Exhibit 10.12
                         MORTGAGE AND SECURITY AGREEMENT

                          Dated as of November 20, 2002


                                     made by


                            AMERICAN TRANS AIR, INC.



                                   in favor of



                                 CITIBANK, N.A.,
                             as the Collateral Agent

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                                TABLE OF CONTENTS

                                                                           Page

RECITALS......................................................................1

GRANTING CLAUSE...............................................................1

HABENDUM CLAUSE...............................................................4

ARTICLE 1  DEFINITIONS........................................................6

Section 1.01   Definitions....................................................6

ARTICLE 2  COVENANTS OF THE COMPANY..........................................14

Section 2.01   Aircraft Registration, Maintenance and Operation; Possession
               and Permitted Leases; Insignia................................14

          (a)  (i)  Registration and Maintenance.............................14

               (ii)  Operation of Aircraft and Spare Engines.................15

               (iii)  Reregistration.........................................16

          (b)  Possession and Permitted Leases...............................18

          (c)  Insignia......................................................22

          (d)  Substitution of Engines/Propellers............................22

          (e)  Additional Aircraft-related Collateral........................22

Section 2.02   Replacement and Pooling of Parts; Alterations, Modifications
               and Additions.................................................23

          (a)  Replacement of Parts..........................................23

          (b)  Pooling of Parts..............................................23

          (c)  Alterations, Modifications and Additions......................23

          (d)  Certain Matters Regarding Passenger Convenience Equipment.....24

Section 2.03   Pledged Spare Parts Use, Possession and Designated Locations..25

Section 2.04   Insurance.....................................................26

          (a)  Public Liability and Property Damage Insurance................26

          (b)  Insurance Against Loss or Damage to an Aircraft, a Spare Engine,
                etc..........................................................27

          (c)  War-Risk, Hijacking and Related Perils Insurance..............28

          (d)  Reports, Certificates, etc....................................28

          (e)  Self-Insurance................................................29

          (f)  Additional Insurance by the Company...........................29

          (g)  Indemnification by Government in Lieu of Insurance............29

          (h)  Terms of Insurance Policies...................................30

          (i)  Application of Payments During Existence of a Specified Default
               or an Event of Default........................................31

Section 2.05   Inspection....................................................31

Section 2.06   UCC Collateral................................................31

Section 2.07   Liens.........................................................33

Section 2.08   Performance...................................................33

Section 2.09   Further Assurances............................................33
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ARTICLE 3  EVENT OF LOSS.....................................................33

Section 3.01 (a)  Event of Loss with Respect to an Aircraft..................33

             (b) Event of Loss with Respect to an Engine, a Propeller or
                 Spare Engine................................................36
             (c) Event of Loss with Respect to Pledged Spare Parts...........38
             (d) Application of Payments from Governmental Authorities for
                 Requisition of Title, etc...................................38
             (e) Requisition for Use of an Aircraft by the United States
                 Government or Government of Registry of an Aircraft.........39
             (f)  Requisition for Use of an Engine, a Propeller or Spare Engine
                  by the United States Government or the Government of Registry
                  of an Aircraft.............................................39
             (g)  Application of Payments During Existence of Specified Defaults
                  and Events of Default......................................39
             (h)  Treatment of Insurance Proceeds in Accordance with Loan
                  Agreement..................................................40

ARTICLE 4  REMEDIES..........................................................40

Section 4.01   Remedies Available to Collateral Agent........................40

Section 4.02   Expenses......................................................43

Section 4.03   Waiver of Claims..............................................43

Section 4.04   Discontinuance of Proceedings.................................44

ARTICLE 5  TERMINATION OF SECURITY AGREEMENT.................................44

Section 5.01   Termination of Security Agreement.............................44

ARTICLE 6  MISCELLANEOUS.....................................................45

Section 6.01   Notices.......................................................45

Section 6.02   GOVERNING LAW.................................................45

Section 6.03   Execution in Counterparts.....................................46

Section 6.04   Amendments....................................................46

Section 6.05   Documentation.................................................46

Section 6.06   Cash Collateral...............................................46
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EXHIBITS

Exhibit A1 Form of Mortgage and Security Agreement Supplement (Aircraft)

Exhibit A2 Form of Mortgage and Security Agreement Supplement (Engine/Propeller)

Exhibit A3 Form of Mortgage and Security Agreement Supplement
           (Pledged Spare Parts)

Exhibit B  Schedule of Aircraft

Exhibit C  Schedule of Spare Engines

Exhibit D  Summary Description of Pledged Spare Parts

Exhibit E  Designated Locations

Exhibit F  Schedule of Countries Authorized for Domicile of Permitted Lessee

Exhibit G  Schedule of Countries Authorized for Aircraft Registration

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                         MORTGAGE AND SECURITY AGREEMENT

This  MORTGAGE  AND  SECURITY  AGREEMENT  (as  amended,  modified,  restated  or
otherwise  supplemented  from time to time in accordance  with the terms hereof,
this  "Security  Agreement")  dated as of November  20, 2002 is made by AMERICAN
TRANS AIR, INC., an Indiana  corporation  (the  "Company") in favor of CITIBANK,
N.A., a national  banking  association  organized and existing under the laws of
the United States of America,  acting solely in its capacity as Collateral Agent
for the Board,  the Lenders and the  Participants  (as such terms are defined in
the Loan  Agreement  (as  defined  below))  and as directed by the Board and the
Lenders (the "Collateral Agent").

                              W I T N E S S E T H:

     WHEREAS,  all capitalized terms used and not otherwise defined herein shall
have the respective meanings set forth or referred to in Article 1 hereof;

     WHEREAS,  the Company is an air carrier  certificated  under Sections 41102
and 44705 of Title 49 of the United States Code and holds air carrier  operating
certificates;

     WHEREAS,  the Company,  ATA Holdings Corp., certain lenders, the Collateral
Agent,  Citibank,  N.A., as Agent, Air  Transportation  Stabilization  Board and
certain other  institutions are parties to a Loan Agreement dated as of November
20, 2002 (as amended, modified,  restated or otherwise supplemented from time to
time in accordance with its terms, the "Loan Agreement")  providing,  subject to
the terms and conditions thereof, for a single term loan (the "Loan") to be made
by such lenders;

     WHEREAS,  it is a  condition  precedent  to the making of the Loan that the
Company shall have executed and delivered to the Collateral  Agent this Security
Agreement;

     WHEREAS,  the Company wishes to execute this Security  Agreement to satisfy
the condition  described in the  preceding  paragraph and to grant certain first
priority  perfected  security  interests  in  the  Collateral  in  favor  of the
Collateral  Agent for the ratable benefit and security of the Board, the Lenders
and the Participants; and

     WHEREAS,  all things  necessary to make this Security  Agreement the legal,
valid and binding  obligation of the Company and the Collateral  Agent,  for the
uses and purposes herein set forth, in accordance with its terms, have been done
and performed and have happened;

                                 GRANTING CLAUSE

     NOW, THEREFORE,  THIS MORTGAGE AND SECURITY AGREEMENT WITNESSETH,  that, to
secure  the prompt  payment  of the  principal  of,  interest  on, and all other
amounts  due with  respect  to,  the  Loan and to  secure  the  performance  and
observance  by the  Obligors  under the Loan  Agreement  of all the  agreements,
covenants and  provisions  contained  herein,  in the Loan  Agreement and in the
other Loan Documents, and the prompt payment of any and all amounts from time to
time owing hereunder, under the Loan Agreement and the other Loan Documents, and
for the uses and purposes and subject to the terms and provisions hereof, and in

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consideration  of the premises and of the  covenants  herein  contained,  and of
other good and  valuable  consideration  the  receipt and  adequacy  whereof are
hereby  acknowledged,  the  Company  has  granted,  bargained,  sold,  assigned,
transferred,  conveyed, mortgaged, pledged and confirmed, and does hereby grant,
bargain, sell, assign, transfer,  convey, mortgage,  pledge and confirm unto the
Collateral  Agent,  its  successors  and assigns,  for the ratable  security and
benefit  of the  Board,  the  Lenders  and the  Participants,  a first  priority
security  interest in and first  priority  mortgage  Lien on all estate,  right,
title and  interest  of the  Company  in, to and under the  following  described
property,  rights,  interests  and  privileges  whether  now owned or  hereafter
acquired,  and wherever  located  (which  collectively,  including  all property
hereafter  specifically  subjected to the Lien of the Security  Documents by any
instrument supplemental hereto, are herein called the "Collateral"):

     (1) each Aircraft  (including,  without  limitation,  each  Airframe,  each
Engine (each such Engine  having 750 or more rated  take-off  horsepower  or the
equivalent thereof) and each Propeller (each such Propeller capable of absorbing
750 or more related takeoff shaft horse power or the equivalent thereof)) as the
same is now and will  hereafter be  constituted,  whether now owned or hereafter
acquired, and in the case of such Engines or Propellers, whether or not any such
Engine or  Propeller  shall be  installed  in or attached to any Airframe or any
other airframe and all  substitutions or replacements  therefor,  as provided in
this Security  Agreement,  together with all Parts of whatever  nature which are
from time to time included in the "Airframe", the "Engines" or the "Propellers",
whether  now  owned or  hereafter  acquired,  and all  renewals,  substitutions,
replacements,  additions,  improvements,   accessories  and  accumulations  with
respect to any of the foregoing;

     (2) each Spare  Engine  (each such  Spare  Engine  having 750 or more rated
take-off  horsepower  or the  equivalent  thereof)  as the  same is now and will
hereafter be constituted,  whether now owned or hereafter acquired,  and whether
or not any such Spare  Engine  shall be installed in or attached to any Airframe
or any  other  airframe  and all  substitutions  or  replacements  therefor,  as
provided in this Security Agreement,  together with all Parts of whatever nature
which are from time to time included in the "Spare  Engines",  whether now owned
or hereafter acquired, and all renewals, substitutions, replacements, additions,
improvements,   accessories  and  accumulations  with  respect  to  any  of  the
foregoing;

     (3) all Spare Parts and Appliances  whether now owned or hereafter acquired
by the Company that are  appropriate  for  installation  or use on, in or with a
Boeing model 757-200, 757-300 or 737-800 aircraft, or on any engine or Appliance
utilized on any such aircraft and without regard to whether any such Spare Parts
or Appliances are appropriate  for  installation or use on, in or with any other
type or model of aircraft  ("Qualified Spare Parts") including any replacements,
substitutions or renewals therefor,  and accessions  thereto,  including but not
limited to Qualified  Spare Parts (by way of  illustration  and not  limitation)
described on Exhibit D attached hereto and incorporated  herein by reference and
located at the Designated  Locations  described on Exhibit E attached hereto and
incorporated herein by reference or any supplement or amendment thereto supplied
hereunder or in any Security Agreement Supplement (Pledged Spare Parts) executed
and delivered from time to time hereunder;  provided that the following shall be
excluded from the Lien under this paragraph (3) of this Granting  Clause of this
Security  Agreement:  (a) any Qualified Spare Part so long as it is incorporated
in,  installed on or attached or appurtenant  to an aircraft or engine,  (b) any
Qualified Spare Part leased to, loaned to or held on consignment by, the Company
and  (c)  any  and  all   Expendables   (such  Qualified  Spare  Parts  and  any
replacements,  substitutions or renewals therefor and accessions thereto, giving
effect to such exclusion, the "Pledged Spare Parts");

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     (4) without  limiting the  generality  of the  foregoing,  all  requisition
proceeds  (including,  without  limitation,  all  payments and proceeds or other
revenues or income under the Civil  Reserve Air Fleet  Program)  with respect to
any Aircraft,  any Airframe,  any Engine,  any Propeller,  any Spare Engine, any
Pledged  Spare Part or any Part thereof or any other  property  described in any
paragraph of this Granting Clause and all insurance proceeds with respect to any
Aircraft, any Airframe, any Engine, any Propeller, any Spare Engine, any Pledged
Spare Part or any Part thereof or any other property  described in any paragraph
of this Granting Clause from insurance  required to be maintained by the Company
under  Section 2.04,  but excluding any insurance  maintained by the Company and
not required under Section 2.04 and all proceeds from the sale or disposition of
any Aircraft,  any Airframe,  any Engine,  any Propeller,  any Spare Engine, any
Pledged  Spare Part or any Part thereof or any other  property  described in any
paragraph of this Granting Clause;

     (5) the Purchase  Agreements,  the Warranty Bills of Sale and the FAA Bills
of Sale;

     (6) the rights of the Company under any  warranty,  indemnity or agreement,
express or implied,  regarding title, materials,  workmanship,  design or patent
infringement  or related matters in respect of any Aircraft,  any Airframe,  any
Engine, any Propeller, any Spare Engine or any Part thereof or any Pledged Spare
Part;

     (7) all repair,  maintenance and inventory  records,  logs, manuals and all
other documents and materials similar thereto  (including,  without  limitation,
any such records, logs, manuals,  documents and materials that are in electronic
format or are computer  print-outs) at any time  maintained,  created or used by
the Company,  and all records,  logs,  documents and other materials required at
any time to be  maintained  by the  Company  pursuant  to the FAA or  under  the
Federal Aviation Act, in each case with respect to any Airframe, any Engine, any
Propeller,  any Spare  Engine or any Part  thereof or any of the  Pledged  Spare
Parts ("Records");

     (8) all Pledged Accounts and Pledged  Equipment,  in each case, whether now
owned or existing or hereafter acquired or arising, and all proceeds,  products,
accessions,   rents,  profits,  income,  benefits,   indemnification   proceeds,
substitutions  and  replacements  of and to any of such  Collateral  and, to the
extent  related to such  Collateral,  all books,  correspondence,  credit files,
records,  invoices and other papers (including,  without limitation,  all tapes,
cards,  computer runs and other papers and documents in the  possession or under
the control of the Company or any computer  bureau or service  company from time
to time acting for the Company)  (collectively,  the "UCC Collateral") provided,
that if any of the Pledged  Equipment is subject to a lease,  title retention or
security  agreement  and cannot be  transferred  or  encumbered  by the  Company
without  resulting  in the  termination  of such  agreement or causing a default
thereunder,  then the grant of a security  interest  therein in accordance  with
this Security  Agreement (a) shall exclude such Pledged  Equipment and (b) shall
include the  Company's  right,  title and  interest in, to and under such lease,
title  retention  or  security  agreement,  together  with the  benefits  of all
deposits and payments now or hereafter  made  thereunder  by or on behalf of the
Company  and  subject  to all of the  terms  and  conditions  of such  lease  or
agreement and the liens and security interests thereunder;

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<PAGE>

     (9) all  moneys  and  securities  now or  hereafter  paid or  deposited  or
required to be paid or deposited to or with the  Collateral  Agent by or for the
account of the Company pursuant to any term hereof or of any other Loan Document
and held or required to be held by the Collateral Agent hereunder or thereunder;

     (10) all right, title, interest,  claims and demands of the Company, in, to
and under any lease of any Aircraft; and

     (11)  all  proceeds  (including,  without  limitation,   Proceeds)  of  the
foregoing.

                                 HABENDUM CLAUSE

     TO HAVE  AND TO HOLD  all and  singular  the  aforesaid  property  unto the
Collateral Agent, its successors and assigns,  and for the uses and purposes and
subject to the terms and provisions set forth in this Security Agreement.

     (1)  It  is  expressly  agreed that  anything  herein  contained to the
contrary notwithstanding, the Company shall remain liable under each of the Loan
Documents to which it is a party to perform all of the obligations assumed by it
thereunder,  all in  accordance  with and  pursuant to the terms and  provisions
thereof,  and the Collateral  Agent shall have no obligation or liability  under
any  of the  Loan  Documents  by  reason  of or  arising  out of the  assignment
hereunder, nor shall the Collateral Agent be required or obligated in any manner
to perform or  fulfill  any  obligations  of the  Company  under any of the Loan
Documents  to which the  Company  is a party,  or,  except  as herein  expressly
provided,  to make any  payment,  or to make any  inquiry  as to the  nature  or
sufficiency of any payment received by it, or present or file any claim, or take
any action to collect or enforce the payment of any amounts  which may have been
assigned to it or to which it may be entitled at any time or times.

     (2)  The  Company does hereby  constitute the  Collateral  Agent as its
true and lawful attorney,  irrevocably,  for good and valuable consideration and
coupled  with an interest  and with full power of  substitution  (in its name or
otherwise)  subject to the terms and conditions of this Security  Agreement,  to
ask, require,  demand,  receive,  sue for, compound and give acquittance for any
and all  moneys  and  claims  for  moneys  due and to become  due to it under or
arising out of the Loan Documents, to endorse any checks or other instruments or
orders  in  connection  therewith,  to file any  claims  or take any  action  or
institute any proceedings which the Collateral Agent may deem to be necessary or
advisable in the premises as fully as the Company itself could do.

     (3)  The  Company agrees that at any time and from time to time, at its
sole cost and expense, upon the written request of the Collateral Agent, it will

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promptly and duly execute,  deliver, file and record (as applicable) any and all
such  further  agreements,  certificates,  instruments  and  documents as may be
necessary or desirable or which the Collateral  Agent may reasonably  request in
order to create,  preserve,  perfect, confirm or validate the security interests
in the Collateral or to enable the Collateral  Agent to obtain the full benefits
of this  Security  Agreement and the other  Security  Documents or to enable the
Collateral  Agent  lawfully to enforce any of its rights,  powers,  and remedies
hereunder  or  thereunder  with  respect  to  any of the  Collateral,  it  being
acknowledged  and agreed that the  Collateral  Agent is expressly  authorized to
unilaterally  exercise or cause to be exercised  any and all rights of a secured
party hereunder or under  applicable law,  including the filing of UCC financing
statements  (or  amendment  thereto)  in  respect  of  any  of  the  Collateral.
Notwithstanding  any contrary  provision in this Security Agreement or the other
Security  Documents,  the Company shall not be obligated to perfect the security
interest of the  Collateral  Agent in motor vehicles for which the Company has a
Certificate  of Title and which are a part of the  Pledged  Equipment  ("Vehicle
Collateral"),  except  as  follows:  the  Company  will  cause  the  Lien of the
Collateral Agent to be perfected on any Vehicle Collateral  acquired:  (a) after
the date of this  Security  Agreement at a cost in excess of $50,000;  or (b) at
any time while the  aggregate  book value of all of Vehicle  Collateral on which
the Collateral  Agent does not have a perfected Lien, net of depreciation and as
determined  in  accordance  with  GAAP,  exceeds  $150,000  or while an Event of
Default or Specified Default exists. In addition, the Company, at the request of
the  Collateral  Agent made at any time after the  occurrence  of and during the
continuance of any Event of Default or Specified  Default,  shall cause the Lien
of the Collateral Agent to be perfected on all Vehicle Collateral.

     (4)  The  Company does hereby warrant and represent that (a) it has not
assigned or pledged,  and hereby covenants that it will not (i) assign or pledge
to any  Person  other  than  the  Collateral  Agent,  so long as the Lien of the
Security  Documents has not been discharged in accordance with the terms hereof,
any of its rights, titles or interests hereby assigned (including,  with respect
to the  Pledged  Accounts,  any  rights  of the  Company  under  any  supporting
obligation,  instrument or other document  evidencing or supporting its right to
payment in respect of the Pledged  Accounts) and (ii) subject to the  provisions
of the Loan Agreement,  except as provided  hereunder or except in a manner that
does not adversely affect the Collateral  Agent, the Board, the Participants and
the Lenders, (A) enter into any agreement amending or supplementing any Security
Document or, except in the ordinary course of business of the Company, any other
material  agreement  assigned  or pledged  hereunder,  (B) execute any waiver or
modification of, or consent under, the terms of, or during the continuance of an
Event of Default,  exercise any rights, powers or privileges under, any Security
Document,  or (C)  during  the  continuance  of an Event of  Default,  settle or
compromise any claim arising under any Security  Document,  submit or consent to
the  submission of any dispute,  difference or other matter  arising under or in
respect of any Security Document, or to arbitration thereunder; (b) Exhibit D is
in all material  respects a true and correct summary  description by type of all
Pledged Spare Parts located at any  Designated  Location owned by the Company as
of the  date  hereof;  (c) all of the  Pledged  Spare  Parts  are or will  (upon
becoming  subject to the Lien of the Security  Documents) be maintained by or on
behalf of the  Company at the  Designated  Locations,  subject  to Section  2.03
hereof;  (d) Exhibit E sets forth a true and complete  list of all  locations at
which the Company  maintains  Qualified  Spare  Parts;  (e) the Company has full
power, authority and legal right to assign and pledge all of the Collateral, and
the Company owns and has good and marketable title to the Collateral now subject
to the Lien of the Security  Documents,  free and clear of any Liens, except for

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the Lien of the  Security  Documents  and except for  Permitted  Liens;  (f) the
Company's location (as such term is used in Section 9-307 of the UCC) is Indiana
and the full and  correct  legal name and  mailing  address of the  Company  are
correctly set forth in Annex A to the Loan Agreement;  (g) the Collateral  Agent
is entitled to the benefits of Section 1110 of the Bankruptcy  Code with respect
to the right to take possession of the Aircraft, Spare Engines and Pledged Spare
Parts,  in each case only to the  extent  that such  Aircraft,  Spare  Engine or
Pledged  Spare  Part,  as the case may be,  was first  placed in  service  after
October 22, 1994, and to enforce any of its other rights or remedies as provided
in this  Security  Agreement  in the  event of a case  under  Chapter  11 of the
Bankruptcy  Code in which the Company is a debtor all subject to the  provisions
and  limitations  of the Bankruptcy  Code; and (h) excepting  motor vehicles for
which the Company has a Certificate  of Title,  and except for the filing of UCC
financing  statements  and such  documents  with the FAA as may be  necessary or
advisable,  no  registration,   recordation  or  filing  with  any  Governmental
Authority  is required in  connection  with the  execution  and delivery of this
Security  Agreement  and the other  Security  Documents or is necessary  for the
validity  or  enforceability   hereof  or  thereof  or  for  the  perfection  or
enforcement of the security interests created hereunder or thereunder.

     (5)  It  is hereby further agreed that any and all property of the type
described  or referred  to in the  Granting  Clause  hereof  which is  hereafter
acquired by the  Company  shall ipso  facto,  and without any other  conveyance,
assignment or act on the part of the Company or the Collateral Agent, become and
be  subject  to the Lien  herein  granted  as fully  and  completely  as  though
specifically described herein.

     IT IS HEREBY FURTHER  COVENANTED AND AGREED by and among the parties hereto
as follows:

                                    ARTICLE 1

                                   DEFINITIONS

     Section 1.01 Definitions.  (a) For all purposes of this Security Agreement,
except  as  otherwise  expressly  provided  or unless  the  context
otherwise requires:

     (i)  each  of  the  "Company",  "Collateral  Agent",  or any  other  Person
includes,  without  prejudice  to the  provisions  of any  Loan  Documents,  any
successor in interest to it and any permitted transferee, permitted purchaser or
permitted assignee of it;

     (ii) the terms defined in this Article 1 have the meanings assigned to them
in this Article 1, and include the plural as well as the singular;

     (iii) all accounting  terms not otherwise  defined herein have the meanings
assigned to them in accordance with generally accepted accounting  principles in
the United States;

     (iv) the words  "herein",  "hereof"  and  "hereunder"  and  other  words of
similar  import  refer  to this  Security  Agreement  as a whole  and not to any
particular Article, Section or other subdivision;

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<PAGE>

     (v) all  references  in this Security  Agreement to Articles,  Sections and
Exhibits  refer to Articles,  Sections and Exhibits of this Security  Agreement;
and

     (vi) all  references in this Security  Agreement to Exhibits  refer to such
Exhibits as such  Exhibits may be amended,  supplemented  or otherwise  modified
from time to time in accordance with the terms hereof.

     (b)  The terms "aircraft",  "aircraft engine", "appliance", "cargo" and
"propeller" shall have the respective meanings ascribed thereto in Section 40102
of Chapter 401 of Title 49 of the United States Code and the term "engine" shall
include an "aircraft engine" as defined therein.

     (c)  The  term "UCC" means the Uniform  Commercial Code as in effect on
the date hereof in the State of New York; provided,  however,  that if by reason
of mandatory  provisions  of law, the  perfection or the effect of perfection or
non-perfection  of any security  interest in any  Collateral  is governed by the
Uniform Commercial Code as in effect in a jurisdiction other than New York, then
for purposes of the provisions  hereof relating to such perfection or the effect
of perfection or  non-perfection  of any security  interest the term "UCC" shall
mean the Uniform  Commercial  Code as in effect in such other  jurisdiction  and
references to Article 9 of the UCC shall include such Article  however  numbered
in any relevant jurisdiction.

     (d)  The terms "Account", "Equipment",  "Fixtures", "Goods", "Proceeds"
and "Inventory" shall have the respective meanings ascribed thereto in Article 9
of the UCC.

     (e)  For  all  purposes  of  this  Security  Agreement,  the  following
capitalized terms have the following respective meanings:

     "Acceptable  Alternate Engine" means a Rolls-Royce  RB211-22B-02 or General
Electric  CT7-98 engine or an engine of either such or another  manufacturer  of
equivalent  or greater value and utility  (without  regard to hours and cycles),
and suitable for installation  and use on the relevant  Airframe or an airframe,
as  applicable;  provided that such engine shall (i) be of the same make,  model
and  manufacturer  as (A) the other Engine pledged with such Airframe or (B) the
Spare Engine  replaced by such engine and (ii) be an engine of a type then being
utilized by the Company on other L1011-50/500 or Saab 340B aircraft owned by the
Company.

     "Acceptable  Alternate  Propeller" means a Hamilton Standard propeller or a
propeller of the same or another manufacturer of equivalent or greater value and
utility (without regard to hours and cycles),  and suitable for installation and
use on the relevant Airframe or an airframe,  as applicable;  provided that such
propeller  shall (i) be of the same make,  model and  manufacturer  as the other
Propeller  pledged  with such  Airframe,  and (ii) be a propeller of a type then
being  utilized  by the  Company on other  Saab 340B  aircraft  operated  by the
Company.

     "Account Debtor" means each Person obligated on an Account.

     "Additional  Insured" means each Lender,  the Board, the Collateral  Agent,
the  Agent,  the  Loan  Administrator,  the  Govco  Administrative  Agent,  each

                                       7
<PAGE>

Participant,  the Company in its capacity as lessor under any  Permitted  Lease,
and each of their respective  Affiliates,  successors and permitted assigns, and
the respective directors, officers and employees of each of the foregoing.

     "Aircraft"  means each Airframe  together  with the Engines and  Propellers
relating to such  Airframe  as  specified  on Exhibit B hereto,  and all Records
relating to such Aircraft.

     "Airframe"  means:  (i)  each  of  the  aircraft   (excluding   Engines  or
Propellers,  or  engines or  propellers  either  initially  or from time to time
installed   thereon)  specified  by  United  States   Registration   Number  and
Manufacturer's  serial number on Exhibit B hereto and on any Security  Agreement
Supplement  (Aircraft) executed and delivered from time to time hereunder;  (ii)
any Replacement  Airframe which may from time to time be substituted pursuant to
clause (B)(2) of Section  3.01(a)(i) hereof and (iii) in either case any and all
Parts  which are from time to time  incorporated  or  installed  in or  attached
thereto or which have been  removed  therefrom,  unless the Lien of the Security
Documents shall not be applicable to such Part in accordance with Section 2.02.

     "Appliances"  means  an  instrument,   equipment,  apparatus,  a  part,  an
appurtenance,  or an accessory  used,  capable of being used,  or intended to be
used in  operating  or  controlling  aircraft in flight,  including a parachute,
communication  equipment,  and  another  mechanism  installed  in or attached to
aircraft during flight, and not part of an aircraft, engine, or Propeller.

     "Bankruptcy  Default" means any event or condition which is or upon notice,
lapse of time or both would, unless cured or waived,  become an Event of Default
under clause (f), (g), (p) or (q) of Section 7.1 of the Loan Agreement.

     "Card Receivables" means all rights to payment of monetary obligations, now
or hereafter  existing and whether or not earned by performance,  arising out of
the use of a credit or charge  card to purchase  property  or services  from the
Company.

     "Certificated  Air Carrier" means a Person holding an air carrier operating
certificate  issued by the  Secretary  of  Transportation  of the United  States
pursuant to Chapter 447 of Title 49 of the United  States Code or any  analogous
successor  provision of the United States Code, for aircraft capable of carrying
ten or more individuals or 6,000 pounds or more of cargo.

     "Civil Reserve Air Fleet Program" means the Civil Reserve Air Fleet Program
administered  by the United States  Government  pursuant to Executive  Order No.
11490, as amended, or any substantially similar program.

     "Closing Date" means the date of this Security Agreement.

     "Collateral"  has the  meaning  assigned  thereto  in the  Granting  Clause
hereof.

     "Company"  has  the  meaning  assigned  thereto  in the  preamble  to  this
Agreement.

                                       8
<PAGE>

     "Designated  Locations" means the locations in the United States designated
from time to time by the Company at which it may keep Pledged Spare Parts, which
initially  shall be the  locations  set forth in Exhibit E and shall include the
additional locations designated by the Company pursuant to Section 2.03 hereof.

     "Eligible Investment" means (i) any bond, note or other obligation which is
a direct  obligation of or guaranteed by the U.S. or any agency  thereof  having
maturities no later than 90 days following the date of such investment; (ii) any
obligation  which is a direct  obligation  of or  guaranteed by any state of the
U.S. or any subdivision  thereof or any agency of any such state or subdivision,
and which has the  highest  rating  published  by Moody's or  Standard & Poor's;
(iii) any  commercial  paper  issued by a U.S.  obligor  and having the  highest
rating  published  by  Moody's  or  Standard  & Poor's;  (iv) any  money  market
investment  instrument  relying upon the credit and backing of any bank or trust
company which is a member of the Federal Reserve System and which has a combined
capital  (including  capital reserves to the extent not included in capital) and
surplus  and  undivided  profits of not less than  $250,000,000  (including  the
Collateral  Agent and its Affiliates if such  requirements as to Federal Reserve
System  membership  and combined  capital and surplus and undivided  profits are
satisfied),  including,  without limitation,  certificates of deposit,  time and
other interest-bearing  deposits,  bankers' acceptances,  commercial paper, loan
and  mortgage   participation   certificates   and  documented   discount  notes
accompanied  by  irrevocable  letters of credit and money market fund  investing
solely in securities  backed by the full faith and credit of the United  States;
or (v) repurchase agreements collateralized by any of the foregoing.

     "Engine"  means (i) each of the  engines  listed by  Manufacturer's  serial
number on Exhibit B hereto and on any Security Agreement  Supplement  (Aircraft)
or Security Agreement Supplement  (Engine/Propeller) executed and delivered from
time to time hereunder, and whether or not either initially or from time to time
installed on any Airframe or any other  airframe;  (ii) any  Replacement  Engine
which may from time to time be substituted  for any of such Engines  pursuant to
the terms  hereof;  and (iii) in either  case,  any and all Parts which are from
time to time incorporated or installed in or attached to any such engine and any
and all Parts removed therefrom unless the Lien of the Security  Documents shall
not  apply to such  Parts in  accordance  with  Section  2.02,  and all  Records
relating to such Engine.

     "Event of Loss" means,  with  respect to any  Aircraft,  Airframe,  Engine,
Propeller,  Spare Engine or any Pledged Spare Part, any of the following  events
with  respect  to such  property:  (i) the loss of such  property  or of the use
thereof  due to the  destruction  of or damage to such  property  which  renders
repair  uneconomic or which renders such property  permanently  unfit for normal
use for any reason whatsoever; (ii) any damage to such property which results in
an insurance  settlement  with respect to such  property on the basis of a total
loss  or  a  constructive  or  compromised   total  loss;  (iii)  the  theft  or
disappearance  of such  property  for the  lesser  of (A) a period  in excess of
ninety (90) consecutive  days, (B) the period to the date when the Net Insurance
Proceeds with respect to such property are paid to the Collateral  Agent, or (C)
the period to the date when the Company has confirmed to the Collateral Agent in
writing  that  it  cannot   recover  such  property;   (iv)  the   confiscation,


                                       9
<PAGE>

condemnation  or  seizure  of, or  requisition  of,  title  to, or use of,  such
property by any  Governmental  Authority  or  purported  Governmental  Authority
(other than a requisition of title, or for use, by the United States  Government
or by any other  government  of  registry  of such  Aircraft,  or any  agency or
instrumentality of any thereof,  which is governed by clause (vi) below),  which
shall have resulted in the loss of possession of such property by the Company or
any lessee  permitted  pursuant to Section  2.01(b)  hereof with respect to such
Aircraft or Spare Engine,  or pursuant to Section 2.03(b) hereof with respect to
such Pledged Spare Part, for a period in excess of sixty (60)  consecutive  days
or shall have resulted in the loss of title of such property by the Company; (v)
as a result of any law,  rule,  regulation,  order or other action by the FAA or
other Governmental Authority of the government of registry of such Aircraft, use
of such  property in the normal  course of the  business  of air  transportation
shall  have been  prohibited  for a period  of sixty  (60)  consecutive  days (a
"grounding");  (vi) the  requisition  of title,  or for use,  by (x) the  United
States  Government  or (y) any other  government of registry of such Aircraft or
any  instrumentality  or agency of any thereof,  which shall have occurred while
the Loan  remains  outstanding  and  shall  continue,  (A) in the case of such a
requisition of title, for a period in excess of fifteen (15) days, or (B) in the
case of such a requisition  for use under (x), beyond the Loan Maturity Date, or
(C) in the case of such a requisition  for use under (y), for a period in excess
of six (6)  months;  and (vii) with  respect to an  Engine,  Propeller  or Spare
Engine only, any  requisition  of title to such Engine,  Propeller or such Spare
Engine,  as  applicable,  or  other  event  which  constitutes  an Event of Loss
pursuant to Section 3.01(b) or 3.01(f) hereof.  An Event of Loss with respect to
an  Aircraft  shall be deemed to have  occurred  if an Event of Loss occurs with
respect to the Airframe of such Aircraft.

     "Excluded  Equipment" means,  collectively,  the following:  (a) all of the
Aircraft and Airframes and any other  aircraft of any sort,  make or model;  (b)
all of the Engines and  Propellers,  and any other aircraft engine and propeller
of any  sort,  make  or  model;  (c) all of the  Spare  Engines,  including  any
Replacement Engine; (d) all Spare Parts, all Appliances and all Expendables, and
all other parts,  appliances,  instruments,  accessory,  avionics,  furnishings,
seats,  cargo  containers and other equipment of any nature,  which is or may be
incorporated,  used or installed in or attached to any aircraft, aircraft engine
or propeller;  (e) all Equipment which is now or hereafter leased by the Company
(whether under a Capital Lease,  an operating lease or any other type of lease),
including  without  limitation  all  Equipment  which is leased  by the  Company
pursuant to leases with any of the Existing Equipment Lessors; (f) all Equipment
subject to Liens  described in Schedule 6.1 to the Loan  Agreement or in Section
6.1(a)(ii) of the Loan Agreement;  (g) all Passenger Convenience Equipment;  (h)
all  Fixtures  which are  leasehold  improvements,  and any  Equipment  which is
released as part of the  Collateral by the Collateral  Agent;  and (i) all parts
and components of, and  accessions,  accessories and  appurtenances  of whatever
nature attached to or intended to be attached to any of the Equipment identified
in the foregoing items (a) through (h).

     "Existing  Equipment  Lessors" means,  collectively,  the following:  Sanwa
Leasing; Fleet Leasing Corporation;  Fleet Capital Leasing - Technology Finance;
Ameritech  Credit  Corporation;   Key  Equipment  Finance;   Aviation  Financial
Services;  Steelcase  Financial  Services;  Tynan  Equipment Co.,  Inc.;  Compaq
Financial Services  Corporation;  Keycorp Leasing, a division of Keycorp Capital
Inc.;  KeyCorp Leasing, a division of Key Corporate Capital Inc.; Fleet National

                                       10
<PAGE>

Bank (Shawmut);  Firstar Bank,  N.A.;  Wells Fargo Bank, N.A., as Owner Trustee;
Wilmington  Trust  Company;  U.S.  Bancorp  Leasing  &  Financial;  AMR  Leasing
Corporation;  Unionbanc Leasing  Corporation;  GATX Third Aircraft  Corporation;
First Security  Bank,  National  Association;  First Fidelity Bank, as Indenture
Trustee and First Union  National  Bank as successor;  Shawmut  Bank;  Provident
Commercial  Group;  Summit Bank;  Fleet Business Credit Corp.;  Keycorp Leasing;
Wells  Fargo  Financial  Leasing,  Inc.;  Citicorp  Del  Lease,  Inc.;  and  NCR
Corporation.

     "Expendables" means those Spare Parts of a type normally used only once and
thereby consumed or otherwise discarded including all Parts which have a limited
life or repair cycle and are not  classified as Fixed Assets in accordance  with
GAAP.

     "FAA"  means the  United  States  Federal  Aviation  Administration  or any
successor   thereto   administering   the  functions  of  the  Federal  Aviation
Administration under the Federal Aviation Act.

     "FAA  Bills  of Sale"  means,  collectively,  each  bill of sale on AC Form
8050-2  or such  other  form as in effect on the date  thereof  executed  by the
applicable Manufacturer in favor of the Company in respect of each Aircraft.

     "Federal  Aviation Act" means Subtitle VII of Title 49 of the United States
Code  relating  to  aviation,  as  amended  from  time to time,  or any  similar
legislation of the United States enacted to supersede,  amend or supplement such
Subtitle.

     "Insurance  Brokers" has the meaning  assigned  thereto in Section 2.04(d).

     "Loss  Payment Date" has the meaning  assigned  thereto in clause (B)(1) of
Section 3.01(a)(i).

     "Manufacturer"  means with  respect to each  Airframe,  Engine,  Propeller,
Spare  Engine  and  Pledged  Spare  Part,  the  manufacturer  thereof,  and  its
successors and assigns.

     "Mortgage and Security  Agreement" or "this  Agreement" means this Security
Agreement.

     "Parts" means, in respect of any Airframe,  any Engine, any Propeller,  any
Spare  Engine  or any  Pledged  Spare  Part,  any  and  all  Appliances,  parts,
instruments, appurtenances,  accessories, avionics, furnishings, seats and other
equipment of whatever nature (other than (i) complete Engines, Propellers, Spare
Engines,  engines or  propellers,  (ii) any items  leased by the Company  from a
third  party,  (iii)  any  Passenger   Convenience   Equipment  and  (iv)  cargo
containers)  which  may from time to time be  incorporated  or  installed  in or
attached to such Airframe, Engine, Propeller, Spare Engine or such Pledged Spare
Part.

     "Passenger  Convenience  Equipment"  means severable  components or systems
installed  on or affixed  to any  Airframe  that are used to provide  individual
telecommunications or electronic entertainment to passengers aboard an Aircraft,

                                       11
<PAGE>

if and for so long as such equipment shall be owned by, or shall be subject to a
security interest,  license or other interest of, another Person (other than any
Affiliate of the Company) in accordance  with the provisions of Section  2.02(d)
hereof.

     "Payment  Default"  means any event or  condition  which is or upon notice,
lapse of time or both would, unless cured or waived,  become an Event of Default
under Section 7.1(a) of the Loan Agreement.

     "Permitted  Air  Carrier"  means any  Certificated  Air  Carrier or any air
carrier principally domiciled in a country listed on Exhibit F hereto.

     "Permitted Lease" means a lease permitted under Section 2.01(b) hereof.

     "Permitted Lessee" means the lessee under a Permitted Lease.

     "Permitted  Liens" means those Liens  permitted  under  clauses (i),  (ii),
(iii) and (v) of the definition of Permitted  Encumbrances contained in the Loan
Agreement.

     "Pledged Accounts" means all of the Accounts of the Company,  now existing,
or hereafter arising; provided, however, that Pledged Accounts shall not include
(i) any  Card  Receivables  (whether  owed  by a card  holder  or a third  party
processor of Card  Receivables),  now  existing,  or hereafter  arising,  to the
extent,  and for so long as such Card  Receivables  are  subject  to a  security
interest  in favor of any  Card  Receivables  processor;  (ii)  proceeds  of the
Company's  membership  interest in BATA Leasing,  LLC; and (iii) rents which are
payable to the Company in respect to the leasing of any Excluded Equipment which
is  identified in section (e) and (f) of the  definition of Excluded  Equipment,
and  Accounts  which arise from the sale or other  disposition  of any  Excluded
Equipment which is not any of the Aircraft,  Engines, Spare Engines,  Propellers
or Spare Parts.

     "Pledged  Equipment" means all Equipment now owned or hereafter acquired by
the Company,  excluding all Excluded Equipment,  now owned or hereafter acquired
by the Company.

     "Pledged Spare Parts" has the meaning  assigned thereto in paragraph (3) of
the Granting Clause hereof.

     "Propeller"  means (i) each of the Hamilton  Standard  propellers listed by
Manufacturer's  serial number on Exhibit B hereto and on any Security  Agreement
Supplement  (Aircraft)  or  Security  Agreement  Supplement   (Engine/Propeller)
executed and delivered  from time to time  hereunder,  and whether or not either
initially or from time to time installed on any Airframe or any other  airframe;
(ii) any  Replacement  Propeller  which may from time to time be substituted for
any of such Propellers  pursuant to the terms hereof;  and (iii) in either case,
any and all Parts which are from time to time  incorporated  or  installed in or
attached to any such  propeller and any and all Parts removed  therefrom  unless
the Lien of the Security  Documents  shall not apply to such Parts in accordance
with Section 2.02.

                                       12
<PAGE>

     "Purchase  Agreements"  means,  collectively,  (i)  with  respect  to  each
Airframe,  the  agreement  between the Company and the  applicable  Manufacturer
relating to the purchase by the Company of such Airframe, as originally executed
or as modified,  amended or  supplemented  in accordance with the terms thereof,
but  only  insofar  as the  foregoing  relates  to  such  Airframe  and to  such
Manufacturer's  warranty  obligations with respect thereto and (ii) with respect
to each Engine, Propeller or Spare Engine, the agreement between the Company and
the  applicable  Manufacturer  relating  to the  purchase by the Company of such
Engine, Propeller or such Spare Engine, as applicable, as originally executed or
as modified,  amended or supplemented in accordance with the terms thereof,  but
only insofar as the  foregoing  relates to such Engine,  Propeller or such Spare
Engine,  as applicable,  and to such  Manufacturer's  warranty  obligations with
respect thereto.

     "Qualified  Spare Parts" has the meaning  assigned thereto in paragraph (3)
of the Granting Clause hereof.

     "Records" has the meaning assigned thereto in paragraph (7) of the Granting
Clause hereof.

     "Replacement  Airframe"  means any airframe  substituted for an airframe in
accordance with Section 3.01(a)(i) hereof.

     "Replacement  Engine" means any engine  substituted  for an Engine or Spare
Engine in accordance with Sections 2.01(d), 3.01(a)(i) or 3.01(b) hereof.

     "Replacement  Propeller" means any propeller substituted for a Propeller in
accordance with Sections 2.01(d), 3.01(a)(i) or 3.01(b) hereof.

     "Security  Agreement  Supplement  (Aircraft)"  means a  supplement  to this
Security Agreement in the form of Exhibit A1.

     "Security Agreement  Supplement  (Engine/Propeller)"  means a supplement to
this Security Agreement in the form of Exhibit A2.

     "Security Agreement Supplement (Pledged Spare Parts)" means a supplement to
this Security Agreement in the form of Exhibit A3.

     "Security  Documents" means,  collectively,  this Security  Agreement,  any
Security Agreement  Supplement  (Aircraft),  any Security  Agreement  Supplement
(Engine/Propeller), any Security Agreement Supplement (Pledged Spare Parts), and
any additional  pledge  agreements,  security  agreements,  supplements or other
agreements delivered pursuant to the Loan Documents to secure the obligations of
the Obligors thereunder, and each certificate,  instrument,  financing statement
or other document  executed,  delivered,  filed or recorded by, on behalf, or in
respect of (as  applicable)  any Obligor,  in connection with or pursuant to the
foregoing.

     "Spare  Engine"  means (i) each of the  engines  listed  by  Manufacturer's
serial  number on  Exhibit C hereto  and on any  Security  Agreement  Supplement

                                       13
<PAGE>

(Engine/Propeller)  executed  and  delivered  from time to time  hereunder,  and
whether or not either  initially or from time to time  installed on any Airframe
or any other airframe;  (ii) any Replacement  Engine which may from time to time
be substituted for any of such Spare Engines  pursuant to the terms hereof;  and
(iii) in either case, any and all Parts which are from time to time incorporated
or  installed  in or attached  to any such engine and any and all Parts  removed
therefrom,  unless the Lien of the  Security  Documents  shall not apply to such
Parts in accordance with Section 2.02.

     "Spare  Part"  means an  accessory,  appurtenance,  or part of an  aircraft
(except an engine or  propeller),  engine  (except a  propeller),  spare engine,
propeller, or Appliance, that is to be installed at a later time on an aircraft,
engine, propeller or Appliance.

     "Specified  Default"  means a  Payment  Default  or a  Bankruptcy  Default.

     "UCC  Collateral" has the meaning  assigned thereto in paragraph (8) of the
Granting Clause hereof.

     "United States" or "U.S." means the United States of America.

     "United  States  Government"  means the  federal  government  of the United
States or any instrumentality or agency thereof.

     "Warranty  Bills of Sale" means,  collectively,  each full warranty bill of
sale  delivered to the Company from the  applicable  Manufacturer  in respect of
each Airframe, Engine, Propeller and Spare Engine.

     "Wet Lease"  means any  arrangement  whereby the Company (or any  Permitted
Lessee)  agrees to furnish the Airframe and Engines or  Propellers or engines or
propellers  installed  thereon to a third party  pursuant to which such Airframe
and  Engines or  Propellers  or engines or  propellers  (i) shall  remain in the
operational  control of the Company (or such Permitted Lessee) and (ii) shall be
maintained,  insured and  otherwise  used and  operated in  accordance  with the
provisions hereof.

     (f) Capitalized terms which are defined in the Loan Agreement and which are
not otherwise  defined herein shall have the meanings  assigned to such terms in
the Loan Agreement.

                                    ARTICLE 2

                            COVENANTS OF THE COMPANY

     The Company covenants and agrees as follows:

     Section 2.01 Aircraft Registration,  Maintenance and Operation;  Possession
and Permitted Leases; Insignia.

     (a) (i)  Registration  and  Maintenance.  The Company,  at its own cost and
expense,  shall (or shall cause any Permitted Lessee to): (A) on or prior to the

                                       14
<PAGE>

Closing Date,  cause each Aircraft to be duly  registered in the Company's name,
and,  subject to  subparagraph  (iii) of this  Section  2.01(a),  to remain duly
registered in the Company's  name under the Federal  Aviation Act; (B) maintain,
service,  repair, and overhaul (or cause to be maintained,  serviced,  repaired,
and  overhauled)  each  Aircraft  (and any engine which is not an Engine and any
propeller  which is not a Propeller  but which,  in either case, is installed on
any Aircraft), Spare Engine and each of the Pledged Spare Parts (x) so as at all
times to keep each Aircraft in as good an operating  condition as when initially
subjected to the Lien hereof,  ordinary  wear and tear  excepted,  and as may be
necessary  to enable the  airworthiness  certification  for such  Aircraft to be
maintained in good standing at all times (other than during temporary periods of
maintenance,  overhaul or storage in  accordance  with  applicable  regulations)
under the Federal Aviation Act or the applicable laws of any other  jurisdiction
in  which  such  Aircraft  may  then be  registered  from  time  to time  and in
substantially  the  same  manner  as  the  Company  (or  any  Permitted  Lessee)
maintains,   services,   repairs  or  overhauls  similar  aircraft,  engines  or
propellers   operated  by  the  Company   (or   Permitted   Lessee)  in  similar
circumstances; (y) so as to keep the Spare Engines in an airworthy condition and
suitable for  installation  and operation on an Airframe in accordance  with any
applicable   maintenance   program  and  in  compliance   with  all   applicable
airworthiness  directives;  and (z) so as to maintain the Pledged Spare Parts in
good working  order and  condition  and shall  perform all  maintenance  thereon
necessary for that purpose and in accordance  with the  requirements  of each of
the  Manufacturer's  manuals and  mandatory  service  bulletins  and each of the
Manufacturer's  non-mandatory  service  bulletins which relate to airworthiness,
excluding Pledged Spare Parts that have become worn out or obsolete or unfit for
use and are not  reasonably  repairable;  (C) maintain or cause to be maintained
all Records,  logs and other  materials  required to be maintained by the FAA or
any other  applicable  regulatory  agency or body in respect  of each  Aircraft,
Spare Engine and each of the Pledged  Spare Parts;  and (D) promptly  furnish or
cause to be  furnished  to the  Collateral  Agent,  the Board or any Lender such
information as may be required to enable the Collateral  Agent, the Board or any
Lender to file any reports  required to be filed by the  Collateral  Agent,  the
Board or any Lender with any  Governmental  Authority  because of such  person's
interest in the Aircraft, Spare Engines or Pledged Spare Parts hereunder.

     (ii)  Operation  of Aircraft  and Spare  Engines.  The Company will not (or
permit any Permitted Lessee to) maintain, use, store, service,  repair, overhaul
or operate any  Aircraft or any Spare  Engine in material  violation of any law,
rule, regulation, treaty, order or certificate of any government or Governmental
Authority  (domestic  or foreign)  having  jurisdiction,  or in violation of any
airworthiness  certificate or material  violation of any license or registration
relating to such Aircraft or Spare Engine issued by any such  authority.  In the
event that any such law, rule, regulation,  treaty, order, certificate,  license
or registration requires alteration of any Aircraft or Spare Engine, the Company
will,  at its sole cost and  expense,  conform  thereto  or  obtain  conformance
therewith.  Notwithstanding  the foregoing,  the Company or any Permitted Lessee
may contest in good faith the  validity or  application  of any such law,  rule,
regulation,   treaty,  order,  certificate,   license  or  registration  in  any
reasonable  manner which does not  materially  adversely  affect the  Collateral
Agent,  the Board or any Lender,  or any of their  respective legal and economic
interests in or to any of the  Aircraft,  Spare  Engines or any Loan  Documents,
including the Lien of the Security  Documents.  In every case,  operation,  use,
storage,  maintenance,  servicing, repair or overhaul of the Aircraft is subject
to  compliance  by the  Company  with the  provisions  of Section  2.04.  If the
indemnities or insurance from the United States Government  specified in Section
2.04(g),  or some  combination  thereof in amounts equal to amounts  required by

                                       15
<PAGE>

Section  2.04(g),  have not been obtained  (unless  indemnities  or insurance in
amounts so required are available in the commercial  aviation  insurance  market
and are obtained),  the Company will not operate or locate any Aircraft or Spare
Engine,  or permit any Permitted Lessee or any other Person to operate or locate
any Aircraft or Spare  Engine,  in or to any area  excluded from coverage by any
insurance  required to be  maintained  by the terms of Section  2.04;  provided,
however,  that the failure of the Company to comply with the  provisions of this
Section  2.01(a)(ii)  shall  not give  rise to an Event of  Default  where  such
failure  is  attributable   to  a  hijacking,   medical   emergency,   equipment
malfunction, weather conditions,  navigational error or act of terrorism and the
Company (or such Permitted  Lessee, as the case may be) is taking all reasonable
steps to remedy such failure as soon as practicable.

     (iii)  Reregistration.  (A) So long as the Lien of the  Security  Documents
shall not have been  discharged  and no  Specified  Default  or Event of Default
shall  have  occurred  or be  continuing,  if  the  Company  has  requested  the
Collateral  Agent's  consent to  registration of any Aircraft in the name of the
Company (or, if appropriate,  in the name of a Permitted  Lessee as a "lessee"),
at the Company's own cost and expense,  under the laws of (1) any country listed
on Exhibit G with which the  United  States  then  maintains  normal  diplomatic
relations or, if Taiwan, the United States then maintains  diplomatic  relations
at least as good as those in effect on the Closing Date (a "Scheduled Country"),
or (2) any other  country  with which the  United  States  maintains  diplomatic
relations,  and the Collateral  Agent has  determined,  based on the information
contemplated   below,  that  the  laws  of  such  other  country  would  provide
substantially  equivalent  protection (including the right to take possession of
such Aircraft in the event of the  bankruptcy  of the Company or such  Permitted
Lessee,  if any) for the  rights of lenders  to that  enjoyed by the  Collateral
Agent under the  Security  Documents as provided  under  United  States law, the
Collateral  Agent will not  (subject to the terms of this  Section  2.01) in the
case of either  (1) or (2)  above,  unreasonably  withhold  its  consent to such
change of registration. Such consent shall only be given if the Collateral Agent
shall  have  received  reasonable  evidence  that  after  giving  effect to such
re-registration  the Collateral Agent shall possess a Lien and security interest
over such Aircraft with priority and perfection  (to the extent  perfection is a
relevant  concept  in such  country)  to  substantially  the same  extent  as is
available  under the  corresponding  laws of the United  States (it being agreed
that the lack of such  reasonable  evidence  shall  constitute  sole  reasonable
grounds to  withhold  such  consent  with  respect to a  Scheduled  Country or a
country mentioned in clause (2) above.

     (B) Prior to any such re-registration under the laws of a Scheduled Country
or the United States,  the Collateral Agent shall have received (1) an Officer's
Certificate  from the Company  certifying  that the  conditions  of this Section
2.01(a)(iii)  have been satisfied and (2) a favorable  opinion of counsel (which
opinion and counsel shall be reasonably  satisfactory  to the Collateral  Agent)
addressed  to the  Collateral  Agent to the effect  that (I) the laws of the new
country of  registration  will  recognize the Company's  right of ownership with
respect to such Aircraft and will give effect to the priority and perfection (to
the extent  perfection  is a relevant  concept in such  country) of the Lien and
security interest created by this Security Agreement (or the Company shall enter
into  such  other  instrument  as  shall be  necessary  to  convey  a valid  and
enforceable  first priority  perfected  security  interest (except for Permitted
Liens) to the  Collateral  Agent,  such  instrument  to be in form and substance
reasonably  satisfactory to the Collateral Agent),  (II) this Security Agreement
(or  such  other  instrument)  and the  Collateral  Agent's  Lien  and  right to

                                       16
<PAGE>

repossession  thereunder is valid and enforceable under the laws of such country
and (III) all filing,  recording  and other action  necessary to perfect (to the
extent perfection is a relevant concept in such country) and protect the Lien of
the  Security  Documents  (or other such  instrument)  in such new  jurisdiction
either has been accomplished prior to such change in the country of registry or,
if  such  opinion  cannot  under   applicable  law  be  given  at  the  time  of
registration,  are  specified  in such  opinion  and the Company  undertakes  to
accomplish such filing, recording or other action as soon as practicable (but in
any event no later than five (5)  Business  Days)  after  giving  effect to such
change in  registry  (in which case a further  opinion  shall be received by the
Collateral Agent  immediately  thereafter to the effect that all such recording,
filing and other action have been accomplished).

     (C) Prior to any such  re-registration  under the laws of any country other
than the U.S. or a Scheduled  Country,  the Collateral Agent shall have received
(1) an Officer's  Certificate from the Company certifying that the conditions of
this Section  2.01(a)(iii)  have been  satisfied and (2) a favorable  opinion of
counsel  (which  opinion and counsel  shall be  reasonably  satisfactory  to the
Collateral  Agent) in the new jurisdiction of registry  covering the matters set
forth in the preceding paragraph and addressed to it, and to the effect that (I)
the terms (including,  without limitation, the governing law, service of process
and jurisdictional submission provisions thereof) of this Security Agreement (or
such other  instrument)  are  legal,  valid,  binding  and  enforceable  in such
jurisdiction, (II) that it is not necessary for the Collateral Agent to register
or  qualify to do  business  in such  jurisdiction,  (III) that there is no tort
liability of the lender of an aircraft or engine not in possession thereof under
the laws of such  jurisdiction  other than tort liability  which might have been
imposed on such lender under the laws of the United  States or any state thereof
(it being understood that, such opinion shall be waived if insurance  reasonably
satisfactory to Collateral Agent is provided, at the Company's expense, to cover
such risk),  (IV)  (unless the  Company  shall have agreed to provide  insurance
covering  the  risk of  requisition  of use or  title  of such  Aircraft  by the
government of such jurisdiction so long as such Aircraft is registered under the
laws of such  jurisdiction)  that the  laws of such  jurisdiction  require  fair
compensation by the government of such  jurisdiction  payable in currency freely
convertible  into  Dollars for the loss of use or title of such  Aircraft in the
event of the  requisition  by such  government  of such use or  title,  (V) if a
Permitted Lease is then in effect,  the laws of the new jurisdiction of registry
do not provide the Permitted Lessee or any third party  possessory  rights which
would,  upon the  Company's  bankruptcy  or insolvency or other Event of Default
(assuming that at such time the Permitted  Lessee is not subject to a proceeding
or final order under applicable bankruptcy, insolvency or reorganization laws of
such  jurisdiction),  prevent the return of such Aircraft in accordance with the
terms of this Security  Agreement (or such other instrument) (such opinion to be
subject to customary  qualifications  and exceptions in the relevant domicile of
the Permitted Lessee but only to the extent that they do not deny the Collateral
Agent the  practical  realization  of its rights and  benefits  pursuant to this
Security Agreement (or such other instrument)),  and (VI) to such further effect
with  respect  to such  other  matters as the  Collateral  Agent may  reasonably
request.

     (D) In  addition  to the  opinion  contemplated  above,  prior  to any such
re-registration under the laws of any country other than the U.S. or a Scheduled
Country,  the  Collateral  Agent  shall  have  received  assurances,  reasonably
satisfactory  to it, to the effect  that (1) the  insurance  provisions  of this
Security  Agreement  will have been  complied  with after giving  effect to such
change of registry, (2) the original indemnities (and any additional indemnities
for which the  Company  is then  willing to enter  into a binding  agreement  to

                                       17
<PAGE>

indemnify)  in favor of the  Collateral  Agent,  the Board,  the Lenders and the
Participants  under the Loan Agreement afford each such party  substantially the
same  protection as provided  prior to such change of registry,  (3) such change
will not result in the  imposition of, or increase in the amount of, any Tax for
which the Company is not required to indemnify,  or is not then willing to enter
into a binding  agreement to indemnify,  the Collateral  Agent,  the Board,  the
Lenders  or the  Participants  and (4)  such new  country  of  registry  imposes
aircraft  maintenance  standards not materially less stringent than those of the
FAA or the Civil  Aviation  Authority of the United  Kingdom,  France,  Germany,
Japan or Canada.

     (E) In connection with any such re-registration,  the Company shall, at its
cost  and to the  extent  permitted  by the  laws of  such  country,  cause  the
interests of the  Collateral  Agent in such  Aircraft to be duly  registered  or
recorded under the laws of such country and at all times thereafter to remain so
duly  registered or recorded  unless and until changed as provided  herein,  and
shall,  at its sole  cost and  expense,  cause to be done at all times all other
acts (including the filing, recording and delivery of any document or instrument
and the  payment of any sum)  necessary  or, by  reference  to prudent  industry
practice in such country, advisable in order to establish the Collateral Agent's
interest in and to such Aircraft as against the Company, any Permitted Lessee or
any third parties in such jurisdiction.

     (F) The  Collateral  Agent shall  execute  and  deliver,  at the  Company's
expense,  all such documents as the Company may reasonably request and otherwise
cooperate  with the  Company  for the purpose of  effecting,  continuing  or (as
provided  in  this  Section  2.01(a)(iii))  changing  the  registration  of such
Aircraft as may be permissible hereunder.

     (G)  The  Company  shall  pay  all  reasonable  fees  and  expenses  of the
Collateral  Agent,  the Board or any  Lender in  connection  with any  change of
registry of any Aircraft.

     (b) Possession and Permitted Leases.  (i) The Company will not, without the
prior written consent of the Collateral Agent,  lease or otherwise in any manner
deliver, transfer or relinquish possession of any Airframe, Engine, Propeller or
any Spare Engine or install or permit any Engine,  Propeller or any Spare Engine
to be installed on any airframe  other than an Airframe;  provided that, so long
as (x) no  Specified  Default or Event of Default  shall  have  occurred  and be
continuing at the time of such lease,  delivery,  transfer or  relinquishment of
possession or installation  and (y) such action shall not deprive the Collateral
Agent of the first  priority  perfected  Lien of the  Security  Documents on any
Aircraft, any Airframe,  any Engine,  Propeller or any Spare Engine, the Company
(or, except with respect to subparagraph (H) below,  any Permitted  Lessee) may,
without the prior written consent of Collateral Agent:

     (A)  subject the  Airframes,  the  Engines,  the  Propellers  or engines or
propellers  then installed  thereon and the Spare Engines to normal  interchange
agreements  or any Engine,  Propeller or any Spare  Engine to normal  pooling or
similar arrangements, in each case customary in the airline industry and entered
into by the  Company (or any  Permitted  Lessee) in the  ordinary  course of its
business;  provided,  that (1) no such agreement or arrangement  contemplates or
requires the transfer of title to any Airframe, any Engine, any Propeller or any
Spare  Engine,  (2) if the  Company's  title to any  Airframe,  any Engine,  any
Propeller  or any Spare  Engine  shall be divested  under any such  agreement or

                                       18
<PAGE>

arrangement,  such  divestiture  shall be  deemed  to be an  Event of Loss  with
respect to such Airframe,  Engine, Propeller or Spare Engine, as applicable, and
the Company shall (or shall cause any  Permitted  Lessee to) comply with Section
3.01 hereof in respect thereof and (3) no such Airframe interchange  arrangement
shall  (I)  be for a  period  in  excess  of 5  days  or  (II)  result  in  such
Certificated  Air  Carrier,  Permitted  Lessee  or other  approved  air  carrier
obtaining possessory rights for a period in excess of 5 days with respect to, or
a Lien on, any  Airframe,  Engines,  Spare  Engines,  Propellers,  engine(s)  or
propeller(s) then installed on such Airframe;

     (B) deliver  possession of any Airframe,  any Engine,  any Propeller or any
Spare  Engine to the  Manufacturer  thereof or to any other  Person for testing,
service,  repair,  maintenance or overhaul work on such  Airframe,  such Engine,
such  Propeller or such Spare Engine or any part thereof or for  alterations  or
modifications in or additions to such Airframe,  such Engine,  such Propeller or
such Spare Engine to the extent required or permitted by the terms hereof;

     (C) install an Engine,  a Propeller or Spare Engine on an airframe owned by
the Company (or any Permitted  Lessee)  which  airframe is free and clear of all
Liens,  except:  (1)  Permitted  Liens and those which apply only to the engines
(other than  Engines or Spare  Engines),  propellers  (other  than  Propellers),
Appliances,  parts,  instruments,  appurtenances,  accessories,  furnishings and
other  equipment  (other than Parts)  installed on such airframe (but not to the
airframe as an  entirety),  (2) the rights of third  parties  under  interchange
agreements  which  would be  permitted  under  clause (A) above,  provided  that
Company's title to such Engine,  Propeller or Spare Engine shall not be divested
as a  result  thereof  and (3)  mortgage  Liens  or  other  security  interests,
provided,  that (as  regards  this clause  (3)),  such  mortgage  Liens or other
security  interests  effectively  provide that such  Engine,  Propeller or Spare
Engine  shall  not  become  subject  to the Lien of such  mortgage  or  security
interest, notwithstanding the installation thereof on such airframe;

     (D) install an Engine,  Propeller or Spare Engine on an airframe  leased to
the  Company  (or any  Permitted  Lessee) or  purchased  by the  Company (or any
Permitted  Lessee)  subject to a conditional  sale or other security  agreement,
provided that (1) such airframe is free and clear of all Liens,  except: (x) the
rights  of the  parties  to the  lease or  conditional  sale or  other  security
agreement covering such airframe, or their assignees,  and (y) Liens of the type
permitted by  subparagraph  (C) of this Section  2.01(b)(i)  and (2) such lease,
conditional  sale or other  security  agreement  effectively  provides that such
Engine,  Propeller or Spare Engine shall not become  subject to the Lien of such
lease,  conditional  sale  or  other  security  agreement,  notwithstanding  the
installation thereof on such airframe;

     (E) install an Engine,  Propeller or Spare  Engine on an airframe  owned by
the Company (or any Permitted  Lessee),  leased to the Company (or any Permitted
Lessee) or  purchased  by the Company  (or any  Permitted  Lessee)  subject to a
conditional sale or other security agreement under  circumstances  where neither
subparagraph (C) nor subparagraph (D) of this Section  2.01(b)(i) is applicable,
provided that any divestiture of title to such Engine, Propeller or Spare Engine
resulting from such  installation  shall be deemed an Event of Loss with respect
to such Engine,  Propeller or Spare Engine and the Company shall (or shall cause

                                       19
<PAGE>

any Permitted  Lessee to) comply with Section 3.01(b) hereof in respect thereof,
the Collateral  Agent not intending hereby to waive any right or interest it may
have to or in such Engine,  Propeller or Spare Engine under applicable law until
compliance by the Company with such Section 3.01(b);

     (F) transfer (or permit any Permitted Lessee to transfer) possession of any
Airframe,  Engine, Propeller or any Spare Engine to the United States of America
or any instrumentality or agency thereof pursuant to the Civil Reserve Air Fleet
Program  so long as the  Company  (or any  Permitted  Lessee)  shall  notify the
Collateral  Agent (1) prior to  transferring  possession  of any such  Airframe,
Engine,  Propeller or any such Spare  Engine to the United  States of America or
any agency or  instrumentality  thereof  pursuant to the Civil Reserve Air Fleet
Program  and  (2) of  the  name  and  the  address  of  the  Contracting  Office
Representative  for the Air Mobility  Command of the United  States Air Force to
whom notice must be given pursuant to Section 4.01(a) hereof;

     (G) transfer  possession  of any Airframe,  Engine,  Propeller or any Spare
Engine to the United States of America or any  instrumentality or agency thereof
pursuant  to a lease,  contract  or other  instrument,  a copy of which shall be
provided to the Collateral Agent; or

     (H) the Company may, at any time so long as no  Specified  Default or Event
of Default  shall have  occurred  and be  continuing,  enter into a lease of any
Aircraft  or any Spare  Engine  with (1) a  Certificated  Air  Carrier,  (2) any
airline  domiciled  and  principally  located  in a country  listed on Exhibit F
hereto,  or (3) any other Person  approved in writing by the  Collateral  Agent;
provided  that (I) no such lease shall be  permitted to a lessee that is subject
to a  proceeding  or final  order under  applicable  bankruptcy,  insolvency  or
reorganization laws on the date the lease is entered into, (II) in the case of a
lease under subclause (2) or (3) above, on the date of such lease or any renewal
or extension thereof,  the United States and the country in which such lessee is
domiciled and  principally  located  maintain  diplomatic  relations  (which for
purposes of this clause (H) shall  include  Taiwan and any other country that is
similarly  situated),  (III) in the case  only of a lease  to any  Person  under
subclause (3) above,  the Collateral Agent receives at the time of such lease an
opinion of counsel  (in form and from  counsel  reasonably  satisfactory  to the
Collateral Agent) to the effect that (w) the terms of the proposed lease will be
legal, valid,  binding and (subject to customary  exceptions in foreign opinions
generally)  enforceable in accordance with its terms against the proposed lessee
in the country in which the  proposed  lessee is  principally  based,  (x) there
exist no  possessory  rights in favor of the lessee  under such lease  under the
laws of such  lessee's  country of  domicile  that  would,  upon  bankruptcy  or
insolvency  of or other  default by the Company  and  assuming at such time such
lessee is not insolvent or bankrupt,  prevent the return or repossession of such
Aircraft or such Spare Engine in accordance with the lease and when permitted by
the terms of Section 4 upon the exercise by the Collateral Agent of its remedies
pursuant  to such  Section,  (y) the laws of such  lessee's  country of domicile
require fair  compensation  by the  government of such  jurisdiction  payable in
currency freely convertible into Dollars for the loss of use of such Aircraft or
such Spare Engine in the event of the  requisition  by such  government  of such
use,  and (z) in the  case of an  Airframe  or  Spare  Engine,  the laws of such
lessee's  country of domicile would give  recognition to the Company's  title to

                                       20
<PAGE>

the  applicable  Aircraft of which such Airframe is a part or such Spare Engine,
to the registry of the  applicable  Aircraft of which such Airframe is a part or
such Spare Engine (if such country maintains a registry for engines) in the name
of the Company (or the proposed lessee, as "lessee", as appropriate), and to the
Lien of the  Security  Documents,  (IV) if the  lessee  under  such  lease  is a
governmental  entity,  such lessee has waived all rights of sovereign  immunity,
and (V) if the lessee is a  Certificated  Air Carrier  and the  Aircraft or such
Spare Engine was first  placed in service  after  October 22, 1994,  the Company
will be entitled as lessor to the  benefits  of Section  1110 of the  Bankruptcy
Code with  respect to such  Aircraft or such Spare Engine in  connection  with a
proceeding  under Chapter 11 of the  Bankruptcy  Code in which the lessee is the
debtor.

     (ii) The rights of any Permitted Lessee or other  transferee  (other than a
transferee where the transfer is of an Engine, a Propeller or Spare Engine which
is to be an Event of Loss)  shall  be (and  the  sublease,  assignment  or other
transfer  document  under which such  transfer  or  sublease  is governed  shall
explicitly  provide  that)  during the period of such  possession,  subject  and
subordinate to, all the terms of the Security Documents (and any Permitted Lease
shall expressly state that it is so subject and subordinate), including, without
limitation,  the covenants contained in this Article 2, including the inspection
rights  contained in Section 2.05 and the Collateral  Agent's right to repossess
such  Aircraft or such Spare  Engine and to avoid and  terminate  any lease upon
such  repossession,  and the  Company  shall  remain  primarily  liable  for the
performance of all of the terms of the Security Documents,  and the terms of any
such  Permitted  Lease shall not permit any Permitted  Lessee to take any action
not permitted to be taken by the Company in the Security  Documents with respect
to such Aircraft or such Spare Engine. No pooling agreement,  Permitted Lease or
other relinquishment of possession of any Airframe, any Engine, any Propeller or
any Spare  Engine shall in any way  discharge  or diminish any of the  Company's
obligations to the Collateral Agent under the Security Documents or constitute a
waiver of Collateral  Agent's rights or remedies  hereunder or  thereunder.  The
Collateral  Agent  agrees,  for the  benefit of the Company  (and any  Permitted
Lessee)  and for the  benefit  of any  mortgagee  or other  holder of a security
interest  in any engine or  propeller  owned by the  Company  (or any  Permitted
Lessee),  any lessor of any engine  (other than an Engine) or  propeller  (other
than a  Propeller)  leased to the  Company  (or any  Permitted  Lessee)  and any
conditional  vendor of any  engine  (other  than an Engine or Spare  Engine)  or
propeller  (other than a Propeller)  purchased by the Company (or any  Permitted
Lessee) subject to a conditional sale agreement or any other security agreement,
that no interest shall be created under this Security Agreement in any engine or
propeller so owned,  leased or purchased and that neither the  Collateral  Agent
nor its successors or assigns will acquire or claim,  as against the Company (or
any Permitted  Lessee) or any such  mortgagee,  lessor or conditional  vendor or
other holder of a security interest or any successor or assignee of any thereof,
any right,  title or interest in such engine or  propeller as the result of such
engine or propeller being  installed on any Airframe.  The Company shall provide
the  Collateral  Agent with a copy of any Permitted  Lease having a term of more
than one (1) year upon entering into such Permitted Lease.

     (iii) In connection with any Permitted Lease, all necessary action shall be
taken by the Company at its expense which is required to continue the Collateral
Agent's security interest in the Aircraft,  Airframes,  Engines,  Propellers and
Spare Engines,  and such Permitted Lease and all other necessary documents shall

                                       21
<PAGE>

be duly filed,  registered or recorded in such public offices as may be required
to fully preserve the priority of the security  interest of the Collateral Agent
in the Aircraft, Airframes, Engines, Propellers and Spare Engines.

     (iv)  Any  Wet  Lease  shall  not   constitute  a  delivery,   transfer  or
relinquishment  of possession  for purposes of this Section 2.01. The Collateral
Agent   acknowledges  that  any  consolidation  or  merger  of  the  Company  or
conveyance,  transfer  or lease  of all or  substantially  all of the  Company's
assets, in each case as permitted by the Loan Documents, shall not be prohibited
by this Section 2.01.

     (v) No Permitted  Lease entered into pursuant to this Section 2.01(b) shall
permit any subleasing of any Aircraft or any Spare Engine.

     (c)  Insignia.  Within  ninety (90) days after (x) the  Closing  Date (with
respect  to  Aircraft,  Engines  and Spare  Engines  covered  by the Lien of the
Security  Documents  as of the  Closing  Date),  and (y) the date on  which  any
Security  Agreement   Supplement   (Aircraft),   Security  Agreement  Supplement
(Engine/Propeller)  or Security Agreement Supplement (Spare Engine) is delivered
(with  respect  to such  additional  Collateral),  and so long as any  Aircraft,
Engines or Spare Engines are subject to the Lien of the Security Documents,  the
Company agrees to affix and maintain (or cause to be affixed and  maintained) in
the cockpit of each Airframe adjacent to the registration  certificate  therein,
on each Engine and on each Spare Engine a nameplate bearing the inscription:

                     "THIS [AIRCRAFT/ENGINE] IS MORTGAGED TO
                                 CITIBANK, N.A.
 AS COLLATERAL AGENT, FOR THE BENEFIT AND SECURITY OF THE AIR TRANSPORTATION
             STABILIZATION BOARD, THE LENDERS AND THE PARTICIPANTS"

     (such nameplate to be replaced,  if necessary,  with a nameplate reflecting
the name of any successor  collateral agent, in each case as permitted under the
Loan Documents).  Except as above provided,  the Company will not allow the name
of any Person other than the Company to be placed on any  Airframe,  any Engine,
any Propeller or on any Spare Engine as a designation  that might be interpreted
as a claim of ownership or of any rights therein.

     (d) Substitution of Engines/Propellers. The Company may at any time, at its
sole cost and  expense,  replace any Engine,  any  Propeller or any Spare Engine
subjected  to the Lien hereof by causing an  Acceptable  Alternate  Engine or an
Acceptable Alternate  Propeller,  as the case may be, to be substituted for such
Engine,  Propeller or Spare Engine,  as the case may be, hereunder in accordance
with the provisions of Section  3.01(b) hereof to the same extent as if an Event
of Loss has occurred with respect to such Engine,  such  Propeller or such Spare
Engine.

     (e) Additional Aircraft-related Collateral. The Company may at any time, at
its sole cost and expense, subject additional airframes,  engines and propellers
to the Lien of the Security  Documents by entering into any one or more Security
Agreement  Supplements and otherwise complying with the terms of Section 5.14 of
the Loan Agreement with respect to such additional collateral.

                                       22
<PAGE>

     Section 2.02 Replacement and Pooling of Parts;  Alterations,  Modifications
and Additions.

     (a) Replacement of Parts.  The Company,  at its own cost and expense,  will
promptly  replace or cause to be replaced  all Parts which may from time to time
become worn out, lost, stolen, destroyed,  seized,  confiscated,  damaged beyond
repair or permanently  rendered unfit for use for any reason whatsoever,  except
as otherwise  provided in Section 2.02(c).  All replacement Parts shall be owned
by the Company  free and clear of all Liens  (except  Permitted  Liens,  pooling
arrangements   permitted  by  Section  2.02(b)  hereof  and  replacement   Parts
temporarily  installed  on an  emergency  basis)  and  shall  be in as  good  an
operating  condition  as, and shall have a value and  utility at least equal to,
the Parts replaced assuming such replaced Parts were in the condition and repair
required to be  maintained  by the terms  hereof.  All Parts at any time removed
from any  Airframe,  any Engine,  any Propeller or any Spare Engine shall remain
the property of the Company and subject to the Lien of the  Security  Documents,
no matter  where  located,  until such time as such Parts  shall be  replaced by
Parts which meet the  requirements  for  replacement  Parts  specified  above as
certified to the Collateral Agent by an Officer's  Certificate from the Company.
Immediately upon any replacement  Part becoming  incorporated or installed in or
attached to any Airframe, any Engine, any Propeller or any Spare Engine, without
further  act  (subject  only to  Permitted  Liens  and any  pooling  arrangement
permitted by Section 2.02(b) hereof and except any replacement  Part temporarily
installed on an emergency  basis),  (i) such  replacement  Part shall become the
property of the Company and subject to the Lien of the Security Documents and be
deemed a Part for all purposes  hereof to the same extent as the Part originally
incorporated  or installed in or attached to such  Airframe,  such Engine,  such
Propeller  or such  Spare  Engine and (ii) the  replaced  Part shall be free and
clear of all rights of the Collateral Agent and shall no longer be deemed a Part
or Spare Part hereunder.

     (b) Pooling of Parts. Any Part removed from any Airframe,  any Engine,  any
Propeller  or any Spare  Engine as  provided  in Section  2.02(a)  hereof may be
subjected by the Company (or any Permitted  Lessee) to a pooling  arrangement of
the type  which  is  permitted  by  clause  (A) of  Section  2.01(b)(i)  hereof;
provided,  that the Part  replacing such removed Part shall be  incorporated  or
installed in or attached to such Airframe,  Engine, Propeller or Spare Engine in
accordance with Section 2.02(a) as promptly as practicable  after the removal of
such removed  Part.  In addition,  any  replacement  Part when  incorporated  or
installed  in or  attached to an  Airframe,  an Engine,  a Propeller  or a Spare
Engine in  accordance  with such Section may be owned by any third party subject
to such a pooling  arrangement,  provided,  that the Company  (or any  Permitted
Lessee),  at its expense,  as promptly  thereafter  as  practicable,  either (i)
causes  such  replacement  Part to become  subject  to the Lien of the  Security
Documents,  free and  clear of all  Liens  other  than  Permitted  Liens or (ii)
replaces  such  replacement  Part with a further  replacement  Part owned by the
Company (or any Permitted Lessee) which shall become the property of the Company
and subject to the Lien of the Security  Documents,  free and clear of all Liens
other than Permitted Liens.

     (c)  Alterations,  Modifications  and  Additions.  The Company,  at its own
expense,  will make (or cause to be made) such alterations and  modifications in
and additions to the Airframes,  Engines, Propellers and Spare Engines as may be
required  to be made  from  time to time so as to  comply  with any  law,  rule,
regulation  or order of any  regulatory  agency or body of any  jurisdiction  in
which any Aircraft may then be registered;  provided,  however, that the Company

                                       23
<PAGE>

or any  Permitted  Lessee  may, in good faith,  and by  appropriate  proceedings
contest the validity or application  of any such law, rule,  regulation or order
in any  reasonable  manner  which  does  not  materially  adversely  affect  the
Collateral  Agent,  the Board or any Lender or any of their respective legal and
economic interests in or to such Airframe, Engine, Propeller or Spare Engine, or
subject any such Person to risk of any material civil or any criminal  penalties
or involve any material risk of loss or  forfeiture  of title to such  Aircraft,
Engine,  Propeller  or such Spare  Engine.  In  addition,  the  Company  (or any
Permitted  Lessee),  at its  own  expense,  may  from  time to  time  make  such
alterations and modifications in and additions to any Airframe,  any Engine, any
Propeller or any Spare Engine as the Company (or any Permitted  Lessee) may deem
desirable  in the proper  conduct of its  business,  including  removal of Parts
which the Company (or any  Permitted  Lessee)  deems to be obsolete or no longer
suitable or appropriate for use on such Airframe, such Engine, such Propeller or
such  Spare  Engine  (such  parts,  "Obsolete  Parts");  provided  that  no such
alteration,   modification,   removal  or  addition  impairs  the  condition  or
airworthiness  of such  Airframe,  such  Engine,  such  Propeller  or such Spare
Engine,  or materially  diminishes the value or utility of such  Airframe,  such
Engine, such Propeller or such Spare Engine below the condition,  airworthiness,
value or utility thereof  immediately  prior to such  alteration,  modification,
removal or addition assuming such Airframe,  such Engine, such Propeller or such
Spare Engine was then in the condition required to be maintained by the terms of
this Security Agreement. In addition, the value (but not the utility,  condition
or airworthiness) of any Airframe, any Engine, any Propeller or any Spare Engine
may be reduced by the value,  if any,  of  Obsolete  Parts which shall have been
removed so long as the  aggregate  value of all Obsolete  Parts which shall have
been removed and not replaced shall not exceed the Obsolete Parts Cap. All Parts
incorporated or installed in or attached or added to an Airframe,  an Engine,  a
Propeller or a Spare Engine as the result of such  alteration,  modification  or
addition  (except those parts which are excluded from the definition of Parts or
which  may be  removed  by the  Company  pursuant  to the  next  sentence)  (the
"Additional  Parts") shall,  without  further act, become subject to the Lien of
the Security Documents.  Notwithstanding the foregoing sentence, the Company (or
any  Permitted  Lessee) may, at its own expense,  so long as no Event of Default
shall  have  occurred  and be  continuing,  remove or suffer to be  removed  any
Additional  Part,  provided that such Additional Part (i) is in addition to, and
not in replacement of or substitution  for, any Part originally  incorporated or
installed  in or attached to such  Airframe,  any Engine,  any  Propeller or any
Spare  Engine  at  the  time  of  delivery  thereof  hereunder  or any  Part  in
replacement  of or  substitution  for any such Part,  (ii) is not required to be
incorporated  or installed in or attached or added to any Airframe,  any Engine,
any  Propeller  or any  Spare  Engine  pursuant  to the first  sentence  of this
paragraph  (c) and (iii) can be removed from such  Airframe,  such Engine,  such
Propeller or such Spare Engine without diminishing the condition, airworthiness,
value or utility of the  Airframe,  such  Engine,  such  Propeller or such Spare
Engine which such  Airframe,  such Engine,  such  Propeller or such Spare Engine
would have had at such time had such  alteration,  modification  or addition not
occurred. Upon the removal thereof as provided above, such Additional Part shall
no longer be deemed to be subject to the Lien of the Security  Documents or part
of the Airframe, Engine, Propeller or Spare Engine from which it was removed.

     (d) Certain Matters Regarding Passenger Convenience Equipment.  The Company
may at any time and from time to time  install on any  Airframe,  subject to the
requirements of Section 2.02(c) above,  Passenger  Convenience Equipment that is
(i) owned by another Person and leased to the Company,  (ii) sold to the Company

                                       24
<PAGE>

by another  Person  subject to a  conditional  sale  contract or other  retained
security  interest,  (iii)  leased to the  Company  pursuant to a lease which is
subject to a security  interest in favor of another  Person or (iv) installed on
the applicable  Aircraft  subject to a license granted to the Company by another
Person, and in any such case (A) the Collateral Agent will not acquire or claim,
as against  any such other  Person,  any right,  title or  interest  in any such
Passenger  Convenience  Equipment solely as a result of its installation on such
Airframe,  (B) the  Company  shall  notify  such  Person of  Collateral  Agent's
interest in such  Aircraft,  and (C) the Company shall  procure  that,  upon the
occurrence  of  any  default  under  the  applicable  lease,   conditional  sale
agreement,  security agreement or license,  such Person shall not be entitled to
repossess such Passenger  Convenience  Equipment  unless it shall, in connection
with such  repossession,  undertake to restore such Aircraft to the condition it
had been in had the  installation  of such Passenger  Convenience  Equipment not
occurred.

     Section 2.03 Pledged Spare Parts Use, Possession and Designated  Locations.

     (a) The Company shall have the right,  at any time and from time to time at
its own cost and expense,  without any release from or consent by the Collateral
Agent,  to deal with the Pledged Spare Parts in any manner  consistent  with the
Company's  ordinary course of business,  including without limitation any of the
following:

     (i) to  incorporate  in,  install on or attach or make  appurtenant  to any
aircraft,  engine or Appliance leased to or owned by the Company (whether or not
subject  to any  Lien) or any  Pledged  Spare  Part,  free  from the Lien of the
Security Documents;

     (ii) to  dismantle  any  Pledged  Spare  Part that has  become  worn out or
obsolete or unfit for use, and to sell or dispose of any such Pledged Spare Part
or any  salvage  resulting  from  such  dismantling,  free  from the Lien of the
Security Documents; and

     (iii) to transfer any or all of the Pledged  Spare Parts  located at one or
more Designated Locations to one or more other Designated Locations.

     (b) Without the prior consent of the Collateral Agent, the Company will not
sell,  lease,  transfer or  relinquish  possession  of any Pledged Spare Part to
anyone other than the Company,  except as  permitted by the  provisions  of this
Section  2.03 and except that the Company  shall have the right in the  ordinary
course of business,  (i) to transfer possession of any Pledged Spare Part to the
Manufacturer  thereof or any service  provider for testing,  overhaul,  repairs,
maintenance,  alterations  or  modifications  purposes  or (ii) to  subject  any
Pledged  Spare  Part  to an  interchange  or  pooling,  exchange,  borrowing  or
maintenance  servicing arrangement customary in the airline industry and entered
into  in the  ordinary  course  of  business;  provided,  however,  that  if the
Company's  title to any such Pledged Spare Part shall be divested under any such
agreement or  arrangement,  such  divestiture  shall be deemed to be an Event of
Loss with  respect to such  Pledged  Spare Part  subject  to the  provisions  of
Section 3.01(c).

     (c) The Company  shall  maintain and keep the Pledged Spare Parts at one or
more of the  Designated  Locations,  except as  otherwise  permitted  under this
Section  2.03.  If any Pledged  Spare Part,  at any time and for any reason,  is
located at any other than a  Designated  Location  or if the  Company  wishes to

                                       25
<PAGE>

subject  additional  Qualified Spare Parts to the Lien of the Security Documents
and such Qualified Spare Parts are not located at any Designated  Location,  the
Company will promptly furnish to the Collateral Agent the following:

     (i) a Security Agreement  Supplement (Pledged Spare Parts) duly executed by
the Company,  identifying each location that is to become a Designated  Location
and specifically subjecting the Pledged Spare Parts at such location to the Lien
of the Security Documents;

     (ii) a legal  opinion  from  counsel  (which  opinion and counsel  shall be
reasonably satisfactory to the Collateral Agent), dated the date of execution of
said Security  Agreement  Supplement  (Pledged  Spare Parts),  stating that said
Security  Agreement  Supplement  (Pledged  Spare  Parts) has been duly filed for
recording in accordance  with the  provisions  of the Federal  Aviation Act, and
either:  (A) no other  filing or recording is required in any other place within
the United States in order to perfect the Lien of the Security  Documents on the
Qualified  Spare  Parts  held  at the  Designated  Locations  specified  in such
Security Agreement Supplement (Pledged Spare Parts) under the laws of the United
States,  or (B) if any such  filing or  recording  shall be  required  that said
filing has been  accomplished  in such other  manner and places,  which shall be
specified  in such legal  opinion,  as are  necessary to perfect the Lien of the
Security Documents; and

     (iii) an Officer's  Certificate  stating that in the opinion of the officer
executing the Officers'  Certificate,  all conditions  precedent provided for in
this Security  Agreement relating to the subjection of such property to the Lien
of the Security Documents have been complied with.

     The Company shall,  on an ongoing  basis,  effect any filings or recordings
(or amend any existing  filings or recordings)  which are necessary or desirable
to perfect the security  interest of the Collateral Agent in the Qualified Spare
Parts  which are being  subjected  to the Lien  hereof in  accordance  with this
Section 2.03 and shall promptly deliver copies of any such filings or recordings
to the Collateral Agent.

     Section 2.04 Insurance.

     (a) Public Liability and Property Damage Insurance.  (i) Except as provided
in clause (ii) of this Section  2.04(a),  and subject to  self-insurance  to the
extent  permitted by Section 2.04(e) hereof at all times, the Company will carry
or cause to be carried  with  respect to each  Aircraft and each Spare Engine at
its or any  Permitted  Lessee's  expense  (A)  comprehensive  airline  liability
(including,  without  limitation,  passenger,  contractual,  bodily injury,  and
property  damage  liability  and  product  liability)  insurance  (exclusive  of
Manufacturer's  product liability insurance),  (B) cargo liability insurance and
(C) war risk  liability  insurance in each case (I) in an amount per  occurrence
not less than the greater of (x) the amounts of comprehensive  airline liability
insurance  from time to time  applicable  per occurrence to aircraft and engines
owned or leased and  operated by the  Company of the same type as such  Aircraft
and such Spare Engines and (y) the Minimum Liability  Insurance Amount,  (II) of
the same type (subject,  however,  to Section 2.04(h)) and covering at least the

                                       26
<PAGE>

same risks as from time to time are  applicable to aircraft and engines owned or
leased and  operated by the Company of the same type as such  Aircraft  and such
Spare  Engines,  and (III)  which is  maintained  in effect  with  insurers  (or
reinsurers)  of  nationally  or   internationally   recognized   reputation  and
reasonably believed to be financially sound.

     (ii) During any period that an Airframe, Engine, Propeller or Spare Engine,
as the case may be, is on the ground and not in operation, the Company may carry
or  cause  to be  carried  as to  such  non-operating  property,  in lieu of the
insurance required by clause (i) above, and subject to the self-insurance to the
extent permitted by Section 2.04(e) hereof,  insurance by insurers of recognized
reputation and reasonably believed to be financially sound otherwise  conforming
with the  provisions of clause (i) except that (A) the amounts of coverage shall
not be  required  to exceed  the  amounts  of  comprehensive  airline  liability
insurance  from  time to time  applicable  to  property  owned or  leased by the
Company  of the same  type as such  non-operating  property  and which is on the
ground and not in operation; and (B) the scope of the risks covered and the type
of  insurance  shall be the same as from  time to time  shall be  applicable  to
property  owned or leased by the Company of the same type as such  non-operating
property and which is on the ground and not in operation.

     (iii)  The  Company  will  carry  or  cause  to be  carried  at  all  times
comprehensive  airline  liability  insurance,   including,  without  limitation,
property damage liability  insurance with respect to the Pledged Spare Parts and
Pledged  Equipment,  which is (A) of  amount  and  scope  as may be  customarily
maintained by similar  corporations  engaged in the same or similar business and
similarly  situated  as the Company for  property  similar to the Pledged  Spare
Parts and  Pledged  Equipment,  (B)  maintained  in  effect  with  insurers  (or
reinsurers)  of  nationally  or   internationally   recognized   reputation  and
reasonably  believed to be financially sound and (C) with such retentions as the
Company  customarily  maintains  (provided,  however,  that  any  self-insurance
retention or deductible shall not exceed $1,000,000 per occurrence).

     (b) Insurance Against Loss or Damage to an Aircraft, a Spare Engine, etc.

     (i) With respect to Aircraft  only,  subject to the  provisions  of Section
2.04(e) hereof permitting self-insurance, the Company shall maintain or cause to
be maintained in effect, at its or any Permitted Lessee's expense, with insurers
of recognized  reputation  and reasonably  believed to be financially  sound (A)
"all-risk"  aircraft hull  insurance  covering  each  Aircraft,  (B)  "all-risk"
coverage  of Spare  Engines,  Engines,  Propellers  and Parts  (while such Spare
Engines,  Engines,  Propellers  and  Parts  are  temporarily  removed  from such
Aircraft and not replaced by similar  components)  and (C)  "all-risk"  coverage
with  respect to Pledged  Spare Parts and Pledged  Equipment,  in such forms and
amounts and with such  retentions  as the  Company  customarily  maintains  with
respect to similar property owned or operated by the Company (provided, however,
that any self-insurance  retention or deductible shall not exceed $1,000,000 per
occurrence);  provided,  that  such  insurance  shall at all  times  while  such
Aircraft  and Spare  Engines are  subject to the  Security  Documents  be for an
amount (taking into account  self-insurance  to the extent  permitted by Section
2.04(e)  hereof) not less than the Insured  Amount for such  Aircraft  and Spare
Engines.  In the case of a loss with respect to an engine  (other than an Engine
or  Spare  Engine)  or  propeller  (other  than a  Propeller)  installed  on any
Airframe,  the  Collateral  Agent shall,  subject to Section  2.6(c) of the Loan

                                       27
<PAGE>

Agreement,  as  promptly  as  practicable  remit any  payment  made to it of any
insurance  proceeds  in respect of such loss to the  Company or any other  third
party  identified,  to the  Collateral  Agent  by the  Company  in an  Officer's
Certificate, entitled to receive such proceeds.

     (ii) All losses will be  adjusted by the Company  (giving due regard to the
interest of the Collateral  Agent) with the insurers;  provided,  however,  that
during a period  when any  Specified  Default  or Event of  Default  shall  have
occurred and be continuing,  the Company shall not agree to any such  adjustment
without  the prior  written  consent of the  Collateral  Agent.  As between  the
Collateral  Agent and the  Company,  it is agreed that all proceeds of insurance
maintained in compliance with the preceding paragraph and received as the result
of the occurrence of an Event of Loss will be applied in accordance with Section
3.01.

     (c) War-Risk, Hijacking and Related Perils Insurance.

     (i) The Company shall at all times maintain hull coverage, in an amount not
less than the Insured  Amount for each Aircraft and Spare Engine,  for war risk,
hijacking and related perils at least as broad as Lloyd's of London Form LSW555B
as in effect on the date hereof,  or its  substantive  equivalent  as reasonably
determined  by  the  Collateral  Agent  (such  determination  to be  made  after
consultation with the Company's insurance broker).

     (ii) At all times when  Section  2.04(a)(ii)  shall not apply,  the Company
shall  maintain  or cause to be  maintained  world-wide  liability  coverage  of
war-risk, hijacking and related perils insurance at least as broad as AVN 52D as
in  effect on the date  hereof,  or its  substantive  equivalent  as  reasonably
determined  by  the  Collateral  Agent  (such  determination  to be  made  after
consultation with the Company's  insurance broker) in an amount,  subject to the
provisions of Section  2.04(e),  not less than the Minimum  Liability  Insurance
Amount.

     (d) Reports,  Certificates,  etc. The Company will furnish,  or cause to be
furnished,  to the  Collateral  Agent on or before the  Closing  Date,  and each
annual  renewal  of  the  applicable  insurances,  (i) a  report,  signed  by an
authorized  representative  of Aon Risk Services,  Inc. or any other independent
firm of insurance  brokers  reasonably  acceptable to the Collateral Agent which
brokers may be  regularly  retained by the Company  (the  "Insurance  Brokers"),
describing in reasonable  detail the hull and liability  insurance (and property
insurance  for  detached  engines,  parts  and other  items)  then  carried  and
maintained  with respect to the  Collateral and stating the opinion of such firm
that (A) such  insurance  complies  with the terms  hereof,  (B) all premiums in
connection  with such  insurance  then due have been paid and (C) such insurance
together with any  self-insurance  permitted hereby provides  coverages  against
risks that are customarily insured against by Certificated Air Carriers and that
such coverages are in  substantially  similar forms,  are of such types and have
limits as are  customarily  carried by  Certificated  Air  Carriers;  and (ii) a
certificate of insurance  evidencing  the due compliance  with the terms of this
Section 2.04 relating to insurance with respect to the  Collateral.  The Company
will cause such  Insurance  Broker to agree to advise  the  Collateral  Agent in
writing of any  default in the payment of any premium and of any act or omission
on the part of the Company of which it has knowledge and which might  invalidate
or render  unenforceable,  in whole or in part,  any insurance on the applicable
Collateral  and to advise the  Collateral  Agent in writing at least thirty (30)
days (twenty (20) days in the case of lapse for nonpayment of premiums and seven
(7)  days in the  case of war  risk and  allied  perils  coverage)  prior to the

                                       28
<PAGE>

cancellation (but not expiration),  lapse for non-payment of premium or material
adverse  change of any  insurance  maintained  pursuant  to this  Section  2.04;
provided that if the notice period specified above is not reasonably obtainable,
the Company will cause the  Insurance  Broker to provide for as long a period of
prior notice as shall then be reasonably  obtainable.  In addition,  the Company
will also cause such Insurance  Broker to deliver to the Collateral  Agent on or
prior  to the  date  of  expiration  of any  insurance  policy  referenced  in a
previously delivered  certificate of insurance,  a new certificate of insurance,
substantially  in the same form as  delivered  by the Company to the  Collateral
Agent on the  Closing  Date  except for  changes  in the report or the  coverage
consistent  with the terms  hereof.  In the event that the Company shall fail to
maintain or cause to be maintained insurance as herein provided,  the Collateral
Agent  may,  at its sole  option,  but shall be under no duty to,  procure  such
insurance on behalf of the Company and, in such event,  the Company shall,  upon
demand,  reimburse the  Collateral  Agent for the cost thereof to the Collateral
Agent,  together with interest on such cost at the Overdue Rate from the date of
such payment by the Collateral Agent to the date of reimbursement without waiver
of any other rights the Collateral Agent may have;  provided,  however,  that no
exercise by the  Collateral  Agent of said option shall affect the provisions of
this Security  Agreement or the other Loan  Documents,  including the provisions
that  failure  by  the  Company  to  maintain  the  prescribed  insurance  shall
constitute  an Event of Default.  Upon  receipt of any  notices or reports,  the
Collateral Agent shall as promptly as practicable  forward copies of the same to
the Agent, the Loan  Administrator,  the Board,  each of the Lenders and each of
the  Participants.  The  Collateral  Agent  shall  have  no  responsibility  for
independently   verifying  the  accuracy  or  completeness  of  any  information
contained in any report or certificate provided by the Insurance Brokers.

     (e)  Self-Insurance.  The Company (but no Permitted Lessee) may self-insure
the risks required to be insured  against  pursuant to this Section 2.04 under a
program  applicable to all aircraft  (whether  owned or leased) in the Company's
fleet,  but in no case  shall the  aggregate  amount of such  self-insurance  in
regard to Sections 2.04(a) and 2.04(b) hereof exceed for any calendar year, with
respect to all of the aircraft  (whether owned or leased) in the Company's fleet
(including,  without limitation,  the Aircraft)  $2,500,000.  In addition to the
foregoing  right to  self-insure,  the Company  (and any  Permitted  Lessee) may
self-insure, to the extent of any applicable mandatory minimum per aircraft (or,
if  applicable,  per  annum or other  period)  the hull or  liability  insurance
deductible  imposed  by the  aircraft  hull  or  liability  insurer,  which  are
commensurate with the standard deductibles in the aircraft insurance industry.

     (f) Additional  Insurance by the Company.  The Company (and, if applicable,
any Permitted Lessee) may at its own expense carry insurance with respect to its
interest in the Aircraft, Engines,  Propellers,  Spare Engines and Pledged Spare
Parts in amounts in excess of that  required to be  maintained  by this  Section
2.04;  provided,  however,  that such insurance does not prevent the Company (or
such Permitted Lessee) from carrying the insurance required or permitted by this
Section  2.04 or  adversely  affect  such  insurance  or the cost  thereof;  and
provided,  further,  that the  proceeds  of such  insurance  shall be subject to
Section 2.6(c) of the Loan Agreement.

     (g) Indemnification by Government in Lieu of Insurance. Notwithstanding any
provisions of this Section 2.04 requiring insurance, the Collateral Agent agrees
to accept, in lieu of insurance against any risk with respect to the Aircraft or
Spare Engines, indemnification from, or insurance provided by, the United States

                                       29
<PAGE>

Government,  against such risk in an amount  which,  when added to the amount of
insurance  against such risk maintained by the Company (or any Permitted Lessee)
shall be at least equal to the amount of insurance  against such risk  otherwise
required by this Section 2.04 (taking into account  self-insurance  permitted by
Section 2.04(e) hereof).  Any such  indemnification or insurance provided by the
United States Government shall provide  substantially  similar protection as the
insurance  required  by this  Section  2.04.  The Company  shall  furnish to the
Collateral  Agent,  in advance of attachment of such indemnity or insurance,  an
Officer's  Certificate  stating that such  indemnification or insurance complies
with  the  preceding  sentence,  and  promptly  following  such  attachment,  an
Officer's  Certificate  confirming in reasonable  detail the amount and scope of
such indemnification or insurance and an FAA Certificate of Insurance confirming
that such  insurance  has been  obtained  from the United  States  Government in
compliance with this Section 2.4.

     (h) Terms of Insurance  Policies.  Any policies  carried in accordance with
Sections 2.04(a) through 2.04(c) hereof covering the applicable Collateral,  and
any policies taken out in substitution or replacement for any such policies, (i)
shall name the Additional  Insureds as additional  insureds and, for purposes of
Sections  2.04(b),  2.04(c)(i) and 2.04(i),  the  Collateral  Agent as sole loss
payee,  as their  respective  interests may appear (but without  imposing on any
such party liability to pay premiums with respect to such  insurance),  (ii) may
provide for  self-insurance  to the extent  permitted in Section 2.04(e) hereof,
(iii) shall  provide that if the insurers  cancel such  insurance for any reason
whatever,  or if the same is allowed to lapse for  non-payment  of premium or if
any  material  change  is made in the  insurance  which  adversely  affects  the
interest of any Additional Insured, such lapse, cancellation or change shall not
be effective as to any Additional Insured for thirty (30) days (twenty (20) days
in the case of lapse for  non-payment of premiums and seven (7) days in the case
of war risk and allied perils coverage) after receipt by such Additional Insured
of  written  notice by such  insurers  of such  lapse,  cancellation  or change;
provided,  however,  that if any notice period specified above is not reasonably
obtainable,  such policies shall provide for as long a period of prior notice as
shall then be reasonably  obtainable,  (iv) shall provide that in respect of the
respective  interests of each Additional  Insured in such policies the insurance
shall not be  invalidated  by any  action or  inaction  of the  Company  (or any
Permitted Lessee) or any other Person and shall insure the respective  interests
of the  Additional  Insureds,  as  they  appear,  regardless  of any  breach  or
violation of any warranty,  declaration or condition  contained in such policies
by the Company (or any Permitted  Lessee) or by any other  Person,  (v) shall be
primary  without any right of  contribution  from any other  insurance  which is
carried by any Additional Insured,  (vi) shall expressly provide that all of the
provisions  thereof,  except the limits of liability,  shall operate in the same
manner as if there were a separate  policy  covering  each  Additional  Insured,
(vii)  shall  waive  any  right  of  the  insurers  to  set-off,  recoupment  or
counterclaim  or any other  deduction,  whether by attachment  or otherwise,  in
respect of any liability of any Additional  Insured,  (viii) in the case of hull
insurance  policies carried in accordance with this Section 2.04, shall name the
Collateral  Agent as sole loss payee in accordance with the provisions of clause
(ix),  (ix) shall  provide  that in the event of a loss  involving  an Aircraft,
Airframe, Engine, Propeller or Spare Engine the proceeds in respect of such loss
for such Aircraft,  Airframe, Engine, Propeller or Spare Engine shall be payable
to the Collateral  Agent and shall be applied in accordance  with Section 2.6(c)
of the Loan Agreement), (x) shall waive any right of the insurers to subrogation
against  any  Additional  Insured,  and (xi) shall  provide  for a 50/50  claims
settlement per AVS 103 or its equivalent.

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<PAGE>

     (i) Application of Payments During  Existence of a Specified  Default or an
Event of Default.  Any amount  referred to in this Section 2.04 which is payable
to or retainable  by the Company (or any Permitted  Lessee) shall not be paid to
or  retained by the  Company  (or any  Permitted  Lessee) if at the time of such
payment or  retention  a  Specified  Default  or an Event of Default  shall have
occurred and be continuing,  but shall be held by or paid over to the Collateral
Agent  and  applied  against  the  obligations  of the  Company  under  the Loan
Documents.  At such time as there  shall not be  continuing  any such  Specified
Default or Event of  Default,  such  amount  shall be paid to the Company to the
extent not previously applied in accordance with the preceding  sentence.  Prior
to  remitting  any such funds to the  Company,  the  Collateral  Agent  shall be
authorized  to request and  receive an  Officer's  Certificate  from the Company
certifying  that no  Specified  Default or Event of Default has  occurred and is
continuing.

     Section 2.05  Inspection.  (a) At reasonable times not more often than once
in any twelve (12) month  period,  and upon at least ten (10) days prior written
notice to the Company (provided,  however,  that if a Specified Default or Event
of Default shall have occurred and be continuing,  any such inspection  shall be
at  reasonable  times without any limit on the number of times and upon at least
three (3)  Business  Days'  prior  written  notice to and at the  expense of the
Company),  the  Collateral  Agent or the  Board or their  respective  authorized
representatives may inspect the Aircraft,  Spare Engines and Pledged Spare Parts
and inspect  and make  copies of the books and of the Company and any  Permitted
Lessee  required  to be  maintained  by the FAA or other  applicable  regulatory
agency or body (at the Company's risk and expense).  Any such  inspection of any
Aircraft,  any Spare  Engine or any  Pledged  Spare Part shall be subject to the
Company's (or any Permitted  Lessee's)  safety and security rules  applicable at
the location of such Collateral and, so long as no Specified Default of Event of
Default shall have occurred and be  continuing,  no exercise of such  inspection
right  shall  interfere  with  the  normal  operation  or  maintenance  of  such
Collateral  by, or the  normal  business  operations  of,  the  Company  (or any
Permitted  Lessee).  Neither the  Collateral  Agent nor the Board shall have any
duty to make any such  inspection  and shall incur no liability or obligation by
reason of not making any such inspection.

     (b) The  Collateral  Agent may by  written  notice to the  Company  request
notice of the next  scheduled  heavy  maintenance  visit of any Aircraft and the
Company  shall  permit  observation  of such  visit  subject  to the  terms  and
conditions set forth above.

     Section 2.06 UCC Collateral. The Company shall:

     (a) upon the occurrence  and during the  continuance of an Event of Default
and upon the request of the Collateral  Agent,  promptly (i) notify each Account
Debtor in respect of the Pledged  Accounts that such Accounts have been assigned
to the Collateral Agent hereunder, and that any payments due or to become due in
respect thereof are to be made directly to the Collateral  Agent or its designee
(it being understood and agreed that the foregoing shall not limit the rights of
the Collateral  Agent upon the occurrence and during the continuance of an Event
of Default to so notify the Account  Debtors  without  giving prior notice to or
making a demand  upon the Company  including,  without  limitation,  any notices
required  to be given  under the  Anti-Assignment  Act (41 U.S.C.  ss. 15 and 31
U.S.C.  ss. 3727)) and (ii) transfer to the Collateral Agent or its designee all
funds  received  by it from or on behalf of an Account  Debtor in respect of the
Pledged  Accounts (it being  acknowledged  and agreed that the Company  shall be

                                       31
<PAGE>

deemed to be holding all such funds as trustee for the Collateral  Agent and, as
such, shall not commingle such funds with other funds of the Company);

     (b) upon the  acquisition  after  the date  hereof  by the  Company  of any
additional or replacement Pledged Equipment covered by a certificate of title or
ownership,  cause the  Collateral  Agent to be listed as the  lienholder on such
certificate  of title and take such other steps as may be required under the law
applicable to perfection of a security interest in such property to perfect such
security  interest,  and  within  thirty  (30) days of the  acquisition  thereof
deliver evidence of the same to the Collateral Agent;

     (c) (i) keep  full and  accurate  books  and  records  relating  to the UCC
Collateral,  including,  without limitation,  a current and complete list of all
Account  Debtors  obligated  on any of the  Pledged  Accounts,  along with their
respective names, addresses,  telephone numbers, account or other identification
numbers and the balance and aging of their respective  Pledged Accounts,  copies
of which list the Company shall deliver to the  Collateral  Agent promptly after
the  end of each  fiscal  quarter  of the  Company  and as  soon as  practicable
following the Collateral Agent's request,  and (ii) stamp or otherwise mark such
books and records in such  manner as may be  required  to perfect  the  security
interest in such  Collateral or at the request of the Collateral  Agent in order
to reflect the security interests granted by this Security Agreement;

     (d) permit representatives of the Collateral Agent, upon reasonable notice,
at any time during normal business hours to inspect the Pledged Equipment and to
inspect  and make  abstracts  from its books and records  pertaining  to the UCC
Collateral,  and permit representatives of the Collateral Agent to be present at
the  Company's  place of business to receive  copies of all  communications  and
remittances relating to the UCC Collateral, and forward copies of any notices or
communications  received by the Company with respect to the UCC Collateral,  all
in such manner as may be deemed necessary or advisable;

     (e) if it wishes to subject any  additional  Accounts,  Equipment  or other
Goods to the Lien of the Security Documents, at its sole cost and expense, amend
or supplement this Agreement to include such Accounts,  Equipment or other Goods
(which  amendment  or  supplement   shall   constitute  a  "Security   Agreement
Supplement" under the Loan Agreement),  and the Collateral Agent shall take, and
the Company  shall  authorize the  Collateral  Agent to take (to the extent such
authorization is necessary or required),  at the Company's sole cost and expense
such action (including,  without limitation, filing UCC financing statements and
the provision of requisite notices of assignment  pursuant to applicable law and
the terms and conditions of any military  charter  contracts  renewed or entered
into after the Closing Date) that may be deemed  necessary or desirable in order
to perfect and protect the security  interest to be created in such  Accounts or
Goods and the Company shall  otherwise  comply with the terms of Section 5.14 of
the Loan Agreement with respect to such additional collateral;

     (f) use commercially  reasonable  efforts to cause to be collected from its
Account  Debtors,  as and when due all amounts owing under or on account of each
of its Pledged Accounts (including,  without limitation,  Pledged Accounts which

                                       32
<PAGE>

are delinquent,  which shall be collected in accordance  with lawful  collection
procedures)  and shall apply  forthwith upon receipt thereof all such amounts as
are so collected to the outstanding balance of such Pledged Accounts;

     (g) keep the UCC  Collateral  (as  applicable)  in good  working  order and
repair,  ordinary  wear  and  tear  excepted,  and not use  such  Collateral  in
violation of law or any policy of insurance thereon;

     (h) not change (i) its name, identity or corporate structure in any manner,
(ii) the location of its chief  executive  office or (iii) its  jurisdiction  of
organization  in any manner unless it shall have given the  Collateral  Agent at
least thirty (30) days' prior  written  notice  thereof;  and

     (i) not  change  the  location  of any UCC  Collateral  owned by it if such
change  would  cause the  security  interests  of the  Collateral  Agent in such
Collateral to lapse or cease to be perfected.

     Section 2.07 Liens.  The Company will not  directly or  indirectly  create,
incur,  assume or suffer to exist any Lien on or with respect to any Collateral,
except  Permitted Liens.  The Company shall promptly,  at its own expense,  take
such  action  as may be  necessary  to duly  discharge  any Lien  (other  than a
Permitted Liens) arising at any time.

     Section 2.08 Performance.  The Company shall perform and observe all of its
agreements,  covenants and  obligations  contained in the Loan Agreement and the
Notes, all of which are hereby incorporated by reference herein.

     Section 2.09 Further  Assurances.  The Company agrees that it will promptly
correct any defect or error that may be discovered in any document  delivered in
connection  with  the  Security  Documents  to  which  it is a  party  or in the
execution, acknowledgment or recordation thereof.

                                    ARTICLE 3

                                  EVENT OF LOSS

     Section 3.01 (a) Event of Loss with Respect to an Aircraft.

     (i) Upon the occurrence of an Event of Loss with respect to any Airframe or
any Airframe and the Engines,  Propellers,  Spare  Engines  and/or  engines then
installed on any Airframe, the Company shall:

     (A) forthwith  (and in any event,  within five (5) Business Days after such
occurrence) give the Collateral Agent written notice of such Event of Loss; and

     (B) not later than the earlier of (x) 60 days after the  occurrence of such
Event of Loss or (y) the fifth (5th) Business Day following  notification to the
Company of receipt by the loss payee of the  insurance  proceeds with respect to
such Event of Loss, give the Collateral  Agent written notice of its election to
perform one of the following  options (it being  understood  that the failure to

                                       33
<PAGE>

give such  notice  shall be deemed to be an  election of the option set forth in
subclause (1) below):

     (1) Not later than the earlier of (x) the Business Day next  succeeding the
one hundred eightieth (180th) day following the occurrence of such Event of Loss
or (y) the first Interest  Payment Date that is at least three (3) Business Days
after receipt by the loss payee of the  insurance  proceeds with respect to such
Event of Loss (but not earlier than the first  Business Day next  succeeding the
thirtieth  (30th)  day  following  the  occurrence  of such  Event of Loss) (the
applicable day being the "Loss Payment Date"),  the Company shall, to the extent
not paid to the Collateral Agent as insurance proceeds,  pay or cause to be paid
to the Collateral Agent the insurance proceeds in respect of such Event of Loss.
Upon  receipt  of the  insurance  proceeds  from  the  Company  or the  relevant
insurance provider,  the Collateral Agent shall apply such insurance proceeds on
behalf of the Company as a prepayment in accordance  with Section  2.6(c) of the
Loan Agreement. If such insurance proceeds are less than the Insured Amount, the
Company  shall pay or cause to be paid to the  Collateral  Agent the  difference
between the Insured Amount and the amount of such proceeds; or

     (2) Not  later  than the  Business  Day  next  succeeding  the one  hundred
eightieth  (180th)  day  following  the  occurrence  of such Event of Loss,  the
Company shall substitute an aircraft  (together with engines and, if applicable,
propellers installed thereon) in accordance with the terms hereof subject to the
provisions  of  Section  2.6(c) of the Loan  Agreement,  provided  that if (x) a
Specified  Default or Event of Default  shall have occurred and be continuing as
of  such  election  date  or (y)  the  Company  shall  have  elected  to  make a
substitution  under  this  clause (2) and shall fail for any reason to make such
substitution  in accordance  with the terms hereof,  then the Company shall make
the payments required by clause (1) above on such date.

     (ii) At such  time as the  Company  shall  have  complied  fully  with  the
provisions of clause (1) above, the Collateral Agent shall release from the Lien
of the Security  Documents  such  Aircraft by executing  and  delivering  to the
Company all documents and  instruments,  prepared at the Company's sole cost and
expense, as the Company may reasonably request to evidence such release.

     (iii)  The  Company's  right  to  substitute  any   Replacement   Airframe,
Replacement  Engine and  Replacement  Propeller as provided in Clause  (B)(2) of
Section  3.01(a)(i) shall be subject to the  fulfillment,  at the Company's sole
cost and expense, of the following conditions precedent:

     (A) on the date  when any  Replacement  Airframe,  Replacement  Engine  and
Replacement  Propeller is subjected to the Lien of the Security  Documents (such
date being referred to in this Section 3.01 as the "Replacement  Closing Date"),
the following documents shall have been duly authorized,  executed and delivered
by the  respective  party or  parties  thereto  and  shall be in full  force and
effect, and an executed counterpart of each thereof shall have been delivered by
the Company to the Collateral Agent:

                                       34
<PAGE>

     (I)  a  Security  Agreement   Supplement   (Aircraft)  covering  each  such
Replacement  Airframe,  Replacement Engine and Replacement  Propeller shall have
been duly filed for  recordation  pursuant to the Federal  Aviation  Act or such
other applicable law of such jurisdiction  other than the United States in which
each such Replacement Airframe,  Replacement Engine and Replacement Propeller is
to be registered in accordance  with Section  2.01(a)(iii),  as the case may be;
and

     (II)  UCC  financing  statements  (and  any  similar  statements  or  other
documents  required  to be  filed  or  delivered  pursuant  to the  laws  of the
jurisdiction in which each such  Replacement  Airframe,  Replacement  Engine and
Replacement   Propeller,   may  be  registered   in   accordance   with  Section
2.01(a)(iii)) as may be necessary or advisable to protect the security interests
of the Collateral Agent in each such Replacement  Airframe,  Replacement  Engine
and Replacement Propeller;

     (B) each Replacement  Airframe shall be one or more airframes,  shall be of
the same  Manufacturer  and type as the  Aircraft  (unless  consented  to by the
Collateral  Agent) and shall have been  manufactured  by the  Manufacturer in or
after the year that the Aircraft  subject of the Event of Loss was  manufactured
and each Replacement  Engine shall be the engine  applicable to such airframe or
airframes,  as the case may be, of the same  Manufacturer and type as the Engine
to be replaced and each Replacement  Propeller shall be the propeller applicable
to such engine or engines, as the case may be, of the same Manufacturer and type
as the Propeller to be replaced and the Collateral  Agent shall have received an
Appraisal  Report  from  an  Appraiser  of  each  such   Replacement   Airframe,
Replacement  Engine and  Replacement  Propeller,  dated within ten (10) Business
Days of the Replacement Closing Date, evidencing that such Replacement Airframe,
Replacement Engine or Replacement Propeller,  as the case may be, is of at least
the same value as the original  Airframe,  Engine or Propeller,  as the case may
be,  at the time of  replacement  (assuming  the  original  Airframe,  Engine or
Propeller, as the case may be, was in the condition and state of repair required
by this Security Agreement);

     (C) the Collateral  Agent shall have received  satisfactory  evidence as to
the compliance with Section 2.04 with respect to each such Replacement Airframe,
Replacement Engine and Replacement Propeller;

     (D) the  Collateral  Agent,  at the  expense  of the  Company,  shall  have
received  (acting  directly or by  authorization  to its special counsel) (I) an
opinion of counsel to the Company (which opinion and counsel shall be reasonably
satisfactory to the Collateral Agent), addressed to the Collateral Agent, to the
effect  that each  Replacement  Airframe,  Replacement  Engine  and  Replacement
Propeller,  if any, has been made subject to the Lien of the Security Documents,
that all required  action has been taken in order to  maintain,  and such action
shall maintain,  the  effectiveness,  perfection and priority (to the extent the
same existed immediately prior to the occurrence of such Event of Loss, assuming
the Company was in  compliance  with all relevant  terms hereof) of the security
interests in each such Airframe,  Engine and Propeller and title thereto created
by this  Security  Agreement  and that,  except as may have been  effected  by a
change in law, the protections  afforded to the Collateral Agent by Section 1110

                                       35
<PAGE>

of the Bankruptcy Code will not be less than such protections  immediately prior
to the  occurrence of such Event of Loss (assuming the Company was in compliance
with all relevant terms hereof) and (II) an opinion of qualified FAA counsel (or
counsel in any jurisdiction  outside the United States where the Aircraft may be
registered in accordance with Section  2.01(a)(iii))  (which opinion and counsel
shall be reasonably  satisfactory  to the  Collateral  Agent),  addressed to the
Collateral Agent, as to, in the case of FAA counsel,  the due recordation of the
Security Agreement Supplement  (Aircraft) and all other documents or instruments
the  recordation  of which is necessary to perfect and protect the rights of the
Collateral  Agent in each such  Replacement  Airframe,  Replacement  Engine  and
Replacement  Propeller or, in the case of counsel in another  jurisdiction,  the
taking of all action necessary in such jurisdiction for such purposes;

     (E) the representation  contained in Section 4.6 of the Loan Agreement with
respect to each such Replacement  Airframe,  Replacement  Engine and Replacement
Propeller shall be true and correct; and

     (F) the  Collateral  Agent shall have received an Officer's  Certificate of
the Company stating that all conditions  precedent  provided for in this Section
3.01(a)  relating to such  replacement  have been complied with and representing
that any such  Replacement  Engine or  Replacement  Propeller  is an  Acceptable
Alternate  Engine  or  Acceptable  Alternate  Propeller,   as  applicable,   and
authorizing the Collateral Agent to rely on such Officer's Certificate.

     (iv) Upon  satisfaction  of all  conditions to such  substitution,  (A) the
Collateral  Agent shall  execute and deliver to the Company such  documents  and
instruments,  prepared by the Company at the Company's sole cost and expense, as
the  Company  shall  reasonably  request to  evidence  the  release of each such
replaced  Airframe,  Engine,  Propeller  or  Spare  Engine  from the Lien of the
Security  Documents,  (B) the  Collateral  Agent shall assign to the Company all
claims it may have against any other Person relating to any Event of Loss giving
rise  to such  substitution  and (C)  subject  to  Section  2.6(c)  of the  Loan
Agreement,  the Company  shall  receive all  insurance  proceeds and proceeds in
respect of any Event of Loss giving rise to such  replacement.  For all purposes
hereof,  the property so substituted shall be deemed to be subjected to the Lien
of the  Security  Documents  and  shall be  deemed  an  "Aircraft",  "Airframe",
"Engine" or "Propeller", as the case may be, as defined herein.

     (b) Event of Loss with Respect to an Engine, a Propeller or Spare Engine.

     (i) Upon the  occurrence of an Event of Loss with respect to an Engine or a
Propeller under  circumstances  in which there has not occurred an Event of Loss
with respect to an Airframe to which such Engine or Propeller was  attached,  or
an Event of Loss with respect to a Spare Engine not  installed on any  Airframe,
the Company  shall  forthwith  (and in any event,  within five (5) Business Days
after such  occurrence)  give the  Collateral  Agent written  notice thereof and
shall,  within one hundred and eighty  (180) days after the  occurrence  of such
Event of Loss, substitute an Acceptable Alternate Engine or Acceptable Alternate
Propeller, as the case may be, free and clear of all Liens (other than Permitted
Liens)  and cause  such  Acceptable  Alternate  Engine or  Acceptable  Alternate
Propeller,  as the  case may be,  to be  subjected  to the Lien of the  Security

                                       36
<PAGE>

Documents.  The Company's right to make a replacement hereunder shall be subject
to the  fulfillment  (which may be  simultaneous  with such  replacement) of the
following  conditions  precedent at the Company's  sole cost and expense and the
Collateral Agent agrees to cooperate with the Company to the extent necessary to
enable it to timely satisfy such conditions:

     (A)  the  following  documents  shall  be  duly  authorized,  executed  and
delivered  by  the  respective  party  or  parties  thereto,   and  an  executed
counterpart of each shall be delivered to the Collateral Agent:

     (I)  a  Security  Agreement  Supplement   (Engine/Propeller)  covering  the
Replacement  Engine or  Replacement  Propeller,  as the case may be, which shall
have been duly filed for  recordation  by the  Company  pursuant  to the Federal
Aviation Act (or such other  applicable law of the  jurisdiction  other than the
United  States in which such  Aircraft  of which such Engine or  Propeller  is a
part) is registered in accordance with Section 2.01(a)(iii); and

     (II) UCC financing  statements  covering the security  interests created by
this Security  Agreement (and any similar statements or other documents required
to be filed or delivered  pursuant to the laws of the jurisdiction in which such
Aircraft  may be  registered)  as may be  necessary  or advisable to perfect the
security  interests  of the  Collateral  Agent  in  the  Replacement  Engine  or
Replacement Propeller, as the case may be;

     (B) the Company  shall cause to be delivered to the  Collateral  Agent,  an
opinion of counsel (which  opinion and counsel shall be reasonably  satisfactory
to the Collateral  Agent) to the effect that the Lien of the Security  Documents
continues  to be in full  force  and  effect,  that the  Replacement  Engine  or
Replacement  Propeller,  as the case may be,  has duly been made  subject to the
Lien of the Security Documents, that all required action has been taken in order
to maintain, and such action shall maintain,  the effectiveness,  perfection and
priority (to the extent the same existed, immediately prior to the occurrence of
such Event of Loss,  assuming  the Company was in  compliance  with all relevant
terms  hereof) of the  security  interest  on such  Engine,  Propeller  or Spare
Engine, as applicable,  and title thereto created by this Security Agreement and
that,  except as may have been  effected  by a change  in law,  the  protections
afforded to the Collateral Agent by Section 1110 of the Bankruptcy Code will not
be less than such protections  immediately prior to the occurrence of such Event
of Loss (assuming the Company was in compliance with all relevant terms hereof);

     (C) an opinion of  qualified  FAA counsel  (or counsel in any  jurisdiction
outside the United  States where such  Aircraft may be  registered in accordance
with  Section  2.01(a)(iii))  (which  opinion  and counsel  shall be  reasonably
satisfactory to the Collateral Agent), addressed to the Collateral Agent, as to,
in the  case of FAA  counsel,  the due  recordation  of the  Security  Agreement
Supplement  (Engine/Propeller)  and  all  other  documents  or  instruments  the
recordation  of which is  necessary  to perfect  and  protect  the rights of the
Collateral Agent in the Replacement Engine or Replacement Propeller, as the case

                                       37
<PAGE>

may be or in the case of  counsel  in  another  jurisdiction,  the taking of all
action necessary in such jurisdiction for such purposes;

     (D) the representation  contained in Section 4.6 of the Loan Agreement with
respect to each such Replacement Engine and Replacement  Propeller shall be true
and correct; and

     (E)  the  Company  shall  deliver  to the  Collateral  Agent  an  Officer's
Certificate stating that in the opinion of such signer, all conditions precedent
provided  for in this Section  3.01(b)  relating to such  replacement  have been
complied with and representing that such alternate engine or alternate propeller
is  an  Acceptable  Alternate  Engine  or  Acceptable  Alternate  Propeller,  as
applicable,  and  authorizing  the  Collateral  Agent to rely on such  Officer's
Certificate.

     (ii) Upon  satisfaction  of all  conditions to such  substitution,  (x) the
Collateral  Agent shall  execute and deliver to the Company such  documents  and
instruments,  prepared at the  Company's  sole cost and expense,  as the Company
shall  reasonably  request to  evidence  the  release of such  replaced  Engine,
replaced  Propeller or replaced Spare Engine,  as the case may be, from the Lien
of the Security Documents,  (y) the Collateral Agent shall assign to the Company
all claims it may have  against any other  Person  relating to any Event of Loss
giving rise to such  substitution  and (z) subject to Section 2.6(c) of the Loan
Agreement,  the Company  shall  receive all  insurance  proceeds and proceeds in
respect of any Event of Loss giving rise to such  replacement.  For all purposes
hereof,  each such replacement engine and replacement  propeller shall be deemed
to be  subjected to the Lien of the  Security  Documents  and shall be deemed an
"Engine", a "Spare Engine" or a "Propeller", as the case may be.

     (c) Event of Loss with  Respect  to Pledged  Spare  Parts.  As between  the
Company and the Collateral Agent, all insurance  proceeds received in respect of
Pledged Spare Parts,  whether as a result of the occurrence of an Event of Loss,
or property  damage or loss not  constituting  an Event of Loss,  under policies
required  to be  maintained  by the  Company  pursuant  to Section  2.04 will be
applied  in  accordance  with  the  provisions  of  Section  2.6(c)  of the Loan
Agreement.  If either the Collateral  Agent or the Company receives a payment of
such insurance  proceeds in excess of its entitlement  pursuant to the preceding
sentence,  it shall cause such payment to be applied in accordance  with Section
2.6(c) of the Loan Agreement.

     (d) Application of Payments from  Governmental  Authorities for Requisition
of Title,  etc. Any payments  (other than insurance  proceeds the application of
which is provided for in Section  2.04)  received at any time by the  Collateral
Agent or by the Company  from any  Governmental  Authority  or other Person with
respect  to an Event of Loss,  other  than a  requisition  for use by the United
States  Government  or  other  government  of  registry  of an  Aircraft  or any
instrumentality or agency of any thereof not constituting an Event of Loss, will
be applied as follows:

     (i) if payments  are  received  with respect to an Airframe (or an Airframe
and any Engine,  any Propeller,  any Spare Engine or engines or propellers  then
installed  thereon),  (A) unless the same are replaced pursuant to clause (B)(2)

                                       38
<PAGE>

of Section  3.01(a)(i),  such  payments  shall be paid and applied in accordance
with clause  (B)(1) of Section  3.01(a)(i);  or (B) if such property is replaced
pursuant to clause (B)(2) of Section 3.01(a)(i), such payments shall, subject to
Section  2.6(c) of the Loan  Agreement,  be paid  over to or  retained  by,  the
Company;  provided, that the Company shall have fully performed or, concurrently
therewith will fully perform,  the terms of Section 3.01(a)(iii) with respect to
the Event of Loss for which such payments are made;

     (ii) if such payments are received with respect to an Engine,  Propeller or
Spare Engine under  circumstances  contemplated by Section 3.01(b) hereof,  such
payments shall be paid in accordance  with Section 2.6(c) of the Loan Agreement;
and

     (iii) if such  payments are received with respect to any Pledged Spare Part
under circumstances  contemplated by Section 3.01(c) hereof, such payments shall
be paid in accordance with Section 2.6(c) of the Loan Agreement.

     (e) Requisition  for Use of an Aircraft by the United States  Government or
Government of Registry of an Aircraft.  In the event of the  requisition for use
of any Airframe and the Engines or engines or Propellers or propellers installed
on such  Airframe by the United  States  Government  or any other  government of
registry of such Aircraft or any  instrumentality or agency of any thereof,  the
Company shall promptly notify the Collateral Agent of such requisition,  and all
of the Company's  obligations under this Security Agreement with respect to such
Aircraft  shall  continue  to the same  extent  as if such  requisition  had not
occurred. Subject to the rights of the Collateral Agent, upon the occurrence and
during the continuance of a Specified Default or Event of Default,  all payments
received by the Collateral Agent or the Company from such government for the use
of such Airframe and Engines or engines or  Propellers  or  propellers  shall be
paid over to, or retained by, the Company  (or, if directed by the Company,  any
Permitted Lessee).

     (f)  Requisition  for Use of an Engine,  a Propeller or Spare Engine by the
United States  Government or the  Government of Registry of an Aircraft.  In the
event of the  requisition  for use of an Engine,  a Propeller or Spare Engine by
the  United  States  Government  or any  other  government  of  registry  of the
applicable  Aircraft or any agency or instrumentality of any thereof (other than
in the circumstances  contemplated by subsection (e)), the Company shall replace
(or cause any  Permitted  Lessee to replace)  such  Engine,  Propeller  or Spare
Engine  hereunder and Collateral  Agent and the Company (or Permitted  Lessee as
the case may be) shall  comply with the terms of Section  3.01(b)  hereof to the
same extent as if an Event of Loss had occurred at the time of such  requisition
with  respect  to such  Engine,  such  Propeller  or  such  Spare  Engine.  Upon
compliance  with, and subject to the rights of the Collateral Agent pursuant to,
Section 3.01(b) hereof, any payments received by Collateral Agent or the Company
from such government with respect to such requisition  shall be paid over to, or
retained by the Company.

     (g)  Application  of Payments  During  Existence of Specified  Defaults and
Events of Default.  Any amount referred to in this Section 3.01 which is payable
to or retainable  by the Company (or any Permitted  Lessee) shall not be paid to
or  retained by the  Company  (or any  Permitted  Lessee) if at the time of such
payment or  retention  a  Specified  Default or any Event of Default  shall have

                                       39
<PAGE>

occurred  and be  continuing,  but shall be held by or paid  over to  Collateral
Agent and applied  against  the  obligations  of the Company (or such  Permitted
Lessee) under the Loan Documents.  At such time as there shall not be continuing
any such Specified Default or Event of Default, such amount shall be paid to the
Company to the extent not  previously  applied in accordance  with the preceding
sentence. Prior to remitting any such funds to the Company, the Collateral Agent
shall be  authorized  to request and receive an Officer's  Certificate  from the
Company  certifying  that no Specified  Default or Event of Default has occurred
and is continuing.

     (h)  Treatment of Insurance  Proceeds in  Accordance  with Loan  Agreement.
Notwithstanding  anything  to  the  contrary  contained  herein,  any  insurance
proceeds and any proceeds  received in connection with a requisition of title by
any Governmental  Authority payable to the Company or the loss payee as a result
of an Event of Loss with respect to all or any portion of the  Collateral  shall
be subject to Section 2.6(c) of the Loan Agreement without regard to whether the
Company  elects  pursuant  to this  Section  3.01  to  substitute  an  aircraft,
Replacement  Airframe,  Replacement Engine,  Replacement  Propeller,  Acceptable
Alternate Engine,  Acceptable Alternate Propeller,  Pledged Spare Parts or other
Collateral,  as the case may be, in respect of Collateral  which has suffered an
Event of Loss.

                                    ARTICLE 4

                                    REMEDIES

     Section 4.01 Remedies Available to Collateral Agent.

     (a) For the purpose of enforcing any and all rights and remedies under this
Security Agreement, after an Event of Default shall have occurred and so long as
such Event of Default shall be  continuing:  (i) upon the written  demand of the
Collateral  Agent and at the  Company's  expense,  the  Company  shall  promptly
deliver  possession of any Collateral as the  Collateral  Agent may so demand to
the  Collateral  Agent or its designee in the manner and condition  required by,
and otherwise in accordance with all the provisions of, this Security Agreement,
or the  Collateral  Agent at its option may enter upon the premises where all or
any part of the  Collateral  is located  and take  immediate  possession  of and
remove the same by  summary  proceedings  or  otherwise  (and at the  Collateral
Agent's option,  store the same at the Company's premises until disposal thereof
by the Collateral Agent), all without liability accruing to the Collateral Agent
(other than that caused by the Collateral  Agent's  willful  misconduct or gross
negligence  as  actually  and  finally  determined  by a  final,  non-appealable
judgment of a court of competent jurisdiction) for or by reason of such entry or
taking of  possession  or  removing  whether  for the  restoration  of damage to
property caused by such action or otherwise;  and (ii) the Company shall, at the
request of the Collateral Agent,  promptly execute and deliver to the Collateral
Agent such  instruments  or other  documents as may be necessary or advisable to
enable the  Collateral  Agent or an agent or  representative  designated  by the
Collateral  Agent,  at such time or times and place or places as the  Collateral
Agent may specify, to obtain possession of all or any part of the Collateral the
possession  of which  the  Collateral  Agent  shall at the time be  entitled  to
hereunder;  provided, that during any period any Aircraft is activated under the
Civil  Reserve Air Fleet Program in  accordance  with the  provisions of Section
2.01(b)(i)(F)  hereof  and in the  possession  of the  government  of the United
States of America or an instrumentality or agency thereof,  the Collateral Agent
shall not,  on account of any Event of Default,  be entitled to exercise  any of
its rights under this Section 4.01 against the  Collateral  in such manner as to

                                       40
<PAGE>

limit the Company's control of the associated  Airframe or any Engines installed
thereon,  unless at least sixty (60) days' (or such lesser period as may then be
applicable  under  the  Air  Mobility  Command  program  of  the  United  States
Government)  prior written notice of Default  hereunder shall have been given by
the  Collateral  Agent to the Company with a copy  addressed to the  Contracting
Office  Representative  for the Air  Mobility  Command of the United  States Air
Force under the contract with the Company relating to such Aircraft.

     (b) After an Event of Default shall have occurred and so long as such Event
of  Default  shall be  continuing,  then and in every  such case the  Collateral
Agent, as holder of a security interest in the Collateral may, and when required
pursuant to the provisions of Section 7.2 of the Loan Agreement shall, exercise,
any or all of the rights  and  powers  and  pursue  any and all of the  remedies
accorded to a secured  party under the UCC and under any other  applicable  law,
may recover  judgment in its own name as Collateral Agent against the Collateral
and may take possession of all or any part of the Collateral and may exclude the
Company and all Persons  claiming under any of them wholly or partly  therefrom.
Any proceeds  received or realized by the Collateral  Agent at any time pursuant
to the  exercise of remedies  hereunder  shall be  promptly  transferred  by the
Collateral  Agent to the account of the Agent specified in Section 2.9(a) of the
Loan Agreement for  application in accordance  with the priority of payments set
forth in Section 2.9(e) of the Loan Agreement.

     (c) So long as an Event of Default shall have  occurred and be  continuing,
the  Collateral  Agent may,  if at the time such action may be lawful and always
subject to compliance  with any  mandatory  legal  requirements,  either with or
without  taking  possession,  and either before or after taking  possession  and
without  instituting any legal  proceedings  whatsoever,  and having first given
notice of such sale by registered mail to the Company, at least 20 days prior to
the date of such sale,  and any other notice which may be required by law,  sell
and dispose of the  Collateral,  or any part thereof,  or interest  therein,  at
public  auction or private sale, in one lot as an entirety or in separate  lots,
and either for cash or on credit and on such terms as the  Collateral  Agent may
determine, and at any place (whether or not it be the location of the Collateral
or any part thereof) and time designated in the notice above referred to.

     (d) Any such sale may be adjourned from time to time by announcement at the
time and place appointed for such sale, or for any such adjourned sale,  without
further  notice,  and the Collateral  Agent or any Lender may bid and become the
purchaser  at any such sale and each  Lender  shall be  entitled  at any  public
auction  sale to credit  against any purchase  price bid at such public  auction
sale by such  Lender  all or any part of any  unpaid  obligations  owing to such
Lender secured by the Lien of the Security Documents.

     (e) If an Event of Default has occurred and is  continuing,  the Collateral
Agent  shall  also be  entitled  to  pursue  all or any  part of the  Collateral
wherever it may be found and may enter any of the premises of the Company or any
other Person  wherever the Collateral may be or be supposed to be and search for
the  Collateral and take  possession of any item of the  Collateral  pursuant to
this  Section  4.01(e).  The  Collateral  Agent may,  from time to time,  at the
expense  of  the  Company,  make  all  such  expenditures  for  the  collection,
maintenance,  insurance,  repairs,  replacements,   alterations,  additions  and
improvements to and of the Collateral, as it may deem proper. In each such case,
the Collateral  Agent shall have the right to collect,  maintain,  use,  insure,
operate,  store,  lease,  control  or  manage  the  Collateral,  and to carry on
business  and  exercise  all rights and powers of the  Company  relating  to the
Collateral as the Collateral Agent shall deem  appropriate,  including the right

                                       41
<PAGE>

to enter  into any and all  such  agreements  with  respect  to the  collection,
maintenance, use, insurance,  operation, storage, leasing, control or management
of the Collateral or any part thereof. The Collateral Agent shall be entitled to
collect,  sue for and receive  directly all monies due or to become due,  tolls,
rents,  issues,  profits,  products,  revenues or other income  pursuant to this
Section  4.01(e).  In accordance  with the terms of this Section  4.01(e),  such
monies due or to become due, tolls, rents, issues, profits,  products,  revenues
and other  income  shall be applied to pay the  expenses of  collecting,  using,
operating,  storing, leasing, controlling or managing the Collateral, and of all
maintenance,  insurance,  repairs,  replacements,   alterations,  additions  and
improvements,  and to make  all  payments  which  the  Collateral  Agent  may be
required or may elect to make,  if any,  for taxes,  assessments,  insurance  or
other proper  charges upon the  Collateral  or any part thereof  (including  the
employment of engineers  and  accountants  to examine,  inspect and make reports
upon the  properties  and  books  and  records  of the  Company),  and all other
payments which the Collateral  Agent may be required or authorized to make under
any provision of this Security  Agreement,  including this Section  4.01(e),  as
well as just and  reasonable  compensation  for the  services of the  Collateral
Agent, and of all persons properly engaged and employed by the Collateral Agent.

     (f) Subject to Section 4.01(c), the Collateral Agent may proceed to protect
and enforce this Security  Agreement by suit or suits or  proceedings in equity,
at law or in  bankruptcy,  and  whether  for  the  specific  performance  of any
covenant or  agreement  herein  contained  or in  execution  or aid of any power
herein  granted;  or for  foreclosure  hereunder,  or for the  appointment  of a
receiver  or  receivers  for the  Collateral  or any  part  thereof,  or for the
recovery of judgment for the indebtedness secured by the Lien created under this
Security  Agreement  or for  the  enforcement  of any  other  proper,  legal  or
equitable remedy available under applicable law.

     (g) Each and every right,  power and remedy herein given to the  Collateral
Agent  specifically or otherwise in this Security  Agreement shall be cumulative
and  shall  be in  addition  to every  other  right,  power  and  remedy  herein
specifically given or now or hereafter existing at law, in equity or by statute,
and each and every right, power and remedy whether  specifically herein given or
otherwise existing may be exercised from time to time and as often in such order
as may be deemed  expedient  by the  Collateral  Agent,  and the exercise or the
beginning  of the exercise of any power or remedy shall not be construed to be a
waiver of the right to exercise at the same time or thereafter  any other right,
power or remedy. No delay or omission by the Collateral Agent in the exercise of
any  right,  remedy or power or in  pursuing  any remedy  shall  impair any such
right, power or remedy or be construed to be a waiver of any default on the part
of the Company or to be an acquiescence therein.

     (h) Upon and during the  continuance  of an Event of Default the Collateral
Agent shall be  entitled  to  undertake  an  acceptance  of all or a part of the
Collateral  in  satisfaction  of  all or a  specified  part  of the  Obligations
pursuant to and in accordance with the provisions of Sections 9-620 and 9-621 of
the UCC and, if pursuant  to such  Sections  and after such Event of Default the
Company  consents to such  acceptance,  which consent shall not be  unreasonably
withheld,  then the Company shall execute and deliver such deeds of  conveyance,
assignments  and other  documents  or  instruments  (including  any  notices  or
applications to the FAA or any other Governmental  Authority having jurisdiction
over the Collateral subject to such conveyance) as shall be reasonably  required
to effectuate the transfer of such Collateral,  together with the  certificates,

                                       42
<PAGE>

if any,  representing  the same and any other rights of the Company with respect
thereto,  to the Collateral  Agent or any designee or designees  selected by the
Collateral Agent.

     Section 4.02  Expenses.  The Company agrees that it will upon demand pay to
the Collateral Agent:

     (a) the  amount of any taxes  payable by reason of the  Collateral  Agent's
security interests in respect of the Collateral or to free any of the Collateral
from any Lien thereon; and

     (b) the amount of any and all reasonable out-of-pocket expenses, including,
but not limited to, any excise, property,  transfer, sales and use taxes imposed
by any state,  federal or other local  authority on any of the  Collateral,  and
reasonable fees and disbursements of counsel and of any other experts payable in
connection with the enforcement of this Security  Agreement after and during the
continuance of any Event of Default,  including such expenses as are incurred in
connection with:

     (i) the collection, sale or other disposition of the Collateral;

     (ii) any  action  taken by the  Collateral  Agent to effect  compliance  on
behalf of the  Company in respect of a failure by the Company to comply with the
provisions of this Security  Agreement which results (or is likely to result) in
the diminution of the value of the Collateral or the validity,  perfection, rank
or value of the Collateral Agent's security interest in the Collateral;

     (iii) protecting,  storing,  warehousing,  appraising,  insuring, handling,
maintaining, shipping, overhauling and repairing the Collateral; or

     (iv) the  exercise by the  Collateral  Agent of any of the rights or powers
conferred upon it hereunder.

     Any such  amount  not paid to the  Collateral  Agent on demand  shall  bear
interest  for each day until paid at a rate per annum equal to the sum of 2% per
annum plus the Applicable Tranche A Interest Rate for such day.

     Section  4.03 Waiver of Claims.  (a) Except as  otherwise  provided in this
Security  Agreement,  the Company hereby waives, to the maximum extent permitted
by applicable law, notice and judicial hearing in connection with the Collateral
Agent's taking  possession,  retention,  disposition or sale of any  Collateral,
including  any and all prior  notice and hearing for any  prejudgment  remedy or
remedies  and any such right which the Company  would  otherwise  have under any
applicable  law, and the Company  hereby further  waives,  to the maximum extent
permitted by law:

     (i) provided that the actions taken comply, in all material respects,  with
applicable  law,  including but not limited to all applicable  provisions of the
UCC, all claims,  damages and demands against the Collateral  Agent,  the Board,
the Lenders  and the  Participants  arising  out of such  taking of  possession,
retention, disposition or sale of the Collateral except such claims, damages and

                                       43
<PAGE>

demands  as may  arise out of such  Person's  own gross  negligence  or  willful
misconduct as actually and finally determined by a final non-appealable judgment
of a court of  competent  jurisdiction  and only to the  extent  of  direct  (as
opposed to special, indirect, consequential or punitive) damages;

     (ii) all  other  requirements  as to the  time,  place and terms of sale or
other  requirements  with respect to the  enforcement of the Collateral  Agent's
rights hereunder; and

     (iii) all rights of redemption,  appraisal,  valuation,  stay, extension or
moratorium  now or  hereafter  in force  under  any  applicable  law in order to
prevent or delay the enforcement of this Security Agreement or the absolute sale
or other disposition of any part of the Collateral,  and the Company, for itself
and all who may claim under it, insofar as it or they now or hereafter  lawfully
may,  hereby waives the benefit of all such laws;  provided,  however,  that the
actions  taken by the  Collateral  Agent as  described  in Section  4.03  herein
comply, in all material respects, with applicable law, including but not limited
to all applicable provisions of the UCC.

     (b) The Company, for itself and all who claim through it, hereby waives all
right to have the Collateral  marshaled upon any  foreclosure  hereof and agrees
that any court having  jurisdiction  to foreclose  this  Security  Agreement may
order the sale of the Collateral as an entity.

     Section 4.04  Discontinuance  of Proceedings.  In case the Collateral Agent
shall have instituted any proceeding to enforce any right, power or remedy under
this Security  Agreement by  foreclosure,  sale,  entry or  otherwise,  and such
proceeding  shall have been  discontinued  or abandoned  for any reason or shall
have been determined  adversely to the Collateral  Agent, then and in every such
case the  Company,  the  Collateral  Agent and each Lender  shall be restored to
their former  positions  and rights  hereunder  with  respect to the  Collateral
subject to the security  interest and Lien created under the Security  Documents
and all rights, remedies and powers of the Collateral Agent shall continue as if
no such proceeding had been instituted.

                                    ARTICLE 5

                        TERMINATION OF SECURITY AGREEMENT

     Section 5.01  Termination of Security  Agreement.  This Security  Agreement
shall  terminate upon payment and  performance in full of all of the obligations
hereby secured.  Upon  termination,  the Company shall direct,  at the Company's
sole cost and  expense,  the  Collateral  Agent to execute and  deliver,  at the
Company's  sole cost and  expense,  to or as  directed in writing by the Company
appropriate instruments reasonably required to release all the property included
in the  Collateral  from the Lien of the Security  Documents and the  Collateral
Agent  shall  execute and  deliver  such  instruments  as  aforesaid;  provided,
however,  that this Security Agreement shall earlier terminate and this Security
Agreement  shall be of no further  force or effect  upon any sale or other final
disposition by the  Collateral  Agent of all property  constituting  part of the
Collateral and the final  distribution by the Collateral  Agent of all monies or

                                       44
<PAGE>

other  property or proceeds  constituting  part of the  Collateral in accordance
with the terms hereof.  Except as aforesaid  otherwise  provided,  this Security
Agreement  shall continue in full force and effect in accordance  with the terms
hereof.


                                    ARTICLE 6

                                  MISCELLANEOUS

     Section  6.01  Notices.  All notices and other  communication  provided for
herein shall be in writing and shall be  delivered by hand or overnight  courier
service, mailed by certified or registered mail or sent by telecopy as follows:


                  if to the Company, to:

                           American Trans Air, Inc.
                           7337 West Washington Street
                           Indianapolis, Indiana  46231
                           Attention:    317-247-4000
                           Facsimile:    317-247-7091

                  if to the Collateral Agent, to:

                           Citibank, N.A., Agency and Trust
                           111 Wall Street, 14th Floor
                           New York, NY  10043
                           Attention:    Fernando Moreyra
                           Facsimile:    212-657-2762

     Either party  hereto may change its address or telecopy  number for notices
and other  communications  hereunder  by notice to the other party  hereto.  All
notices and other communications given to either party hereto in accordance with
the provisions of this Security  Agreement shall be deemed to have been given on
the date of receipt.

     Section 6.02 GOVERNING LAW. THIS SECURITY  AGREEMENT IS BEING  DELIVERED IN
THE  STATE  OF NEW  YORK.  THIS  SECURITY  AGREEMENT  SHALL BE  GOVERNED  BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK; PROVIDED THAT IN
THE EVENT THE BOARD BECOMES A LENDER PURSUANT TO THE BOARD GUARANTEE, THE RIGHTS
AND  OBLIGATIONS OF THE BOARD  HEREUNDER  SHALL BE GOVERNED BY, AND CONSTRUED IN
ACCORDANCE WITH, THE FEDERAL LAW OF THE UNITED STATES OF AMERICA,  IF AND TO THE
EXTENT SUCH FEDERAL LAW IS APPLICABLE,  AND OTHERWISE IN ACCORDANCE WITH THE LAW
OF THE STATE OF NEW YORK.  THE PROVISIONS OF SECTION 10.11 OF THE LOAN AGREEMENT

                                       45
<PAGE>

ARE INCORPORATED HEREIN MUTATIS MUTANDIS, AS IF FULLY SET FORTH HEREIN.

     Section 6.03  Execution in  Counterparts.  This  Security  Agreement may be
executed in any number of  counterparts,  each of which shall be an original but
such counterparts shall together constitute but one instrument.

     Section  6.04  Amendments.  This  Security  Agreement  may  be  amended  in
accordance with the provisions set forth in Section 10.1 of the Loan Agreement.

     Section 6.05 Documentation.  The Company shall provide the Collateral Agent
with copies of all documents executed in connection with the Security Documents.

     Section 6.06 Cash Collateral.  (a) Any amounts held by the Collateral Agent
pursuant to the provisions of this Agreement shall be invested by the Collateral
Agent from time to time in Eligible  Investments  as  directed  in an  Officer's
Certificate  from the  Company so long as the  Collateral  Agent may acquire the
same using commercially  reasonable  efforts.  The parties hereto agree that the
Collateral  Agent and/or an Affiliate of the Collateral  Agent may charge and/or
collect  fees  and  expenses  in  connection   with  the  purchase  of  Eligible
Investments or for other services  rendered to the parties hereto (provided that
such charges, fees and expenses are on terms consistent with terms negotiated at
arm's length).  Neither the Collateral  Agent nor any of its Affiliates shall be
required  to account  for any profits or  benefits  described  in the  preceding
sentence. All Eligible Investments held by the Collateral Agent pursuant to this
Section  6.05 shall be  registered  in the name of,  payable to the order of, or
specially  endorsed to, the Collateral Agent. Any income realized as a result of
any such investment,  net of the Collateral Agent's reasonable fees and expenses
in making such investment,  shall be held and applied by the Collateral Agent in
the same manner as the principal  amount of such investment is to be applied and
any losses,  net of earnings and such  reasonable  fees and  expenses,  shall be
charged  against  the  principal  amount  invested.  All taxes on any  income so
realized  shall be charged to the  Company.  The  Collateral  Agent shall not be
liable for any loss  resulting  from any  investment to be made by it under this
Agreement other than by reason of its willful  misconduct or gross negligence as
actually and finally determined in a final,  non-appealable  judgment of a court
of competent jurisdiction.

     (b) Neither the Collateral Agent nor any of its Affiliates  assume any duty
or liability for monitoring the rating of the selected investment.  In the event
an investment  selection is not made, the amounts held by the  Collateral  Agent
pursuant to the provisions of this Security  Agreement shall not be invested and
the  Collateral  Agent  shall not incur any  liability  for  interest  or income
thereon.

     (c) The  Collateral  Agent shall have no  obligation  to invest or reinvest
amounts to be held by the  Collateral  Agent if all or a portion of such amounts
are deposited with the Collateral  Agent after 11:00 a.m. (New York time) on the
day of the deposit.  Instructions  to invest or reinvest that are received after
11:00 a.m.  (New York time) will be  treated  as if  received  on the  following
Business Day in New York.

                                       46
<PAGE>

     (d) The  Collateral  Agent  shall have the power to sell or  liquidate  the
foregoing  investments  whenever  the  Collateral  Agent  shall be  required  to
distribute the amounts held pursuant to the terms of this Security  Agreement or
as otherwise  contemplated in this Security Agreement.  Requests or instructions
received after 11:00 a.m. (New York time) by the  Collateral  Agent to liquidate
such amounts will be treated as if received on the following Business Day in New
York.

     (e) The Collateral  Agent shall have no  responsibility  for any investment
losses resulting from the investment, reinvestment or liquidation of the amounts
held by the Collateral  Agent  pursuant to the terms of this Security  Agreement
provided that the Collateral  Agent has made such  investment,  reinvestment  or
liquidation of the trust assets in accordance with the terms, and subject to the
conditions, of this Security Agreement.

     (f)  Each  of the  parties  to this  Security  Agreement  acknowledge  that
non-deposit  investment  products  are not  obligations  of, or  guaranteed  by,
Citibank,  N.A. or Citigroup North America,  Inc., nor any of their  affiliates;
are not FDIC  insured;  and are  subject  to  investment  risks,  including  the
possible loss of principal amount invested in one of the money market funds made
available by the Collateral Agent and selected by the Company.

     (g) Any investment  direction  contained  herein may be executed through an
affiliated  broker  or dealer of the  Collateral  Agent and any such  affiliated
broker or dealer  shall be  entitled  to such  broker's  or  dealer's  usual and
customary fees for such execution.

     (h) The Eligible  Investments may be held by the Collateral  Agent directly
or through  any  clearing  agency or  depository  (collectively,  the  "Clearing
Agency") including,  without limitation, the Federal Reserve/Treasury Book-Entry
System for United States and federal agency securities, and The Depository Trust
Company. The Collateral Agent shall not have any responsibility or liability for
the actions or omissions to act on the part of any Clearing Agency.

     (i) Notwithstanding  anything contained herein to the contrary, the parties
hereto  hereby  agree and  acknowledge  that due to the  potential  conflict  of
interest,  the Collateral Agent will not purchase Citigroup North America,  Inc.
or any affiliate's commercial paper (collectively, "Citigroup Paper") unless the
Collateral  Agent is specifically  instructed to purchase  Citigroup Paper in an
Officer's  Certificate  from the Company.  Any  instruction  for the purchase of
Citigroup  Paper must be given by the Company on a  transaction  by  transaction
basis in the manner set forth in the preceding sentence.

                                       47
<PAGE>


     IN WITNESS  WHEREOF,  the parties to hereto have caused this  Mortgage  and
Security  Agreement to be duly executed by their respective  officers  thereunto
duly authorized.

                                   AMERICAN TRANS AIR, INC.


                                   By: /s/Kenneth K. Wolff
                                       Name: Kenneth K. Wolff
                                       Title: Executive Vice President & CFO

<PAGE>

                                   CITIBANK, N.A.,
                                   as Collateral Agent


                                   By: /s/Edward C. Morelli
                                       Name: Edward C. Morelli
                                       Title: Vice President

<PAGE>

     EXHIBIT A1 to Mortgage and Security Agreement

     MORTGAGE AND SECURITY AGREEMENT SUPPLEMENT (AIRCRAFT) NO. ( )

     This MORTGAGE AND SECURITY AGREEMENT SUPPLEMENT  (AIRCRAFT) NO. (___) dated
__________ (herein called this "Security Agreement Supplement") made by AMERICAN
TRANS AIR, INC., an Indiana corporation (herein called the "Company"),  in favor
of CITIBANK,  N.A., as Collateral  Agent for, and directed by, the Board and the
Lenders (as defined in the Loan Agreement (as defined in the Security  Agreement
(as defined below))) (the "Collateral Agent").

                                   WITNESSETH:

     WHEREAS,   the  Company  has  heretofore  executed  and  delivered  to  the
Collateral Agent a Mortgage and Security Agreement dated as of November 20, 2002
(as amended,  modified,  restated or otherwise supplemented from time to time in
accordance  with its terms,  the "Security  Agreement"),  covering,  inter alia,
Aircraft, Airframes, Engines and Propellers of the Company;

     WHEREAS,  terms that are  defined  in the  Security  Agreement  or the Loan
Agreement (as such term is defined in the Security  Agreement) and which are not
otherwise  defined herein shall have the meanings  assigned to such terms in the
Security Agreement or the Loan Agreement;

     WHEREAS, the Security Agreement has been recorded,  pursuant to the Federal
Aviation Act, by the FAA at Oklahoma  City,  Oklahoma,  on ________ and assigned
Conveyance No. _________; and

     WHEREAS,  the Security  Agreement  provides for the  execution and delivery
from  time  to  time  of  Mortgage  and  Security  Agreement  Supplements,  each
substantially  in the form hereof,  for the purpose of  subjecting  an aircraft,
airframe, engine and/or propeller to the Lien of the Security Agreement.

     NOW,  THEREFORE,  this Security Agreement  Supplement  Witnesseth,  that to
secure  the prompt  payment  of the  principal  of,  interest  on, and all other
amounts  due  with  respect  to the  Loan  and to  secure  the  performance  and
observance  by the  Company  of all the  agreements,  covenants  and  provisions
contained in the Security Agreement, in the Loan Agreement and in the other Loan
Documents and the prompt  payment of any and all amounts from time to time owing
hereunder,  under the Loan Agreement and the other Loan  Documents,  and for the
uses and  purposes  and  subject  to the terms and  provisions  of the  Security
Agreement,  and in consideration of the premises and of the covenants  contained

<PAGE>

in the  Security  Agreement,  and of other good and valuable  consideration  the
receipt and adequacy whereof are hereby  acknowledged,  the Company has granted,
bargained,  sold,  assigned,  transferred,   conveyed,  mortgaged,  pledged  and
confirmed,  and does hereby grant,  bargain,  sell,  assign,  transfer,  convey,
mortgage,  pledge and confirm,  unto the  Collateral  Agent,  its successors and
assigns,  for the  security  and  benefit  of the  Board,  the  Lenders  and the
Participants,  a first priority security interest in and first priority mortgage
Lien on the following described property:

                                    AIRFRAME

     One Airframe identified as follows:

                                              FAA
                                          Registration       Manufacturer's
    Manufacturer           Model             Number          Serial Number


together with all Parts which are from time to time incorporated or installed in
or attached  thereto,  unless the Lien of the  Security  Agreement  shall not be
applicable to such Part pursuant to the provisions of the Security Agreement.

                                AIRCRAFT ENGINES

     [____] aircraft engines, each such engine having 750 or more rated take-off
horsepower  or the  equivalent  thereof,  whether or not such  engines  shall be
installed  in or  attached  to the  above  Airframe  or any  other  Aircraft  or
airframe, identified as follows:

                                                          Manufacturer's
                    Manufacturer             Model        Serial Number


                                   PROPELLERS

     [____]  propellers,  each such  propeller  capable of absorbing 750 or more
rated take-off shaft horsepower or the equivalent  thereof,  whether or not such
propellers  shall be installed in or attached to the above  Engines or any other
engine, identified as follows:

                                                          Manufacturer's
                    Manufacturer             Model        Serial Number


in each case,  together with all Parts which are from time to time  incorporated
or installed in or attached thereto,  unless the Lien of the Security  Agreement
shall not be applicable to such Part pursuant to the  provisions of the Security
Agreement.
<PAGE>

     TO HAVE  AND TO HOLD  all and  singular  the  aforesaid  property  unto the
Collateral  Agent,  its  successors  and assigns,  for the uses and purposes and
subject to the terms and provisions set forth in the Security Agreement.

     This Security  Agreement  Supplement  shall be construed as a  supplemental
Security Agreement and shall form a part thereof,  and the Security Agreement is
hereby  incorporated by reference  herein and is hereby  ratified,  approved and
confirmed.

<PAGE>

     IN WITNESS WHEREOF, the Company caused this Mortgage and Security Agreement
Supplement  (Aircraft)  No.  (__) to be duly  executed  by one of its  officers,
thereunto duly authorized, on the day and year first above written.

                                          AMERICAN TRANS AIR, INC.


                                          By:
                                             -------------------------------
                                             Name:
                                             Title:

<PAGE>

     EXHIBIT A2 to Mortgage and Security Agreement

     MORTGAGE AND SECURITY AGREEMENT SUPPLEMENT (ENGINE/PROPELLER) NO. ( )

     This MORTGAGE AND SECURITY AGREEMENT SUPPLEMENT (ENGINE/PROPELLER) NO. (__)
dated ______________  (herein called this "Security Agreement  Supplement") made
by  American  Trans  Air,  Inc.,  an  Indiana  corporation  (herein  called  the
"Company"),  in favor of CITIBANK,  N.A., as Collateral  Agent for, and directed
by, the Board and the Lenders (as defined in the Loan  Agreement  (as defined in
the Security Agreement (as defined below))) (the "Collateral Agent").

                              W I T N E S S E T H:

     WHEREAS,   the  Company  has  heretofore  executed  and  delivered  to  the
Collateral Agent a Mortgage and Security Agreement dated as of November 20, 2002
(as amended,  modified,  restated or otherwise supplemented from time to time in
accordance  with its terms,  the "Security  Agreement"),  covering,  inter alia,
Engines, Propellers and Spare Engines of the Company;

     WHEREAS,  terms that are  defined  in the  Security  Agreement  or the Loan
Agreement (as such term is defined in the Security  Agreement) and which are not
otherwise  defined herein shall have the meanings  assigned to such terms in the
Security Agreement or the Loan Agreement;

     WHEREAS, the Security Agreement has been recorded,  pursuant to the Federal
Aviation Act, by the FAA at Oklahoma  City,  Oklahoma,  on ________ and assigned
Conveyance No. _________; and

     WHEREAS,  the Security  Agreement  provides for the  execution and delivery
from  time  to  time  of  Mortgage  and  Security  Agreement  Supplements,  each
substantially in the form hereof,  for the purpose of subjecting  engines and/or
propellers to the Lien of the Security Agreement.

     NOW,  THEREFORE,  this Security Agreement  Supplement  Witnesseth,  that to
secure the prompt payment of the principal of, interest on and all other amounts
due with respect to the Loan and to secure the performance and observance by the
Company  of all  the  agreements,  covenants  and  provisions  contained  in the
Security  Agreement,  in the Loan  Agreement and in the other Loan Documents and
the prompt  payment of any and all  amounts  from time to time owing  hereunder,
under the Loan  Agreement  and the  other  Loan  Documents  and for the uses and
purposes and subject to the terms and provisions of the Security Agreement,  and
in consideration of the premises and of the covenants  contained in the Security
Agreement, and of other good and valuable consideration the receipt and adequacy

<PAGE>

whereof  are hereby  acknowledged,  the Company has  granted,  bargained,  sold,
assigned,  transferred,  conveyed,  mortgaged,  pledged and confirmed,  and does
hereby grant, bargain,  sell, assign,  transfer,  convey,  mortgage,  pledge and
confirm, unto the Collateral Agent, its successors and assigns, for the security
and benefit of the Board,  the Lenders and the  Participants,  a first  priority
security interest in and first priority mortgage Lien on the following described
property:

                                AIRCRAFT ENGINES

     [____] aircraft engines, each such engine having 750 or more rated take-off
horsepower  or the  equivalent  thereof,  whether or not such  engines  shall be
installed in or attached to any Aircraft or airframe, identified as follows:

                                                              Manufacturer's
               Manufacturer                Model              Serial Number


                                   PROPELLERS

                  [____] propellers, each such propeller capable of absorbing
750 or more rated take-off shaft horsepower or the equivalent thereof, whether
or not such propellers shall be installed in or attached to the above Engines or
any other engine, identified as follows:

                                                             Manufacturer's
               Manufacturer               Model              Serial Number


together with all Parts which are from time to time incorporated or installed in
or attached thereto or which have been removed therefrom, unless the Lien of the
Security  Agreement  shall  not be  applicable  to  such  Part  pursuant  to the
provisions of the Security Agreement.

     TO HAVE  AND TO HOLD  all and  singular  the  aforesaid  property  unto the
Collateral  Agent,  its  successors  and assigns,  for the uses and purposes and
subject to the terms and provisions set forth in the Security Agreement.

     This Security  Agreement  Supplement  shall be construed as a  supplemental
Security Agreement and shall form a part thereof,  and the Security Agreement is
hereby  incorporated by reference  herein and is hereby  ratified,  approved and
confirmed.

<PAGE>

     IN WITNESS  WHEREOF,  the  Company has caused this  Mortgage  and  Security
Agreement Supplement  (Engine/Propeller)  No. (__) to be duly executed by one of
its  officers,  thereunto  duly  authorized,  on the day and  year  first  above
written.


                                          AMERICAN TRANS AIR, INC.


                                         By:
                                            -----------------------------------
                                            Name:
                                            Title:

<PAGE>

     EXHIBIT A3 to Mortgage and Security Agreement

     MORTGAGE AND SECURITY AGREEMENT SUPPLEMENT (PLEDGED SPARE PARTS) NO. ( )

     This MORTGAGE AND SECURITY AGREEMENT  SUPPLEMENT  (PLEDGED SPARE PARTS) NO.
(__) dated ______________  (herein called this "Security Agreement  Supplement")
made by AMERICAN  TRANS AIR,  INC., an Indiana  corporation  (herein  called the
"Company"),  in favor of CITIBANK,  N.A., as Collateral  Agent for, and directed
by, the Board and the Lenders (as defined in the Loan  Agreement  (as defined in
the Security Agreement (as defined below))) (the "Collateral Agent").


                              W I T N E S S E T H:

     WHEREAS,   the  Company  has  heretofore  executed  and  delivered  to  the
Collateral Agent a Mortgage and Security Agreement dated as of November 20, 2002
(as amended,  modified,  restated or otherwise supplemented from time to time in
accordance  with its terms,  the "Security  Agreement"),  covering,  inter alia,
certain Spare Parts and Appliances of the Company;

     WHEREAS,  terms that are  defined  in the  Security  Agreement  or the Loan
Agreement (as such term is defined in the Security  Agreement) and which are not
otherwise  defined herein shall have the meanings  assigned to such terms in the
Security Agreement or the Loan Agreement;

     WHEREAS, the Security Agreement has been recorded,  pursuant to the Federal
Aviation Act, by the FAA at Oklahoma  City,  Oklahoma,  on ________ and assigned
Conveyance No. _________; and

     WHEREAS,  the Security  Agreement  provides for the  execution and delivery
from  time  to  time  of  Mortgage  and  Security  Agreement  Supplements,  each
substantially in the form hereof,  for the purpose of subjecting spare parts and
appliances to the Lien of the Security Agreement.

     NOW,  THEREFORE,  this Security Agreement  Supplement  Witnesseth,  that to
secure the prompt payment of the principal of, interest on and all other amounts
due with respect to the Loan and to secure the performance and observance by the
Company  of all  the  agreements,  covenants  and  provisions  contained  in the
Security  Agreement,  in the Loan  Agreement and in the other Loan Documents and
the prompt  payment of any and all  amounts  from time to time owing  hereunder,
under the Loan  Agreement  and the  other  Loan  Documents  and for the uses and
purposes and subject to the terms and provisions of the Security Agreement,  and

<PAGE>

in consideration of the premises and of the covenants  contained in the Security
Agreement, and of other good and valuable consideration the receipt and adequacy
whereof  are hereby  acknowledged,  the Company has  granted,  bargained,  sold,
assigned,  transferred,  conveyed,  mortgaged,  pledged and confirmed,  and does
hereby grant, bargain,  sell, assign,  transfer,  convey,  mortgage,  pledge and
confirm, unto the Collateral Agent, its successors and assigns, for the security
and benefit of the Board,  the Lenders and the  Participants,  a first  priority
security interest in and first priority mortgage Lien on the following described
property:

                               PLEDGED SPARE PARTS

                                   [Describe]

     The Pledged Spare Parts described above are located, as of the date hereof,
at [specify  locations]  (each such  location  to be  included  as a  Designated
Location).

     TO HAVE  AND TO HOLD  all and  singular  the  aforesaid  property  unto the
Collateral  Agent,  its  successors  and assigns,  for the uses and purposes and
subject to the terms and provisions set forth in the Security Agreement.

     This Security  Agreement  Supplement  shall be construed as a  supplemental
Security Agreement and shall form a part thereof,  and the Security Agreement is
hereby  incorporated by reference  herein and is hereby  ratified,  approved and
confirmed.

<PAGE>

     IN WITNESS  WHEREOF,  the  Company has caused this  Mortgage  and  Security
Agreement  Supplement  (Pledged Spare Parts) No. (__) to be duly executed by one
of its  officers,  thereunto  duly  authorized,  on the day and year first above
written.


                                      AMERICAN TRANS AIR, INC.


                                      By:
                                         --------------------------------------
                                         Name:
                                         Title:


<PAGE>

     EXHIBIT B to Mortgage and Security Agreement

                              SCHEDULE OF AIRCRAFT


<PAGE>

     EXHIBIT C to Mortgage and Security Agreement

                            SCHEDULE OF SPARE ENGINES

<PAGE>
     EXHIBIT D to Mortgage and Security Agreement

                   SUMMARY DESCRIPTION OF PLEDGED SPARE PARTS

     Boeing  Model  737-83N  aircraft   (737-800)  rotable  parts,   meaning  an
accessory, appurtenance, or part of an aircraft (except an engine or propeller),
engine (except a propeller),  spare engine,  propeller, or Appliance, that is to
be installed at a later time on an aircraft, engine, propeller or Appliance.

     Boeing Model  757-33N  (757-200/300)  aircraft  rotable  parts,  meaning an
accessory, appurtenance, or part of an aircraft (except an engine or propeller),
engine (except a propeller),  spare engine,  propeller, or Appliance, that is to
be installed at a later time on an aircraft, engine, propeller or Appliance.

     Multi-fleet  rotables compatible with B737-800,  B757-200,  and/or B757-300
aircraft  types,  meaning an  accessory,  appurtenance,  or part of an  aircraft
(except an engine or  propeller),  engine  (except a  propeller),  spare engine,
propeller, or Appliance, that is to be installed at a later time on an aircraft,
engine, propeller or Appliance.

     (this summary description is by way of illustration and not limitation)

<PAGE>

     EXHIBIT E to Mortgage and Security Agreement


                              DESIGNATED LOCATIONS

Boston, Massachusetts (BOS)
           Logan International Airport
           c/o Hudson General
           American Airlines Hgr.
           East Boston, MA 02128

Chicago, Illinois (MDW)
           Midway Airport
           ATA Warehouse
           6535 South Austin Avenue
           Bedford Park, Illinois 60638

Chicago, Illinois (MDW)
           Midway Airport
           ATA MDW Hangar
           5245 W. 55th St.
           Chicago, IL 60638

Chicago, Illinois (ORD)
           Terminal 5
           O'Hare International Airport (P.O. Box 66499)
           Gate M4, Lower
           Chicago, Illinois 60666

Detroit, Michigan (DTW)
           Detroit Metropolitan Airport
           ATA Maintenance, Bldg 719
           Detroit, MI 48242

Ft. Lauderdale, Florida (FLL) 100 Terminal Drive Terminal No. 2
           Ft. Lauderdale / Hollywood International Airport Ft. Lauderdale, FL
           33315

Honolulu, Hawaii (HNL)
           Honolulu International Airport
           ATA Maintenance Office
           300 Rodgers Blvd. No. 5
           Honolulu, HI 96819
<PAGE>

Indianapolis, Indiana (IND)
           ATA Distribution Center
           4555 West Bradbury Avenue. Suite No. 3
           Indianapolis, IN 46241

Indianapolis, Indiana (IND)
           ATA IND Hangar
           7661 N. Perimeter Rd.
           Indianapolis, IN 46241

Las Vegas, Nevada (LAS)
           Charter Int'l Terminal
           5757 Wayne Newton Blvd.
           Las Vegas, NV 89111

Las Vegas, Nevada (LAS)
           McCarran International Airport
           ATA Maintenance
           P.O. Box 11027 Las Vegas, NV 89111

Las Vegas, Nevada (LAS)
           Nelles AFB, Bldg #2094
           Las Vegas, NV 89191

Los Angeles, California (LAX)
           5720 Avion Drive, Unit A
           LAX International Airport
           Los Angeles, CA 90045

Los Angeles, California (LAX)
           c/o Ogden Allied
           6951 World Way West
           Los Angeles, CA 90045

Milwaukee, Wisconsin (MKE)
           201 W. Cargo Way
           Milwaukee, WI 53207

Minneapolis, Minnesota (MSP)
           3000 E 72nd Street
           Bloomington, MN 55450

Minneapolis, Minnesota (MSP)
           6300 34th Ave So
           Minneapolis, MN 55450

New York City, New York (JFK)
           JFK International Airport
           Horizon Aviation
           Hangar No. 4
           Jamaica, NY 11430
<PAGE>

Orlando, Florida (MCO)
           9043 Tradeport Drive
           Orlando, FL 32827-4365

Orlando, Florida (MCO)
           9443 Benford Road
           Orlando, FL 32827

Philadelphia, Pennsylvania (PHL)
           c/o AMR, Inc.
           Cargo Unit No. 1
           Philadelphia, PA 19152

Philadelphia, Pennsylvania (PHL)
           Art Milano
           c/o American Trans Air
           1343 Bullens Lane
           Woodlyn, PA 19094

Phoenix, Arizona (PHX)
           Phoenix International Airport
           c/o America West Airlines
           4000 E. Skyharbor Blvd.
           Terminal No. 4
           Phoenix, AZ 85034

St. Petersburg/Tampa, Florida (PIE) St. Petersburg-Clearwater Int'l
           Airport 4707 140th Avenue North
           Suite 307
           Clearwater, FL 33762

San Francisco, California (SFO)
           San Francisco Int'l Airport
           Gate 24, Lower
           San Francisco, CA 94128

Sarasota/Bradenton, Florida (SRQ)
           c/o Servisair Cargo
           Sarasota / Bradenton Airport
           8051 N. Tamiani, Trail, Suite 25
           Sarasota, FL 34243


<PAGE>

     EXHIBIT F to Mortgage and Security Agreement

                        SCHEDULE OF COUNTRIES AUTHORIZED
                        FOR DOMICILE OF PERMITTED LESSEES

Australia
Austria
Belgium
Brazil
Canada
Chile
Czech Republic
Denmark
Finland
France
Germany
Iceland
Ireland
Italy
Japan
Luxembourg
Mexico
Netherlands
New Zealand
Norway
Poland
Republic of China (Taiwan)
South Africa
South Korea
Sweden
Switzerland
United Kingdom

<PAGE>

     EXHIBIT G to Mortgage and Security Agreement

                        SCHEDULE OF COUNTRIES AUTHORIZED
                            FOR AIRCRAFT REGISTRATION

Australia
Austria
Belgium
Brazil
Canada
Chile
Czech Republic
Denmark
Finland
France
Germany
Iceland
Ireland
Italy
Japan
Luxembourg
Mexico
Netherlands
New Zealand
Norway
Poland
Republic of China (Taiwan)
South Africa
South Korea
Sweden
Switzerland
United Kingdom