31, 2008

Agreement, is subject to variable price provisions that typically reduce the final purchase price if the actual closing occurs beyond an initially agreed upon date. The purchase price for aircraft we are committed to acquire under the Airbus A330 Agreement is subject to adjustment for configuration changes, engine selection and contractual price escalations.

Committed amounts for the purchase of aircraft and related flight equipment and improvements, including the aircraft purchases discussed above, together with estimated amounts for pre-delivery deposits and, based on estimates for engine acquisition cost, contractual price escalation and other adjustments, are approximately $213,268 in 2008, $233,355 in 2009, $408,513 in 2010 and $440,050 in 2011.

Note 12.    Derivatives

We held the following interest rate derivative contracts as of March 31, 2008:


Hedged Item Current/
Starting
Notional
Amount
Effective
Date
Mandatory
Early
Termination
Date
Maturity
Date
Future
Maximum
Notional
Amount
Floating Rate Fixed Rate Fair Value
of
Derivative
Asset or
(Liability)
Securitization No. 1 $ 521,725 Jun-06 N/A Jun-16 $ 521,725 1M LIBOR
+ 0.27%
5.78% $ (53,603 )  
Securitization No. 2 1,140,319 Jun-07 N/A Jun-12 1,140,319 1M LIBOR 5.25% to 5.36% (92,417 )  
Revolving Credit Facility 28,000 Jun-07 Dec-11 Jan-12 203,000 1M LIBOR 4.89% (7,528 )  
Amended Credit Facility No. 2 240,000 Jun-07 Jun-08 Feb-13 240,000 1M LIBOR 4.88% (17,256 )  
Amended Credit Facility No. 2 and 747 PDP Credit Facility 220,000 Aug-07 Nov-08 May-13 220,000 1M LIBOR 5.33% (17,632 )  
Future debt and securitization 190,000 Jan-08 Feb-09