<PAGE>
 
                                                                   EXHIBIT 10.18

CONFIDENTIAL TREATMENT HAS BEEN SOUGHT FOR PORTIONS OF THIS DOCUMENT MARKED WITH
"*" AND SUCH PORTIONS HAVE BEEN SEPARATELY FILED WITH THE SEC.
 
                                                                  EXECUTION COPY


                           AIRCRAFT LEASE AGREEMENT



                                  Dated as of

                                March 25, 1997

                                    between

                     GENERAL ELECTRIC CAPITAL CORPORATION

                                      as

                                    Lessor

                                      and

                            FRONTIER AIRLINES, INC.

                                      as

                                    Lessee

                                 in respect of



Aircraft :        Boeing 737-300

Serial No:        28563

U.S. Reg. No.:    N
                   ----------


Note:  This Aircraft Lease Agreement has been executed in several counterparts
       of which this is Counterpart No. [ ]. See Clause 16.15 hereof for
       information concerning the distinction between various counterparts.
<PAGE>
 
                                    INDEX 

<TABLE>
<CAPTION>
CLAUSE                                                                      PAGE
------                                                                      ----
<S>                                                                         <C>
1.   Interpretation.........................................................  1
        1.1   Definitions...................................................  1
        1.2   Construction..................................................  17
2.   Representations and Warranties.........................................  17
        2.1   Lessee's Representations and Warranties.......................  17
        2.2   Lessee's Further Representations and Warranties...............  19
        2.3   Repetition....................................................  20
        2.4   Lessor's Representations and Warranties.......................  20
3.   Conditions Precedent...................................................  21
        3.1  Conditions Precedent...........................................  21
        3.2  Further conditions precedent...................................  24
        3.3  Waiver.........................................................  24
4.   Commencement...........................................................  26
        4.1   Leasing.......................................................  26
        4.2   Delivery......................................................  26
        4.3   Delayed Delivery..............................................  26
        4.4   Licenses......................................................  27
        4.5   Inspection....................................................  27
        4.6   Indemnity.....................................................  27
5.   Payments...............................................................  27
        5.1   Deposit.......................................................  27
        5.2   Rental Periods................................................  27
        5.3   Rent..........................................................  28
        5.4   Maintenance Reserves..........................................  28
        5.5   Payments......................................................  29
        5.6   Withholding...................................................  29
        5.7   General Tax indemnity.........................................  29
        5.8   Sales and Use Taxes...........................................  30
        5.9   Information...................................................  31
        5.10   Indemnity Payments to be Made on an After-Tax Basis..........  31
        5.11   Default Interest.............................................  31
        5.12   Contest......................................................  32
        5.13   Net Lease....................................................  33
        5.14   Security.....................................................  33
6.   Manufacturer's Warranties..............................................  34
        6.1   Assignment....................................................  34
        6.2   Proceeds......................................................  34
        6.3   Parts.........................................................  35
        6.4   Agreement.....................................................  35
7.   Lessor's Covenants.....................................................  35
        7.1   Quiet Enjoyment...............................................  35
        7.2   Release of Maintenance Reserves...............................  35
        7.3   Lessor Obligations Following Expiry Date......................  36
</TABLE>

                                       I
<PAGE>
 
<TABLE> 
<S>                                                                          <C>
8.   Lessee's Covenants.....................................................  37
        8.1   Duration......................................................  37
        8.2   Information...................................................  37
        8.3   Lawful and Safe Operation.....................................  38
        8.4   Taxes and other Outgoings.....................................  40
        8.5   Sub-Leasing and Wet-Leasing...................................  40
        8.6   Inspection....................................................  40
        8.7   Title.........................................................  42
        8.8   General.......................................................  43
        8.9   Records.......................................................  43
        8.10   Protection...................................................  43
        8.11   Maintenance and Repair.......................................  44
        8.12   Removal of Engines and Parts.................................  45
        8.13   Installation of Engines and Parts............................  45
        8.14   Non-Installed Engines and Parts..............................  46
        8.15   Pooling of Engines and Parts.................................  47
        8.16   Equipment Changes............................................  47
        8.17   Title on an Equipment Change.................................  47
        8.18   Third Party..................................................  48
9.   Insurance..............................................................  48
        9.1   Insurances....................................................  48
        9.2   Requirements..................................................  48
        9.3   Change........................................................  48
        9.4   Insurance Covenants...........................................  49
        9.5   Failure to Insure.............................................  50
        9.6   Continuing Indemnity..........................................  50
        9.7   Application of Insurance Proceeds.............................  50
10.  Indemnity..............................................................  51
        10.1   General......................................................  51
        10.2   Duration.....................................................  52
11.  Events of Loss.........................................................  52
        11.1   Events of Loss...............................................  52
        11.2   Substitute Aircraft..........................................  53
        11.3   Requisition..................................................  54
12.  Return of Aircraft.....................................................  54
        12.1   Return.......................................................  54
        12.2   Final Inspection.............................................  54
        12.3   Non-Compliance...............................................  55
        12.4   Redelivery...................................................  55
        12.5   Acknowledgment...............................................  55
        12.6   Maintenance Program..........................................  55
        12.7   Fuel.........................................................  55
        12.8   Automatic Extension of Term..................................  55
13.   Default...............................................................  56
        13.1   Events.......................................................  56
        13.2   Rights.......................................................  59
        13.3   Deregistration...............................................  63
</TABLE> 

                                      II
<PAGE>
 
<TABLE> 
<S>                                                                          <C>
14.   Assignment............................................................. 63
        14.1   Lessee's Assignment........................................... 63
        14.2   Lessor's Assignment........................................... 63
        14.3   Transfer...................................................... 63
15.   Illegality............................................................. 64
16.   Miscellaneous.......................................................... 64
        16.1   Waivers, Remedies Cumulative.................................. 64
        16.2   Delegation.................................................... 64
        16.3   Certificates.................................................. 64
        16.4   Appropriation................................................. 64
        16.5   Currency...................................................... 64
        16.6   Set-off....................................................... 64
        16.7   Severability.................................................. 65
        16.8   Remedy........................................................ 65
        16.9   Expenses...................................................... 65
        16.10   Time of Essence.............................................. 66
        16.11   Notices...................................................... 66
        16.12   Governing Law and Jurisdiction............................... 67
        16.13   Sole and Entire Agreement.................................... 69
        16.14   Indemnities.................................................. 69
        16.15   Counterparts................................................. 69
        16.16   Language..................................................... 69
        16.17   No Brokers................................................... 69
17.  Disclaimers and Waivers................................................. 70
        17.1   Exclusion..................................................... 70
        17.2   Waiver........................................................ 70
        17.3   Disclaimer of Consequential Damages........................... 71
        17.4   Confirmation.................................................. 71
18.  Section 1110............................................................ 71
19.  Usury Laws.............................................................. 71
20.  Modification or Revision................................................ 72
21.  Witness................................................................. 73
<CAPTION> 
                                   SCHEDULES
<S>                                                                          <C>
SCHEDULE 1.   Description of Aircraft.......................................  74
SCHEDULE 2.   Certificate of Technical Acceptance...........................  79
SCHEDULE 3.   Operating Condition at Redelivery.............................  85
SCHEDULE 4.   Insurances Requirements.......................................  89
SCHEDULE 5.   Form of Legal Opinion.........................................  93
SCHEDULE 6.   Lease Supplement No. ____.....................................  97
SCHEDULE 7.   Form of Lease Termination Certificate......................... 100
SCHEDULE 8.   Form of Aircraft Usage Report................................. 102
</TABLE>

                                      III
<PAGE>
 
                           AIRCRAFT LEASE AGREEMENT

THIS AGREEMENT is made as of the 25th day of March, 1997 between:-

(1)   GENERAL ELECTRIC CAPITAL CORPORATION, a company incorporated under the
      laws of New York whose principal place of business is at 260 Long Ridge
      Road, Stamford, Connecticut, 06927 ("Lessor"); and

(2)   FRONTIER AIRLINES, INC., a company incorporated under the laws of the
      State of Colorado whose principal place of business is at 12015 East 46th
      Avenue, Denver, Colorado, 80239, United States of America ("Lessee").

      WHEREAS: Lessor wishes to lease to Lessee and Lessee is willing to lease
      from Lessor the Aircraft on the terms of this Agreement.

      IT IS AGREED as follows:-

1.    INTERPRETATION

1.1   DEFINITIONS

      In this Agreement the following expressions have the meanings set out
      opposite:-

      After-Tax Basis                   in the case of any amount payable on an
                                        "After-Tax Basis" to or for the benefit
                                        of any Person (including any amount
                                        payable pursuant to this definition) (a
                                        "Required Payment"), the total amount
                                        that must be paid is the amount such
                                        that, after deduction of the net amount
                                        of all Taxes required to be paid by such
                                        Person with respect to the receipt or
                                        accrual by it of such amount (and
                                        assuming that such Person is subject to
                                        (i) United States Federal income tax at
                                        the highest marginal statutory rate
                                        imposed on corporations for the relevant
                                        period, (ii) United States state and
                                        local income taxes at the composite of
                                        the highest marginal statutory rates
                                        imposed on such Person for the relevant
                                        period, as such composite rate shall be
                                        certified by a financial officer of such
                                        Person, and (iii) income taxes (if any)
                                        imposed by countries outside the United
                                        States at the actual rates imposed on
                                        such Person) the net amount received is
                                        the amount of the Required Payment.

                                       1
<PAGE>
 
      Agreed Value                      the amount specified for Agreed Value in
                                        Letter Agreement No. 1.

      Air Authority                     Federal Aviation Administration ("FAA").

      Aircraft                          the aircraft described in Part 1 of
                                        Schedule 1, (which term includes where
                                        the context admits a separate reference
                                        to all Engines, Parts and Aircraft
                                        Documents) or any aircraft substituted
                                        in place thereof pursuant to Clause 11.1
                                        or 11.2.

      Aircraft Documents                the documents, data and records
                                        identified in Part 2 of Schedule 1 and
                                        all additions, renewals, revisions and
                                        replacements from time to time made in
                                        accordance with this Agreement.

      Airframe                          the Aircraft, excluding the Engines and
                                        Aircraft Documents.

      Appraisal Procedure               the following procedure for determining
                                        the "fair market rental value" of the
                                        Aircraft: (a) Lessor shall select an
                                        independent aircraft appraiser who shall
                                        make a determination of "fair market
                                        rental value" of the Aircraft; and (b)
                                        the fees and expenses of the appraiser
                                        shall be paid by Lessee. "Fair market
                                        rental value" shall mean the value
                                        determined by an appraisal completed on
                                        an "as-is" and "where-is" basis.

      APU                               the auxiliary power unit installed on
                                        the Aircraft on the Delivery Date and
                                        any replacement auxiliary power unit
                                        installed in accordance with this
                                        Agreement.

      Boeing                            The Boeing Company, a Delaware
                                        corporation with its principal office in
                                        Seattle, State of Washington, U.S.A.

      Business Day                      a day (other than a Saturday or Sunday)
                                        on which business of the nature required
                                        by this Agreement is carried out in the
                                        State of Incorporation or where used in
                                        relation to payments on which banks are
                                        open for business in San Francisco and
                                        New York.

                                       2
<PAGE>
 
      Certificated Air Carrier          any Person (except the United States
                                        Government) that is a citizen of the
                                        United States of America (as defined in
                                        Section 40102 of Title 49 of the United
                                        States Code) and holding a Certificate
                                        of Public Convenience and Necessity
                                        issued under Section 41102 of Title 49
                                        of the United States Code by the
                                        Department of Transportation or any
                                        predecessor or successor agency thereto,
                                        or, in the event such certificates shall
                                        no longer be issued, any Person (except
                                        the United States Government) that is a
                                        citizen of the United States of America
                                        (as defined in Section 40102 of Title 49
                                        of the United States Code) and legally
                                        engaged in the business of transporting
                                        for hire passengers or cargo by air
                                        predominantly to, from or between points
                                        within the United States of America,
                                        and, in either event, operating
                                        commercial jet aircraft capable of
                                        carrying ten or more individuals or
                                        6,000 pounds or more of cargo, which
                                        also is certificated so as to entitle
                                        Lessor, as a lessor, to the benefits of
                                        Section 1110 of Title 11 of the United
                                        States Code with respect to the
                                        Aircraft.

      Cold Section Refurbishment        with respect to any Engine the
                                        completion of the following: completely
                                        unstacking either high or low or both
                                        compressor sections, if needed, and
                                        completing the following for the
                                        appropriate section(s): visual
                                        inspection; de-blading discs as
                                        necessary; visual and NDT (Non-
                                        Destructive Testing) inspections as
                                        necessary of all discs; verification
                                        that all snap diameters on discs are
                                        within limits; inspection of all blades
                                        for proper chord dimensions and
                                        cracking; repair or replacement of
                                        blades below minimums; inspection and
                                        repair of stators as necessary; blade-up
                                        of discs using new lock plates; assembly
                                        of rotors in the compressor; balance of
                                        all rotors; and installation of rotors
                                        in the engine.

      Cycle                             one take-off and landing of the
                                        Aircraft.

                                       3
<PAGE>
 
      Damage Notification Threshold     the amount specified therefor in Letter
                                        Agreement No. 1.

      Default                           any Event of Default and any event which
                                        with the giving of notice, lapse of
                                        time, determination of materiality or
                                        fulfillment of other condition would
                                        constitute an Event of Default.

      Delivery Condition
      Requirements                      the requirements specified on Part 1 of
                                        Schedule 1.

      Delivery Date                     the date on which the Aircraft is
                                        tendered for delivery by Lessor in
                                        accordance with this Agreement.

      Delivery Location                 Seattle, Washington, United States or
                                        such other location as may be nominated
                                        by Lessor.

      Deposit                           all amounts payable pursuant to Clause
                                        5.1.

      Dollars and $                     the lawful currency of the United States
                                        of America.

      Engine                            whether or not installed on the
                                        Aircraft:-

                                        (a)  each engine of the manufacture and
                                             model specified in Part 1 of
                                             Schedule 1 (each of which has 750
                                             or more rated takeoff horsepower or
                                             the equivalent of such horsepower)
                                             which Lessor elects to tender to
                                             Lessee with the Aircraft on the
                                             Delivery Date, such engines being
                                             described as to serial numbers on
                                             the certificate of acceptance to be
                                             executed by Lessee upon delivery of
                                             the Aircraft; or

                                        (b)  any engine which has replaced that
                                             engine, title to which has or
                                             should have, passed to Lessor in
                                             accordance with this Agreement;

                                        and in each case includes all modules
                                        and Parts from time to time belonging to
                                        or installed in that engine but excludes
                                        any 

                                       4
<PAGE>
 
                                        properly replaced engine title to which
                                        has, or should have, passed to Lessee
                                        pursuant to this Agreement.

      Engine Event of Loss              the occurrence with respect to an Engine
                                        only, whether or not installed on the
                                        Airframe, of any of those events
                                        described in provisions (a) through (d)
                                        of the definition of Event of Loss.

      Engine Flight Hour                means each hour or part thereof an
                                        Engine is operated, elapsing from the
                                        moment that wheels of an aircraft on
                                        which such Engine is installed leave the
                                        ground until the wheels of such aircraft
                                        next touch the ground.

      Engine Refurbishment              a complete disassembly, inspection and
                                        repair of the modules of an Engine per
                                        the engine manufacturer's maintenance
                                        manual, so that such Engine shall have a
                                        minimum expected on-wing life of 8,000
                                        hours and 6,000 cycles.

      ERISA                             the Employee Retirement Income Security
                                        Act of 1974, as amended.

      Event of Default                  an event or condition specified in
                                        Clause 13.1.

      Event of Loss                     with respect to the Aircraft (including
                                        for the purposes of this definition the
                                        Airframe):-

                                        (a)  the actual or constructive total
                                             loss of the Aircraft (including any
                                             damage to the Aircraft which
                                             results in an insurance settlement
                                             on the basis of a total loss, or
                                             requisition for use or hire which
                                             results in an insurance settlement
                                             on the basis of a total loss); or

                                        (b)  it being destroyed, damaged beyond
                                             repair or permanently rendered
                                             unfit for normal use for any reason
                                             whatsoever; or

                                        (c)  the requisition of title, or other
                                             compulsory acquisition, capture,

                                       5
<PAGE>
 
                                             seizure, deprivation, confiscation
                                             or detention for any reason of the
                                             Aircraft by the government of the
                                             State of Registration or other
                                             competent authority (whether de
                                             jure or de facto), but excluding
                                             requisition for use or hire not
                                             involving requisition of title; or

                                        (d)  the hi-jacking, theft,
                                             condemnation, confiscation, seizure
                                             or requisition for use or hire of
                                             the Aircraft which deprives any
                                             person permitted by this Agreement
                                             to have possession and/or use of
                                             the Aircraft of its possession
                                             and/or use for more than 15 days
                                             (or, if earlier, beyond the Expiry
                                             Date).

      Excusable Delay                   with respect to delivery of the
                                        Aircraft, delay or non-performance due
                                        to or arising out of acts of God or
                                        public enemy, civil war, insurrection or
                                        riot, fire, flood, explosion,
                                        earthquake, accident, epidemic,
                                        quarantine restriction, any act of
                                        government, governmental priority,
                                        allocation, regulation or order
                                        affecting directly or indirectly, the
                                        Aircraft, any manufacturer, Lessor or
                                        any materials or facilities, strike or
                                        labor dispute causing cessation,
                                        slowdown or interruption of work,
                                        inability after due and timely diligence
                                        to procure equipment, data or materials
                                        from manufacturers, suppliers, any
                                        existing owner, seller or lessee in a
                                        timely manner, damage, destruction or
                                        loss, or any other cause to the extent
                                        that such cause is beyond the control of
                                        Lessor whether above mentioned or not
                                        and whether or not similar to the
                                        foregoing.

      Expiry Date                       the day preceding the numerically
                                        corresponding day 96 months after the
                                        Delivery Date or if earlier the date on
                                        which:-

                                        (a)  the date Lessor, acting in
                                             accordance with the terms of this
                                             Agreement 

                                       6
<PAGE>
 
                                             terminates the leasing of the
                                             Aircraft to Lessee under this
                                             Agreement; or

                                        (b)  Lessor receives the Agreed Value
                                             together with any other amounts
                                             then due and unpaid by Lessee
                                             following an Event of Loss. 

      FAA                               the Federal Aviation Administration of
                                        the United States of America and any
                                        successor thereof.

      FAR                               the Federal Aviation Regulations set
                                        forth in Title 14 of the United States
                                        Code of Federal Regulations, as amended
                                        and modified from time to time.

      Federal Aviation Act              The Transportation Laws of the United
                                        States as set forth at 49 United States
                                        Code et seq. or any similar legislation
                                        of the United States of America enacted
                                        in substitution or replacement thereof.

      Financing Statements              Uniform Commercial Code Financing
                                        Statements in respect of the Aircraft
                                        and Engines leased hereunder prepared in
                                        a form acceptable for filing with the
                                        applicable Government Entities in the
                                        Habitual Base, the state in which the
                                        chief executive office (as that term is
                                        defined in Article 9 of the Uniform
                                        Commercial Code as in effect in the
                                        Habitual Base) and such other
                                        jurisdiction as Lessor shall reasonably
                                        require.

      Flight Hour                       each hour or part thereof (rounded up to
                                        two decimal places) elapsing from the
                                        moment the wheels of the Aircraft leave
                                        the ground on take off until the wheels
                                        of the Aircraft next touch the ground.

      GAAP                              generally accepted accounting principles
                                        in the United States. 

      Governing Law                     the laws of the State of California.

                                       7
<PAGE>
 
      Government Entity                 (a)  any national government, political
                                             subdivision thereof, or local
                                             jurisdiction therein;

                                        (b)  any instrumentality, board,
                                             commission, court, or agency of any
                                             thereof, however constituted; and

                                        (c)  any association, organization, or
                                             institution of which any of the
                                             above is a member or to whose
                                             jurisdiction any thereof is subject
                                             or in whose activities any of the
                                             above is a participant.

      Gross Negligence                  means any intentional, conscious or
                                        voluntary action or decision which is
                                        taken with wanton, reckless, flagrant
                                        and culpable disregard for the
                                        consequences of such action or decision.

      Habitual Base                     the State of Colorado or, subject to the
                                        prior written consent of Lessor, any
                                        other state, country or countries in
                                        which the Aircraft is for the time being
                                        habitually based.

      Hot Section Refurbishment         with respect to any Engine, the complete
                                        visual inspection and repair as
                                        necessary of the combustion section of
                                        an Engine in an engine repair/overhaul
                                        station including without limitation
                                        complete unstacking of the high pressure
                                        or low pressure turbine or both if
                                        needed; complete visual inspection of
                                        such turbine(s); de-blading of discs as
                                        required; visual and NDT inspections of
                                        all discs as required; verification that
                                        all snap diameters on discs are within
                                        limits; inspection of all blades for
                                        proper chord dimensions and cracking;
                                        repair or replacement of all blades
                                        below minimums; inspection and repair of
                                        stators as necessary; blade-up of discs
                                        using new lock plates; assembly of
                                        rotors in the turbine; balance of all
                                        rotors; and installation of rotors in
                                        the engine.

      Indemnitee                        each of GE Capital Aviation Services,
                                        Inc. ("GECASI"), GE Capital Aviation
                                        Services

                                       8
<PAGE>
 
                                        Limited ("GECASL"), Lessor, and any of
                                        their respective successors and assigns,
                                        shareholders, subsidiaries, affiliates,
                                        partners, contractors, directors,
                                        officers, servants, agents and employees
                                        and indemnitees; provided, however, that
                                        no such Indemnitee shall be entitled to
                                        an indemnification to the extent such
                                        Indemnitee is manufacturer of the
                                        Aircraft, any Engines, or Parts in its
                                        capacity as such.

      Insurances                        as defined in Clause 9.1 hereof.

      Landing Gear                      the landing gear assembly of the
                                        Aircraft excluding any rotable
                                        components.

      Law                               shall mean and include (a) any statute,
                                        decree, constitution, regulation, order
                                        judgment or other directive of any
                                        Governmental Entity; (b) any treaty,
                                        pact, compact or other agreement to
                                        which any Governmental Entity is a
                                        signatory or party; (c) any judicial or
                                        administrative interpretation or
                                        application of any Law described in (a)
                                        or (b) above; and (d) any amendment or
                                        revision of any Law described in (a),
                                        (b) or (c) above.

      Lease Supplement                  a Lease Supplement, substantially in the
                                        form of Schedule 6 hereto, entered into
                                        between Lessor and Lessee.

      Lessee's Maintenance Program      the Maintenance Program specifically
                                        approved by the Air Authority for
                                        Lessee's maintenance of the Aircraft.

      Lessor Lien                       (a)  any Security Interest whatsoever
                                             from time to time created by or
                                             through Lessor in connection with
                                             the financing of the Aircraft;

                                        (b)  any other Security Interest in
                                             respect of the Aircraft which
                                             results from acts of or claims
                                             against Lessor not related to the
                                             transactions contemplated by or
                                             permitted under this Agreement; and

                                       9
<PAGE>
 
                                        (c)  Security Interests in respect of
                                             the Aircraft for Lessor Taxes.

      Lessor Taxes                      Taxes:-

                                        (a)  imposed as a direct result of
                                             activities of Lessor in the
                                             jurisdiction imposing the Tax
                                             unrelated to Lessor's dealings with
                                             Lessee or to the transactions
                                             contemplated by this Agreement or
                                             the operation of the Aircraft by
                                             Lessee; or

                                        (b)  imposed on the net income, profits
                                             or gains of Lessor by any
                                             Government Entity in the United
                                             State of America; provided,
                                                               --------
                                             however, that Lessor Taxes shall
                                             -------
                                             not include any Tax imposed by any
                                             government or taxing authority of
                                             any jurisdiction if and to the
                                             extent that such Tax results from
                                             (i) the use, operation, presence or
                                             registration of the Aircraft, the
                                             Airframe, any Engine or any Part in
                                             the jurisdiction imposing the Tax,
                                             or (ii) the situs of organization,
                                             any place of business or any
                                             activity of Lessee or any other
                                             Person having use, possession or
                                             custody of the Aircraft, the
                                             Airframe, any Engine or any Part in
                                             the jurisdiction imposing the Tax;
                                             or

                                        (c)  imposed with respect to any period
                                             commencing or event occurring after
                                             the Expiry Date and unrelated to
                                             Lessor's dealings with Lessee or to
                                             the transactions contemplated by
                                             this Agreement;

                                        provided always, that Lessor Taxes shall
                                        not include any income taxes or other
                                        amounts payable and subject to
                                        indemnification in favor of Lessor
                                        pursuant to the Tax Indemnity Agreement.

      Letter Agreement No. 1            that certain Letter Agreement No. 1
                                        between Lessor and Lessee dated as of
                                        the date hereof.

                                      10
<PAGE>
 
      Maintenance Performer             the Lessee, Tramco, USAir Inc., or such
                                        other Person as is approved by the FAA
                                        to perform maintenance and/or
                                        modification services on commercial
                                        aircraft and/or commercial aircraft
                                        engines, which Person shall be agreed by
                                        Lessor and Lessee to have recognized
                                        standing and experience, suitable
                                        facilities for the level of maintenance
                                        being carried out and suitable equipment
                                        to perform such services on aircraft
                                        and/or engines of the same or improved
                                        model as the Aircraft or, in the case of
                                        engines, the Engines.

      Maintenance Program               an Air Authority approved maintenance
                                        program for the Aircraft based upon the
                                        Manufacturer's specifications, service
                                        bulletins, planning documents,
                                        maintenance manuals and documents and
                                        encompassing scheduled maintenance
                                        (including block maintenance), 
                                        condition-monitored maintenance, and/or
                                        on-condition maintenance of Airframe,
                                        Engines and Parts, including but not
                                        limited to, servicing, testing,
                                        preventive maintenance, repairs,
                                        structural inspections, system checks,
                                        overhauls, approved modifications,
                                        service bulletins, engineering orders,
                                        airworthiness directives, corrosion
                                        control, inspections and treatments.

      Maintenance Reserves              all amounts payable under Clause 5.4(a).

      Major Checks                      any C-Check, multiple C-Check, D-Check
                                        or annual heavy maintenance visit or
                                        segment thereof suggested for commercial
                                        aircraft of the same model as the
                                        Aircraft by its manufacturer (however
                                        denominated) as set out in Lessee's
                                        Maintenance Program.

      Manufacturer                      Boeing.

      Minimum Liability Coverage        the amount set forth therefore in Letter
                                        Agreement No. 1.

      Mortgage Convention               shall mean the Convention for the
                                        International Recognition of Rights in
                                        Aircraft, signed (ad referendum) at
                                        Geneva, 

                                      11
<PAGE>
 
                                        Switzerland, on June 19, 1948, and
                                        amended from time to time, but excluding
                                        the terms of any adhesion thereto or
                                        ratification thereof containing
                                        reservations to which the United States
                                        of America does not accede.

      Operative Documents               shall mean this Agreement, all Lease
                                        Supplements hereto, Letter Agreement No.
                                        1, the Tax Indemnity Agreement, any
                                        schedules or documents prepared in
                                        conformance to the Schedules hereto, any
                                        side-letters related hereto and any
                                        amendments, revisions, supplements or
                                        modifications hereto or thereto.

      Other Agreements                  any agreement (other than this
                                        Agreement) made or to be made between
                                        Lessor (or an associate or affiliate
                                        thereof or a trustee-lessor acting for
                                        Lessor as beneficiary, including without
                                        limitation Polaris Holding Company) or
                                        GPA Group plc (or an associate or
                                        affiliate thereof) and Lessee (or an
                                        associate or affiliate thereof).

      Part                              whether or not installed on the
                                        Aircraft:-

                                        (a)  any component, furnishing or
                                             equipment (other than a complete
                                             Engine) furnished with the Aircraft
                                             on the Delivery Date; and

                                        (b)  any other component, furnishing or
                                             equipment (other than a complete
                                             Engine) title to which has, or
                                             should have passed to Lessor
                                             pursuant to this Agreement;

                                             but excludes any such items title
                                             to which has, or should have,
                                             passed to Lessee pursuant to this
                                             Agreement.

      Permitted Lien                    (a)  any lien for Taxes not assessed or,
                                             if assessed, not yet due and
                                             payable, or being contested in good
                                             faith by appropriate proceedings;

                                        (b)  any lien of a repairer, mechanic,
                                             carrier, hangarkeeper or other
                                             similar 

                                      12
<PAGE>
 
                                             lien arising in the ordinary course
                                             of business or by operation of Law
                                             in respect of obligations which are
                                             not overdue or are being contested
                                             in good faith by appropriate
                                             proceedings; and

                                        (c)  any Lessor Lien.

                                        but only if (in the case of both (a) and
                                        (b)) (i) adequate resources have been
                                        provided by Lessee for the payment of
                                        the Taxes or obligations; and (ii) such
                                        proceedings, or the continued existence
                                        of the lien, do not give rise to any
                                        likelihood of the sale, forfeiture or
                                        other loss of the Aircraft or any
                                        interest therein or of criminal
                                        liability on Lessor.

      Person                            any individual person, corporation,
                                        partnership, firm, joint stock company,
                                        joint venture, trust, estate,
                                        unincorporated organization,
                                        association, Government Entity, or
                                        organization or association of which any
                                        of the above is a member or a
                                        participant.

      Redelivery Location               a location on Lessee's route system in
                                        the United States designated by Lessor,
                                        or such other location as Lessor and
                                        Lessee shall agree.

      Related Agreements                any agreement (other than this
                                        Agreement) made or to be made between or
                                        with Lessor (or an associate or
                                        affiliate thereof or a trustee-lessor
                                        acting for Lessor as beneficiary,
                                        including without limitation Polaris
                                        Holding Company) and Lessee (or an
                                        associate or affiliate of Lessee).

      Replacement Engine                an engine of the same manufacturer and
                                        model, and having equivalent value,
                                        utility, modification status, time
                                        elapsed since Hot Section Refurbishment
                                        and Cold Section Refurbishment and
                                        remaining warranty status as the Engine
                                        it is intended to replace under Clause
                                        11.1(c), or at Lessee's option, 

                                      13
<PAGE>
 
                                        an engine of the same manufacturer as
                                        such Engine but of an improved model,
                                        and otherwise of an equivalent value and
                                        utility and suitable for installation
                                        and use on the Airframe without
                                        impairing the value or utility of the
                                        Airframe and compatible with the
                                        remaining installed Engine.

      Rent                              all amounts payable pursuant to Clause
                                        5.3.

      Rental Period                     each period ascertained in accordance
                                        with Clause 5.2.

      Rent Date                         the first day of each Rental Period.

      Return Occasion                   the date on which the Aircraft is
                                        redelivered to Lessor in accordance with
                                        Clause 12 hereof.

      Scheduled Delivery Month          August, 1997.

      Security Interest                 any mortgage, charge, pledge, lien,
                                        assignment, hypothecation, right of set-
                                        off or any agreement or arrangement
                                        having the effect of creating a Security
                                        Interest other than a Permitted Lien.

      State of Incorporation            State of Colorado.

      State of Registration             United States of America.

      Subsidiary                        (a)  in relation to any reference to
                                             accounts, any company whose
                                             accounts are consolidated with the
                                             accounts of Lessee in accordance
                                             with GAAP;

                                        (b)  for any other purpose an entity
                                             from time to time:-

                                             (i)   of which another has direct
                                                   or indirect control or owns
                                                   directly or indirectly more
                                                   than 50 per cent of the
                                                   voting share capital; or

                                             (ii)  which is a direct or indirect
                                                   subsidiary of another under

                                      14
<PAGE>
 
                                                   the laws of the jurisdiction
                                                   of its incorporation.

      Tax Indemnity Agreement           the Tax Indemnity Agreement of even date
                                        herewith between Lessee and Lessor
                                        pertaining to U.S. Federal Income Taxes
                                        and Lessee operations outside the United
                                        States of America.

      Taxes                             any and all present and future taxes,
                                        duties, withholdings, levies,
                                        assessments, imposts, fees and other
                                        governmental charges of all kinds
                                        together with any penalties, fines,
                                        surcharges and interest thereon and any
                                        additions thereto.

      Term                              the period commencing on the Delivery
                                        Date and ending on the Expiry Date,
                                        except that the Term may be extended
                                        beyond the Expiry Date if the Return
                                        Occasion is delayed in the circumstances
                                        specified, and subject to the limitation
                                        described, in Clause 12.3.

      United States                     the United States of America

      Warrant                           the warrant referred to in Clause
                                        3.1(a)(xii).

      Wet Lease                         any arrangement whereby Lessee agrees to
                                        furnish the Aircraft to a third party
                                        pursuant to which the Aircraft (i) shall
                                        be solely within the operational control
                                        of Lessee and shall be operated solely
                                        by regular employees of Lessee
                                        possessing all current certificates and
                                        licenses that would be required under
                                        the Federal Aviation Act for the
                                        performance by such employees of similar
                                        functions within the United States of
                                        America, (ii) shall be maintained by
                                        Lessee in accordance with Lessee's
                                        Maintenance Program and (iii) shall be
                                        and remain subject and subordinate to
                                        all other terms and conditions of this
                                        Agreement; provided, however, that
                                        Lessee shall remain primarily liable for
                                        the performance of all of the terms of
                                        this Agreement (including, without
                                        limitation, its obligations set forth in
                                        Clause 

                                      15
<PAGE>
 
                                        9 of this Agreement) to the same extent
                                        as if such arrangement had not been
                                        entered into.

                                      16
<PAGE>
 
1.2  CONSTRUCTION

(a)  In this Agreement, unless the contrary intention is stated, a reference
     to:-

     (i)    each of "Lessor" or "Lessee" or any other person includes without
            prejudice to the provisions of this Agreement any successor in title
            to it and any permitted assignee;

     (ii)   words importing the plural shall include the singular and vice
            versa;

     (iii)  any document shall include that document as amended, novated or
            supplemented;

     (iv)   a Clause or a Schedule is a reference to a clause of or a schedule
            to this Agreement;

     (v)    a reference to "Agreement", "the Agreement" or "this Agreement"
            shall, unless expressly provided otherwise, mean and include this
            Aircraft Lease Agreement and each of the other Operative Documents;
            and

(b)  the headings in this Agreement are to be ignored in construing this
     Agreement.
 
2.   REPRESENTATIONS AND WARRANTIES

2.1  Lessee's Representations and Warranties:  Lessee represents and warrants to
     Lessor that:-

(a)  Status: Lessee is a corporation duly incorporated and validly existing
     under the laws of the State of Incorporation and has the corporate power to
     own its assets and carry on its business as it is being conducted and is
     the holder of all necessary air transportation licenses required in
     connection therewith and with the use and operation of the Aircraft;

(b)  Power and authority: Lessee has the corporate power to enter into and
     perform, and has taken all necessary corporate action to authorize the
     entry into, performance and delivery of, this Agreement and the
     transactions contemplated by this Agreement;

(c)  Legal validity: this Agreement has been duly entered into and delivered by
     Lessee, and this Agreement does, and the Operative Documents when executed
     and delivered by Lessee will, constitute legal, valid and binding
     obligations of Lessee, enforceable in accordance with their respective
     terms, except as may be limited by applicable bankruptcy, insolvency,
     reorganization, moratorium or other similar Laws affecting the enforcement
     of creditors' rights generally, and, to the extent that certain remedies
     require or may require enforcement by a court of equity, by such principles
     of equity (regardless of whether such enforceability is considered in a
     proceeding in equity or at law) as a court having jurisdiction may impose
     and by Laws which may affect some of such remedies but which do not make
     the available remedies inadequate for the substantial realization of the
     benefits provided herein;

                                      17
<PAGE>
 
(d)  Non-conflict: the entry into and performance by Lessee of, and the
     transactions contemplated by, this Agreement do not and will not:-

     (i)    conflict with any laws binding on Lessee; or

     (ii)   conflict with the constitutional documents of Lessee; or

     (iii)  conflict with or result in default under any indenture, mortgage,
            chattel mortgage, deed of trust, conditional sales contract, lease,
            bank loan or credit agreement or other agreement which is binding
            upon Lessee or any of its assets nor result in the creation of any
            Security Interest over any of its assets;

(e)  Authorization: all authorizations, consents, registrations and
     notifications required in connection with the entry into, performance,
     validity and enforceability of, this Agreement and the transactions
     contemplated by this Agreement, have been (or will on or before the
     Delivery Date have been) obtained or effected (as appropriate) and are (or
     will on their being obtained or effected be) in full force and effect;

(f)  No Immunity:

     (i)    Lessee is subject to civil commercial law with respect to its
            obligations under this Agreement; and

     (ii)   neither Lessee nor any of its assets is entitled to any right of
            immunity and the entry into and performance of this Agreement by
            Lessee constitute private and commercial acts;

(g)  Accounts: the audited consolidated accounts of Lessee and its Subsidiaries
     most recently delivered to Lessor, including balance sheets and statements
     of income and retained earnings:-

     (i)  have been prepared in accordance with GAAP; and

     (ii) fairly represent the consolidated financial condition of Lessee and
          its Subsidiaries as at the date to which they were drawn up;

(h)  Restricted Countries:  Lessee does not hold a contract or other obligation
     to operate the Aircraft to or for any of the countries designated under
     U.S. Code of Federal Regulations 31 CFR Parts 500-599 including, without
     limitation, Cuba, Iraq, Iran, Libya, North Korea, the Bosnia-Serb
     controlled areas of the Republic of Bosnia and Herzegovina and the Unita
     Rebels of Angola.

(i)  Chief Executive's Office:  Lessee's Chief Executive Office (as that term is
     defined in Article 9 of the Uniform Commercial Code as in effect in the
     State of Colorado) is located at 12015 East 46th Avenue, Denver, Colorado,
     United States of America;

(j)  Certificated Air Carrier:  Lessee is a Certificated Air Carrier and Lessor,
     as lessor of the Aircraft to Lessee, is entitled to the benefits of Section
     1110 of Title 11 of the United States Code with respect to the Aircraft;
     and

                                      18
<PAGE>
 
(j)  Citizen of the United States:  Lessee is a "citizen of the United States"
     as defined in Section 40102 of Title 49 of the United States Code.

2.2  Lessee's Further Representations and Warranties: Lessee further represents
     and warrants to Lessor that:-

(a)  No Default:

     (i)    no Default has occurred and is continuing or might result from the
            entry into or performance of the Operative Documents; and

     (ii)   no other event or condition has occurred and is continuing which
            constitutes (or with the giving of notice, lapse of time,
            determination of materiality or the fulfillment of any other
            applicable condition or any combination of the foregoing, might
            constitute) a material default under any indenture, mortgage,
            chattel mortgage, deed of trust, conditional sales contract, lease,
            bank loan or credit agreement or other agreement which is binding on
            Lessee or any assets of Lessee;

(b)  Registration:

     (i)    except for the filing for recordation of this Agreement and a Lease
            Supplement with the FAA, and the filing of any Financing Statements
            required (and continuation statements at periodic intervals), no
            further filing or recording of this Agreement or of any other
            document (including any financing statement under Article 9 of the
            Uniform Commercial Code) and no further action, is or will be
            necessary under the Laws of the United States, the State of
            Incorporation, and the State of Registration, the Habitual Base or
            any other states in order to (A) fully establish, perfect and
            protect Lessor's title to, and interest in, the Aircraft or any
            Engine or Part as against Lessee or any third party, or (B) ensure
            the validity, effectiveness and enforceability of this Agreement or
            any other Operative Document to which the Lessee is a party; and

     (ii)   under the laws of the State of Incorporation, the State of
            Registration and the Habitual Base the property rights of Lessor in
            the Aircraft have been fully established, perfected and protected
            and this Agreement will have priority in all respects over the
            claims of all creditors of Lessee;

(c)  Litigation: no litigation, arbitration or administrative proceedings are
     pending or to its knowledge threatened against Lessee which, if adversely
     determined, would have a material adverse effect upon its financial
     condition or business or its ability to perform its obligations under this
     Agreement;

(d)  Pari Passu: the obligations of Lessee under the Operative Documents rank at
     least pari passu with all other present and future unsecured and
     unsubordinated obligations (including contingent obligations) of Lessee,
     with the exception of such obligations as are mandatorily preferred by law
     and not by virtue of any contract;

                                      19
<PAGE>
 
(e)  Material Adverse Change: there has been no material adverse change in the
     consolidated financial condition of Lessee and its Subsidiaries or the
     financial condition of Lessee since the date to which the accounts most
     recently provided to Lessor on or prior to the Delivery Date were drawn up;

(f)  Taxes: Lessee has delivered all necessary returns and payments due to the
     tax authorities in the State of Incorporation, the State of Registration
     and the Habitual Base and is not required by Law to deduct any Taxes from
     any payments under this Agreement;

(g)  Information: the financial and other information furnished by Lessee in
     connection with this Agreement does not contain any untrue statement or
     omit to state facts, the omission of which makes the statements therein, in
     the light of the circumstances under which they were made, misleading, nor
     omits to disclose any material matter to Lessor and all forecasts and
     opinions contained therein were honestly made on reasonable grounds after
     due and careful inquiry by Lessee; and

(h)  ERISA: Lessee is not engaged in any transaction in connection with which it
     could be subjected to either a civil penalty assessed pursuant to Section
     502 of ERISA or any tax imposed by Section 4975 of the Internal Revenue
     Code; no material liability to the Pension Benefit Guaranty Corporation has
     been or is expected by Lessee to be incurred with respect to any employee
     pension benefit plan (as defined in Section 3 of ERISA) maintained by
     Lessee or by any trade or business (whether or not incorporated) which
     together with Lessee would be treated as a single employer under Section
     4001 of ERISA and Section 414 of the Internal Revenue Code; there has been
     no reportable event (as defined in Section 4043(b) of ERISA) with respect
     to any such employee pension benefit plan; no notice of intent to terminate
     any such employee pension benefit plan has been filed or is expected to be
     filed, nor has any such employee pension benefit been terminated; no
     circumstance exists or is anticipated that constitutes or would constitute
     grounds under Section 4042 of ERISA for the Pension Benefit Guaranty
     Corporation to institute proceedings to terminate, or to appoint a trustee
     to manage the administration of, such an employee pension benefit plan; and
     no accumulated funding deficiency (as defined in Section 302 of ERISA or
     Section 412 of the Internal Revenue Code), whether or not waived, exists
     with respect to any such employee pension benefit plan.

2.3  Repetition: The representations and warranties in Clause 2.1 and Clause 2.2
     will survive the execution of this Agreement. The representations and
     warranties contained in Clause 2.1 and Clause 2.2 will be deemed to be
     repeated by Lessee on the Delivery Date with reference to the facts and
     circumstances then existing. The representations and warranties contained
     in Clause 2.1 will be deemed to be repeated by Lessee on each Rent Date as
     if made with reference to the facts and circumstances then existing.

2.4  Lessor's Representations and Warranties: Lessor represents and warrants to
     Lessee that:-

                                      20
<PAGE>
 
(a)  Status: Lessor is a company duly incorporated and validly existing under
     the laws of the State of New York and has the corporate power to own its
     assets and carry on its business as it is now being conducted;

(b)  Power and authority: Lessor has the corporate power to enter into and
     perform, and has taken all necessary corporate action to authorize the
     entry into, performance and delivery of, the Operative Documents and the
     transactions contemplated by the Operative Documents;

(c)  Legal validity: the Operative Documents constitute Lessor's legal, valid
     and binding obligation;

(d)  Non-conflict: the entry into and performance by Lessor of, and the
     transactions contemplated by, the Operative Documents do not and will not:-

     (i)    conflict with any laws binding on Lessor; or

     (ii)   conflict with the constitutional documents of Lessor; or

     (iii)  conflict with any document which is binding upon Lessor or any of
            its assets;

(e)  Authorization: so far as concerns the obligations of Lessor, all
     authorizations, consents, registrations and notifications required under
     the laws of the State of New York in connection with the entry into,
     performance, validity and enforceability of, and the transactions
     contemplated by, the Operative Documents by Lessor have been (or will on or
     before the Delivery Date have been) obtained or effected (as appropriate)
     and are (or will on their being obtained or effected be) in full force and
     effect; and

(f)  No Immunity:

     (i)    Lessor is subject to civil commercial law with respect to its
            obligations under the Operative Documents; and
     (ii)   neither Lessor nor any of its assets is entitled to any right of
            immunity and the entry into and performance of the Operative
            Documents by Lessor constitute private and commercial acts.

3.   CONDITIONS PRECEDENT

3.1  Conditions Precedent: Lessor's obligation to deliver and lease the Aircraft
     under this Agreement is subject to satisfaction of each of the following
     conditions:-

(a)  receipt by Lessor from Lessee not later than 5 Business Days prior to the
     Delivery Date  of the following satisfactory in form and substance to
     Lessor:-

     (i)    Constitutional Documents: a copy of the constitutional documents of
            Lessee including without limitation articles of incorporation,
            bylaws and a current certificate of good standing issued by the
            secretary of the state for the State of Incorporation;

                                      21
<PAGE>
 
     (ii)   Resolutions: a copy of a resolution of the board of directors of
            Lessee approving the terms of, and the transactions contemplated by,
            this Agreement, resolving that it enter into this Agreement, and
            authorizing a specified person or persons to execute this Agreement
            and the other Operative Documents and accept delivery of the
            Aircraft on its behalf;

     (iii)  Opinion: evidence that opinions substantially in the form of
            Schedule 5 will be issued on the Delivery Date by legal counsel
            acceptable to Lessor;

     (iv)   FAA Opinion: a draft of an opinion of Crowe & Dunlevy P.C. or other
            counsel acceptable to Lessor who are recognized specialists with
            regard to FAA registration matters in form acceptable to Lessor as
            to the due filing for recordation of this Agreement, to be delivered
            in executed final form to Lessor and Lessee upon such filing and
            recordation;

     (v)    Approvals: evidence of the issue of each approval, license and
            consent which may be required in relation to, or in connection with,
            the performance by Lessee of any of its obligations hereunder
            (including, without limitation, any consent to the export of the
            Aircraft from the Habitual Base and consent to the deregistration of
            the Aircraft upon the termination of the leasing of the Aircraft
            under this Agreement);

     (vi)   Licenses: copies of Lessee's Certificate of Convenience and
            Necessity, Radio License, FAR Part 121 operator's certificates and
            all other licenses, certificates and permits required by Lessee in
            relation to, or in connection with, the operation of the Aircraft;

     (vii)  Process Agent: a letter from the process agent appointed by Lessee
            in this Agreement accepting that appointment;

     (viii) Certificate: a certificate of a duly authorized officer of Lessee:-

            (a)  setting out a specimen of each signature referred to in Clause
                 3.1(a)(ii);

            (b)  certifying that each copy document specified in this Clause is
                 correct, complete and in full force and effect;

            (c)  certifying that Lessee's representations and warranties
                 contained in Clause 2.1 and 2.2 are true and correct on the
                 Delivery Date as if given on such date; and

            (d)  certifying that there has been no material change in Lessee's
                 Constitutional Documents since originally delivered by Lessee
                 to Lessor;

     (ix)   Air Traffic Control: a letter from Lessee addressed to Transport
            Canada or other relevant air traffic control authority pursuant to
            which Lessee authorizes

                                      22
<PAGE>
 
            the addressee to issue to Lessor, upon Lessor's request from time to
            time, a statement of account of all sums due by Lessee to the
            authority in respect of all aircraft (including, without limitation,
            the Aircraft) operated by Lessee;

     (x)    Deregistration Power: an irrevocable power of attorney authorizing
            Lessor or such other person as Lessor may from time to time specify
            to do any thing or act or to give any consent or approval which may
            be required to obtain deregistration of the Aircraft and to export
            the Aircraft from the Habitual Base upon termination of the leasing
            of the Aircraft under this Agreement, duly notarized and legalized;

     (xi)   Certificate of Lease Termination: a certificate of lease termination
            executed by a duly authorized officer of Lessee, substantially in
            the form of Schedule 7 hereto, acknowledging that this Agreement is
            no longer in effect with respect to the Aircraft and Engines, which
            certificate Lessor will hold in escrow to be filed at the FAA upon
            the expiration of the Term or other termination of the leasing of
            the Aircraft to the Lessee hereunder.

     (xii)  Warrant: evidence of the grant by Lessee to Lessor of a warrant
            entitling Lessor to purchase 55,000 shares of Lessee's common stock
            no par value at an aggregate purchase price for all such shares of
            $385,000, such shares carrying demand registration rights by Lessor
            and such other rights as Lessor may require, to be set forth in a
            side letter dated as of the date of this Agreement concerning such
            warrant. It is understood and acknowledged that upon delivery of the
            Aircraft, such warrant shall be deemed solely as additional
            consideration to induce Lessor to deliver the Aircraft to Lessee and
            shall then and thereafter cease to have any attribute or character
            of a security or other deposit. Such warrant shall expire at 5:00
            p.m. Denver, Colorado, local time on the Expiry Date;

     (xiii) Side Letter Concerning Warrant: a side letter dated as of the date
            of this Agreement concerning the issuance of a Warrant for the
            purchase by Lessor of shares of Lessee's common stock as set forth
            in subclause (xii) above in form and substance satisfactory to
            Lessor;

     (xiv)  Documentary Fee: the $5,000 documentary fee specified in Clause
            16.9(e); and

     (xv)   General:  such other documents as Lessor may reasonably request;

(b)  the receipt by Lessor on or before the Delivery Date of:-

     (i)    Opinions: a signed original of each of the opinions referred to in
            Clause 3.1(a)(iii) and 3.1(a)(iv);

     (ii)   Payments: all sums due to Lessor under this Agreement on or before
            the Delivery Date including, without limitation, the first payment
            of Rent;

                                      23
<PAGE>
 
     (iii)  Insurances: certificates of insurance, an undertaking from Lessee's
            insurance broker and other evidence satisfactory to Lessor that
            Lessee is taking the required steps to ensure due compliance with
            the provisions of this Agreement as to Insurances with effect on and
            after the Delivery Date;

     (iv)   Lease Supplement No. 1: in the form of Schedule 6 hereto, to be
            dated the Delivery Date, fully completed and executed by Lessor and
            Lessee, and filed for recording at the FAA;

     (v)    Certificate of Technical Acceptance: in the form of Schedule 2
            hereto, to be dated and fully completed, and executed by Lessor and
            Lessee certifying that Lessee has completed its inspection of the
            Aircraft in accordance with Clause 4.5 hereof and that Aircraft
            conforms to the provisions set forth therein and is in all respects
            acceptable to Lessee, or if not so acceptable, then setting forth
            discrepancies and corrective action to be taken;

     (vi)   Accounts: the latest available accounts of Lessee as described in
            Clause 8.2(b)(i) and (ii);

     (vii)  Documents: a confirmation of receipt of the Aircraft Documents
            delivered with the Aircraft on the Delivery Date;

     (viii) UCC-1 Financing Statements: in form acceptable to Lessor, and
            suitable for filing in the States of Colorado and California and
            signed by Lessee; and

     (ix)   General:  such other documents as Lessor may reasonably request.

(c)  receipt by Lessor of such information and documents relating to the
     proposed Maintenance Program as Lessor may require and Lessor having agreed
     the proposed Maintenance Program on or prior to the Delivery Date; and

(d)  evidence that on the Delivery Date that all filings, registrations,
     recordings and other actions have been or will be taken which are necessary
     or advisable to ensure the validity, effectiveness and enforceability of
     this Agreement and the Assignments and to protect the property rights of
     Lessor in the Aircraft or any Part.

3.2  Further conditions precedent: The obligations of Lessor to deliver and
     lease the Aircraft under this Agreement are subject to the further
     conditions precedent that:-

(a)  the representations and warranties of Lessee under Clauses 2.1 and 2.2 are
     correct and would be correct if repeated on delivery of the Aircraft under
     this Agreement; and

(b)  no Default has occurred and is continuing or might result from the leasing
     of the Aircraft to Lessee under this Agreement.

3.3  Waiver:  The conditions specified in Clauses 3.1 and 3.2 are for the sole
     benefit of Lessor and may be waived or deferred in whole or in part and
     with or without conditions by Lessor. If any of those conditions are not
     satisfied on the Delivery Date and Lessor


                                      24
<PAGE>
 
(in its absolute discretion) nonetheless agrees to deliver the Aircraft to
Lessee, Lessee will ensure that those conditions are fulfilled within 15 days
after the Delivery Date and Lessor may treat as an Event of Default the failure
of Lessee to do so.

                                      25
<PAGE>
 
4.   COMMENCEMENT

4.1  Leasing: Lessor will lease the Aircraft to Lessee and Lessee will take the
     Aircraft on lease in accordance with this Agreement for the duration of the
     Term. Lessor will deliver and Lessee will accept the Aircraft on the day in
     the Scheduled Delivery Month notified by Lessor to Lessee at least 5
     Business Days in advance of such date or such other day as may be agreed.
     In the event (a) Lessee is unwilling or unable to accept delivery of the
     Aircraft on the date notified by Lessor as the Delivery Date, and (b) the
     Aircraft meets Delivery Condition Requirements then Lessee's obligation to
     pay Rent hereunder shall commence on such Delivery Date notwithstanding
     that Lessee has not accepted possession of the Aircraft. After delivery the
     Aircraft and every Part will be in every respect at the sole risk of
     Lessee, who will bear all risk of loss, theft, damage or destruction to the
     Aircraft from any cause whatsoever.

4.2  Delivery: The Aircraft will be delivered to and accepted by Lessee at the
     Delivery Location or such other location as may be agreed. Lessee will
     effect acceptance of the Aircraft by execution and delivery to Lessor of
     the duly completed and executed Certificate of Acceptance in the form of
     Schedule 2 and a duly completed and executed Lease Supplement No. 1 in the
     form of Schedule 6 hereto and by authorizing the filing at the FAA of an
     executed copy of such Lease Supplement with an executed copy of this
     Agreement attached thereto.

4.3  Delayed Delivery: If owing to:-

(a)  any seller, manufacturer or existing lessee of the Aircraft delaying in the
     delivery of, or failing to deliver, the Aircraft to Lessor for any reason
     (other than because of any default of Lessor in the performance of its
     obligations under an agreement with that seller, manufacturer or lessee
     unless the default arises from any act or omission of Lessee) whether or
     not in circumstances entitling that seller, manufacturer or lessee to
     terminate that agreement;

(b)  any purchase agreement for the Aircraft terminating prior to delivery of
     the Aircraft (other than because of any default of Lessor in the
     performance of its obligations under that agreement unless the default
     arises from any act or omission of Lessee);

(c)  any Excusable Delay; or

(d)  notification of any defect or non-conformity pursuant to Clause 4.5; Lessor
     delays in the delivery of, or fails to deliver, the Aircraft under this
     Agreement:-

     (i)   Lessor will not be responsible for any losses, including loss of
           profit, costs or expenses arising from or in connection with the
           delay or failure suffered or incurred by Lessee;

     (ii)  subject to Clause 4.5, Lessee will not be entitled to terminate this
           Agreement or to reject the Aircraft when tendered for delivery by
           Lessor, on the grounds of any such delay;

                                      26
<PAGE>
 
     (iii)  in the case of termination of a purchase agreement, Lessor may at
            any time after the termination terminate this Agreement; and

     (iv)   upon any such termination or termination pursuant to Clause 4.5
            neither Lessor nor Lessee will have any further obligation to the
            other under this Agreement other than as expressly set out in this
            Agreement, except that Lessor will repay to Lessee the Deposit and
            shall return the warrant certificate representing the Warrant.

4.4  Licenses: Lessee will at its expense obtain all licenses, permits and
     approvals which may be necessary to export the Aircraft from the Delivery
     Location. Lessor will furnish such data and information as may be
     reasonably requested by Lessee in connection with obtaining any such
     license, permit or approval.

4.5  Inspection: Prior to the Delivery Date, subject to any applicable purchase
     or lease agreement, Lessor will give Lessee an opportunity:-

(a)  to inspect the Aircraft at the Delivery Location; and

(b)  to assign up to 2 representatives to participate as observers in a
     demonstration flight to demonstrate the condition of the Aircraft.

     If Lessee notifies Lessor promptly prior to the Delivery Date of any defect
     or non-conformity with Schedule 1 observed during the inspection or
     demonstration flight, Lessor will correct or procure the correction of the
     defect or non-conformity as promptly as practicable (except to the extent
     otherwise agreed or to the extent in the opinion of Lessor it is
     impracticable or prohibitively expensive to do so). Subject to Clause 4.3,
     Lessor may postpone the Delivery Date in such a case to the date which
     Lessor notifies Lessee that the defect or non-conformity has been
     rectified. Lessee will be entitled to terminate this Agreement if Lessor
     notifies it that Lessor does not intend to correct the defect or non-
     conformity.

4.6  Indemnity: Lessee will indemnify and hold harmless the Indemnitees from and
     against all Claims (as defined in Clause 10) arising from death or injury
     to any observer or any employee of Lessee in connection with any
     demonstration flight or inspection of the Aircraft by Lessee.

5.   PAYMENTS

5.1  Deposit: Lessee shall pay to Lessor a Deposit in the amounts set forth in
     the definition of that term in Letter Agreement No. 1 and in accordance
     with the schedule set forth therein. So long as no Default or Event of
     Default then exists, Lessor shall refund to Lessee all Deposits then held
     by Lessor upon return and final acceptance of the Aircraft by Lessor on the
     Expiry Date or promptly after receipt of the Agreed Value after an Event of
     Loss.

5.2  Rental Periods: The Term will consist of consecutive whole or partial
     Rental Periods set forth in Letter Agreement No. 1. The first Rental Period
     will commence on the

                                      27
<PAGE>
 
     Delivery Date and each subsequent Rental Period will commence on the date
     succeeding the last day of the previous Rental Period. Each Rental Period
     will end on the date immediately preceding the calendar day in the next
     month numerically corresponding to the Delivery Date, except that:

(a)  if there is no such numerically corresponding day in that month, it will
     end on the last day of that month; and

(b)  if a Rental Period would otherwise overrun the Expiry Date, it will end on
     the Expiry Date.

5.3  Rent: Lessee will pay to Lessor or its order on each Rent Date, Rent in
     advance in the amount specified as "Rent" in Letter Agreement No. 1.
     Payment must be initiated adequately in advance of the Rent Date to ensure
     that Lessor receives credit for the payment on the Rent Date. If a Rental
     Period begins on a non-Business Day, the Rent payable in respect of that
     Rental Period shall be paid on the Business Day immediately preceding the
     date on which such Rental Period commences.

5.4  Maintenance Reserves:

(a)  Amount: Lessee will further pay to Lessor Maintenance Reserves in relation
     to each calendar month or portion thereof during the Term and for the last
     Rental Period of the Term no later than the 10th day following the end of
     such calendar month as follows:-

      (i)   in respect of the Airframe, the product of the Airframe Maintenance
            Reserve Rate specified in Letter Agreement No. 1 and the number of
            Flight Hours operated by the Aircraft during that calendar month
            ("Airframe Maintenance Reserves"); and

     (ii)   in respect of the life-limited Parts ("LLP") for each Engine, the
            product of the Life-Limited Parts Reserve Rate specified in Letter
            Agreement No. 1 and the number of Engine Flight Hours (or fraction
            thereof) operated by the Engine during that calendar month ("Engine
            LLP Refurbishment Reserves"); and

     (iii)  in respect of Engine Refurbishment for each Engine, the product of
            the Engine Refurbishment Reserve Rate specified in Letter Agreement
            No. 1 and the number of Engine Flight Hours (or fraction thereof)
            operated by the Engine during that calendar month ("Engine
            Refurbishment Reserves"); and

     (iv)   in respect of the Landing Gear, the product of the Landing Gear
            Reserve Rate specified in Letter Agreement No. 1 and the number of
            Flight Hours operated by the Landing Gear during that calendar month
            ("Landing Gear Maintenance Reserves").

(b)  Adjustment: Lessor may adjust the amount of Maintenance Reserves after the
     Delivery Date upon notice to Lessee not more frequently than annually
     utilizing the Escalation Adjustment set forth in Letter Agreement No. 1.
     The Engine Reserve Rate may be 

                                      28
<PAGE>
 
     further adjusted not more frequently than annually as provided in Section
     III of Letter Agreement No. 1.

5.5  Payments: All payments by Lessee to Lessor under this Agreement will be
     made for value on the due date in Dollars and in same day funds settled
     through the New York Clearing House System or such other funds as may for
     the time being be customary for the settlement in New York City of
     international payments in Dollars by telegraphic transfer to Bank of
     America, San Francisco, California, ABA No. 121-000-358, Account No. 14993-
     03400 or to such other account as Lessor may advise Lessee in writing.

5.6  Withholding: All payments by Lessee pursuant to the Operative Documents
     shall be free of all withholdings of any nature whatsoever except to the
     extent otherwise required by Law, and if any such withholding is so
     required, Lessee shall pay on an After-Tax Basis an additional amount such
     that after the deduction of all amounts required to be withheld, the net
     amount actually received by Lessor on an After-Tax Basis will equal the
     amount that Lessor would have received on an After-Tax Basis if such
     withholding had not been required; provided, however, that if Lessee pays
     any such additional amount to compensate for the withholding of any Lessor
     Tax, Lessor shall repay to Lessee within 30 days after receipt of Lessee's
     written request therefor (which request shall include a description in
     reasonable detail of the Lessor Tax involved and the calculation of the
     additional amount to be repaid) the amount of such additional amount to the
     extent attributable to any Lessor Tax.

5.7  General Tax Indemnity:

     General:

     (i)    Lessee will on demand pay and indemnify each Indemnitee against all
            Taxes (other than Lessor Taxes) levied or imposed against or upon or
            payable by such Indemnitee or Lessee and arising from, with respect
            to or in connection with the transactions pursuant to the Operative
            Documents (except for the Warrant and the side letter dated as of
            March 25, 1997 specifically relating thereto, but save in so far as
            any indemnity by Lessee in respect of Taxes is specifically provided
            for therein, including (but not limited to) all Taxes relating or
            attributable to Lessee, any Operative Document or the Aircraft
            directly or indirectly in connection with the importation,
            exportation, registration, ownership, leasing, sub-leasing,
            purchase, delivery, possession, use, operation, repair, maintenance,
            overhaul, transportation, landing, storage, presence or redelivery
            of the Aircraft or any part thereof or any rent, receipts, insurance
            proceeds, income or other amounts arising therefrom.

     (ii)   All Taxes indemnified pursuant to this Clause 5.7 shall be paid by
            Lessee directly to the appropriate taxing authority (to the extent
            permitted by applicable Law) at or before the time prescribed by
            applicable Law. After any payment by Lessee of any Tax directly to a
            taxing authority, Lessee shall furnish to Lessor, on request, a
            certified copy of a receipt for Lessee's payment

                                      29
<PAGE>
 
            of such Tax or such other evidence of payment of such Tax as is
            reasonably obtainable by Lessee and reasonably acceptable to Lessor.

     (iii)  Any amount payable by Lessee to an Indemnitee pursuant to Clause 5.7
            shall be paid within ten days after receipt of a written demand
            therefor from the relevant Indemnitee accompanied by a written
            statement describing in reasonable detail the basis for such
            indemnity and the computation of the amount so payable, provided
            that if an amount of any indemnified Tax is being contested in
            accordance with Clause 5.12 and Lessee shall have duly performed
            (and shall continue to perform) all its obligations under Clause
            5.12 with respect to such contest, then payment of the indemnity
            with respect to such Tax under Clause 5.12 shall , at Lessee's
            election, be deferred until the date the contest has been completed.

5.8. Sales and Use Taxes:

(a)  Lessee shall pay to Lessor (or, if permitted by applicable Law and if
     requested by Lessor, Lessee shall pay to the relevant tax authority for the
     account of Lessor), in addition to the amounts specified as "Rent" in
     Letter Agreement No. 1:

     (i)    all sales, use, rental, value added, goods and services and similar
            taxes ("Sales Taxes") required to be paid to the tax authority of
            the jurisdiction in which the Delivery Location is situated or to
            the jurisdiction in which the Aircraft is habitually based with
            respect to the lease of the Aircraft to Lessee pursuant to the
            Operative Documents unless Lessee delivers to Lessor on or prior to
            the Delivery Date such exemption certificate or other document as
            may be acceptable to Lessor to evidence Lessee's entitlement to
            exemption from all Sales Taxes imposed by such jurisdiction with
            respect to the lease of the Aircraft pursuant to the Operative
            Documents; and

     (ii)   all Sales Taxes required to be paid to the tax authority of any
            jurisdiction in which the Aircraft may be used, operated or
            otherwise located from time to time unless Lessee delivers to Lessor
            such exemption certificates or other documents as may be required by
            applicable Law to evidence Lessee's entitlement to exemption from
            all Sales Taxes imposed by each such jurisdiction with respect to
            the lease of the Aircraft pursuant to the Operative Documents.

(b)  Lessee will cooperate with Lessor in connection with the preparation and
     filing of any exemption application or similar document that is reasonably
     necessary or desirable under applicable Law to avoid the imposition of any
     Sales Taxes with respect to the transactions contemplated by the Operative
     Documents.

(c)  The specific obligations with respect to sales and use taxes set forth in
     this Clause 5.8 are in addition to, and are not in substitution for, the
     Lessee's obligation to indemnify for sales and use taxes pursuant to Clause
     5.7.

                                      30
<PAGE>
 
5.9  Information:

(a)  If Lessee is required by any applicable Law, or by any third party, to
     deliver any report or return in connection with any Taxes for which Lessee
     would be obligated to indemnify Lessor under the Operative Documents,
     Lessee will complete the same and, on request, supply a copy of the report
     or return to Lessor.

(b)  If any report, return or statement is required to be made by Lessor with
     respect to any Tax for which there is an indemnity obligation of Lessee
     under this Clause 5, Lessee will promptly notify Lessor of the requirement
     and:

     (i)  if permitted by applicable Law, make and timely file such report,
          return or statement (except for any report, return or statement that
          Lessor has notified Lessee that Lessor intends to prepare and file),
          prepare such return in such manner as will show the ownership of the
          Aircraft in Lessor if required or appropriate, and provide Lessor upon
          request a copy of each such report, return or statement filed by
          Lessee, or

     (ii) if Lessee is not permitted by applicable Law to file any such report,
          return or statement, Lessee will prepare and deliver to Lessor a
          proposed form of such report, return or statement within a reasonable
          time prior to the time such report, return or statement is to be
          filed.

     Lessee will provide such information and documents as Lessor may reasonably
     request to enable Lessor to comply with its tax filing, audit and
     litigation obligations.

5.10 Indemnity Payments to be Made on an After-Tax Basis: Lessee agrees that,
     with respect to any payment or indemnity pursuant to Clause 5.7 (Tax
     Indemnity), Clause 5.8 (Sales and Use Taxes) or Clause 10 (Indemnity) to or
     for the benefit of any Indemnitee, Lessee's indemnity obligations shall
     include such amount as may be necessary to hold such Indemnitee harmless on
     an After-Tax Basis from all Taxes required to be paid by such Indemnitee
     with respect to such payment or indemnity (including any payments pursuant
     to this Clause 5.10), determined based on the assumption that at the time
     each such payment or indemnity accrues to the relevant Indemnitee, such
     payment or indemnity will be subject to (i) United States Federal income
     tax at the highest marginal statutory tax rate applicable to corporations,
     (ii) United States state and local income taxes at the composite of the
     highest marginal statutory tax rates applicable to the Indemnitee and (iii)
     income taxes (if any) imposed by countries outside the United States at the
     actual rates imposed on the relevant Indemnitee.

5.11 Default Interest: If Lessee fails to pay any amount payable under this
     Agreement on the due date, Lessee will pay on demand from time to time to
     Lessor interest (both before and after judgment) on that amount, from the
     due date to the date of payment in full by Lessee to Lessor, at the
     Interest Rate specified in Letter Agreement No. 1; provided, however, that
     in no event shall such rate exceed the maximum permitted by Law. All such
     interest will be compounded monthly and calculated on the basis of the
     actual number of days elapsed in the month assuming a 30 day month and a
     360 day year.

                                      31
<PAGE>
 
5.12 Contest:

(a)  If an Indemnitee receives a written claim for any Tax for which Lessee
     would be required to pay an indemnity pursuant to Clause 5.7 or Clause 5.8,
     such Indemnitee shall notify Lessee promptly of such claim, provided that
     any failure to provide such notice will not relieve Lessee of any
     indemnification obligation pursuant to Clause 5.7 or Clause 5.8.  If
     requested by Lessee in writing promptly after receipt of such Indemnitee's
     notice, such Indemnitee shall, upon receipt of indemnity satisfactory to it
     and at the expense of Lessee (including, without limitation, all costs,
     expenses, legal and accountants' fees and disbursements, and penalties,
     interest and additions to tax incurred in contesting such claim) in good
     faith contest or (if permitted by applicable Law) permit Lessee to contest
     such claim by (i) resisting payment thereof if practicable and appropriate,
     (ii) not paying the same except under protest if protest is necessary and
     proper, or (iii) if payment is made, using reasonable efforts to obtain a
     refund of such Taxes in appropriate administrative and judicial
     proceedings.  Such Indemnitee shall determine the method of any contest
     conducted by such Indemnitee and (in good faith consultation with Lessee)
     control the conduct thereof.  Lessee shall determine the method of any
     contest conducted by Lessee and (in good faith consultation with such
     Indemnitee) control the conduct thereof.  Lessee shall pay in full all
     payments of Rent and other amounts payable pursuant to the Operative
     Documents, without reduction for or on account of any Tax, while such
     contest is continuing.  Such Indemnitee shall not be required to contest,
     or to continue to contest, a claim for Taxes under this Clause 5.12 if (x)
     such contest would result in a risk of criminal penalties or of a sale,
     forfeiture or loss of, or the imposition of a Lien (other than a Permitted
     Lien) on, the Aircraft, or (y) Lessee shall not have furnished an opinion
     of independent tax counsel selected by such Indemnitee and reasonably
     satisfactory to Lessee, that a reasonable basis exists for such contest, or
     (z) a Default or an Event of Default shall be continuing (unless Lessee
     shall have provided security reasonably satisfactory to such Indemnitee
     securing Lessee's performance of its obligations under this Clause 5).  If
     such Indemnitee contests any claim for Taxes by making a payment and
     seeking a refund thereof, then Lessee shall advance to such Indemnitee, on
     an interest-free basis, an amount equal to the Taxes to be paid by such
     Indemnitee in connection with the contest and shall indemnify such
     Indemnitee on an After-Tax Basis for any adverse tax consequences to such
     Indemnitee of such interest-free advance.  Upon the final determination of
     any contest pursuant to this Clause 5.12 in respect of any Taxes for which
     Lessee shall have made an advance to such Indemnitee in accordance with the
     immediately preceding sentence, the amount of Lessee's obligation shall be
     determined as if such advance had not been made; any indemnity obligation
     of Lessee to such Indemnitee under this Clause 5 and such Indemnitee's
     obligation to repay the advance will be satisfied first by setoff against
     each other, and any difference owing by either party shall be paid within
     ten days after such final determination.

(b)  If an Indemnitee obtains a refund of all or any part of any Taxes for which
     a full indemnity was paid by Lessee, such Indemnitee shall pay Lessee the
     amount of such refund, reduced by any Taxes imposed on such Indemnitee on
     receipt or accrual of such refund and increased by any Taxes saved by such
     Indemnitee by reason of the deductibility of such payment by such
     Indemnitee.  If, in addition to such refund, such

                                      32
<PAGE>
 
     Indemnitee receives an amount of interest on such refund, such Indemnitee
     shall pay to Lessee the portion of such interest which is fairly
     attributable to such refund, reduced by any Taxes imposed on such
     Indemnitee on receipt or accrual of such interest and increased by any
     Taxes saved by reason of the deductibility of such payment by such
     Indemnitee. Such Indemnitee shall not be required to make any payment to
     Lessee pursuant to this Clause 5.12 if, and for so long as, an Event of
     Default shall have occurred and be continuing.

(c)  Any Indemnitee in its sole discretion (by written notice to Lessee) may
     waive its rights to indemnification pursuant to Clause 5.7 with respect to
     any claim for any Tax and may refrain from contesting or continuing the
     contest of such claim, in which event Lessee shall have no obligation to
     indemnify such Indemnitee for the Taxes that are the subject of such claim.
     If an Indemnitee agrees to a settlement of any contest conducted pursuant
     to this Clause 5.11 without the prior written consent of Lessee, which
     consent shall not be unreasonably withheld, then Lessor shall be deemed to
     have waived its rights to the indemnification provided for in Clause 5.7
     with respect to the Tax liability accepted in such settlement.

5.13 Net Lease: This Agreement is a net lease. Lessee's obligations under this
     Agreement are absolute and unconditional irrespective of any contingency
     whatsoever including (but not limited to):-

(a)  any right of set-off, counterclaim, recoupment, defense or other right
     which either party to this Agreement may have against the other;

(b)  any unavailability of the Aircraft for any reason, including, but not
     limited to, a requisition of the Aircraft or any prohibition or
     interruption of or interference with or other restriction against Lessee's
     use, operation or possession of the Aircraft;

(c)  any lack or invalidity of title or any other defect in title,
     airworthiness, merchantability, fitness for any purpose, condition, design,
     or operation of any kind or nature of the Aircraft for any particular use
     or trade, or for registration or documentation under the laws of any
     relevant jurisdiction, or any Event of Loss in respect of or any damage to
     the Aircraft;

(d)  any insolvency, bankruptcy, reorganization, arrangement, readjustment of
     debt, dissolution, liquidation or similar proceedings by or against Lessor
     or Lessee;

(e)  any invalidity or unenforceability or lack of due authorization of, or
     other defect in, this Agreement;

(f)  and Security Interests with respect to the Aircraft or Taxes; and/or

(g)  any other cause which but for this provision would or might otherwise have
     the effect of terminating or in any way affecting any obligation of Lessee
     under this Agreement.

5.14 Security

                                      33
<PAGE>
 
(a)  To the fullest extent permitted by Law and by way of continuing security
     Lessee as sole beneficial owner charges the Deposit and the Maintenance
     Reserves and all rights of Lessee to payment thereof and the debt
     represented thereby (the "Charged Monies") to Lessor by way of first fixed
     charge as security for Lessee's obligations and liabilities under this
     Agreement and the Related Agreements (the "Secured Liabilities").  Except
     as expressly permitted under this Agreement, Lessee will not be entitled to
     payment of the Charged Monies.  Lessee will not assign, transfer or
     otherwise dispose of all or part of its rights in the Charged Monies and it
     will enter into any additional documents and instruments necessary or
     advisable to evidence, create or perfect Lessor's rights to the Charged
     Monies;

(b)  If Lessee fails to comply with any provision of this Agreement or any Event
     of Default has occurred and is continuing, in addition to all rights and
     remedies accorded to Lessor elsewhere in this Agreement and under Law as a
     secured party in respect of the Charged Monies, Lessor may immediately or
     at any time thereafter, without prior notice to Lessee:-

     (i) set-off all or any part of the Secured Liabilities against the
     liabilities of Lessor in respect of the Charged Monies; or

     (ii) apply or appropriate the Charged Monies in or towards the payment or
     discharge of the Secured Liabilities in such order as Lessor sees fit; and

(c)  If Lessor has exercised the set-off described in sub-clause (b) above,
     Lessee shall, following a demand in writing from Lessor, restore the
     Charged Monies to the level at which they stood immediately prior to such
     set-off.

 6.  MANUFACTURER'S WARRANTIES

6.1  Assignment: Notwithstanding this Agreement, Lessor will remain entitled to
     the benefit of each warranty, express or implied, with respect to the
     Aircraft, any Engine or Part so far as concerns any manufacturer, vendor,
     subcontractor or supplier. Except to the extent Lessor otherwise directs,
     Lessor hereby authorizes Lessee to pursue any claim thereunder in relation
     to defects affecting the Aircraft, any Engine or Part and Lessee agrees
     diligently to pursue any such claim which arises at its own cost. Lessee
     will notify Lessor promptly upon becoming aware of any such claim.

6.2  Proceeds: Except to the extent Lessor otherwise agrees in a particular
     case, all proceeds of any such claim will be paid directly to Lessor but if
     and to the extent that such claim relates:-

(a)  to defects affecting the Aircraft which Lessee has rectified; or

(b)  to compensation for loss of use of the Aircraft, an Engine or any Part
     during the Term; and

                                      34
<PAGE>
 
     provided no Default has occurred and is continuing the proceeds will be
     paid to Lessee by Lessor but in the case of (a) above only on receipt of
     evidence satisfactory to Lessor that Lessee has rectified the relevant
     defect.

6.3  Parts: Except to the extent Lessor otherwise agrees in a particular case,
     Lessee will procure that all engines, components, furnishings or equipment
     provided by the manufacturer, vendor, subcontractor or supplier in
     replacement of a defective Engine or Part pursuant to the terms of any
     warranty will be installed promptly by Lessee and that title thereto free
     of Security Interests vests in Lessor. On installation each part will be
     deemed to be a Part. In the case of a Replacement Engine, Lessee will
     satisfy and perform each of the conditions and covenants set forth in
     Clause 11.1(c), and upon satisfaction of such conditions, such Replacement
     Engine will be deemed an "Engine" for all purposes of this Agreement.

6.4  Agreement: To the extent any warranties relating to the Aircraft are made
     available under an agreement between any manufacturer, vendor,
     subcontractor or supplier and Lessee, this Clause 6 is subject to that
     agreement. However Lessee will:-

(a)  pay the proceeds of any claim thereunder to Lessor to be applied pursuant
     to Clause 6.2 and pending such payment will hold the claim and the proceeds
     on trust for Lessor; and

(b)  Lessee will take all such steps as are necessary at the end of the Term to
     ensure the benefit of any of those warranties which have not expired are
     vested in Lessor. 

7.   LESSOR'S COVENANTS

7.1  Quiet Enjoyment: Lessor will not interfere with the quiet use, possession
     and enjoyment of the Aircraft by Lessee but the exercise by Lessor of its
     rights under or in connection with this Agreement will not constitute such
     an interference. Lessor will procure at Lessee's request an undertaking of
     quiet enjoyment for the benefit of Lessee with respect to any prospective
     Lessor Lien.

7.2  Release of Maintenance Reserves: Provided no Default has occurred and is
     continuing Lessor will release funds to Lessee from the Maintenance
     Reserves respecting maintenance work performed upon submission by Lessee to
     Lessor within 6 months of the commencement of that maintenance and before
     the Expiry Date of an invoice and supporting documentation reasonably
     satisfactory to Lessor evidencing:-

(a)  with respect to the Airframe, the completion, in accordance with this
     Agreement, of those items of maintenance (excluding any repairs arising as
     the result of operational or maintenance mishandling) characterized by the
     Manufacturer's maintenance planning document and best industry practice as
     "D" Check and/or individual structural inspections having an interval of
     not less than 20,000 Flight Hours or 6 years for the Aircraft or any lesser
     interval for an equivalent major structural inspection if required by the
     Manufacturer's maintenance planning document subject to retroactive and
     prospective adjustment of the Reserve Rates as deemed appropriate by
     Lessor, the lesser of (i) the amount of that invoice and (ii) the amount
     equal to the aggregate amount of Airframe Maintenance Reserves paid under
     this Agreement at the time of 

                                      35
<PAGE>
 
     commencement of that maintenance less the aggregate amount previously
     released by Lessor under this sub-clause;

(b)  with respect to any Engine, the performance, in accordance with this
     Agreement, of all shop visits requiring engine disassembly (other than (i)
     repairs arising as a result of foreign object damage or operational or
     maintenance mishandling and/or (ii) removal, installation, maintenance and
     repair of Quick Engine Change ("QEC") kits), the lesser of (i) the amount
     of that invoice and (ii) the amount equal to the aggregate amount of Engine
     Refurbishment Reserves paid in respect of that Engine under this Agreement
     at the time of commencement of that maintenance less the aggregate amount
     previously paid in respect of that Engine by Lessor under this sub-clause;

(c)  with respect to life limited parts within any Engine, the performance, in
     accordance with this Agreement, of any such parts replacement (other than
     (i) replacement arising as a result of accidents or incidents (whether or
     not eligible for recovery under Lessee's insurance), foreign object damage
     or operational or maintenance mishandling and/or (ii) removal,
     installation, maintenance and repair of QEC kits) and/or (iii) any elective
     parts replacement), the lesser of (i) the amount of that invoice and (ii)
     the amount equal to the aggregate of Engine LLP Refurbishment Reserves paid
     in respect of that Engine under this Agreement at the time of commencement
     of that maintenance less the aggregate amount previously paid in respect of
     that Engine by Lessor under this sub-clause; and

(d)  with respect to the Landing Gear, the performance in accordance with this
     Agreement, of all work on the landing gear in the nature of overhaul and
     requiring removal and disassembly (other than repairs arising as the result
     of operational or maintenance mishandling), the lesser of (i) the amount of
     that invoice and (ii) the amount equal to the aggregate amount of Landing
     Gear Maintenance Reserves paid under this Agreement at the time of
     commencement of that maintenance less the aggregate amount previously paid
     by Lessor under this sub-clause.

7.3  Lessor Obligations Following Expiry Date: Within 5 Business Days of:-

(a)  redelivery of the Aircraft to Lessor in accordance with and in the
     condition required by this Agreement; or

(b)  payment to Lessor of the Agreed Value following an Event of Loss after the
     Delivery Date;

     or in each case such later time as Lessor is reasonably satisfied Lessee
     has irrevocably paid to Lessor all amounts which may then be outstanding or
     become payable under this Agreement, the other Operative Documents or the
     Related Agreements and Lessee, Lessor will pay to Lessee:-

     (i)  the balance of the Deposit; and

     (ii) the amount of any Rent received in respect of any period falling after
     the date of redelivery of the Aircraft or payment of the Agreed Value, as
     the case may

                                      36
<PAGE>
 
         be; and shall return to Lessee the warrant certificate, if not
         previously exercised, representing the Warrant.

8.   LESSEE'S COVENANTS

8.1  Duration: The undertakings in this Clause and in Clause 12 will:-

(a)  except as otherwise stated, be performed at the expense of Lessee; and

(b)  remain in force until the Expiry Date in accordance with this Agreement and
     thereafter to the extent of any accrued rights of Lessor in relation to
     those undertakings.

8.2  Information: Lessee will:-

(a)  notify Lessor forthwith of the occurrence of any Default or any other event
     which might adversely affect Lessee's ability to perform any of its
     obligations under this Agreement;

(b)  furnish to Lessor:-

     (i)   upon request, the consolidated management accounts of Lessee
           (comprising a balance sheet and profit and loss statement) prepared
           for the most recent previous financial quarter;

     (ii)  as soon as available but not in any event later than 120 days after
           the last day of each financial year of Lessee, its audited
           consolidated balance sheet as of such day and its audited
           consolidated profit and loss statement for the year ending on such
           day;

     (iii) at the same time as it is issued to the shareholders or creditors of
           Lessee, a copy of each notice or circular issued to Lessee's
           shareholders or creditors as a group; and

     (iv)  on request from time to time such other information regarding Lessee
           and its business and affairs as Lessor may reasonably request;

(c)  keep Lessor informed as to current serial numbers of the Engines and any
     engine installed on the Aircraft;

(d)  promptly furnish to Lessor all information Lessor from time to time
     reasonably requests regarding the Aircraft, any Engine or any Part, its
     use, location and condition including, without limitation, the hours
     available on the Aircraft and any Engine until the next scheduled check,
     inspection, overhaul, refurbishment or shop visit, as the case may be;

(e)  on request, within 10 days after the end of any Rental Period, furnish to
     Lessor evidence satisfactory to Lessor of payment of all Taxes due during
     that or any previous Rental Period;

(f)  on request, furnish to Lessor evidence satisfactory to Lessor that all
     Taxes and charges incurred by Lessee with respect to the Aircraft,
     including without limitation all 

                                      37
<PAGE>
 
     payments due to the relevant air traffic control authorities, have been
     paid and discharged in full;

(g)  within 7 days after the end of each calendar month during the Term, provide
     Lessor with a monthly report on the Aircraft and each Engine in the form
     set out in Schedule 8 hereto;

(h)  give Lessor not less than 60 days' written notice as to the time and
     location of all Major Checks; and

(i)  promptly notify Lessor of:-

     (i)  any loss, theft, damage or destruction to the Aircraft, any Engine or
          any Part, or any modification to the Aircraft if the potential cost
          may exceed the Damage Notification Threshold; and

     (ii) any claim or other occurrence likely to give rise to a claim under the
          Insurances (but in the case of hull claims only in excess of the
          Damage Notification Threshold) and details of any negotiations with
          the insurance brokers over any such claim.

8.3  Lawful and Safe Operation: Lessee will:-

(a)  comply with the law for the time being in force in any country or
     jurisdiction which may for the time being be applicable to the Aircraft
     (including without limitation Laws mandating insurance coverage) or, so far
     as concerns the use and operation of the Aircraft or an owner or operator
     thereof and take all reasonable steps to ensure that the Aircraft is not
     used for any illegal purpose;

(b)  not use the Aircraft in any manner contrary to any recommendation of the
     manufacturers of the Aircraft, any Engine or any Part or any recommendation
     or regulation of the Air Authority or for any purpose for which the
     Aircraft is not designed or reasonably suitable;

(c)  ensure that the crew and engineers employed by it in connection with the
     operation and maintenance of the Aircraft have the qualifications and hold
     the licenses required by the Air Authority and applicable Law;

(d)  use the Aircraft solely in commercial or other operations for which Lessee
     is duly authorized by the Air Authority and applicable Law;

(e)  not use the Aircraft for the carriage of:-

     (i)  whole animals living or dead except in the cargo compartments
          according to I.A.T.A. regulations, and except domestic pet animals
          carried in a suitable container to prevent the escape of any liquid
          and to ensure the welfare of the animal;

                                      38
<PAGE>
 
     (ii)   acids, toxic chemicals, other corrosive materials, explosives,
            nuclear fuels, nuclear wastes, or any nuclear assemblies or
            components, except as permitted for passenger aircraft under the
            "Restriction of Goods" schedule issued by I.A.T.A. from time to time
            and provided that all the requirements for packaging or otherwise
            contained therein are fulfilled;

     (iii)  any other goods, materials or items of cargo which could reasonably
            be expected to cause damage to the Aircraft and which would not be
            adequately covered by the Insurances; or

     (iv)   any illegal item or substance;

(f)  not utilize the Aircraft for purposes of training, qualifying or re-
     confirming the status of cockpit personnel except for the benefit of
     Lessee's cockpit personnel, and then only if the use of the Aircraft for
     such purpose is not disproportionate to the use for such purpose of other
     aircraft of the same type operated by Lessee;

(g)  not cause or permit the Aircraft to proceed to, or remain at, any location
     which is for the time being the subject of a prohibition order (or any
     similar order or directive) by:-

     (i)    any Government Entity of the State of Registration or the Habitual
            Base; or

     (ii)   any Government Entity of the country in which such location is
            situated; or

     (iii)  any Government Entity having jurisdiction over Lessor or the
            Aircraft;

(h)  obtain and maintain in full force all certificates, licenses, permits and
     authorizations required for the use and operation of the Aircraft for the
     time being, and for the making of payments required by, and the compliance
     by Lessee with its other obligations under, this Agreement;

(i)  not operate the Aircraft, or suffer or permit the Aircraft to operate, to
     or for any country or entity that is the subject of sanctions under the
     U.S. International Economic Emergency Powers Act or U.N. Security Council
     directives (presently Iraq, Iran, Libya, the Bosnia-Serb controlled areas
     of the Republic of Bosnia and Herzegovina and the Unita Rebels of Angola).
     Lessee also covenants and agrees (i) not to operate or locate, or suffer or
     permit to be operated or located, the Aircraft in any country restricted
     under the U.S. Trading with the Enemy Act and the U.S. Export
     Administration Act except as may be permitted by operating in accordance
     with the conditions specified by the U.S. Export Administration Regulations
     (15 CFR Parts 730-799), General License GATS (15 CFR Part 771.19)
     (presently Cuba, Iran, North Korea, Sudan, and Syria), and (ii) not to
     operate the Aircraft between Cuba and the United States; and

(j)  not use, operate, or locate the Aircraft, or cause suffer or permit the
     Aircraft to be used, operated or located during the Term in any manner not
     covered by the Insurances or in any area excluded from coverage by the
     Insurances or in any manner which would prejudice the interests of the
     Indemnitees in the Insurances, the Aircraft, any Engine or any Part.


                                      39
<PAGE>
 
8.4  Taxes and other Outgoings: Lessee will promptly pay:-

(a)  all license and registration fees, Taxes (other than Lessor Taxes) and
     other amounts of any nature imposed by any Government Entity with respect
     to the Aircraft, including without limitation the purchase, ownership,
     delivery, leasing, possession, use, operation, return, sale or other
     disposition of the Aircraft; and

(b)  all rent, fees, charges, Taxes (other than Lessor Taxes) and other amounts
     in respect of any premises where the Aircraft or any Part thereof is
     located from time to time;

     except to the extent that in the reasonable opinion of Lessor such payment
     is being contested in good faith by appropriate proceedings, in respect of
     which adequate resources have been provided by Lessee and non-payment of
     which does not give rise to any material likelihood of the Aircraft or any
     interest therein being sold, forfeited or otherwise lost or of criminal
     liability on the part of Lessor.

8.5  Sub-Leasing and Wet-Leasing: LESSEE WILL NOT, WITHOUT THE PRIOR WRITTEN
     CONSENT OF LESSOR, SUB-LEASE, WET LEASE OR PART WITH POSSESSION OF THE
     AIRCRAFT, THE ENGINES OR ANY PART EXCEPT THAT LESSEE MAY PART WITH
     POSSESSION (A) WITH RESPECT TO THE AIRCRAFT, THE ENGINES OR ANY PART TO THE
     RELEVANT MANUFACTURERS FOR TESTING OR SIMILAR PURPOSES OR TO THE
     MAINTENANCE PERFORMER FOR SERVICE, REPAIR, MAINTENANCE OR OVERHAUL WORK, OR
     ALTERATION, MODIFICATIONS OR ADDITIONS TO THE EXTENT REQUIRED OR PERMITTED
     BY THIS AGREEMENT, AND (B) WITH RESPECT TO AN ENGINE OR PART, AS EXPRESSLY
     PERMITTED BY THIS AGREEMENT. LESSEE MAY ENTER INTO A WET LEASE FOR THE
     AIRCRAFT, THE ENGINES OR ANY PART FOR A TERM NOT TO CONTINUE BEYOND THE
     TERM, ON TERMS CUSTOMARY IN THE INDUSTRY FOR WET LEASES OF SUCH DURATION;
     PROVIDED, HOWEVER, THAT LESSEE SHALL REMAIN PRIMARILY LIABLE FOR THE
     PERFORMANCE OF ALL OF THE TERMS OF THIS AGREEMENT (INCLUDING WITHOUT
     LIMITATION, ITS OBLIGATIONS UNDER CLAUSES 8 AND 9) TO THE SAME EXTENT AS IF
     SUCH WET LEASE HAD NOT BEEN ENTERED INTO AND PROVIDED, FURTHER, THAT NO
     SUCH WET LEASE INVOLVES OR RELATES TO A CONTRACT OR AN OPERATION PROHIBITED
     UNDER CLAUSE 2.1(H) HEREOF.

8.6  Inspection:

(a)  Lessor and any person designated by Lessor may at any time visit, inspect
     and survey the Aircraft, any Engine or any Part and for such purpose may,
     subject to any applicable Air Authority regulation, travel on the flight
     deck as observer;

(b)  Lessee will pay to Lessor on an After-Tax Basis on demand all reasonable
     out-of-pocket expenses incurred by Lessor in connection with any such
     visit, inspection or survey; and

(c)  Lessor will:-

                                      40
<PAGE>
 
     (i)  have no duty or liability to make, or arising out of making or failing
          to make, any such visit, inspection or survey; and

     (ii) so long as no Default has occurred and is continuing, not exercise
          such right other than on reasonable notice and so as not to disrupt
          unreasonably the commercial operations of Lessee, provided, however,
          Lessee will take such action as may be reasonably required to
          facilitate Lessor's inspection.

                                      41
<PAGE>
 
8.7  Title: Lessee will:-

(a)  not do or knowingly permit to be done or omit or knowingly permit to be
     omitted to be done any act or thing which might reasonably be expected to
     jeopardize the rights of Lessor as owner of the Aircraft;

(b)  on all occasions when the ownership of the Aircraft, any Engine or any Part
     is relevant, make clear to third parties that title is held by Lessor;

(c)  not at any time (i) represent or hold out Lessor, GECASI or GACASL as
     carrying goods or passengers on the Aircraft or as being in any way
     connected or associated with any operation or carriage (whether for hire or
     reward or gratuitously) which may be undertaken by Lessee or (ii) pledge
     the credit of Lessor;

(d)  ensure that there is always affixed, and not removed or in any way
     obscured, a fireproof plate (having dimensions of not less than 10 cm. x 7
     cm.) in a reasonably prominent position in the cockpit of the Aircraft and
     on each Engine stating:-

     "This Aircraft/Engine is owned by General Electric Capital Corporation and
     is leased to Frontier Airlines, Inc. and may not be operated by any other
     person without the prior written consent of General Electric Capital
     Corporation";

(e)  not create or permit to exist any Security Interest upon the Aircraft, any
     Engine or any Part;

(f)  not do or permit to be done anything which may reasonably be expected to
     expose the Aircraft, any Engine or any Part to penalty, forfeiture,
     impounding, detention, appropriation, damage or destruction and without
     prejudice to the foregoing, if any such penalty, forfeiture, impounding,
     detention or appropriation, damage or destruction occurs, give Lessor
     notice and use best endeavors to procure the immediate release of the
     Aircraft, any Engine or the Part, as the case may be;

(g)  not abandon the Aircraft, the Engine or any Part;

(h)  pay and discharge or cause to be paid and discharged when due and payable
     or make adequate provision by way of security or otherwise for all debts,
     damages, claims and liabilities which have given or might give rise to a
     Security Interest over or affecting the Aircraft, any Engine or any Part;
     and

(i)  not attempt, or hold itself out as having any power, to sell, lease or
     otherwise dispose of the Aircraft, any Engine or any Part; and

(j)  obtain a waiver of any mechanic's lien or right thereto from any vendor
     providing maintenance services for Lessee prior to delivering the Aircraft
     or any Engine or Part to such vendor.

                                      42
<PAGE>
 
8.8  General: Lessee will:-

(a)  not make any substantial change in the nature of the business in which it
     is engaged, will preserve its corporate existence (other than in connection
     with a solvent reconstruction the terms of which have been approved by
     Lessor, such approval not to be unreasonably withheld), and will conduct
     its business in an orderly and efficient and will maintain all rights,
     privileges, licenses and franchises material thereto or material to
     performing its obligations under this Agreement;

(b)  ensure that no change will occur in the Habitual Base of the Aircraft
     without the prior written consent of Lessor;

(c)  not without giving Lessor 30 days prior notice (in accordance with this
     Agreement), change its chief executive office (as such term is defined in
     Article 9 of the Uniform Commercial Code as in effect in the State of
     Colorado) from 12015 East 46th Avenue, Denver, Colorado, 80239, United
     States of America;

(d)  remain a Certified Air Carrier and maintain, without limitation, its status
     so as to fall within the preview of Section 1110 of Title 11 of the United
     States Code or any analogous Statute; and

(e)  remain a "citizen of the United States" as defined in Section 40102 of
     Title 49 of the United States Code.

8.9  Records: Lessee will:-

(a)  procure that accurate, complete and current records of all flights made by,
     and all maintenance carried out on, the Aircraft (including in relation to
     each Engine and Part subsequently installed, before the installation) are
     kept; keep the records in such manner as the Air Authority may from time to
     time require.  All records must be maintained in English.  The records will
     form part of the Aircraft Documents; and

(b)  maintain, with appropriate revisions in English, all Aircraft Documents,
     records, logs, and other materials required by applicable Laws and best
     practice of major international air transport operators in respect of the
     Aircraft.

8.10 Protection: Lessee will:-

(a)  maintain the registration of the Aircraft with the Air Authority reflecting
     (so far as permitted by applicable Law) the interest of Lessor and not do
     or suffer to be done anything which might adversely affect that
     registration; and

(b)  do all acts and things (including, without limitation, making any filing or
     registration with the Air Authority or any other Government Entity or as
     required to comply with the Mortgage Convention where applicable) and
     execute and deliver all documents (including, without limitation, any
     amendment of this Agreement) as may be required by Lessor:-

                                      43
<PAGE>
 
     (i)    following any change or proposed change in the ownership or
            financing of the Aircraft; or

     (ii)   following any modification of the Aircraft, any Engine or any Part
            or the permanent replacement of any Engine or Part in accordance
            with this Agreement, so as to ensure that the rights of Lessor under
            this Agreement apply with the same effect as before; or

     (iii)  to establish, maintain, preserve, perfect and protect the rights of
            Lessor under this Agreement and the interest of Lessor in the
            Aircraft.

8.11 Maintenance and Repair: Lessee will:-

(a)  keep the Aircraft airworthy in all respects and in good repair and
     condition;

(b)  not change the Maintenance Performer without providing the Lessor with
     prior written notice;

(c)  not materially change the Lessee's Maintenance Program or the schedule of
     the Lessee's Maintenance Program without the prior written consent of
     Lessor;

(d)  maintain the Aircraft in accordance with Lessee's Maintenance Program
     through the Maintenance Performer and perform (at the respective intervals
     provided in Lessee's Maintenance Program) all Major Checks;

(e)  maintain the Aircraft in accordance with the standard of maintenance
     required by FAR Part 121, Subpart L and any other rules and regulations of
     the FAA and in at least the same manner and with at least the same care,
     including, without limitation, maintenance scheduling, modification status
     and technical condition, as is the case with respect to similar aircraft
     owned or otherwise operated by Lessee and as if Lessee were to retain and
     continue operating the Aircraft in its fleet after the Expiry Date,
     including, without limitation, all maintenance to the Airframe, any Engine
     or any Part required to maintain all warranties, performance guarantees or
     service life policies in full force and effect except to the extent of
     conflict with the rules and regulations of the Air Authority;

(f)  subject to Letter Agreement No. 1, comply with all outstanding (i.e. at or
     prior to the Expiry Date) mandatory inspection and modification
     requirements, airworthiness directives and similar requirements applicable
     to the Aircraft, any Engine or Part having a compliance date during the
     Term or within 180 days after the Expiry Date and which are required by the
     Air Authority and/or mandated by any manufacturer of the Aircraft, any
     Engine or Part (an "Airworthiness Directive);

(g)  comply with all applicable Laws and the regulations of the Air Authority
     and other aviation authorities with jurisdiction over Lessee or the
     Aircraft, any Engine or Part regardless of upon whom such requirements are
     imposed and which relate to the maintenance, condition, use or operation of
     the Aircraft or require any modification or alteration to the Aircraft, any
     Engine or Part;

                                      44
<PAGE>
 
(h)  maintain in good standing a current certificate of airworthiness (in the
     appropriate category for the nature of the operations of the Aircraft) for
     the Aircraft issued by the Air Authority except where the Aircraft is
     undergoing maintenance, modification or repair required or permitted by
     this Agreement and will from time to time provide to Lessor a copy on
     request;

(i)  if required by the Air Authority, maintain a current certification as to
     maintenance issued by or on behalf of the Air Authority in respect of the
     Aircraft and will from time to time provide to Lessor a copy on request;
     and

(j)  procure promptly the replacement of any Engine or Part which has become
     time, cycle or calendar expired, lost, stolen, seized, confiscated,
     destroyed, damaged beyond repair, unserviceable or permanently rendered
     unfit for use, with an engine or part complying with the conditions set out
     in Clause 8.13(a) and in the case of any Engine which suffers an Engine
     Event of Loss, shall procure that such engine complies with the provisions
     of Clause 11.1(c).

8.12 Removal of Engines and Parts: Lessee will ensure that no Engine or Part
     installed on the Aircraft is at any time removed from the Aircraft other
     than:-

(a)  if replaced as expressly permitted by this Agreement; or

(b)  if the removal is of an obsolete item and is in accordance with Lessee's
     Maintenance Program; or

(c)  (i)    during the course of maintaining, servicing, repairing, overhauling
            or testing that Engine or the Aircraft, as the case may be; or

     (ii)   as part of a normal engine or part rotation program; or

     (iii)  for the purpose of making such modifications to the Engine or the
            Aircraft, as the case may be, as are permitted under this Agreement;

     and then in each case (A) with respect to a Part, only if it is reinstalled
     or replaced by a part complying with Clause 8.13(a) as soon as practicable
     and in any event no later than the Expiry Date, and (B) with respect to an
     Engine, title to such Engine shall remain vested in Lessor.

8.13 Installation of Engines and Parts: Lessee will:-

(a)  ensure that, except as permitted by this Agreement, no engine or part is
     installed on the Aircraft unless:-

     (i)    in the case of an engine, it is an engine of the same model as, or
            an improved or advanced version of the Engine it replaces, which is
            in the same or better operating condition, has substantially similar
            hours available until the next scheduled checks, inspections,
            overhauls and shop visits and has the same or greater value and
            utility as the replaced Engine;

                                      45
<PAGE>
 
     (ii)   in the case of a part, it is in as good operating condition, has
            substantially similar hours available until the next scheduled
            checks, inspections, overhauls and shop visits, is of the same or a
            more advanced make and model and is of the same interchangeable
            modification status as the replaced Part;

     (iii)  in the case of a part, it has become and remains the property of
            Owner free from Security Interests and on installation on the
            Aircraft will without further act be subject to the Head Lease and
            this Agreement; and

     (iv)   in each case, Lessee has full details as to its source and
            maintenance records;

(b)  if no Default has occurred which is continuing, be entitled to install any
     engine or part on the Aircraft by way of replacement notwithstanding Clause
     8.13(a) if:-

     (i)    there is not available to Lessee at the time and in the place that
            that engine or part is required to be installed on the Aircraft, a
            replacement engine or, as the case may be, part complying with the
            requirements of Clause 8.13(a);

     (ii)   it would result in an unreasonable disruption of the operation of
            the Aircraft and/or the business of Lessee to ground the Aircraft
            until an engine or part, as the case may be, complying with Clause
            8.13(a) becomes available for installation on the Aircraft; and

     (iii)  as soon as practicable after installation of the same on the
            Aircraft but, in any event, no later than the Expiry Date, Lessee
            removes any such engine or part and replaces it with the Engine or
            Part replaced by it or by an engine or part, as the case may be,
            complying with Clause 8.13(a).

8.14 Non-Installed Engines and Parts: Lessee will:-

(a)  ensure that any Engine or Part which is not installed on the Aircraft (or
     any other aircraft as permitted by this Agreement) is, except as expressly
     permitted by this Agreement, properly and safely stored, and kept free from
     Security Interests;

(b)  notify Lessor whenever any Engine is removed from the Aircraft and, from
     time to time, on request procure that any person to whom possession of an
     Engine is given acknowledges in writing to Lessor, in form and substance
     satisfactory to Lessor, that it will respect the interest of  Lessor in the
     Engine and will not seek to exercise any rights whatsoever in relation to
     it;

(c)  (notwithstanding the foregoing provisions of this sub-clause), be
     permitted, if no Default has occurred and is continuing, to install any
     Engine or Part on an aircraft, or in the case of a Part on an engine:-

     (i)    owned and operated by Lessee free from Security Interests;  or

     (ii)   leased or hired to Lessee pursuant to a lease or conditional sale
            agreement on a long-term basis and on terms whereby Lessee has full
            operational control of that aircraft or engine; or

                                      46
<PAGE>
 
     (iii)  acquired by Lessee and/or financed or refinanced, and operated by
            Lessee, on terms that ownership of that aircraft or engine, as the
            case may be, pursuant to a lease or conditional sale agreement, or a
            Security Interest therein, is vested in or held by any other Person;

     provided that in the case of (ii) and (iii):-

     (1)    the terms of any such lease, conditional sale agreement or Security
            Interest will not have the effect of prejudicing the interest of
            Lessor in that Engine or Part; and

     (2)    the lessor under such lease, the seller under such conditional sale
            agreement or the holder of such Security Interest, as the case may
            be, has confirmed and acknowledged in writing to Lessor, in form and
            substance satisfactory to Lessor, that it will respect the interest
            of Lessor in respect of that Engine or Part and that it will not
            seek to exercise any rights whatsoever in relation thereto.

8.15 Pooling of Engines and Parts: Lessee will not enter into nor permit any
     pooling agreement or arrangement in respect of an Engine or Part without
     the prior written consent of Lessor.

8.16 Equipment Changes:

(a)  Lessee will not make any modification or addition to the Aircraft (each an
     "Equipment Change"), except for an Equipment Change which:-

     (i)    is expressly permitted by this Agreement, or

     (ii)   has the prior written approval of Lessor and which does not diminish
            the value, utility, condition, or airworthiness of the Aircraft;

(b)  So long as a Default has not occurred and is continuing, Lessee may remove
     any Equipment Change if it can be removed from the Aircraft without
     diminishing or impairing the value, utility, condition or airworthiness of
     the Aircraft; and

(c)  Lessee shall indemnify Lessor on an After-Tax Basis for any and all Taxes
     payable by Lessor as the case may be, as a result of an Equipment Change.

8.17 Title on an Equipment Change:

(a)  Title to all Parts installed on the Aircraft whether by way of replacement,
     as the result of an Equipment Change or otherwise (except those installed
     pursuant to Clause 8.13(b)) will on installation, without further act, vest
     in Lessor subject to this Agreement free and clear of all Security
     Interests. Lessee will at its own expense take all such steps and execute,
     and procure the execution of, all such instruments as Lessor may require
     and which are necessary to ensure that title so passes  to Lessor according
     to all applicable Laws.  At any time when requested by Lessor, Lessee will
     provide evidence to Lessor's 

                                      47
<PAGE>
 
     satisfaction (including the provision, if required, to Lessor of one or
     more legal opinions) that title has so passed to Lessor;

(b)  Lessor may require Lessee to remove any Equipment Change and to restore the
     Aircraft to its condition prior to that Equipment Change; and

(c)  Except as referred to in Clause 8.17(b) any Engine or Part at any time
     removed from the Aircraft will remain the property of Owner until a
     replacement has been made in accordance with this Agreement and until title
     in that replacement has passed, according to applicable Laws, to Lessor
     subject to this Agreement and free of all Security Interests.  Upon title
     to such replacement so passing to Lessor, title to the replaced Engine or
     Part, will, provided no Default has occurred and is continuing, pass to
     Lessee.

8.18 Third Party: Lessee will procure that no person (other than Lessor) will
     act in any manner inconsistent with its obligations under this Agreement
     and that all persons will comply with those obligations as if references to
     "Lessee" included a separate reference to those persons.

9.   INSURANCE

9.1  Insurances: Lessee will maintain in full force during the Term, and
     thereafter as expressly required in this Agreement, insurances in respect
     of the Aircraft in form and substance satisfactory to Lessor (the
     "Insurances" which expression includes, where the context so admits, any
     relevant re-insurance(s)) through such brokers and with such insurers and
     having such deductibles and being subject to such exclusions as may be
     approved by Lessor from time to time. The Insurances will be effected
     either:-

(a)  on a direct basis with insurers of recognized standing who normally
     participate in aviation insurances in the leading international insurance
     markets and led by reputable underwriter(s) approved by Lessor; or

(b)  with a single insurer or group of insurers approved by Lessor who does not
     retain the risk but effects substantial reinsurance with reinsurers in the
     leading international insurance markets and through brokers each of
     recognized standing and acceptable to Lessor for a percentage acceptable to
     Lessor of all risks insured (the "Reinsurances").

9.2  Requirements: Lessor's current requirements as to required Insurances are
     as specified in this Clause and in Schedule 4. Lessor may from time to time
     stipulate other requirements for the Insurances so that the scope and level
     of cover is maintained in line with best industry practice and the
     interests of Lessor protected.

9.3  Change: If at any time Lessor wishes to revoke its approval of any insurer,
     reinsurer, insurance or reinsurance, Lessor and/or its brokers will consult
     with Lessee and Lessee's brokers (as for the time being approved by Lessor)
     regarding whether that approval should be revoked to protect the interests
     of the parties insured. If, following the consultation, Lessor considers
     that any change should be made, Lessee will then arrange or procure the
     arrangement of alternative cover satisfactory to Lessor.

                                      48
<PAGE>
 
9.4  Insurance Covenants: Lessee will:-

(a)  ensure that all legal requirements as to insurance of the Aircraft, any
     Engine or any Part which may from time to time be imposed by the laws of
     the State of Registration or any state to, from or over which the Aircraft
     may be flown, in so far as they affect or concern the operation of the
     Aircraft, are complied with and in particular those requirements compliance
     with which is necessary to ensure that (i) the Aircraft is not in danger of
     detention or forfeiture, (ii) the Insurances remain valid and in full force
     and effect, and (iii) the interests of the Indemnitees in the Insurances
     and the Aircraft or any Part are not thereby prejudiced;

(b)  not use, cause or permit the Aircraft, any Engine or any Part to be used
     for any purpose or in any manner not covered by the Insurances or outside
     any geographical limit imposed by the Insurances;

(c)  comply with the terms and conditions of each policy of the Insurances and
     not do, consent or agree to any act or omission which:-

     (i)    invalidates or may invalidate the Insurances; or

     (ii)   renders or may render void or voidable the whole or any part of any
            of the Insurances; or

     (iii)  brings any particular liability within the scope of an exclusion or
            exception to the Insurances;

(d)  not take out without the prior written approval of Lessor any insurance or
     reinsurance in respect of the Aircraft other than those required under this
     Agreement unless relating solely to hull total loss, business interruption,
     profit commission and deductible risk;

(e)  commence renewal procedures at least 30 days prior to expiry of any of the
     Insurances and provide to Lessor:-

     (i)    if requested by Lessor, a written status report of renewal
            negotiation 14 days prior to each expiry date;

     (ii)   telexed telecopy confirmation of completion of renewal prior to each
            expiry date; and

     (iii)  certificates of insurance (and where appropriate certificates of
            reinsurance), and broker's (and any reinsurance brokers') letter of
            undertaking in a form acceptable to Lessor in English, detailing the
            coverage and confirming the insurers' (and any reinsurers')
            agreement to the specified insurance requirements of this Agreement
            within 7 days after each renewal date;

(f)  on request, provide to Lessor copies of documents or other information
     evidencing the Insurances;

(g)  on request, provide to Lessor evidence that the Insurance premiums have
     been paid;

                                      49
<PAGE>
 
(h)  not make any modification or alteration to the Insurances material and
     adverse to the interests of any of the Indemnitees;

(i)  be responsible for any deductible under the Insurances; and

(j)  provide any other insurance and reinsurance related information, or
     assistance, in respect of the Insurances as Lessor may reasonably require.

9.5  Failure to Insure: If Lessee fails to maintain the Insurances in compliance
     with this Agreement, each of the Indemnitees will be entitled but not
     bound, (without prejudice to any other rights of Lessor under this
     Agreement):-

(a)  to pay the premiums due or to effect and maintain insurances satisfactory
     to it or otherwise remedy Lessee's failure in such manner (including,
     without limitation to effect and maintain an "owner's interest" policy) as
     it considers appropriate. Any sums so expended by it will become
     immediately due and payable by Lessee to Lessor on an After-Tax Basis
     together with interest thereon at the rate specified in Clause 5.11, from
     the date of expenditure by it up to the date of reimbursement by Lessee;
     and

(b)  at any time while such failure is continuing to require the Aircraft to
     remain at any airport or to proceed to and remain at any airport designated
     by it until the failure is remedied to its satisfaction.

9.6  Continuing Indemnity: Lessee shall effect and maintain insurance after the
     Expiry Date with respect to its liability under the Indemnity in Clause 10
     for 2 years which provides for each Indemnitee to be named as additional
     insured. Lessee's obligation in this Clause shall not be affected by Lessee
     ceasing to be lessee of the Aircraft and/or any of the Indemnitees ceasing
     to have any interest in respect of the Aircraft.

9.7  Application of Insurance Proceeds:-

     As between Lessor and Lessee:-

(a)  all insurance payments received as the result of an Event of Loss or Engine
     Event of Loss occurring during the Term will be paid to Lessor and Lessor
     will pay the balance of those amounts to Lessee after deduction of all
     amounts which may be or become payable by Lessee to Lessor under this
     Agreement (including under Clause 11.1(b));

(b)  all insurance proceeds of any property, damage or loss to the Aircraft, any
     Engine or any Part occurring during the Term not constituting an Event of
     Loss or Engine Event of Loss and in excess of the Damage Notification
     Threshold will be applied in payment (or to reimburse Lessee) for repairs
     or replacement property upon Lessor being satisfied that the repairs or
     replacement have been effected in accordance with this Agreement. Insurance
     proceeds in amounts below the Damage Notification Threshold may be paid by
     the insurer directly to Lessee. Any balance remaining may be retained by
     Lessor;

(c)  all insurance proceeds in respect of third party liability will, except to
     the extent paid by the insurers to the relevant third party, be paid to
     Lessor to be paid directly in 

                                      50
<PAGE>
 
     satisfaction of the relevant liability or to Lessee in reimbursement of any
     payment so made; and

(d)  notwithstanding Clauses 9.7(a), (b) or (c), if at the time of the payment
     of any such insurance proceeds a Default has occurred and is continuing,
     all such proceeds will be paid to or retained by Lessor to be applied
     toward payment of any amounts which may be or become payable by Lessee in
     such order as Lessor sees fit or as Lessor may elect.

     To the extent insurance proceeds are paid to Lessee, Lessee agrees to
     comply with the foregoing provisions and apply or pay over such proceeds as
     so required.

10.  INDEMNITY

10.1 GENERAL: LESSEE AGREES TO DEFEND, INDEMNIFY AND HOLD HARMLESS THE
     INDEMNITEES ON AN AFTER-TAX BASIS FROM AND AGAINST ANY AND ALL CLAIMS,
     PROCEEDINGS, LOSSES, LIABILITIES, SUITS, JUDGMENTS, COSTS, EXPENSES,
     PENALTIES OR FINES (EACH A "CLAIM") (REGARDLESS OF WHEN THE SAME IS MADE OR
     INCURRED, WHETHER DURING OR AFTER THE TERM (BUT NOT BEFORE)):-

     (A)    WHICH MAY AT ANY TIME BE SUFFERED OR INCURRED DIRECTLY OR INDIRECTLY
            AS A RESULT OF OR CONNECTED WITH THE POSSESSION, DELIVERY,
            PERFORMANCE, MANAGEMENT, OWNERSHIP, REGISTRATION, CONTROL,
            MAINTENANCE, CONDITION, SERVICE, REPAIR, OVERHAUL, LEASING, USE,
            OPERATION OR RETURN OF THE AIRCRAFT, ANY ENGINE OR PART (EITHER IN
            THE AIR OR ON THE GROUND) WHETHER OR NOT THE CLAIM MAY BE
            ATTRIBUTABLE TO ANY DEFECT IN THE AIRCRAFT, ANY ENGINE OR ANY PART
            OR TO ITS DESIGN, TESTING OR USE OR OTHERWISE, AND REGARDLESS OF
            WHEN THE SAME ARISES OR WHETHER IT ARISES OUT OF OR IS ATTRIBUTABLE
            TO ANY ACT OR OMISSION, NEGLIGENT OR OTHERWISE, OF ANY INDEMNITEE;

     (B)    WHICH ARISE OUT OF ANY ACT OR OMISSION WHICH INVALIDATES OR WHICH
            RENDERS VOIDABLE ANY OF THE INSURANCES; AND

     (C)    WHICH MAY AT ANY TIME BE SUFFERED OR INCURRED AS A CONSEQUENCE OF
            ANY DESIGN, ARTICLE OR MATERIAL IN THE AIRCRAFT, ANY ENGINE OR ANY
            PART OR ITS OPERATION OR USE CONSTITUTING AN INFRINGEMENT OF PATENT,
            COPYRIGHT, TRADEMARK, DESIGN OR OTHER PROPRIETARY RIGHT OR A BREACH
            OF ANY OBLIGATION OF CONFIDENTIALITY OWED TO ANY PERSON;

     BUT EXCLUDING ANY CLAIM IN RELATION TO A PARTICULAR INDEMNITEE TO THE
     EXTENT THAT THAT CLAIM IS COVERED PURSUANT 

                                      51
<PAGE>
 
     TO ANOTHER INDEMNITY PROVISION OF THIS AGREEMENT OR TO THE EXTENT IT ARISES
     SOLELY AS A RESULT OF THE GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF THAT
     INDEMNITEE, LESSOR TAXES OR A LESSOR LIEN.

10.2 Duration: The indemnities contained in this agreement will continue in full
     force following the end of the Term notwithstanding any breach or
     repudiation by Lessor or Lessee of this Agreement or any termination of the
     lease of the Aircraft hereunder.

11.  EVENTS OF LOSS

11.1

(a)  Pre-delivery: If an Event of Loss occurs prior to delivery of the Aircraft
     to Lessee, Lessor will have the option, exercisable by giving Lessee notice
     in writing, to substitute an alternative aircraft of the same manufacture,
     model, value and utility as the Aircraft.  If Lessor exercises such option,
     Lessee shall be obliged to lease such substitute aircraft pursuant to the
     terms and conditions of this Agreement and such substitute aircraft shall
     constitute the Aircraft for all purposes of this Agreement.  Lessor shall
     provide Lessee with details of the substitute aircraft as soon as may be
     practicable after the occurrence of the Event of Loss.  If Lessor advises
     Lessee that Lessor does not wish to exercise such option, this Agreement
     will immediately terminate and except as expressly stated in this Agreement
     neither party will have any further obligation or liability under this
     Agreement other than pursuant to Clause 16.9 except that Lessor will return
     the Deposit to Lessee; and

(b)  Post-delivery: If an Event of Loss occurs after delivery of the Aircraft to
     Lessee, Lessee will pay the Agreed Value to Lessor on or prior to the
     earlier of (i) 5 Business Days after the Event of Loss and (ii) the date of
     receipt of insurance proceeds in respect of that Event of Loss. Subject to
     the rights of any insurers and reinsurers or other third party, upon
     irrevocable payment in full to Lessor of that amount and all other amounts
     which may be or become payable to Lessor under this Agreement, Lessor will
     without recourse or warranty (except as to Lessor's Liens) and without
     further act, be deemed to have transferred to Lessee all of Lessor's rights
     to any Engines and Parts not installed when the Event of Loss occurred, all
     on an as-is where-is basis, and will at Lessee's expense, execute and
     deliver such bills of sale and other documents and instruments as Lessee
     may reasonably request to evidence (on the public record or otherwise) the
     transfer and the vesting of Lessor's rights in such Engines and Parts in
     Lessee, free and clear of all rights of Lessor and Lessor Liens.

(c)  Engine Event of Loss: From the Delivery Date upon an Engine Event of Loss,
     Lessee shall give Lessor prompt written notice thereof and shall, within 45
     days after such occurrence, convey to Lessor, as replacement for the Engine
     suffering such event, title to a Replacement Engine.  Each Replacement
     Engine shall be free of all Security Interests and shall be in as good an
     operating condition as the Engine being replaced, assuming the Engine being
     replaced was in the condition and repair required by the terms hereof
     immediately prior to the Engine Event of Loss. Upon full compliance by
     Lessee with the terms of this Clause 11.1(c), Lessor will transfer to
     Lessee title to the 

                                      52
<PAGE>
 
     Engine which suffered the Engine Event of Loss. Prior to or at the time of
     any such conveyance, Lessee, at its own expense, will promptly (i) furnish
     Lessor with a full warranty bill of sale, in form and substance reasonably
     satisfactory to Lessor, with respect to such Replacement Engine; (ii) cause
     a lease supplement (in form and substance satisfactory to Lessor)
     subjecting such Replacement Engine to this Agreement, to be duly executed
     by Lessee, and recorded pursuant to applicable Law; (iii) furnish Lessor
     with such evidence of title to such Replacement Engine as Lessor may
     reasonably request; (iv) furnish Lessor with an opinion of Lessee's counsel
     to the effect that title to such Replacement Engine has been duly conveyed
     to Lessor subject to this Agreement, free and clear of all Security
     Interests, and that such Replacement Engine is duly leased hereunder; (v)
     furnish a certificate signed by a duly authorized financial officer or
     executive of Lessee certifying that, upon consummation of such replacement,
     no Event of Default will have occurred or be continuing; (vi) furnish
     Lessor with such documents as Lessor may reasonably request in connection
     with the consummation of the transactions contemplated by this Clause
     11.1(c), in each case in form and substance satisfactory to Lessor; and
     (vii) furnish such Financing Statements incorporating the Replacement
     Engine as may be requested by Lessor. For all purposes hereof, each such
     Replacement Engine shall be deemed part of the property leased hereunder,
     shall be deemed an "Engine" as defined herein and shall be deemed part of
     the same Aircraft as was the Engine replaced thereof. No Engine Event of
     Loss covered by this Clause 11.1(c) shall result in any reduction in Rent
     or affect Lessee's obligation to pay Engine Maintenance Reserves or the
     amount thereof to be paid by Lessee.

     Lessee shall indemnify each Indemnitee on an After-Tax Basis for any
     adverse tax consequence to such Indemnitee of the replacement of one or
     more Engines pursuant to this Clause 11.1.

11.2 Substitute Aircraft:

(a)  Without prejudice to the provisions of Clause 11.1 (b), if an Event of Loss
     occurs after delivery of the Aircraft to Lessee, Lessor will have the
     option, exercisable by giving Lessee notice in writing, to substitute an
     alternative aircraft (the "Substitute Aircraft") of the same manufacture
     and model as the Aircraft and having a value, utility and condition equal
     to or greater than the Aircraft as at the date of occurrence of the Event
     of Loss which Substitute Aircraft will be leased by Lessor to Lessee for
     the remainder of the Term pursuant to the terms and conditions of this
     Agreement.  If Lessor exercises such option, the Substitute Aircraft will
     constitute the Aircraft for all purposes of this Agreement in respect of
     facts and circumstances arising after the date of delivery thereof to
     Lessee.  Lessor shall provide Lessee with details of the Substitute
     Aircraft as soon as may be practicable after the occurrence of the Event of
     Loss;

(b)  Lessor will use all reasonable endeavors to deliver the Substitute Aircraft
     to Lessee as soon as may be practicable following the date of occurrence of
     the Event of Loss but not later than 3 months after such date; and

(c)  Lessee agrees to enter into such documentation as Lessor may require in
     order to reflect the leasing of the Substitute Aircraft as aforesaid
     including, without limitation, documentation in respect of the Insurances.

                                      53
<PAGE>
 
     Lessee shall indemnify each Indemnitee on an After-Tax Basis for any
     adverse tax consequence to such Indemnitee of the replacement of the
     Aircraft or Airframe pursuant to this Clause 11.2.

11.3 Requisition: During any requisition for use or hire of the Aircraft, any
     Engine or Part which does not constitute an Event of Loss:-

(a)  the Rent and other charges payable under this Agreement will not be
     suspended or abated either in whole or in part, and Lessee will not be
     released from any of its other obligations under the Agreement (other than
     operational obligations with which Lessee is unable to comply solely by
     virtue of the requisition); and

(b)  so long as no Default has occurred and is continuing, Lessee will be
     entitled to any hire paid by the requisitioning authority in respect of the
     Term. Lessee will, as soon as practicable after the end of any such
     requisition, cause the Aircraft to be put into the condition required by
     this Agreement. Lessor will be entitled to all compensation payable by the
     requisitioning authority in respect of any change in the structure, state
     or condition of the Aircraft arising during the period of requisition, and
     Lessor will apply such compensation in reimbursing Lessee for the cost of
     complying with its obligations under this Agreement in respect of any such
     change, but so that, if any Default has occurred and is continuing, Lessor
     may apply the compensation or hire in or towards settlement of any amounts
     owing by Lessee under this Agreement. 

12.  RETURN OF AIRCRAFT

12.1 Return: On the Expiry Date or redelivery of the Aircraft pursuant to Clause
     13.2 or termination of the leasing of the Aircraft under this Agreement
     Lessee will, unless an Event of Loss has occurred, at its expense,
     redeliver the Aircraft and Aircraft Documents to Lessor at the Redelivery
     Location or such other airport as is mutually acceptable to the parties
     hereto, in accordance with the procedures and in compliance with the
     conditions set forth in Schedule 3, free and clear of all Security
     Interests and Permitted Liens (other than Lessor Liens) and in a condition
     qualifying for immediate certification of airworthiness by the FAA or as
     otherwise agreed by Lessor and Lessee.

12.2 Final Inspection: Immediately prior to redelivery of the Aircraft, Lessee
     will make the Aircraft available to Lessor for inspection ("Final
     Inspection") in order to verify that the condition of the Aircraft complies
     with this Agreement. The Final Inspection will permit, and be of sufficient
     duration for, Lessor to:-

(a)  inspect the Aircraft Documents;

(b)  inspect the Aircraft and uninstalled Parts;

(c)  inspect the Engines, including without limitation (i) a borescope
     inspection of (A) the low pressure and high pressure compressors and (B)
     turbine and combustion areas, (ii) engine condition runs and (iii) review
     of Engine trend monitoring data and technical log reports covering the last
     ninety (90) days of operation; and

                                      54
<PAGE>
 
(d)  perform a complete borescope inspection of the APU; and

(e)  observe a 2 hour demonstration flight (with Lessor's representatives as on-
     board observers).

12.3 Non-Compliance: To the extent that, at the time of Final Inspection, the
     condition of the Aircraft does not comply with this Agreement, Lessee will
     at Lessor's option:-

(a)  immediately rectify the non-compliance and to the extent the non-compliance
     extends beyond the Expiry Date, the Term will be automatically extended and
     this Agreement will remain in force until the non-compliance has been
     rectified as provided in Clause 12.8; or

(b)  redeliver the Aircraft to Lessor and indemnify Lessor on an After-Tax
     Basis, and provide to Lessor's satisfaction cash as security for that
     indemnity, against the cost of putting the Aircraft into the condition
     required by this Agreement.

12.4 Redelivery: Upon redelivery Lessee will provide to Lessor, upon Lessor's
     request, all documents necessary to export the Aircraft from the Habitual
     Base (including, without limitation, a valid and subsisting export license
     for the Aircraft) and required in relation to the deregistration of the
     Aircraft with the Air Authority.

12.5 Acknowledgment: Provided Lessee has complied with its obligations under
     this Agreement, following redelivery of the Aircraft by Lessee to Lessor at
     the Redelivery Location, Lessor will deliver to Lessee an acknowledgment
     confirming that Lessee has redelivered the Aircraft to Lessor in accordance
     with this Agreement.

12.6 Maintenance Program:

(a)  Prior to the Expiry Date and upon Lessor's request, Lessee will provide
     Lessor or its agent reasonable access to Lessee's Maintenance Program and
     the Aircraft Documents in order to facilitate the Aircraft's integration
     into any subsequent operator's fleet; and

(b)  Lessee will, if requested by Lessor to do so, upon return of the Aircraft
     deliver to Lessor a certified true current and complete copy of  Lessee's
     Maintenance Program. Lessor agrees that it will not disclose the contents
     of  Lessee's Maintenance Program to any person or entity except to the
     extent necessary to monitor Lessee's compliance with this Agreement and/or
     to bridge the maintenance program for the Aircraft from Lessee's
     Maintenance Program to another program after the Expiry Date.

12.7 Fuel: Upon redelivery of the Aircraft to Lessor, an adjustment will be made
     in respect of fuel on board on the Delivery Date and the Expiry Date at the
     price then prevailing at the Redelivery Location.

12.8 Automatic Extension of Term: In the event of Lessee's failure to make the
     Aircraft available to Lessor for timely inspection pursuant to Clauses 12.1
     hereof, non-compliance of the condition of the Aircraft under Clause 12.3
     hereof or any other failure of Lessee which prevents timely Redelivery of
     the Aircraft to Lessor, the Term of this 

                                      55
<PAGE>
 
     Agreement will be automatically extended and this Agreement will remain in
     force until such non-compliance has been rectified, with Lessee being
     obligated to pay Rent at a rate specified in Clause 5.3 plus 50 percent on
     a per diem basis with respect to the period of such extension.

13.  DEFAULT

13.1 Events: Each of the following events will constitute an Event of Default
     and a repudiation (but not a termination) of this Agreement by Lessee
     (whether any such event or condition is voluntary or involuntary or occurs
     by operation of law or pursuant to or in compliance with any judgment,
     decree or order of any court or any order, rule or regulation of any
     Government Entity). Lessee acknowledges that the occurrence of any Event of
     Default would represent a material default in the performance of its
     obligations under this Agreement:-

(a)  Non-payment: Lessee fails to make any payment under this Agreement on the
     due date; or

(b)  Insurance: Lessee fails to comply with any provision of Clause 9 or any
     insurance required to be maintained under this Agreement is canceled or
     terminated or notice of cancellation is given in respect of any such
     insurance; or

(c)  Breach: Lessee fails to comply with any other provision of this Agreement
     and, if such failure is in the reasonable opinion of Lessor capable of
     remedy, the failure continues for 5 days after notice from Lessor to
     Lessee; or

(d)  Representation: any representation or warranty made (or deemed to be
     repeated) by Lessee in or pursuant to this Agreement or in any document or
     certificate or statement is or proves to have been incorrect in any
     material respect when made or deemed to be repeated; or

(e)  Cross Default:

     (i)    a final judgment for the payment of money not covered by insurance
            in excess of Two Hundred Fifty Thousand Dollars ($250,000), or final
            judgments for the payment of money not covered by insurance in
            excess of Two Hundred Fifty Thousand Dollars ($250,000) in the
            aggregate, shall be rendered against Lessee and the same shall
            remain undischarged for a period of ninety (90) days during which
            execution thereof shall not be effectively stayed by agreement of
            the parties involved, stayed by court order or adequately bonded; or

     (ii)   attachments or other Security Interests shall be issued or entered
            against substantially all of the property of Lessee and shall remain
            undischarged or unbonded for ninety (90) days except for Security
            Interests created in connection with monies borrowed or obligations
            agreed to by Lessee in the ordinary course of its business; or

                                      56
<PAGE>
 
     (iii) Lessee shall default in the payment of any sum which by itself is in
           excess of $100,000 or any sums which in aggregate exceed $250,000
           notwithstanding that any particular individual sum thereof does not
           exceed $100,000 of any one or more obligations for the payment of
           borrowed money, for the deferred purchase price of property or for
           the payment of rent or hire under any lease of aircraft when the same
           becomes due if such nonpayment results in or would permit an
           acceleration of such indebtedness, or Lessee shall default in the
           performance of any other term, agreement, or condition contained in
           any agreement or instrument under or by which any such obligation is
           created, evidenced or secured, if the effect of such default is to
           cause or permit such obligation to become due prior to its stated
           maturity; or

     (iv)  any event of default or termination event, howsoever described,
           occurs under the Other Agreements; or

(f)  Approvals: any consent, authorization, license, certificate or approval of
     or registration with or declaration to any Government Entity in connection
     with this Agreement (including, without limitation): -

     (i)   any authorization required by Lessee to obtain and transfer freely
           Dollars (or any other relevant currency) out of any relevant country;
           or

     (ii)  required by Lessee to authorize, or in connection with, the
           execution, delivery, validity, enforceability or admissibility in
           evidence of this Agreement or the performance by Lessee of its
           obligations under this Agreement; or

     (iii) the registration of the Aircraft; or

     (iv)  any airline license or air transport license including, without
           limitation, authority to operate the Aircraft under FAR Part 121 and
           a Certificate of Public Convenience and Necessity issued under
           Section 41102 of Title 49 of the United States Code;

     is modified in a manner unacceptable to Lessor or is withheld, or is
     revoked, suspended, canceled, withdrawn, terminated or not renewed, or
     otherwise ceases to be in full force; or

(g)  Bankruptcy, etc.:

     (i)   Lessee or any Subsidiary consents to the appointment of a custodian,
           receiver, trustee or liquidator of itself or all or any material part
           of Lessee's property or Lessee's consolidated property, or Lessee or
           any Subsidiary admits in writing its inability to, or is unable to,
           or does not, pay its debts generally as they come due, or makes a
           general assignment for the benefit of creditors, or Lessee or any
           Subsidiary files a voluntary petition in bankruptcy or a voluntary
           petition seeking reorganization in a proceeding under any bankruptcy
           or insolvency Laws (as now or hereafter in effect) or an answer
           admitting the material allegations of a petition filed against Lessee
           or any Subsidiary in any such

                                      57
<PAGE>
 
           proceeding, or Lessee or any subsidiary by voluntary petition, answer
           or consent seeks relief under the provisions of any other bankruptcy,
           insolvency or other similar Law providing for the reorganization or
           winding-up of corporations, or provides for an agreement,
           composition, extension or adjustment with its creditors, or any
           corporate action (including, without limitation, any board of
           directors or shareholder action) is taken by Lessee or any Subsidiary
           in furtherance of any of the foregoing, whether or not the same is
           fully effected or accomplished; or

     (ii)  an order, judgment or decree is entered by any court appointing,
           without the consent of Lessee or any of its Subsidiaries, a
           custodian, receiver, trustee or liquidator of Lessee or any
           Subsidiary, or of all or any material part of Lessee's property or
           Lessee's consolidated property is sequestered, and any such order,
           judgment or decree of appointment or sequestration remains in effect,
           undismissed, unstayed or unvacated for a period of 30 days after the
           date of entry thereof or at any time an order for relief is granted;
           or

     (iii) an involuntary petition against Lessee or any Subsidiary in a
           proceeding under the United States Federal Bankruptcy Laws or other
           insolvency Laws (as now or hereafter in effect) is filed and is not
           withdrawn or dismissed within 30 days thereafter or at any time an
           order for relief is granted in such proceeding, or if, under the
           provisions of any Law providing for reorganization or winding-up of
           corporations which may apply to Lessee or any Subsidiary, any court
           of competent jurisdiction assumes jurisdiction over, or custody or
           control of, Lessee or any Subsidiary or of all or any material part
           of Lessee's property, or Lessee's consolidated property and such
           jurisdiction, custody or control remains in effect, unrelinquished,
           unstayed or unterminated for a period of 30 days or at any time an
           order for relief is granted in such proceeding; or

(h)  Unlawful: it becomes unlawful for Lessee to perform any of its obligations
     under this Agreement or this Agreement becomes wholly or partly invalid or
     unenforceable; or

(i)  Suspension of Business: Lessee or any of its Subsidiaries suspends or
     ceases or threatens to suspend or cease to carry on all or a substantial
     part of its business; or

(j)  Disposal: Lessee or any of its Subsidiaries disposes, conveys or transfers
     or threatens to dispose, convey or transfer of all or a material part of
     its assets, liquidates or dissolves or consolidates or merges with any
     other Person whether by one or a series of transactions, related or not,
     other than for the purpose of a reorganization of the terms of which have
     received the previous consent in writing of Lessor; or

(k)  Rights and Remedies: the existence, validity, enforceability or priority of
     the rights of Lessor as owner and the rights of Lessor as lessor in respect
     of the Aircraft are challenged by Lessee or any other person claiming by or
     through Lessee; or

(l)  Delivery: Lessee fails to timely comply with its obligations under Clause 4
     to accept delivery of the Aircraft; or

                                      58
<PAGE>
 
(m)  Ownership, Security Interests and Related Matters:  Lessee fails to timely
     comply with its obligations under Clause 8.7; or

(n)  Transfer:  Lessee makes or permits any assignment or transfer of this
     Agreement, or any interest herein, or of the right to possession of the
     Aircraft, the Airframe, or any Engine; or

(o)  Redelivery:  Lessee fails to return the Aircraft to Lessor on the Expiry
     Date in accordance with Clause 12.

(p)  Adverse Change: any event or series of events occurs which, in the
     reasonable opinion of Lessor might have a material adverse effect on the
     financial condition or operations of Lessee and its Subsidiaries or on the
     ability of Lessee to comply with its obligations under this Agreement; or

13.2 Rights: If an Event of Default occurs, Lessor may at its option (and
     without prejudice to any of its other rights under this Agreement), at any
     time thereafter (without notice to Lessee except as required under
     applicable Law):-

(a)  by notice to Lessee and with immediate effect on dispatch of such notice
     terminate the letting of the Aircraft (but without prejudice to the
     continuing obligations of Lessee under this Agreement), whereupon all
     rights of Lessee under this Agreement shall cease; and/or

(b)  proceed by appropriate court action or actions to enforce performance of
     this Agreement, including, without limitation, the payment of all Rent and
     all other amounts payable to Lessor or any Indemnitee pursuant to the terms
     hereof; and/or

(c)  proceed by appropriate court action or actions to recover damages for the
     breach of this Agreement which shall include, without limitation: -

     (i)   all Rent and other amounts which are or become due and payable
           hereunder prior to the date Lessor recovers possession of the
           Aircraft;

     (ii)  at Lessor's election, either one of the amounts determined pursuant
           to Clause 13.2(e) or Clause 13.2(f) below or any lost profits
           suffered by Lessor as a consequence of Lessor's inability to place
           the Aircraft with another lessee on financial terms that are as
           favorable to Lessor as the terms of this Agreement;

     (iii) all costs associated with Lessor's exercise of its remedies
           hereunder, including, but not limited to, repossession costs, legal
           fees, Aircraft storage costs, Aircraft re-lease or sale costs and
           Lessor's internal costs and expenses (including the cost of personnel
           time calculated based upon the compensation paid to the individuals
           involved on an annual basis and a general Lessor overhead
           allocation);

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<PAGE>
 
     (iv)  any loss, premium, penalty or expense which may be incurred in
           repaying funds raised to finance the Aircraft or in unwinding any
           financial instrument relating in whole or in part to Lessor's
           financing of the Aircraft;

     (v)   any loss, cost, expense or liability sustained by Lessor due to
           Lessee's failure to redeliver the Aircraft in the condition required
           by this Agreement; and

     (vi)  any other losses (including lost profits), damage, expense, cost or
           liability which Lessor suffers or incurs as a result of the Event of
           Default and/or termination of this Agreement, including an amount
           sufficient to fully compensate Lessor for any loss of or damage to
           Lessors residual interest in the Aircraft caused by Lessee's default;
           and/or

(d)  either: -

     (i)   enter upon the premises where all or any part of the Aircraft is
           located and take immediate possession of and, at Lessor's sole
           option, remove the same (and/or any engine which is not an Engine but
           which is installed on the Airframe, subject to the rights of the
           owner, lessor or secured party thereof) or cause it to be redelivered
           to Lessor at a location in the United States identified by Lessor (or
           such other location as Lessor may require) (the "Return Location"),
           by summary proceedings or otherwise, all without liability accruing
           to Lessor for or by reason of such entry or taking of possession
           whether for the restoration of damage to property, or otherwise,
           caused by such entry or taking, except damages caused by gross
           negligence or willful misconduct; and Lessor is hereby irrevocably,
           by way of security for Lessee's obligations under this Agreement,
           appointed attorney for Lessee in causing the redelivery or in
           directing the pilots of Lessee or other pilots to fly the Aircraft to
           that airport and will have all the powers and authorizations
           necessary for taking that action; or

     (ii)  by serving notice require Lessee to redeliver the Aircraft to Lessor
           at a point within the continental United States designated by Lessor;
           and/or

(e)  sell at private or public sale, as Lessor may determine, or hold, use,
     operate or lease to others the Aircraft as Lessor in its sole discretion
     may determine, all free and clear of any rights of Lessee; and/or

(f)  whether or not Lessor shall have exercised, or shall thereafter at any time
     exercise, any of its rights under paragraph (a), paragraph (b), paragraph
     (c), paragraph (d), or paragraph (e) of this Clause 13.2, Lessor, by 30
     days written notice to Lessee specifying a payment date, may demand that
     Lessee pay to Lessor, and Lessee shall pay to Lessor, on the payment date
     specified in such notice, as liquidated damages for loss of bargain and not
     as a penalty (in lieu of the Rent due for the period commencing after the
     date specified for payment in such notice), any unpaid Rent for the
     Aircraft and other amounts owing under this Agreement (prorated in the case
     of Rent on a daily basis) to and including the payment date specified in
     such notice, plus the amount, if any, by which the aggregate Rent for the
     remainder of the Term (determined without reference 

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<PAGE>
 
     to any right of Lessor to terminate the leasing of the Aircraft, whether or
     not such right is exercised), discounted periodically (equal to installment
     frequency) to present worth at the interest rate of 4 percent (4%) per
     annum, exceeds the fair market rental value (determined pursuant to the
     Appraisal Procedure) of the Aircraft for the remainder of the Term, after
     discounting such fair market rental value periodically (equal to
     installment frequency) to present worth as of the payment date specified in
     such notice at the interest rate of 4 percent (4%) per annum; and/or

(g)  In the event that Lessor, pursuant to Clause 13.2(e) above, shall have
     relet the Aircraft under a lease which extends at least to the date upon
     which the Term for the Aircraft would have expired but for Lessee's
     default, Lessor, in lieu of exercising its rights under Clause 13.2(f)
     above with respect to the Aircraft, may, if it shall so elect, demand that
     Lessee pay Lessor, and Lessee shall pay Lessor, as liquidated damages for
     loss of bargain and not as a penalty (in lieu of the Rent for the Aircraft
     due after the time of reletting) any unpaid Rent for the Aircraft due up to
     the date of reletting and any other amounts owing under this Agreement,
     plus the amount, if any, by which the aggregate Rent for the Aircraft,
     which would otherwise have become due over the remainder of the Term
     (determined without reference to any right of Lessor to terminate the
     leasing of the Aircraft, whether or not such right is exercised),
     discounted periodically (equal to installment frequency) to present worth
     as of the date of reletting at the interest rate of 4 percent (4%) per
     annum, exceeds the aggregate basic rental payments to become due under the
     reletting from the date of such reletting to the date upon which the Term
     for the Aircraft would have expired but for Lessee's default, discounted
     periodically (equal to installment frequency) to present worth as of the
     date of the reletting at the interest rate of 4 percent (4%) per annum;
     and/or

(h)  in lieu of the remedies set forth in paragraphs (a), (c), (d), (e), (f),
     and (g) of this Clause 13.2, by 30 days written notice to Lessee specifying
     a payment date, Lessor may demand that Lessee pay to Lessor, and Lessee
     shall pay to Lessor on the payment date specified in such notice as
     liquidated damages for loss of bargain and not as a penalty (in lieu of the
     Rent due for the period commencing after the date specified for payment in
     such notice), any unpaid Rent for the Aircraft and other amounts payable
     under this Agreement (prorated in the case of Rent on a daily basis) to and
     including the payment date specified in such notice, plus an amount
     equaling the aggregate Rent for the remainder of the Term, discounted
     periodically (equal to installment frequency) to present worth at the
     interest rate of 4 per cent (4%) per annum;

(i)  draw upon the Deposit or the Maintenance Reserves furnished under this
     Agreement or the Related Agreements (as those times are defined in such
     agreements) and apply such amounts to amounts owing to Lessor hereunder.

     Lessee, for itself and for its successors and assigns, hereby agrees that,
     to the extent now or hereafter permitted by applicable Law, notwithstanding
     any provision of the Federal Bankruptcy Code as amended from time to time,
     the title of Lessor to the Aircraft and any right of Lessor to take
     possession of the Aircraft in compliance with the provisions of this
     Agreement, in each case, upon the occurrence and continuance of 

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<PAGE>
 
     an Event of Default, shall not be affected by the provisions of the Federal
     Bankruptcy Code, as amended from time to time.

     In addition to the foregoing, Lessee shall be liable for any and all unpaid
     Rent and other amounts payable under this Agreement during or after the
     exercise of any of the aforementioned remedies, together with interest on
     such unpaid amounts at the Interest Rate set forth in Letter Agreement No.
     1, and until satisfaction of all of Lessee's obligations to Lessor
     hereunder and (on an After-Tax Basis) for all reasonable legal fees and
     other reasonable costs and expenses incurred by Lessor by reason of the
     occurrence of any Event of Default or the exercise of Lessor's remedies
     with respect thereto, including all costs and expenses incurred in
     connection with the return of the Aircraft in accordance with the terms of
     Clause 12 hereof or in placing the Aircraft in the condition and with
     airworthiness certification as required by such Clause.

     In effecting any repossession, Lessor and its representatives and agents,
     to the extent permitted by Law, shall: (i) have the right to enter upon any
     premises where it reasonably believes the Aircraft, the Airframe, an Engine
     or Part to be located; (ii) not be liable, in conversion or otherwise, for
     the taking of any personal property of Lessee which is in or attached to
     the Aircraft, the Airframe, an Engine or Part which is repossessed;
     provided, however, that Lessor shall return to Lessee all personal property
     of Lessee or its passengers which was on the Aircraft at the time Lessor 
     re-takes possession of the Aircraft; (iii) not be liable or responsible, in
     any manner, for any inadvertent damage or injury to any of Lessee's
     property in repossessing and holding the Aircraft, the Airframe, an Engine
     or Part, except for that caused by or in connection with Lessor's gross
     negligence or willful acts; (iv) have the right to maintain possession of
     and dispose of the Aircraft, the Airframe, an Engine or Part on any
     premises owned by Lessee or under Lessee's control; and (v) have the right
     to obtain a key to any premises at which the Aircraft, the Airframe, an
     Engine or Part may be located from the landlord or owner thereof.

     If reasonably required by Lessor, Lessee, at its sole expense, shall
     assemble and make the Aircraft, the Airframe, an Engine or Part available
     at a place designated by Lessor in accordance with Clause 12 hereof. Lessee
     hereby agrees that, in the event of the return to or repossession by Lessor
     of the Aircraft, the Airframe, an Engine or Part, any rights in any
     warranty (express or implied) previously assigned to Lessee or otherwise
     held by Lessee shall without further act, notice or writing be assigned or
     reassigned to Lessor, if assignable. Lessee shall be liable to Lessor on an
     After-Tax Basis for all reasonable expenses, disbursements, costs and fees
     incurred in (i) repossessing, storing, preserving, shipping, maintaining,
     repairing and refurbishing the Aircraft, the Airframe, an Engine or Part to
     the condition required by Clause 12 hereof and (ii) preparing the Aircraft,
     the Airframe, an Engine or Part for sale or lease, advertising the sale or
     lease of the Aircraft, the Airframe, an Engine or Part and selling or
     releasing the Aircraft, the Airframe, an Engine or Part. Lessor is hereby
     authorized and instructed, at its option, to make reasonable expenditures
     which Lessor considers advisable to repair and restore the Aircraft, the
     Airframe, an Engine or Part to the condition required by Clause 12 hereof,
     all at Lessee's sole expense.

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<PAGE>
 
     At any public sale of the Aircraft, the Airframe, an Engine or Part
     pursuant to this Clause, Lessor may bid for and purchase such property and
     Lessee agrees that the amounts paid therefor shall be used in the
     computation contemplated herein.
 
     With the exception that the remedy in Clause 13.2(g) can be elected only if
     the remedy in Clause 13.2(f) is not elected and the remedy in Clause
     13.2(h) can be elected only in lieu of all other remedies save the remedies
     in Clauses 13.2(b) and 13.2(i), no remedy referred to in this Clause 13 is
     intended to be exclusive, but, to the extent permissible hereunder or under
     applicable Law, each shall be cumulative and in addition to any other
     remedy referred to above or otherwise available to Lessor at Law or in
     equity; and the exercise or beginning of exercise by Lessor of any one or
     more of such remedies shall not preclude the simultaneous or later exercise
     by Lessor of any or all of such other remedies; provided, however, that
     nothing in this Clause 13 shall be construed to permit Lessor to obtain a
     duplicate recovery of any element of damages to which Lessor is entitled.
     No express or implied waiver by Lessor of any Default or Event of Default
     shall in any way be, or be construed to be, a waiver of any future or
     subsequent Default.

13.3 Deregistration: If an Event of Default occurs, Lessor may sell or otherwise
     deal with the Aircraft free and clear of any leasehold or other interest of
     Lessee as if this Agreement had never been made and Lessee will at the
     request of Lessor take all steps necessary to effect (if applicable)
     deregistration of the Aircraft and its export from the country where the
     Aircraft is for the time being situated and any other steps necessary to
     enable the Aircraft to be redelivered to Lessor in accordance with this
     Agreement including without limitation execution and filing of a
     certificate or other instrument of lease termination with the Air Authority
     and; Lessee hereby irrevocably and by way of security for its obligations
     under this Agreement appoints (which appointment is coupled with an
     interest) Lessor as its attorney to execute and deliver any documentation
     and to do any act or thing required in connection with the foregoing.

14.  ASSIGNMENT

14.1 Lessee's Assignment: LESSEE WILL NOT ASSIGN, TRANSFER (VOLUNTARILY OR
     INVOLUNTARILY BY OPERATION OF LAW OR OTHERWISE) OR CREATE OR PERMIT TO
     EXIST ANY SECURITY INTEREST OVER, ANY OF ITS RIGHTS UNDER THIS AGREEMENT.

14.2 Lessor's Assignment: Lessor may assign or transfer all or any of its rights
     under this Agreement and in the Aircraft. In the case of an assignment
     other than by way of security, Lessor will be released from and will have
     no further obligation under this Agreement following the assignment of all
     its rights under this Agreement and the assumption by the assignee or
     transferee of all of Lessor's obligations under this Agreement.
     Notwithstanding any such assignment, Lessor will remain entitled to the
     benefit of each indemnity and the liability insurances effected under this
     Agreement. Lessee will comply with all reasonable requests of Lessor, its
     successors and assigns in respect of any such assignment. Lessor will
     promptly notify Lessee of any assignment.

14.3 Transfer: If Lessor desires to effect any assignment or transfer of its
     rights and obligations under this Agreement, Lessee agrees to cooperate and
     take all such steps as 

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<PAGE>
 
     Lessor may reasonably request to give the transferee the benefit of this
     Agreement and to acknowledge the release of Lessor from its obligations
     hereunder as of the time of such assignment or transfer.


15.  ILLEGALITY

     If it is or becomes unlawful in any jurisdiction for Lessor to give effect
     to any of its obligations as contemplated by this Agreement or to continue
     this Agreement, Lessor may by notice in writing to Lessee terminate the
     leasing of the Aircraft under this Agreement and Lessee will forthwith
     redeliver the Aircraft to Lessor in accordance with Clause 12. Without
     prejudice to the foregoing Lessor will consult in good faith with Lessee as
     to any steps which may be taken to restructure the transaction to avoid
     that unlawfulness but will be under no obligation to take any such steps.

16.  MISCELLANEOUS

16.1 Waivers, Remedies Cumulative: The rights of Lessor under this Agreement:-
    
     (i)   may be exercised as often as necessary;
 
     (ii)  are cumulative and not exclusive of its rights under any Law; and

     (iii) may be waived only in writing and specifically.

     Delay in exercising or non-exercise of any such right will not constitute a
     waiver of that right.

16.2 Delegation: Lessor may delegate to any person or persons all or any of the
     trusts, powers or discretions vested in it by these presents and any such
     delegation may be made upon such terms and conditions and subject to such
     regulations (including power to sub-delegate) as Lessor in its absolute
     discretion thinks fit.

16.3 Certificates: Save where expressly provided in this Agreement, any
     certificate or determination by Lessor as to any rate of interest or as to
     any other amount payable under this Agreement will, in the absence of
     manifest error, be conclusive and binding on Lessee.

16.4 Appropriation: If any sum paid or recovered in respect of the liabilities
     of Lessee under this Agreement is less than the amount then due, Lessor may
     apply that sum to amounts due under this Agreement in such proportions and
     order and generally in such manner as Lessor may determine at its sole
     discretion.

16.5 Currency: Lessee acknowledges that the specification of Dollars in this
     Agreement is of the essence and that Dollars shall be the currency of
     account in any and all events. Lessee waives any right it may have in any
     jurisdiction to pay any amount under this Agreement in a currency other
     than Dollars.

16.6 Set-off: Lessor may set off any matured obligation owed by Lessee under
     this Agreement, the Related Agreements or under any other agreement between
     Lessor (or 

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<PAGE>
 
     any affiliate or associate of Lessor or a trustee-lessor acting for Lessor
     as beneficiary) and Lessee against any obligation (whether or not matured)
     owed by Lessor to Lessee, regardless of the place of payment or currency.
     If the obligations are in different currencies, Lessor may convert either
     obligation at the market rate of exchange available in New York or at its
     option London for the purpose of the set-off. If an obligation is
     unascertained or unliquidated, Lessor may in good faith estimate that
     obligation and set off in respect of the estimate, subject to the relevant
     party accounting to the other when the obligation is ascertained or
     liquidated. Lessor will not be obliged to pay any amounts to Lessee under
     this Agreement so long as any sums which are then due from Lessee under
     this Agreement, the Related Agreements or under any other agreement between
     Lessor (or any affiliate or associate of Lessor or a trustee-lessor acting
     for Lessor as beneficiary) and Lessee remain unpaid and any such amounts
     which would otherwise be due will fall due only if and when Lessee has paid
     all such sums except to the extent Lessor otherwise agrees or sets off such
     amounts against such payment pursuant to the foregoing.

16.7 Severability: If a provision of this Agreement is or becomes illegal,
     invalid or unenforceable in any jurisdiction, that will not affect:-

(a)  the legality, validity or enforceability in that jurisdiction of any other
     provision of this Agreement; or

(b)  the legality, validity or enforceability in any other jurisdiction of that
     or any other provision of this Agreement.

16.8 Remedy: If Lessee fails to comply with any provision of this Agreement,
     Lessor may, without being in any way obliged to do so or responsible for so
     doing and without prejudice to the ability of Lessor to treat the non-
     compliance as a Default or an Event of Default, effect compliance on behalf
     of Lessee, whereupon Lessee shall become liable to pay immediately any sums
     expended by Lessor together with all costs and expenses (including legal
     costs) in connection therewith.

16.9 Expenses: Whether or not the Aircraft is delivered to Lessee pursuant to
     this Agreement, Lessee is to pay to Lessor on an After-Tax Basis on 
     demand:-

     (a)   all costs associated with perfecting Lessor's rights in the Aircraft
           and/or this Agreement in the State of Registration, the Habitual Base
           of the Aircraft (and other states as appropriate given the operation
           of the Aircraft), including (but not limited to) the provision of
           legal opinions, tax advice, stamp duties, translations and
           registrations, whether required by Lessor or Lessee.

     (b)   all expenses (including legal, professional, and out-of-pocket
           expenses) incurred or payable by Lessor related to any amendment to
           or extension of or other documentation in connection with, or the
           granting of any waiver or consent under this Agreement requested by
           Lessee or the monitoring of compliance by Lessee with this Agreement;

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<PAGE>
 
      (c)   all expenses (including legal, survey and other costs) payable or
            incurred by Lessor in contemplation of, or otherwise in connection
            with, the enforcement of or preservation of any of Lessor's or
            Owner's rights under this Agreement, or in respect of the
            repossession of the Aircraft;

      (d)   a $25,000 documentary review fee to defray Lessor's expenses of
            review in connection with each and any request for Lessor's consent
            to a sub-lease, wet-lease or parting of possession as specified in
            Clause 8.5; and

      (e)   a $5,000 documentary fee to defray a portion of Lessor's expenses in
            connection with preparation of this Agreement, receipt whereof is
            acknowledged.

      All expenses payable pursuant to this Clause 16.9 will be paid in the
      currency in which they are incurred by Lessor.

16.10  Time of Essence: The time stipulated in this Agreement for all payments
       payable by Lessee to Lessor and the prompt, punctual and performance of
       Lessee's other obligations under this Agreement are of the essence of
       this Agreement.

16.11  Notices: All notices under, or in connection with, this Agreement will,
       unless otherwise stated, be given in writing by letter, facsimile or
       SITA.  Any such notice is deemed effectively to be given as follows:-

       (i)  if by letter, on the earlier of the date when delivered or the 7th
            day after dispatch;

       (ii) if by facsimile or SITA, when transmitted and full transmission has
            been separately notified by telephone by the transmitting party.

       The address, telex numbers, SITA, facsimile and telephone numbers of
       Lessee, Lessor and Owner are as follows:-

       Lessee:               Address:     12015 East 46th Avenue
                                          Denver, Colorado 80239
                                          United States of America
                             Attn:        General Counsel
                             SITA:        DENGAF9
                             Facsimile:   (303) 371-7007
                             Telephone:   (303) 371-7400

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<PAGE>
 
      Lessor:                 Address:    General Electric Capital Corporation
                                          c/o GE Capital Aviation Services, Inc.
                                          201 High Ridge Road
                                          Stamford, CT  06927-4900
                              Attn:       Senior Vice President-Portfolio and 
                                          Risk Management, North America
                              Facsimile:  (203) 961-5965
                              Telephone:  (203) 357-4585
 
      With a copy to:         Address     GE Capital Aviation Services, Inc.
                                          201 Mission Street
                                          Suite 2700
                                          San Francisco, CA  94105
                              Attn:       Senior Vice President-Marketing
                              Facsimile:  (415) 284-7477
                              Telephone:  (415) 284-7400

16.12 Governing Law and Jurisdiction:
    
(a)   THIS AGREEMENT IN ALL RESPECTS SHALL BE GOVERNED BY AND CONSTRUED IN
      ACCORDANCE WITH THE GOVERNING LAW (WITHOUT REFERENCE TO CONFLICT OF LAWS
      PRINCIPLES);

(b)   For the benefit of Lessor, Lessee agrees that the courts of the United
      States District Court for the Northern District of California and any
      California state court sitting in the City of San Francisco, California
      are to have nonexclusive jurisdiction to settle any disputes arising out
      of or relating to this Agreement and submits itself and its property to
      the nonexclusive jurisdiction of the foregoing courts with respect to such
      disputes;

(c)   Without prejudice to any other mode of service, Lessee: -

      (i)   appoints The Prentice-Hall Corporation System, Inc., 1455 Response
            Road, Suite 250, Sacramento, California, 95815 as its agent for
            service of process relating to any proceedings before the California
            courts in connection with this Agreement and agrees to maintain the
            process agent in California notified to Lessor;

      (ii)  agrees that failure by a process agent to notify Lessee of the
            process shall not invalidate the proceedings concerned;

      (iii) consents to the service of process relating to any such proceedings
            by prepaid mailing of a copy of the process to Lessee's agent at the
            address identified in paragraph (i) or by prepaid mailing by air
            mail, certified or registered mail of a copy of the process to
            Lessee at the address set forth in Clause 16.11;

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<PAGE>
 
(d)   LESSEE: -

      (i)   WAIVES TO THE FULLEST EXTENT PERMITTED BY LAW ANY OBJECTION WHICH
            LESSEE MAY NOW OR HEREAFTER HAVE TO THE COURTS REFERRED TO IN CLAUSE
            16.12(B) ABOVE ON GROUNDS OF INCONVENIENT FORUM OR OTHERWISE AS
            REGARDS PROCEEDINGS IN CONNECTION WITH THIS AGREEMENT;

      (ii)  WAIVES TO THE FULLEST EXTENT PERMITTED BY LAW ANY OBJECTION WHICH
            LESSEE MAY NOW OR HEREAFTER HAVE TO THE LAYING OF VENUE OF ANY SUIT,
            ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT
            BROUGHT IN THE COURTS REFERRED TO IN CLAUSE 16.12(B);

      (iii) AGREES THAT A JUDGMENT OR ORDER OF ANY COURT REFERRED TO IN CLAUSE
            16.12(B) IN CONNECTION WITH THIS AGREEMENT IS CONCLUSIVE AND BINDING
            ON IT AND MAY BE ENFORCED AGAINST IT IN THE COURTS OF ANY OTHER
            JURISDICTION;

(e)   NOTHING IN THIS CLAUSE 16.12 LIMITS THE RIGHT OF LESSOR TO BRING
      PROCEEDINGS AGAINST LESSEE IN CONNECTION WITH THIS AGREEMENT: -

      (i)   IN ANY OTHER COURT OF COMPETENT JURISDICTION; OR

      (ii)  CONCURRENTLY IN MORE THAN ONE JURISDICTION;

(f)   LESSEE IRREVOCABLY AND UNCONDITIONALLY: -

      (i)   AGREES THAT IF LESSOR BRINGS LEGAL PROCEEDINGS AGAINST IT OR ITS
            ASSETS IN RELATION TO THIS AGREEMENT NO IMMUNITY FROM SUCH LEGAL
            PROCEEDINGS (WHICH WILL BE DEEMED TO INCLUDE WITHOUT LIMITATION,
            SUIT, ATTACHMENT PRIOR TO JUDGMENT, OTHER ATTACHMENT, THE OBTAINING
            OF JUDGMENT, EXECUTION OR OTHER ENFORCEMENT) WILL BE CLAIMED BY OR
            ON BEHALF OF ITSELF OR WITH RESPECT TO ITS ASSETS;

      (ii)  WAIVES ANY SUCH RIGHT OF IMMUNITY WHICH IT OR ITS ASSETS NOW HAS OR
            MAY IN THE FUTURE ACQUIRE;

      (iii) CONSENTS GENERALLY IN RESPECT OF ANY SUCH PROCEEDINGS TO THE GIVING
            OF ANY RELIEF OR THE ISSUE OF ANY PROCESS IN CONNECTION WITH SUCH
            PROCEEDINGS INCLUDING, WITHOUT LIMITATION, THE MAKING, ENFORCEMENT
            OR EXECUTION AGAINST ANY PROPERTY WHATSOEVER (IRRESPECTIVE OF ITS

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<PAGE>
 
               USE OR INTENDED USE) OF ANY ORDER OR JUDGMENT WHICH 
               MAY BE MADE OR GIVEN IN SUCH PROCEEDINGS.

16.13 Sole and Entire Agreement: This Agreement and the other Operative
      Documents are the sole and entire agreement between Lessor and Lessee in
      relation to the leasing of the Aircraft, and supersede all previous
      agreements in relation to that leasing.

16.14 Indemnitees: All rights expressed to be granted to each Indemnitee under
      this Agreement (other than Lessor) are given to Lessor on behalf of that
      Indemnitee.

16.15 Counterparts: This Agreement may be executed in two or more counterparts,
      each of which shall be deemed an original, but all of which together shall
      constitute one and the same instrument. To the extent, if any, that this
      Agreement constitutes chattel paper (as such term is defined in the
      Uniform Commercial Code as in effect in any applicable jurisdiction) no
      Security Interest in this Agreement may be created through the transfer or
      possession of any counterpart other than the counterpart that has been
      marked "Counterpart No. 1" on the cover page thereof.

16.16 Language: All notices to be given under this Agreement will be in English.
      All documents delivered to Lessor pursuant to this Agreement will be in
      English, or if not in English, will be accompanied by a certified English
      translation. If there is any inconsistency between the English version of
      this Agreement and any version in any other language, the English version
      will prevail.

16.17 No Brokers: Lessee hereby represents and warrants that it has not paid,
      agreed to pay or caused to be paid directly or indirectly in any form, any
      commission, percentage, contingent fee, brokerage or other similar
      payments of any kind, in connection with the establishment or operation of
      this Agreement, to any employee of Lessor or to any person or entity in
      the State of Registration or elsewhere, except to Excluded Persons, as
      herein defined. Lessor hereby represents and warrants that it has not
      paid, agreed to pay or caused to be paid directly or indirectly in any
      form, any commission, percentage, contingent fee, brokerage or other
      similar payments of any kind, in connection with the establishment or
      operation of this Agreement, to any employee of Lessee or to any person or
      entity in the State of Registration or elsewhere, except to Excluded
      Persons, as herein defined. For the purposes hereof, the term "Excluded
      Persons" shall mean (x) in the case of Lessor, any of its officers,
      directors, employees, attorneys or other professional advisors, whether
      located in the State of Registration or elsewhere, and (y) in the case of
      Lessee, any of its officers, directors, employees, attorneys or other
      professional advisors, whether located in the State of Registration or
      elsewhere. Each party agrees to indemnify and hold the other harmless from
      and against any and all claims, suits, damages, costs and expenses
      (including, but not limited to reasonable attorneys' fees) asserted by any
      agent, broker or other third party for any commission or compensation of
      any nature whatsoever based upon this Agreement or the Operative Documents
      or the Aircraft, if such claim damage, cost or expense arises out of any
      action or alleged action by the indemnifying party, its employees or
      agents.

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17.  DISCLAIMERS AND WAIVERS

17.1 Exclusion: THE AIRCRAFT IS TO BE LEASED AND DELIVERED HEREUNDER "AS IS,
     WHERE IS" AND LESSEE AGREES AND ACKNOWLEDGES THAT, SAVE AS EXPRESSLY STATED
     IN THIS AGREEMENT, LESSOR WILL HAVE NO LIABILITY IN RELATION TO, AND LESSOR
     HAS NOT AND WILL NOT BE DEEMED TO HAVE MADE OR GIVEN (WHETHER BY VIRTUE OF
     HAVING DONE OR FAILED TO DO ANY ACT, OR HAVING ACQUIRED OR FAILED TO
     ACQUIRE ANY STATUS UNDER OR IN RELATION TO THIS AGREEMENT OR OTHERWISE),
     ANY WARRANTIES OR REPRESENTATIONS, EXPRESS OR IMPLIED, WITH RESPECT TO, THE
     AIRCRAFT, INCLUDING BUT NOT LIMITED TO: -

(a)  THE TITLE, DESCRIPTION, AIRWORTHINESS, COMPLIANCE WITH SPECIFICATIONS,
     OPERATION, MERCHANTABILITY, FREEDOM FROM CLAIMS OF INFRINGEMENT OR THE
     LIKE, FITNESS FOR ANY PARTICULAR USE OR PURPOSE, VALUE, DURABILITY,
     CONDITION, OR DESIGN, OR AS TO THE QUALITY OF THE MATERIAL OR WORKMANSHIP,
     THE ABSENCE OF LATENT OR OTHER DEFECTS, WHETHER OR NOT DISCOVERABLE, OR AS
     TO ANY OTHER REPRESENTATION OR WARRANTY WHATSOEVER, EXPRESS OR IMPLIED
     (INCLUDING ANY IMPLIED WARRANTY ARISING FROM A COURSE OF PERFORMANCE OR
     DEALING OR USAGE OF TRADE) WITH RESPECT TO THE AIRCRAFT, ANY ENGINE OR ANY
     PART; OR

(b)  ANY OBLIGATION, LIABILITY, RIGHT, CLAIM OR REMEDY IN CONTRACT OR IN TORT
     OUT OF ANY NEGLIGENCE OR STRICT LIABILITY OF LESSOR OR OTHERWISE; FOR: -

     (i)   ANY LIABILITY, LOSS OR DAMAGE CAUSED OR ALLEGED TO BE CAUSED DIRECTLY
           OR INDIRECTLY BY THE AIRCRAFT OR ANY ENGINE OR BY ANY INADEQUACY
           THEREOF OR DEFICIENCY OR DEFECT THEREIN OR BY ANY OTHER CIRCUMSTANCE
           IN CONNECTION THEREWITH;

     (ii)  THE USE OPERATION, OR PERFORMANCE OF THE AIRCRAFT OR ANY RISKS
           RELATING THERETO;

     (iii) ANY INTERRUPTION OF SERVICE, LOSS OF BUSINESS OR ANTICIPATED PROFITS
           OR CONSEQUENTIAL DAMAGES;

     (iv)  THE DELIVERY, OPERATION, SERVICING, MAINTENANCE, REPAIR, IMPROVEMENT
           OR REPLACEMENT OF THE AIRCRAFT, ANY ENGINE OR ANY PART; OR

     (v)   ANY OTHER DIRECT, INCIDENTAL OR CONSEQUENTIAL DAMAGES.

17.2 Waiver: LESSEE HEREBY WAIVES, AS BETWEEN ITSELF AND THE LESSOR, ALL ITS
     RIGHTS IN RESPECT OF ANY WARRANTY OR REPRESENTATION, 

                                      70
<PAGE>
 
     EXPRESS OR IMPLIED, ON THE PART OF LESSOR AND ALL CLAIMS AGAINST LESSOR
     HOWSOEVER AND WHENEVER ARISING AT ANY TIME IN RESPECT OF OR OUT OF THE
     POSSESSION, OPERATION OR PERFORMANCE OF THE AIRCRAFT, ANY ENGINE OR ANY
     PART OR THIS AGREEMENT OR THE OTHER OPERATIVE DOCUMENTS EXCEPT TO THE
     EXTENT ARISING UNDER CLAUSE 2.4.

17.3 Disclaimer of Consequential Damages: LESSEE AGREES THAT IT SHALL NOT BE
     ENTITLED TO RECOVER, AND HEREBY DISCLAIMS AND WAIVES ANY RIGHT THAT IT MAY
     OTHERWISE HAVE TO RECOVER, CONSEQUENTIAL DAMAGES (AS SUCH TERM IS DEFINED
     IN SECTION 10520(B) OF THE CALIFORNIA UNIFORM COMMERCIAL CODE) AS A RESULT
     OF ANY BREACH OR ALLEGED BREACH BY LESSOR OF ANY OF THE AGREEMENTS,
     REPRESENTATIONS OR WARRANTIES OF LESSOR CONTAINED IN THIS AGREEMENT OR THE
     OTHER OPERATIVE DOCUMENTS.

17.4 Confirmation: LESSEE CONFIRMS THAT IT IS FULLY AWARE OF THE PROVISIONS OF
     THIS CLAUSE AND ACKNOWLEDGES THAT RENT AND OTHER AMOUNTS HAVE BEEN
     CALCULATED BASED ON ITS PROVISIONS.

18.  SECTION 1110

     Lessee acknowledges that Lessor would not have entered into this Agreement
     unless it had available to it the benefits of a lessor under Section 1110
     of Title 11 of the United States Code. Lessee covenants and agrees with
     Lessor that to better ensure the availability of such benefits, Lessee
     shall support any motion, petition or application filed by Lessor with any
     bankruptcy court having jurisdiction over Lessee, whereby Lessor seeks
     recovery of possession of the Aircraft under said Section 1110 and shall
     not in any way oppose such action by Lessor unless Lessee shall have
     complied with the requirements of said Section 1110 to be fulfilled in
     order to entitle Lessee to continued use and possession of the Aircraft
     hereunder. In the event said Section 1110 is amended, or if it is repealed
     and another statute is enacted in lieu thereof, Lessor and Lessee agree to
     amend this Agreement and take such other action not inconsistent with this
     Agreement as Lessor reasonably deems necessary so as to afford to Lessor
     the rights and benefits as such amended or substituted statute confers upon
     owners and lessors of aircraft similarly situated to Lessor.

19.  USURY LAWS: The parties intend to contract in strict compliance with the
     usury Laws of the States of California and Colorado and, to the extent
     applicable, the United States of America. Notwithstanding anything to the
     contrary in the Operative Documents, Lessee will not be obligated to pay
     any interest in excess of the maximum non-usurious interest rate, as in
     effect from time to time, which may by applicable Law be charged,
     contracted for, reserved, received or collected by Lessor in connection
     with the Operative Documents. During any period of time in which the then-
     applicable highest lawful rate is lower than the rate specified in Clauses
     5.11 or 13.2, interest will accrue and be payable at such highest lawful
     rate; however, if at later times such highest lawful rate is greater than
     the rate specified in Clauses 5.11 or 13.2, then Lessee will 

                                      71
<PAGE>
 
     pay interest at the highest lawful rate until the aggregate amount of
     interest paid by Lessee equals the amount of interest that would have been
     payable in accordance with the interest rate specified in Clauses 5.11 or
     13.2.

20.  MODIFICATION OR REVISION:

     Neither this Agreement nor any term of this Agreement may be modified,
     rescinded, changed waived, discharged or terminated except by a writing
     signed by the party to be charged. Lessor and Lessee acknowledge their
     agreement to the provision of this Clause 20 by their initials below: -

     LESSOR:                     LESSEE:              
             ----------                  ------------

                                      72

<PAGE>
 
21.  IN WITNESS whereof the parties hereto have executed this Agreement on the
     date shown at the beginning of this Agreement.

     WITNESS      SIGNED on behalf of
                  GENERAL ELECTRIC CAPITAL CORPORATION


                  By:  
                       ------------------------------

                  Name:  
                         ----------------------------

                  Title:
                          ---------------------------


     WITNESS      SIGNED on behalf of FRONTIER AIRLINES, INC.


                  By: 
                       ------------------------------

                  Name: 
                         ----------------------------

                  Title: 
                          ---------------------------

                                      73
<PAGE>
 
                                  SCHEDULE 1

 
                                    PART 1

                            DESCRIPTION OF AIRCRAFT

AIRCRAFT
--------

MANUFACTURER:   Boeing

MODEL:          737-300

SERIAL NUMBER:  28563

ENGINES
-------

ENGINE TYPE:    CFM-56-3C1

SERIAL NOS:     SN [______];  SN [______];

On the Delivery Date the Aircraft shall be in the following condition:-

(a)  New, ex factory;

(b)  painted in Lessee's livery, provided that Lessor has been furnished with a
     detailed working drawing no later than three months prior to the scheduled
     Delivery Month and that costs in excess of normal aircraft exterior
     painting costs to accommodate the application of Lessee's decorative decals
     to the vertical fin and rudder areas shall be reimbursed by Lessee;

(c)  have had accomplished all outstanding (i.e. at or prior to the Delivery
     Date) mandatory inspection and modification requirements, airworthiness
     directives and similar requirements applicable to the Aircraft, any Engine
     or Part having a compliance date prior to the Delivery Date or within 
     90 days after the Delivery Date and which are required by the Air
     Authority, and/or the FAA and/or mandated by any manufacturer of the
     Aircraft, any Engine or Part;

(d)  shall have no open, deferred, continued, carryover or placarded log book
     items; and

(e)  equipped for US domestic passenger operation under FAR Part 121.

                                      74
<PAGE>
 
                                    PART 2

                              AIRCRAFT DOCUMENTS

A.   CERTIFICATES

     .    FAA Certificate of Airworthiness (on board aircraft)
     .    Current Aircraft Registration Certificate (on board aircraft)

B.   AIRCRAFT STATUS SUMMARIES

     .    Aircraft record of flight time and cycles (listing of accumulated
          hours and cycles as of specific dates)

     .    Airworthiness Directive Applicability and Compliance Report

     .    Supplemental Structural Inspection (SSID) Status (if applicable)

     .    Corrosion Prevention and Control Program Task Status

     .    List of Major Repairs and Alterations

     .    List and Status of Life Limited Components

     .    Check/Inspection Status

     .    List and Current Status of Time-Controlled Components

     .    Serialized On-Condition/Condition Monitored Components Inventory of
          Installed Units

C.   AIRCRAFT MAINTENANCE RECORDS

     Airframe inspection, maintenance, modification, and repair documents with
     maintenance and/or inspection signatures (as required) and description of
     work done.

     .    Last "A", "B", "C" and "D" Checks (or equivalents) 
          (In the event that a check is performed in phases, all phases
          necessary to constitute a complete block check are required. In the
          event that check content varies by multiples of the check, all
          multiples necessary to constitute a complete cycle are required.)

     .    Airworthiness Directive, Service Bulletin and modification compliance
          documents including engineering orders, drawings, shop cards, etc., as
          necessary to establish method of compliance, quality control
          acceptance, and approval authority

                                      75
<PAGE>
 
     .    Supplemental Structural Inspection (SSID) compliance documents and
          findings (if applicable)

     .    Corrosion Prevention and Control Program compliance documents and
          findings

     .    Documentation of major repairs and alterations including engineering
          orders, drawings, Supplemental Type Certificates, Master Change
          Notice, etc., as necessary to define work done, certification basis,
          and approval authority.

     .    Aircraft weighing records

D.   AIRCRAFT HISTORY RECORDS

     .    Service Difficulty Reports

     .    Accident or Incident Reports

E.   ENGINE RECORDS (for each engine)

     .    Engine Master Record (record of installation and removal and
          accumulated flight time and cycles)

     .    Airworthiness Directive Applicability and Compliance Report

     .    Manufacturer Service Bulletin Compliance Report

     .    List of Operator Modifications Incorporated, if any

     .    List of Major Repairs and Alterations, if any

     .    List of Current Status of Life Limited Components

     .    Check/Inspection Status

     .    List and Status of Time Controlled Components

     .    Serialization On-Condition/Condition Monitored Components Inventory of
          Installed Units

     .    Repair, overhaul and inspection documents including FAA Forms 337

     .    Documents necessary to demonstrate installation and traceability to
          new for life limited components currently installed

     .    Test Cell Records for last test

                                      76
<PAGE>
 
F.   APU RECORDS

     .    APU Master Record (record of installation and removal and accumulated
          time and cycles)
     
     .    Airworthiness Directive Applicability and Compliance Report

     .    Manufacturer Service Bulletin Compliance Report

     .    List of Operator Modifications Incorporated, if any

     .    List and Current Status of Life Limited Components

     .    List and Status of Time Controlled Components

     .    Serialized On-Condition/Condition Monitored Components Inventory of
          Installed Units

     .    Repair, overhaul and inspection documents including FAA Forms 337

     .    Documents necessary to demonstrate installation and traceability to
          new for life limited components currently installed

G.   COMPONENT RECORDS

     .    Time Controlled Component Historical Records with installation and
          serviceability tags

     .    Documents necessary to demonstrate installation and traceability to
          new for life limited components currently installed

     .    Installation records and serviceability tags for Serialized On-
          condition/Condition Monitored Components (minimum of last twelve
          months)

H.   MANUALS

     Airplane Delivered Used:

     .    Airplane Flight Manual

     .    Weight and Balance Control and Loading Manual

     .    Maintenance Manual (microfilm)

     .    Wiring Diagram Manual (microfilm)

     .    Illustrated Parts Catalog (microfilm)

                                      77
<PAGE>
 
     .    Structural Repair Manual (microfilm)

     .    Engine Maintenance Manual (microfilm)

     .    Engine Illustrated Parts Manual (microfilm)

     .    Operator Weight and Balance Manual

     .    Pilots Handbook

     .    Minimum Equipment List

I.   MISCELLANEOUS TECHNICAL DOCUMENTS

     .    Maintenance Program Specifications

     .    Engine Build Specifications

     .    Reference material necessary for interpretation of status summaries,
          i.e. Operator Part Number Cross Reference

     .    Interior configuration drawings

     .    Boeing Aircraft Readiness Log

     .    Loose Equipment Inventory

     .    FAA Burn Certificates of Aircraft Interiors and seats

                                      78
<PAGE>
 
                                  SCHEDULE 2

                      CERTIFICATE OF TECHNICAL ACCEPTANCE

This Certificate of Technical Acceptance is delivered, on the date set out below
by Frontier Airlines, Inc. ("Lessee"), to GENERAL ELECTRIC CAPITAL CORPORATION
("Lessor"), pursuant to the Aircraft Lease Agreement dated as of the 18th of
November, 1996 between Lessor and Lessee (the "Agreement"). The capitalized
terms used in this Certificate shall have the meaning given to such terms in the
Agreement.

1.   DETAILS OF ACCEPTANCE

     Lessee hereby confirms to Lessor that Lessee has at [ ] o'clock on this 
     [ ] day of [ ], 199[ ], at [ ], accepted the following, in accordance with
     the provisions of the Agreement:

(a)  Boeing Model 737-300 airframe, Manufacturer's Serial No. 28563;

(b)  CFM-56-3C1 Engines: -

     Engine Manufacturer's Serial Nos.

     1)  [______]

     2)  [______]

     (Each of which shall have more than 750 rated takeoff horsepower or the
     equivalent of such horsepower);

(c)  Fuel on Board Status:     [         ] (lbs.) (gals.)

(d)  Loose Equipment Check List: as per list signed by Lessor and Lessee and
     attached hereto; and

(e)  Aircraft Documents: as per list signed by Lessor and Lessee and attached
     hereto.

                                      79
<PAGE>
 
2.   HOURS AND CYCLES DATA (as of Delivery Date)

(a)  Airframe:
     --------

     Number of Hours since last phase "D" Check (Heaviest Check):  ______ hours
     -----------------------------------------------------------

     "C" Check (or Equivalent):
     -------------------------

          Interval:  
                     ----------------------------

          Time Since:  
                       --------------------------

(b)  Landing Gear Overhaul:
     ---------------------

     Number of Cycles Since Last Overhaul:

          Left Gear                            cycles
                    --------------------------

          Right Gear                           cycles
                     -------------------------

          Nose Gear                            cycles
                    --------------------------

          Center Gear                          cycles
                      ------------------------

     Interval: Left Gear 
                         ---------------------

          Right Gear 
                     -------------------------

          Nose Gear 
                    --------------------------

          Center Gear 
                      ------------------------

(c)  Engines:
     -------

     Number of Hours Since Last Heavy Shop Visit:

          S/N            :       hours
             ------------ -------

          S/N            :       hours
             ------------ -------

     Number of Hours Since Last Hot Section Refurbishment:

          S/N            :       hours
             ------------ -------

          S/N            :       hours
             ------------ -------
                                      80
<PAGE>
 
     Number of Hours Since Last Cold Section Refurbishment:

          S/N    :       hours
                  ------                 

          S/N    :       hours
                  ------                 

     Hot Section Inspection:

          Interval: 
                     ---------------------------

          Time Since (S/N       ):  
                                    --------------------------

          Time Since (S/N       ):  
                                    --------------------------

     Time Remaining to First Restriction:

     Engine S/N:           

          Hours:                               Restriction:  
                   ----------                                ----------
     
          Cycles:                              Restriction:  
                   ----------                                ----------
                                                                            
     Engine S/N:                                                            
                                                                            
          Hours:                               Restriction:  
                   ----------                                ----------
                                                                            
          Cycles:                              Restriction:  
                   ----------                                ----------

     Average Cycles in Life Limited Parts (see attached Schedule):
                                                                  ---------

(d)  Auxiliary Power Unit:
     --------------------

     Number of APU Hours Since Last Heavy Shop Visit:

                     hours           Date accomplished 
          ----------                                   ----------

     Hot Section Inspection:

          Interval:         
                            ------------------------

          Time Since:       
                            ------------------------

(e)  Time Controlled Components:   [See attached DUJX Report]
     --------------------------

(f)  Interior Equipment:
     ------------------

     Number of Passenger Seats and  Configuration:
                                                  ---------------

 --------------------

                                      81
<PAGE>
 
     Number of Galleys and Location:     
                                         ---------  ----------

     Number of Lavatories and Location: 
                                         ---------  ----------
                                                    
     LOPA - Attached                   
                                         ---------  ----------
                                                    
     List of Loose Equipment on Board:              
                                                    
     ---------------------------------------------  ---------------             
                                                                                
     ---------------------------------------------  ---------------             
                                                                                
     ---------------------------------------------  ---------------             
                                                                                
     ---------------------------------------------  ---------------             
                                                                                
     ---------------------------------------------  ---------------             
                                                                                
     ---------------------------------------------  ---------------             

(g)  Avionics:            Description                        Model        Part 
     --------             -----------                        -----        ----
     No. 
     ---

     ---------------------------------------------  ---------  ----------------
                                                                               
     ---------------------------------------------  ---------  ----------------
                                                                               
     ---------------------------------------------  ---------  ----------------
                                                                               
     ---------------------------------------------  ---------  ----------------
                                                                               
     ---------------------------------------------  ---------  ----------------
                                                                               
     ---------------------------------------------  ---------  ----------------


                                      82
<PAGE>
 
3.   ACCEPTANCE:

     The undersigned hereby confirms that the Aircraft, Engines, Parts and
     Aircraft Documents are acceptable to it, satisfy all of the Delivery
     Condition Requirements and are in the condition for delivery to and
     acceptance by Lessee as required under the Agreement, except as described
     on the EXCEPTIONS LIST attached hereto. LESSEE'S EXECUTION AND DELIVERY OF
     THIS CERTIFICATE SIGNIFIES LESSEE'S ABSOLUTE AND IRREVOCABLE ACCEPTANCE OF
     DELIVERY OF THE AIRCRAFT TO IT FOR ALL PURPOSES HEREOF AND OF THE
     AGREEMENT.

     IN WITNESS WHEREOF, Lessee has, by its duly authorized representative,
     executed this Certificate on the date in paragraph 1 above.

     LESSEE: FRONTIER AIRLINES, INC.

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

                                      83
<PAGE>
 
                                                                      ATTACHMENT

                                EXCEPTIONS LIST
                                ---------------

     The items set forth below represent non-conformities to the Delivery
Condition Requirements as of the Delivery Date, the corrective action (or
payment to Lessee in lieu thereof), if any, to be taken by Lessor and the date
of accomplishment. LESSEE ACKNOWLEDGES AND AGREES THAT LESSOR'S UNDERTAKINGS SET
FORTH HEREIN ARE IN FURTHERANCE OF AND SUBJECT TO THE AIRCRAFT LEASE AGREEMENT
DATED AS OF MARCH 25, 1997 BETWEEN LESSOR AND LESSEE (THE "LEASE"), THAT LESSOR
MAKES NO REPRESENTATIONS OR WARRANTIES OF ANY KIND, EXPRESS OR IMPLIED,
HEREUNDER AND THAT LESSORS UNDERTAKINGS ARE SUBJECT TO EACH AND EVERY DISCLAIMER
OF LESSOR SET FORTH IN THE LEASE INCLUDING, WITHOUT LIMITATION, THOSE SET FORTH
IN CLAUSE 17 THEREOF.


LESSOR                                   LESSEE

By:                                      By:
     -------------------------------          -------------------------------

Title:                                   Title:                            
        ----------------------------             ----------------------------

<TABLE> 
<CAPTION> 
------------------------------------------------------------------------------
  ITEM     DESCRIPTION AND CORRECTIVE         COMPLETION          LESSEE'S 
   NO.              ACTION                       DATE             INITIALS
<S>    <C>                                 <C>                <C> 
       ---------------------------------                  
                                                          
1.     ---------------------------------                  
                                                          
       ---------------------------------                  
                                                          
       ---------------------------------   ----------------   ----------------
                                                          
                                                              --
2.     ---------------------------------                  
                                                          
       ---------------------------------                  
                                                          
       ---------------------------------                  
                                                          
       ---------------------------------   ----------------   ----------------
                                                          
                                                              --
3.     ---------------------------------                  
                                                          
       ---------------------------------                  
                                                          
       ---------------------------------                  
                                                          
       ---------------------------------   ----------------   ----------------
                                                          
                                                              --
------------------------------------------------------------------------------
</TABLE> 

                                      84
<PAGE>
 
                                  SCHEDULE 3

                       OPERATING CONDITION AT REDELIVERY

     On the Expiry Date the Aircraft, subject to fair wear and tear generally,
     will be in the condition set out below:-

1.   GENERAL CONDITION

     The Aircraft will:-

(a)  be in the same configuration as on the Delivery Date or as reasonably
     requested by Lessor;

(b)  be clean by commercial airline standards;

(c)  have installed the full complement of engines and other equipment, parts,
     furnishings  and accessories as is normally installed in the Aircraft and
     the loose equipment as was installed in the Aircraft at the time of
     Delivery, and be in a condition suitable for immediate operation in
     commercial service;

(d)  have in existence a valid certificate of airworthiness (or if required by
     Lessor, a valid export certificate of airworthiness) with respect to the
     Aircraft issued by the Air Authority and be in compliance without waiver
     with all current FAR Part 121 requirements;

(e)  comply with the manufacturer's original specifications or as modified by
     Lessee with the approval of Lessor, and as required to meet the regulations
     of the Air Authority at the Expiry Date;

(f)  have undergone, immediately prior to redelivery, a block 'C' Check so that
     all inspections falling due within the next following 3,200 Flight Hours,
     3,000 Cycles or the next following 12 months of operation in accordance
     with Lessee's Maintenance Program, have been accomplished;

(g)  have had accomplished all outstanding (i.e. at or prior to the Expiry Date)
     mandatory inspection and modification requirements, airworthiness
     directives and similar requirements applicable to the Aircraft, any Engine
     or Port having a compliance date during the Term or within 90 days after
     the Expiry Date and which are required by the Air Authority, and/or
     mandated by any manufacturer of the Aircraft, any Engine or Part, for this
     purpose, compliance shall be by terminating action if:  the latest date
     permitted by such Airworthiness Directive for compliance by terminating
     action falls within 90 days after the Expiry Date;

                                      85
<PAGE>
 
(h)  have installed all applicable vendor's and manufacturer's service bulletin
     kits received free of charge by Lessee that are appropriate for the
     Aircraft and to the extent not installed, those kits will be furnished free
     of charge to Lessor;

(i)  have its fuselage, engine cowlings, and vertical fin and rudder freshly
     painted in an all white livery and the paint on the wings and the
     horizontal stabilizer surfaces shall be clean and in good condition, free
     from cracks, peeling, blistering and erosion and shall be uniform in color
     and free from areas of local touch up;

(j)  have all signs and decals clean, secure and legible;

(k)  shall have no open, deferred, continued, carryover or placarded log book
     items; and

(l)  meet the requirements of FAR Part 36, Appendix C, Stage 3 noise compliance
     as then in effect without waiver or restriction.

2.   COMPONENTS

(a)  Each Flight Hour and Cycle limited component (other than the APU) shall
     have not less than 3,200 Flight Hours and 3,000 Cycles (whichever is the
     more stringent test) of life remaining to the next expected removal, in
     accordance with Lessee's Maintenance Program and shall be supported by
     documentation indicating Time Since New, Cycles Since New, Time Since
     Overhaul and Cycles Since Overhaul and shall be accompanied by appropriate
     certification documentation acceptable to the Air Authority from the last
     overhaul or zero time shop visit such as JAR form 1 or FAA form 8130-1;

(b)  Each calendar-limited component including safety equipment will have not
     less than 12 months life remaining to the next scheduled removal in
     accordance with Lessee's Maintenance Program and shall be supported by
     documentation indicating Time Since New, Cycles Since New, Time Since
     Overhaul, Cycles Since Overhaul and shall be accompanied by appropriate
     certification documentation acceptable to the Air Authority from the last
     overhaul or zero time shop visit such as JAR form 1 or FAA form 8130-1;

(c)  Each life-limited component will be supported by certification
     documentation necessary to demonstrate traceability of utilization since
     new (i.e. back-to-birth traceability);

(d)  Each "on-condition" and "condition monitored" component will be
     serviceable;

(e)  The APU will be fresh from a burner can change and have not more than 1,500
     Flight Hours since the last hot section inspection (including removal and
     inspection of the plenum, torus and turbine nozzle), and have not more than
     5,000 Flight Hours since last gas path refurbishment in accordance with the
     manufacturer's specifications and be free of any defects as determined by
     manufacturer limits; and

(f)  The installed components as a group will have an average of total flight
     time since new of not more than that of the Airframe.

                                      86
<PAGE>
 
3.   ENGINES

     Each Engine will be installed on the Aircraft and if not the engines
     installed on the Delivery Date will be accompanied by all documentation
     Lessor may require to evidence that title thereto is properly vested in
     Owner and will:-

(a)  have not less than 4,000 Engine Flight Hours or 3,500 Cycles (whichever is
     the more restrictive factor) remaining to next scheduled life limited part
     replacement and have an expected on-wing remaining life of not less than
     4,000 Engine Flight Hours or 3,500 Cycles (whichever is the more
     restrictive factor). The expected life remaining will be determined by the
     inspection and checks accomplished by Lessor in accordance with this
     Agreement;

(b)  not be "on watch".  (For purposes of the Agreement "on watch" shall mean
     any maintenance condition that would require an Engine removal and/or
     reinspection or airworthiness directive action that would require an Engine
     removal within 4,000 flight hours and 3,500 Cycles of the Expiry Date); and

(c)  be in a condition which can operate at maximum rated take off power at sea
     level at a temperature of 45oC.

4.   FUSELAGE, WINDOWS AND DOORS

(a)  The fuselage will be free of major dents and abrasions, and any dents and
     abrasions that require a repetitive inspection or future repair, temporary
     repairs, and loose or pulled or missing rivets and all structural repairs
     shall be in accordance with the manufacturer's and Air Authority's approved
     data for permanent repair;

(b)  Windows will be free of delamination, blemishes, crazing and will be
     properly sealed; and

(c)  Doors will be free moving, correctly rigged and be fitted with serviceable
     seals.

5.   WINGS AND EMPENNAGE

(a)  Leading edges will be free from damage;

(b)  Control surfaces will be waxed and polished;

(c)  Unpainted cowlings and fairings will be polished; and

(d)  Wings will be free of fuel leaks.

6.   INTERIOR

(a)  Ceilings, sidewalls and bulkhead panels will be clean and free of cracks
     and stains;

(b)  Carpets and seat covers will be in good condition, clean and free of stains
     and meet FAR fire resistance regulations;

                                      87
<PAGE>
 
(c)  Seats will be serviceable, in good condition and repainted as necessary;
     and

(d)  Emergency equipment having a calendar life will have a minimum of 1 year or
     100% of its total approved life, whichever is less, remaining.

7.   COCKPIT

(a)  Fairing panels shall be free of stains and cracks, will be clean secure and
     repainted as necessary;

(b)  Floor coverings will be clean and effectively sealed;

(c)  Seat covers will be in good condition, clean and free of stains and will
     conform to FAR fire resistance regulation; and

(d)  Seats will be serviceable, in good condition and will be repainted as
     necessary.

8.   CARGO COMPARTMENTS

(a)  Panels will be in good condition; and

(b)  Nets will be in good condition.

9.   LANDING GEAR

     The landing gear and wheel wells will be clean, free of leaks and repaired
     as necessary. Wheels and brakes shall be in a half life condition or
     better.

(a)  The landing gear and wheel wells will be clean, free of leaks and repaired
     as necessary.

(b)  Each wheel and brake assembly shall be in a half life condition or better.

10.  CORROSION

(a)  The Aircraft shall be in compliance with the Manufacturer's corrosion
     prevention and control program (CPCP) requirements.  All CPCP inspections
     which would normally be accomplished while access is provided during
     structural inspection in accordance with Lessee's Maintenance Program
     during the Term shall have been accomplished.;

(b)  The entire fuselage will be substantially free from corrosion and will be
     adequately treated and an approved corrosion prevention program will be in
     operation; and

(c)  Fuel tanks will be free from contamination and corrosion and a tank
     treatment program will be in operation.

                                      88
<PAGE>
 
                                  SCHEDULE 4

                            INSURANCE REQUIREMENTS

     The Insurances required to be maintained are as follows:-

(a)  HULL ALL RISKS of Loss or Damage whilst flying and on the ground with
     respect to the Aircraft on an "agreed value basis" for the Agreed Value and
     with a deductible not exceeding the Deductible Amount set forth in Letter
     Agreement No. 1, or such other amount agreed by Lessor from time to time;

(b)  HULL WAR AND ALLIED PERILS, being such risks excluded from the Hull All
     Risks Policy to the fullest extent available from the leading international
     insurance markets including confiscation and requisition by the State of
     Registration for the Agreed Value, however, when the Aircraft is being
     operated solely in or over the United States of America and/or Canada,
     coverage may be limited to such perils as are customarily insured by
     comparable airlines, operating similar equipment in similar circumstances;

(c)  ALL RISKS (INCLUDING WAR AND ALLIED RISK except when on the ground or in
     transit other than by air) property insurance on all Engines and Parts when
     not installed on the Aircraft on an "agreed value" basis for their full
     replacement value and including engine test and running risks;

(d)  AIRCRAFT THIRD PARTY, PROPERTY DAMAGE, PASSENGER, BAGGAGE, CARGO AND MAIL
     AND AIRLINE GENERAL THIRD PARTY (INCLUDING PRODUCTS) LEGAL LIABILITY for a
     Combined Single Limit (Bodily Injury/Property Damage) of an amount not less
     than the Minimum Liability Coverage for the time being any one occurrence
     (but in respect of products and personal injury liability this limit may be
     an aggregate limit for any and all losses occurring during the currency of
     the policy). War and Allied Risks are also to be covered under the Policy
     in  line with prudent market practice for comparable airlines, operating
     similar equipment in similar circumstances;

(e)  All required hull and spares insurance (as specified above), so far as it
     relates to the Aircraft will: -

     (i)  name Lessor and its successors and assigns as additional assureds for
          their respective rights and interests, warranted, each as to itself
          only, no operational interest;

     (ii) provide that any loss will be settled jointly with Lessor and Lessee
          and will be payable in Dollars to Lessor except where the loss does
          not exceed the Damage Notification Threshold, and Lessor has not
          notified the insurers to the contrary, in which case the loss will be
          settled with and paid to Lessee;

                                      89
<PAGE>
 
     (iii) if separate Hull "all risks" and "war risks" insurances are arranged,
           include a 50/50 provision in accordance with market practice (AVS.
           103 is the current market language);

     (iv)  confirm that the insurers are not entitled to replace the Aircraft in
           the event of an insured Event of Loss;

     (v)   confirm that the insurers will not obtain a valid discharge of the
           obligations under the Insurances by payment to the broker,
           notwithstanding market practice to the contrary;

(f)  All required liability insurances (specified above) will:-

     (i)   include Lessor, GECASI, GECASL and their respective successors and
           assigns and their respective shareholders, subsidiaries, directors,
           officers, agents, employees and indemnitees as additional insureds
           for their respective rights and interests, warranted, each as to
           itself only, no operational interest;

     (ii)  include a Severability of Interest Clause which provides that the
           insurance, except for the limit of liability, will operate to give
           each assured the same protection as if there was a separate policy
           issued to each assured;

     (iii) contain a provision confirming that the policy is primary without
           right of contribution and the liability of the insurers will not be
           affected by any other insurance of which Lessor or Lessee have the
           benefit so as to reduce the amount payable to the additional insureds
           under such policies;

(g)  All Insurances will:-

     (i)   be in accordance with normal industry practice of persons operating
           similar aircraft in similar circumstances;

     (ii)  provide cover denominated in Dollars and any other currencies which
           Lessor may reasonably require in relation to liability insurance;

     (iii) operate on a worldwide basis subject to such limitations and
           exclusions as Lessor may agree;

     (iv)  acknowledge the insurer is aware (and has seen a copy) of this
           Agreement and that the Aircraft is owned by Lessor;

     (v)   provide that, in relation to the interests of each of the additional
           assureds the Insurances will not be invalidated by any act or
           omission by Lessee, or any other person other than the respective
           additional assured seeking protection and shall insure the interests
           of each of the additional assureds regardless of any breach or
           violation by Lessee, or any other person other than the respective
           additional assured seeking protection of any warranty, declaration or
           condition, contained in such Insurances;

                                      90
<PAGE>
 
     (vi)   provide that the insurers will hold harmless and waive any rights of
            recourse and/or subrogation against the additional assureds,
            including GECASI and GECASL or to be subrogated to any rights of
            Lessor against Lessee ;
                     
     (vii)  provide that the additional assureds will have no obligation or
            responsibility for the payment of any premiums due (but reserve the
            right to pay the same should any of them elect so to do) and that
            the insurers will not exercise any right of set-off or counter-claim
            in respect of any premium due against the respective interests of
            the additional assureds other than outstanding premiums relating to
            the Aircraft, any Engine or Part the subject of the relevant claim;

     (viii) provide that the Insurances will continue unaltered for the benefit
            of the additional assureds for at least 30 days after written notice
            by registered mail or telex of any cancellation, change, event of
            non-payment of premium or installment thereof has been sent to
            Lessor, except in the case of war risks for which 7 days (or such
            lesser period as is or may be customarily available in respect of
            war risks or allied perils) will be given, or in the case of war
            between the 5 great powers or nuclear peril for which termination is
            automatic;

     (ix)   if reinsurance is a requirement of this Agreement such reinsurance
            will (i) be on the same terms as the original insurances and will
            include the provisions of this Schedule, (ii) provide that
            notwithstanding any bankruptcy, insolvency, liquidation, dissolution
            or similar proceedings of or affecting the reinsured that the
            reinsurers' liability will be to make such payments as would have
            fallen due under the relevant policy of reinsurance if the reinsured
            had (immediately before such bankruptcy, insolvency, liquidation,
            dissolution or similar proceedings) discharged its obligations in
            full under the original insurance policies in respect of which the
            then relevant policy of reinsurance has been effected; and (iii)
            contain a "cut-through" clause in the following form (or otherwise,
            satisfactory to Lessor): "The Reinsurers and the Reinsured hereby
            mutually agree that in the event of any claim arising under the
            reinsurances in respect of a total loss or other claim where as
            provided by the Aircraft Lease Agreement dated March 25, 1997 and
            made between Lessor and Lessee such claim is to be paid to the
            person named as sole loss payee under the primary insurances, the
            Reinsurers will in lieu of payment to the Reinsured, its successors
            in interest and assigns pay to the person named as sole loss payee
            under the primary insurances effected by the Reinsured that portion
            of any loss due for which the Reinsurers would otherwise be liable
            to pay the Reinsured (subject to proof of loss), it being understood
            and agreed that any such payment by the Reinsurers will (to the
            extent of such payment) fully discharge and release the Reinsurers
            from any and all further liability in connection therewith"; subject
            to such provisions not contravening any law of the State of
            Incorporation;

     (x)    contain a provision entitling Lessor or any insured party to
            initiate a claim under any policy in the event of the refusal or
            failure of Lessee to do so; and

                                      91
<PAGE>
 
     (xi)   accept and insure the indemnity provisions of this Agreement to the
            extent of the risks covered by the policies.

                                      92
<PAGE>
 
                                  SCHEDULE 5


                             FORM OF LEGAL OPINION


     To:  General Electric Capital Corporation



                                                           [Date]


     Dear Sirs,

1.   You have asked us to render an opinion in connection with the transaction
     governed, inter alia, by the under mentioned documents. Words and
     expressions used herein will bear the same meanings as defined in an
     Aircraft Lease Agreement (the "Lease") dated March 25, 1997 between General
     Electric Capital Corporation ("Lessor") and Frontier Airlines, Inc.
     ("Lessee") in respect of one Boeing 737-300 aircraft with manufacturer's
     serial number 28563 together with the two installed engines (the
     "Aircraft").

1.1. the Lease;

1.2. the Memorandum and Articles of Association of Lessee;

1.3. all other documents, approvals and consents of whatever nature and wherever
     kept which it was, in our judgment and to our knowledge, necessary or
     appropriate to examine to enable us to give the opinion expressed below.

2.   Having considered the documents listed in paragraph 1 above, and having
     regard to the relevant laws of [the State of California] [the State of
     Colorado] we are pleased to advise that in our opinion:-

(a)  Lessee was duly incorporated in the State of [     ] on [ ] for an
     indefinite period as a limited company and is a validly existing separate
     legal entity, is subject to suit in its own name, and, to the best of our
     knowledge, no steps have been, or are being, taken to appoint a receiver,
     liquidator, trustee or similar officer over, or to wind up, Lessee;

(b)  Lessee has the corporate power to enter into and perform, and has taken all
     necessary corporate action to authorize the entry into, performance and
     delivery of, the Lease and the transactions contemplated by the Lease;

(c)  the entry into and performance by Lessee of, and the transactions
     contemplated by, the Lease do not and will not:-

     (i)   conflict with any laws binding on Lessee; or

     (ii)  conflict with the constitutional documents of Lessee; or

                                      93
<PAGE>
 
     (iii) conflict with or result in default under any document which is
           binding upon Lessee or any of its assets or result in the creation of
           any Security Interest over any of its assets.

(d)  no authorizations, consents, licenses, approvals and registrations (other
     than those which have been obtained and of which copies are attached
     hereto) are necessary or desirable to be obtained from any governmental or
     other regulatory authorities in the United States of America (the "United
     States") to enable Lessee:-

     (1)  to enter into and perform the transactions contemplated by the Lease;

     (2)  to import the Aircraft into the United States for the duration of the
          Term;

     (3)  to operate the Aircraft in the United States for the transport of 
          fare-paying passengers; or

     (4)  to make the payments provided for in the Lease;

(e)  except for [the filing and recordation of the Agreement with the FAA and]
     the filing of the Financing Statements with [   ] (which filing has been
     duly made on or before this date) it is not necessary or desirable, to
     ensure the priority, validity and enforceability of all the obligations of
     Lessee under the Lease that the Lease be filed, registered, recorded or
     notarized in any public office or elsewhere or that any other instrument
     relating thereto be signed, delivered, filed, registered or recorded, that
     any tax or duty be paid or that any other action whatsoever be taken;

(f)  No steps are necessary or desirable to record or perfect Lessor's interest
     in the Aircraft in the United States;

(g)  on termination of the Lease (whether on expiry or otherwise) as
     contemplated in the Lease, Lessor would be entitled:-

     (1)  to repossess the Aircraft;

     (2)  to export the Aircraft from the United States;

     without requiring any further consents, approvals or licenses from any
     governmental or regulatory authority in [];

(h)  the Lease has been properly signed and delivered on behalf of Lessee and
     the obligations on the part of Lessee contained therein, are valid and
     binding on and enforceable against Lessee respectively under the laws of
     the United States;

(i)  the events described in Clause 13.1(g) of the Lease comprise an accurate
     and complete statement of all events and situations provided for by the
     laws of the United States which may lead to the cessation of activities,
     winding up or dissolution of Lessee;

(j)  Lessee is a Certificated Air Carrier;

                                      94
<PAGE>
 
(k)  Lessee is a "citizen of the United States" as defined in Section 40102 of
     Title 49 of the United States Code;

(l)  Lessor is entitled to the benefits of Section 1110 of Title 11 of the
     United States Code;

(m)  Lessee's chief executive office (as defined in the Uniform Commercial Code
     in effect in [    ]) is located at [         ];

(n)  the obligations of Lessee under the Lease rank at least pari passu with all
     other present and future unsecured and unsubordinated (including contingent
     obligations) of Lessee;

(o)  there is no withholding tax or other Tax to be deducted from any payment
     whatsoever which may be made by Lessee pursuant to the Lease; with respect
     to any withholdings, the provisions of Clauses 5.6, 5.7 and 5.10 of the
     Lease are fully effective; and the arrangements contemplated by the Lease
     do not give rise to any charge whatsoever to Taxes in the United States;

(p)  there is no applicable usury or interest limitation law in the United
     States which may restrict the recovery of payments in accordance with the
     Lease;

(q)  there are no registration, stamp or other taxes or duties of any kind
     payable in the United States in connection with the signature, performance
     or enforcement by legal proceedings of the Lease;

(r)  Lessor will not violate any law or regulation in the United States nor
     become liable to tax in the United States by reason of entering into the
     Lease with Lessee, or performing its obligations thereunder;

(s)  it is not necessary to establish a place of business in the United States
     in order to enforce any provisions of the Lease;

(t)  the choice of the Governing Law to govern the Lease will be upheld as a
     valid choice of law in any action in the Courts of the United States;

(u)  the consent to the jurisdiction by Lessee contained in the Lease is valid
     and binding on Lessee and not subject to revocation;

(v)  any judgment for a definite sum given by the Courts of the State of
     California against Lessee would be recognized and accepted by the Courts of
     the United States without re-trial or examination of the merits of the
     case;

(w)  (i)  Lessee is subject to civil commercial law with respect to its
          obligations under the Lease; and

     (ii) neither Lessee nor any of its assets is entitled to any right of
          immunity and the entry into and performance of the Lease by Lessee
          constitute private and commercial acts; and

                                      95
<PAGE>
 
(x)  there are no laws or other rules in the United States (including, without
     limitation, Emergency Powers laws) pursuant to which Lessee may be deprived
     of the Aircraft by any Government Entity or any other person, other than
     Lessor or any assignee of Lessor.

3.   We do not purport to be experts on and do not purport to be generally
     familiar with or qualified to express legal opinions based on any law other
     than the laws of the United States and accordingly express no legal opinion
     herein based upon any law other than the laws of the United States.



     Yours faithfully,


                                      96
<PAGE>
 
                                  SCHEDULE 6

                            LEASE SUPPLEMENT NO. __



     LEASE SUPPLEMENT NO. ___, dated _________, 1995, between General Electric
Capital Corporation, a corporation organized under the laws of New York
("Lessor"), and Frontier Airlines, Inc. a corporation organized under the laws
of the State of Colorado ("Lessee").

     Lessor and Lessee have previously entered into that certain Aircraft Lease
Agreement dated as of March 25, 1997 (herein referred to as the "Agreement" and
the defined terms therein being hereinafter used with the same meaning).  The
Agreement provides for the execution and delivery from time to time of a Lease
Supplement substantially in the form hereof for the purpose of leasing the
aircraft described below under the Agreement as and when delivered by Lessor to
Lessee in accordance with the terms thereof.

     The Agreement and this Lease Supplement relate to the Aircraft, Engines and
Parts as more precisely described below.  A counterpart of the Agreement is
attached hereto and this Lease Supplement and the Agreement shall form one
document.

     In consideration of the premises and other good and sufficient
consideration, Lessor and Lessee hereby agree as follows: -

1.    Lessor hereby delivers and leases to Lessee under the Agreement and Lessee
      hereby accepts, acknowledges receipt of possession and leases from Lessor
      under the Agreement, that certain Boeing Model 737-300 commercial jet
      Aircraft, and the two (2) CFM International CFM-56-3-C1 Engines (each of
      which Engines has 750 or more rated takeoff horsepower or the equivalent
      of such horsepower) described in Schedule 1 hereto, together with the
      Aircraft Documents described in the Agreement (the "Delivered Aircraft").

2.    The Delivery Date of the Delivered Aircraft is the date of this Lease
      Supplement set forth in the opening paragraph hereof.

3.    The Term for the Delivered Aircraft shall commence on the Delivery Date
      and shall end on the Expiry Date.

4.    The amount of Rent for the Delivered Aircraft is set forth in Letter
      Agreement No. 1 to the Agreement.

5.    Lessee hereby confirms to Lessor that (i) the Delivered Aircraft and each
      delivered Engine have been duly marked in accordance with the terms of
      ---------
      Clause 8.7(d) of the Agreement, (ii) the Aircraft is insured as required
      by the Agreement, (iii) the representations and warranties of Lessee
      referred to in Clause 2 of the Agreement are hereby repeated with effect
      as of the date first above written, (iv) having inspected the Delivered
      Aircraft, Lessee acknowledges that the Delivered Aircraft satisfies all


                                      97
<PAGE>
 
      conditions required for Lessee's acceptance of delivery as set forth in
      the Agreement, except as noted in the Exceptions List attached to the
      Certificate of Technical Acceptance, and (v) the execution and delivery of
      this Lease Supplement signifies absolute and irrevocable acceptance by
      Lessee of the Delivered Aircraft for all purposes hereof and of the
      Agreement.

6.    All of the terms and provisions of the Agreement are hereby incorporated
      by reference in this Lease Supplement to the same extent as if fully set
      forth herein.

7.    This Lease Supplement may be executed in any number of counterparts, each
      of such counterparts, shall for all purposes be deemed to be an original;
      and all such counterparts shall together constitute but one and the same
      Lease Supplement.

      IN WITNESS WHEREOF, Lessor and Lessee have caused this Lease Supplement
No. __ to be duly executed as of the day and year first above written.

LESSOR,                               LESSEE,

GENERAL ELECTRIC CAPITAL              FRONTIER AIRLINES, INC.
CORPORATION


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





                                      98
<PAGE>
 
                                  SCHEDULE 1

                                      TO

                             LEASE SUPPLEMENT NO.

                                      One

                              New Boeing 737-300

                                   Airframe

                               Registration Mark
                               -----------------

                                    N_____
                                     


Manufacturer's

     Serial No.             Total Time*            Total Cycles*
     ----------             ----------             ------------

     28563                  
                            ----------             ------------


                       Installed CFM International, Inc.

                                  Engines                     
                              ----------------
Model No.           Serial No.         Total Time*          Total Cycles*
--------            ----------         ----------           ------------

CFM-56-3-C1         [________]                              
                                       -------------        -------------


CFM-56-3-C1         [________]
                                       -------------        -------------


     Each of the above-described Aircraft Engines is 750 or more rated takeoff
horsepower or its equivalent.

*    The total time and total cycles referred to above are as of ____________
     Time,_________,____. Such times and cycles are within________hours and
     _________cycles of the actual hours and cycles at the time of this Lease
     Supplement. 

                                      99
<PAGE>
 
                                  SCHEDULE 7


                                    FORM OF

                         LEASE TERMINATION CERTIFICATE

The undersigned hereby certify that the Aircraft Lease Agreement dated as of
March 25, 1997 between the undersigned Lessor and undersigned Lessee, and as
further described in the Appendix attached hereto, has terminated and the
aircraft and aircraft engines covered thereby are no longer subject to the terms
thereof.  This certificate may be executed in one or more counterparts each of
which when taken together shall constitute one and the same instrument.

     DATED this __________ day of ____________________, __________

LESSOR                                  LESSEE

GENERAL ELECTRIC CAPITAL                FRONTIER AIRLINES, INC.
CORPORATION


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




                                      100
<PAGE>
 
                                   APPENDIX
                                   --------


FAA Recording Date                              FAA Conveyance No.
------------------                              ------------------







                                      101
<PAGE>
 
                                  SCHEDULE 8

                         FORM OF AIRCRAFT USAGE REPORT

                  FOR PERIOD BEGINNING ON __________, 199____
                      AND ENDING ON ___________, 199____


The undersigned Officer of Frontier Airlines, Inc. ("Lessee") hereby certifies
as follows:

1.   This report is submitted to General Electric Capital Corporation ("Lessor")
under that certain Aircraft Lease Agreement dated as of March 25, 1997, between
Lessor and Lessee (the "Lease"), and capitalized terms used and not otherwise
defined herein have the meanings ascribed to them in the Lease.

2.   The Aircraft covered by this report is:

              Aircraft:                  Boeing 737-300
              Serial No:                 28563
              U.S. Reg. No.:             N_____
 
3.   During the period covered by this report, the Airframe which is the subject
of the Lease was operated for the following number of Flight Hours and Cycles as
such terms are defined in the Lease:


                   Flight Hours                     Cycles
         ---------                       ----------

4.   During the period covered by this report, the CFM-56-C1 Engines Bearing
respective serial numbers __________ and ____________ which are the subject of
the Lease, where each operated for the following number of Engine Flight Hours
and Cycles, as defined in the Lease:

                              Engine Flight Hours           Cycles
                              -------------------           ------
                         
     SN 
        --------              ------------------            ------------------
     SN 
        --------              ------------------            ------------------


This Aircraft Usage Report is dated __________________, 199_____,


                                            FRONTIER AIRLINES, INC.



                                            By:
                                               --------------------------------

                                            Title:
                                                  -----------------------------

                                      102
<PAGE>
 
                                                                  EXECUTION COPY

                            LETTER AGREEMENT NO. 1


                               As of March 25, 1997



Frontier Airlines, Inc.
12015 East 46th Avenue
Denver, Colorado  80239
United States of America

     Re:  Letter Agreement No. 1 to Aircraft Lease Agreement dated as of March
          25, 1997, between General Electric Capital Corporation, Lessor, and
          Frontier Airlines, Inc., Lessee - Definitions of Certain Terms and
          Other Matters

Gentlemen:

Reference is made to that certain Aircraft Lease Agreement dated as of March 25,
1997 (the "Lease") between General Electric Capital Corporation as lessor
("Lessor") and Frontier Airlines, Inc. as lessee ("Lessee") for the lease of one
new Boeing Model 737-300 commercial aircraft bearing manufacturer's serial
number 28563 (the "Aircraft").  Terms not otherwise defined herein shall have
the meanings ascribed to them in the Lease.

In order further to preserve the confidentiality of certain of the business
terms of the Lease and the other Operative Documents, Lessor and Lessee have
agreed that certain defined terms used in the Lease and their understanding
respecting certain other matters shall be set forth in this letter rather than
in the body of the Lease.

I.   Confidentiality.
     --------------- 

     Lessor and Lessee understand that certain commercial and financial
     information contained in or provided in connection with the Lease, this
     Letter Agreement No. 1, Tax Indemnity Agreement and the other documents
     executed or furnished in connection herewith and therewith, is considered
     by Lessor and Lessee as privileged and confidential.  Lessor and Lessee
     each hereby agree, that it will treat Letter Agreement No. 1 and each such
     other document as privileged and confidential and will not, without the
     prior written consent of the other, disclose or cause to be disclosed, the
     terms hereof or thereof to any Person, except to its counsel and auditors,
     or except (a) as may be required by applicable Law or governmental
     regulation or pursuant to an order, or a valid and binding request, issued
     by any court or governmental agency or authority having jurisdiction over
     Lessor or Lessee, as the case may be, or (b) as necessary to enable Lessor
     to make transfers, assignments or other dispositions to potential
     transferees, assignees or participants of its interest in and to this
     Agreement.
<PAGE>
 
Frontier Airlines, Inc.
As of March 25, 1997

Page 2


     In connection with any such disclosure or any filing of the information
     contained herein or therein pursuant to any such applicable Law or
     governmental regulation, Lessor or Lessee,  as the case may be, shall
     request and use its best reasonable efforts to obtain confidential
     treatment of this Letter Agreement No. 1, Tax Indemnity Agreement, such
     other documents and such information contained herein or therein or
     furnished in connection therewith and the other party will cooperate in
     making and supporting any such request for confidential treatment.

II.  Definitions of Certain Terms.
     ---------------------------- 

     Lessor and Lessee agree that the following terms shall have the following
     meanings for all purposes of the Lease, the Lease Supplement and this
     Letter Agreement No. 1:

     Agreed Value:

          *

     Airframe Maintenance Reserve Rate:

          The Airframe Maintenance Reserve Rate initially shall be * per Flight
          Hour. Such rate shall be increased annually by the Escalation
          Adjustment.
 
     Damage Notification Threshold:

          *

     Deposit:

          The Deposit equal to * is to be paid in cash as follows:

          (i)    *
          (ii)   *
          (iii)  *
          (iv)   *


<PAGE>
 
Frontier Airlines, Inc.
As of March 25, 1997

Page 3


     Deductible Amount:

          *

     Life Limited Parts Reserve Rate:

          The Life Limited Parts Reserve Rate initially shall be * per Engine
          Flight Hour. Such rate shall be increased annually by the Escalation
          Adjustment and shall be subject to further adjustment from time to
          time on the terms set forth in Section III to this Letter Agreement
          No. 1.

     Engine Refurbishment Reserve Rate:

          The Engine Refurbishment Reserve Rate for each Engine initially shall
          be * per Engine Flight Hour. Such rate shall be increased annually by
          the Escalation Adjustment and shall be subject to further adjustment
          from time to time on the terms set forth in Section III to this Letter
          Agreement No. 1.

     Escalation Adjustment:

          Each Reserve Rate shall escalate at a rate of *, compounded annually,
          commencing on the first annual anniversary of the Delivery Date.

     Interest Rate:

          * per month, but not to exceed the maximum amount permitted by Law.

     Landing Gear Reserve Rate:

          The Landing Gear Reserve Rate for the landing gear shall be * per
          Flight Hour. Such rate shall be increased annually by the Escalation
          Adjustment and shall be subject to further adjustment from time to
          time on the terms set forth in Section III to this Letter Agreement
          No. 1.

     Minimum Liability Coverage:

          Five Hundred Million Dollars ($500,000,000).
<PAGE>
 
Frontier Airlines, Inc.
As of March 25, 1997

Page 4


     Rent:

          The Rent for the Aircraft for each calendar month during the Term of
          the Lease shall be payable in ninety six (96) consecutive monthly
          installments, in advance on each Rent Date with each such installment
          being in the amount of *.

     Rental Periods:

          The Rental Periods of the Term comprise ninety six (96) consecutive
          monthly Rental Periods, which commence on the Delivery Date.

     Reserve Rate:

          The term "Reserve Rate" shall mean any of the Airframe Reserve Rate,
          Engine Refurbishment Reserve Rate,  Engine LLP Reserve Rate and
          Landing Gear Reserve Rate.

III. Further Adjustment of Reserve Rates.
     ----------------------------------- 

     Lessor and Lessee acknowledge that the Engine Reserve Rates specified
     herein are based upon the assumption that the Aircraft will operate at 3B1
     thrust levels and on a two hour to one cycle ratio (2:1).  In the event
     that the foregoing assumption proves to be incorrect at any time during the
     Term based upon Lessee's actual operating experience during the previous
     twelve (12) months, and the hour cycle ratio differs from such assumption
     by more than 0.1 during such twelve (12) month period, Lessor shall have
     the right, upon written notice to Lessee, to adjust the Engine Reserve
     Rates in the case of a decrease in the ratio and Lessor,  upon written
     request from Lessee, will make such an adjustment in the case of an
     increase in the ratio.  Any such adjustment shall be based on the following
     table:

<TABLE>
<CAPTION>
     ---------------------------------------------------------------------   
      PER ENGINE HOUR/CYCLE                                 
     ---------------------------------------------------------------------   
                                             1.5       2.0      2.5   
     ---------------------------------------------------------------------   
     <S>                                     <C>       <C>      <C>     
      Engine Refurbishment Reserves Rates     *         *        *
     ---------------------------------------------------------------------   
      Engine LLP Reserve Rates                *         *        *
     ---------------------------------------------------------------------   
</TABLE>

     (Note: *this figure shall be increased at a rate of three percent (3%)
     compounded annually, commencing on the first annual anniversary of the
     Delivery Date).

     Actual hour to cycle ratios may fall outside of the amount identified in
     the table.  In such case, the actual values shall be determined by
     extrapolating the closest observed intervals in the table.  (For example,
     an hour to cycle ratio of 1.7:1 falls in between 1.5:1 and 2.0:1 resulting
     in the extrapolated values of * for Engine Refurbishment Reserve Rates

<PAGE>
 
Frontier Airlines, Inc.
As of March 25, 1997

Page 5


     and * for Engine LLP Reserve Rates.)  In addition, these rates are
     subject to further adjustment by Lessor in the event that Lessee operates
     the Engines at other than 3B1 thrust levels.

     In the event that Lessee's Maintenance Program is materially revised,
     Lessor may make such adjustment as Lessor determines is necessary in its
     reasonable discretion to maintain the respective Reserve Rates at levels
     which accurately reflect the costs associated with obtaining maintenance
     services at prevailing industry rates.  Each such notice shall specify the
     revised Reserve Rate and the effective date of such revision.  Lessee
     agrees to advise Lessor, in writing, promptly following the occurrence of
     any circumstances or events which would result in the foregoing assumptions
     becoming incorrect at any time during the Term.

IV.  Airworthiness Directives Cost Sharing.
     ------------------------------------- 

     The Lessor shall, if the cost to Lessee of performing an inspection
     resulting in modification or terminating action with regard to any
     Airworthiness Directive or causing such inspection resulting in
     modification or terminating action being performed with regard to such
     Airworthiness Directive, exceeds * in respect of any individual item
     of the same, provided no Default has occurred and is continuing, on receipt
     by Lessor of evidence of payment for and completion of the relevant work,
     reimburse Lessee with an amount equal to the solution to the following
     formula:-

     *

<PAGE>
 
Frontier Airlines, Inc.
As of March 25, 1997

Page 6


If this Letter Agreement No. 1 to Aircraft Lease Agreement is consistent with
your understanding of the subject matter hereof, please so confirm by executing
this letter where indicated at the end hereof and returning the fully executed
letter to Lessor.


                                       GENERAL ELECTRIC CAPITAL
                                       CORPORATION
                                       as Lessor,
                                       
                                       By:
                                          ---------------------------------
                                       
                                       Name:
                                            -------------------------------
                                       
                                       Title:
                                             ------------------------------


The undersigned hereby confirms that the foregoing letter accurately reflects
the understanding of the undersigned with respect to the subject matter of such
letter.


                                       FRONTIER AIRLINES, INC.
                                       as Lessee,
                                     
                                       By:
                                          ---------------------------------
                                       
                                       Name:
                                            -------------------------------
                                       
                                       Title:
                                             ------------------------------
<PAGE>
 
                                                                  EXECUTION COPY

                            TAX INDEMNITY AGREEMENT
                            -----------------------


TAX INDEMNITY AGREEMENT dated as of March 25, 1997 (the "Tax Indemnity
Agreement") between FRONTIER AIRLINES, INC. (the "Lessee") and GENERAL ELECTRIC
CAPITAL CORPORATION (the "Lessor").

     As inducement to the Lessor to enter into Aircraft Lease Agreement dated as
of March 25, 1997 (the "Lease") with respect to one new Boeing 737-300 Aircraft
bearing Manufacturer's Serial Number 28563 (the "Aircraft") to be entered into
contemporaneously between Lessor and Lessee and in consideration of the mutual
covenants contained herein and therein, the Lessee and the Lessor hereby agree
as follows:

     SECTION 1.  Definitions.
                 ----------- 

     (a)  The term "Lessor" shall mean the Lessor and for any taxable year in
which the Lessor joins in the filing of a consolidated federal income tax
return, shall include each member of the affiliated group (within the meaning of
Section 1504 of the United States Internal Revenue Code of 1986, as amended, or
any successor provision thereto (the "Code")) of which the Lessor is a member.

     (b)  "Tax Attribute Period" shall mean the period beginning on the Delivery
Date and ending on December 31, 2003, provided that in the event the 
                                      --------                      
depreciation period for the Aircraft is other than the period specified in Tax
Assumption 2(d)(i) as a result of a Lessee Act (as hereinafter defined), such
period shall end on the last day of the calendar year in which a depreciation
deduction for the Aircraft is allowed or allowable, or would have been
allowable, to the Lessor.

     (c)  "Reasonable Basis" for a position exists if tax counsel may properly
advise reporting such position on a tax return in accordance with Formal Opinion
85-352 issued by the Standing Committee on Ethics and Professional
Responsibility of the American Bar Association and, for purposes of Sections
6(a) and 7(b), if "substantial authority" for such position exists for purposes
of Section 6662 of the Code and the regulations thereunder.

     (d)  "Permitted Percentage" shall mean 5% in each of Lessor's taxable
years.

     (e)  Capitalized terms used herein without definition shall have meanings
ascribed thereto in Schedule 1 to the Lease.

     SECTION 2.  Assumptions.  The transactions described in the Lease have been
                 -----------
entered into on the assumptions (the "Tax Assumptions") that for Federal income
tax purposes:

                                       1
<PAGE>
 
     (a)  at all times during the Term, for federal income tax purposes the
Lease will constitute a "true lease", the Lessor will be treated as the owner
and lessor of the Aircraft and the Lessee will be treated as the lessee of the
Aircraft;

     (b)  The Lessor's taxable year is the calendar year ending December 31, and
the Lessor ill include all items of income, gain, loss, deduction, or credit
with respect to the transactions contemplated by the Lease using an accrual
method of accounting;
 
     (c)  The Lessor, as the owner of the Aircraft for Federal income tax
purposes, will be entitled to the following Federal income tax benefits:

          (i)    cost recovery deductions for 100% of the Lessor's Cost of the
     Aircraft pursuant to Section 168(b) of the Code, commencing in the Lessor's
     taxable year in which the Delivery Date occurs, computed (i) on the basis
     that the Aircraft is "7-year property" (within the meaning of Section
     168(e) of the Code), (ii) by using the 200% declining balance method over a
     7 year recovery period, switching to the straight-line method for the first
     taxable year of the Lessor during the term for which such method yields a
     larger allowance, (iii) assuming salvage value is zero and (iv) using a
     half-year convention (the "MACRS Deductions");

          (ii)   for each taxable year of the Lessor during the Tax Attribute
     Period, not more than the Permitted Percentage of any item of income,
     deduction or loss with respect to the transactions contemplated by the
     Lease will be treated for Federal income tax purposes as derived from, or
     allocable to, sources outside the United States; and

          (iii)  the Lessor will be a domestic corporation subject to a Federal
     and state income tax rate of (after giving effect to the deductibility of
     such state income taxes for Federal income tax purposes) 40% (the "Assumed
     Tax Rate") in 1997 and in each year thereafter, and the Lessor will have
     sufficient taxable income to be taxed at the Assumed Tax Rate after full
     utilization of the MACRS Deductions.; and
                                           ---

     (d)  The Lessor will not be subject to the minimum tax under Section 55 of
the Code.

     The foregoing assumptions will be appropriately modified or adjusted from
time to time to reflect the occurrence of an event for which an indemnity has
been paid pursuant to this Tax Indemnity Agreement.

     SECTION 3.  No Inconsistent Action.  The Lessee agrees that neither it, nor
                 ----------------------                                         
any Person controlled by it, in control of it, or under common control with it,
directly or indirectly, nor any Person claiming by, through or under the Lessee,
nor any sublessee or other user or person in possession of the Aircraft (or any
part thereof) during the Term, nor any Affiliate of any of the foregoing (but
excluding the Lessor or the Lessor or any Person claiming by, through or under
the Lessor (but not so excluding any Person claiming directly or indirectly
through or under the Lease), unless any such Person is in 

                                       2
<PAGE>
 
possession of the Aircraft or any part thereof pursuant to an exercise of
remedies in connection with a Lease Event of Default) (each such Person not so
excluded, a "Lessee Person") will at any time file any returns or other
documents or take any action in dealing with tax authorities (including, without
limitation, any action in connection with the examination of any tax return)
inconsistent with the assumptions set forth in Section 2 hereof or the
representations set forth in Section 5 hereof and the Lessee will file such
returns, take such actions in dealing with tax authorities and execute such
documents as may be reasonably necessary to facilitate accomplishment of the
intent hereof.

     SECTION 4.  Records and Statements.  The Lessee shall, at its expense,
                 ----------------------                                    
maintain such information or records relating to the Aircraft as are regularly
maintained by the Lessee or as may be required by law to be maintained
(including, but not limited to, flight logs).  The Lessee shall, at Lessee's
expense, provide or cause to be provided any such records or information, and
such other information customarily maintained by comparable airlines, as the
Lessor may reasonably request from the Lessee to enable the Lessor to fulfill
its tax filing, tax audit, and tax litigation obligations, including, but not
limited to, its Federal income tax filing obligations.
            ---                                       

     SECTION 5.  Representations, Warranties and Covenants of Lessee.  The
                 ---------------------------------------------------      
Lessee represents, warrants and covenants that:

     (a)  on the Delivery Date, the Aircraft will qualify as 7-year property
within the meaning of Section 168(e) of the Code;

     (b)  neither Lessee nor any other Lessee Person thereof has claimed or will
claim the MACRS Deductions, or claim to be the owner of the Aircraft in respect
of any period during the Term, or has taken or will take any action or position
(not required by the Lease) inconsistent with the status of the Lessor as the
sole owner of the Aircraft for Federal, state, local and foreign tax purposes,
in each case, with respect to any period after the Delivery Date;

     (c)  assuming that neither Lessor nor any Affiliate of Lessor is a "tax-
exempt entity" within the meaning of Section 168(h)(2) of the Code during the
Tax Attribute Period, neither the Aircraft nor any part thereof will be "tax-
exempt use property" within the meaning of Section 168(h) of the Code; or

     (d)  during the Tax Attribute Period, neither the Aircraft nor any part
thereof will be treated as "used predominantly outside the United States" within
the meaning of Section 168(g) of the Code.

     SECTION 6.  Federal Income Tax Indemnity.
                 ---------------------------- 

     (a)  If for any taxable year, (i) as a result of (A) any act or omission on
the part of the Lessee or any Lessee Person (other than the execution and
delivery of the Lease or an act required under the Lease or permitted under
Clause 4.5 of the Lease (provided, however, that the following acts shall not be
treated as required under the Lease for purposes of this paragraph:  any,
maintenance, repair, improvements, alterations, 

                                       3
<PAGE>
 
modifications or additions to the Aircraft (or any part thereof), the temporary
or permanent removal from service of the Aircraft (or any part thereof) or the
replacement or substitution of the Aircraft (or any part thereof)), or (B) the
inaccuracy or breach of any representation, agreement, covenant or warranty of
the Lessee contained herein (each such act, omission, inaccuracy, breach or
event, a "Lessee Act"), the Lessor shall suffer a loss, disallowance or deferral
of, shall suffer a delay in claiming, shall not have the right to claim (based
on a written opinion of independent tax counsel selected by the Lessor and
reasonably acceptable to the Lessee that there is not a Reasonable Basis for
claiming the item in question), or shall be required to recapture (a
"Recapture"), all or any portion of the MACRS Deductions (hereinafter referred
to as a "Tax Loss"), then the Lessee, after written notice from the Lessor of
such Tax Loss, shall pay to the Lessor as an indemnity, form time to time as
required, an amount which, after deduction of the amount of all additional
Federal, state, local, and foreign taxes required to be paid by the Lessor in
respect of the receipt or accrual of such amount, shall be equal to the increase
in income taxes payable by (or not refundable to) the Lessor as a result of such
Tax Loss, plus the amount of any actual interest, penalties and additions to tax
payable by the Lessor with respect to such Tax Loss. Further, for purposes of
determining the amounts of the increase in income taxes as a result of the Tax
Loss, the applicable tax rate shall be the Assumed Tax Rate and shall be
calculated on a hypothetical basis (i.e., assuming that the Lessor pays taxes
                                    ----         
and can fully utilize the MACRS Deductions). Each payment by the Lessee pursuant
to this Section 6(a) shall be made within 30 days after receipt of a written
demand certifying that there has been a Tax Loss, describing in reasonable
detail the Tax Loss in question, the amount of additional income tax, interest,
penalties and additions to tax and the calculation of the payment due in respect
thereof and describing the event or condition that Lessor claims gives rise to
an obligation by the Lessee to indemnify hereunder (but in no event earlier than
five (5) Business Days prior to the date the indemnified tax liability is, or
would be, due); provided that, if a contest of the Tax Loss is being conducted 
                -------- ----
pursuant to Section 8 hereof, payment (other than payments required under
Section 8), shall not be required from the Lessee until 30 days after the Final
Determination (as hereinafter defined) of such contest.

     (b)  If, as the result of a Tax Loss, the amount of Federal income taxes
payable by the Lessor for any taxable year shall be less than the amount of such
taxes which would have been payable by the Lessor had such Tax Loss not occurred
(or as the result thereof the Lessor shall receive a refund of Federal income
taxes, which shall be greater than the amount of such refund, if any, which the
Lessor would have received had such Tax Loss not occurred), then the Lessor
shall pay to the Lessee the amount of such increased reduction in taxes (or
refund, including any actual interest (net of any taxes payable with respect to
such interest) received thereon), plus any net additional Federal, state, local
or foreign tax benefits actually realized by the Lessor as the result of any
payment made  pursuant to this sentence (such reduction in or increased refund
of income taxes to be determined on a hypothetical basis, i.e., assuming the
                                                          ----              
Lessor can utilize any additional tax benefits resulting form the Tax Loss at
the Assumed Tax Rate; provided, however, that the amount payable by the Lessor
                      --------  -------                                       
pursuant to this sentence shall not exceed the sum of the amounts previously
paid by the Lessee to the Lessor pursuant to Section 6(a) with respect to such
Tax Loss to the extent not previously taken into account under this provision;
provided, further, that the Lessor shall not be obligated to make any 
--------  -------                                                            

                                       4
<PAGE>
 
payment pursuant to this sentence if a Payment Default or Event of Default under
the Lease shall have occurred and be continuing. If an amount payable by the
Lessor to the Lessee pursuant to this Section 6(b) is not paid when due because
of the occurrence and continuation of such Payment Default or Event of Default,
such amount shall be payable by the Lessor to the Lessee upon the Lessee's
curing such Payment Default or Event of Default. Each payment made by the Lessor
to the Lessee pursuant to this Section 6(b) shall be made within 30 days after
the Lessor files a tax return or received a refund or adjustment from the
Internal Revenue Service which reflects such reduction in federal income tax.

     (c)  Any taxes that are imposed on the Lessor as a result of the subsequent
disallowance of all or any portion of a reduction (or refund) of the Lessor's
tax liability, which reduction (or refund) was taken into account under Section
6(b), shall be treated as a Tax Loss subject to indemnification under this
Agreement without regard to Section 7 hereof.

     (d)  (i)   If, as a result of the use or operation or location of the
Aircraft outside the United States by any Lessee Person, the Tax Assumption set
forth in Section 2(d)(ii) hereof shall be inaccurate during any taxable year of
the Lessor included in whole or in part within the Tax Attribute Period (an
"Excess Foreign Allocation"), and if as a result thereof the amount of the
foreign tax credits available for utilization by the Lessor for any taxable year
shall be less than the amount of the foreign tax credits that would have been
available for utilization by the Lessor if such Tax Assumption had been accurate
(such event being referred to herein as a "Foreign Tax Credit Loss"), then the
Lessee shall pay to the Lessor as an indemnity an amount which, after deduction
of the amount of all additional federal, state, local and foreign taxes actually
required to be paid by the Lessor in respect of the receipt or accrual of such
amount, is equal to the actual increase in the Federal income taxes payable by
(or not refundable to) the Lessor for such taxable year as a result of such
Foreign Tax Credit Loss, plus the amount of any interest, penalties and
additions to tax payable by the Lessor as a result of such Foreign Tax Credit
Loss.  The amounts of any increase in Federal income taxes payable by (or not
refundable to) the Lessor as a result of a Foreign Tax Credit Loss shall be
computed on the assumption that any reduced amount of foreign tax credits of the
Lessor is attributable to an Excess Foreign Allocation and foreign source losses
arising from other equipment leasing transactions that provided the Lessor with
indemnification for the loss of foreign tax credits, on a pro rata basis, prior
to being attributable to any other foreign source deductions or losses of the
Lessor;

          (ii)  If, as a result of (A) an Excess Foreign Allocation or (B) the
usage or location of the Aircraft outside the United States so that more than
the Permitted Percentage of any item of income or gain with respect to the
transactions contemplated by the Lease during any taxable year following the Tax
Attribute Period is treated as derived from sources outside the United States,
the amount of the foreign tax credits that the Lessor utilizes against its tax
liability for a taxable year exceeds the amount of such foreign tax credits to
which the Lessor would have otherwise been entitled, and provided that no
Payment Default or Event of Default under the Lease shall have occurred and be
continuing (in which event such amounts shall become payable upon the Lessee's
curing 

                                       5
<PAGE>
 
such Payment Default or Event of Default, then the Lessor shall pay to the
Lessee the amount of any actual reduction in its Federal income tax liability
(or actual increase in a refund of Federal income taxes owning to the Lessor),
plus any net additional Federal, state, local and foreign income tax benefits
actually realized by the Lessor as the result of such payment; provided, 
                                                               --------
however, that the sum of the amounts payable by the Lessor pursuant to this 
-------                                                               
sentence shall not exceed the sum of the amounts previously paid by the Lessee
to the Lessor pursuant to this Section 6(d) to the extent not previously taken
into account under this provision and provided, further, however, that no 
                                      --------  -------  -------         
payment shall be required with respect to clause (B) above unless and until the
usage or location outside the United States has resulted in an aggregate amount
of increased foreign tax credits being available to the Lessor (calculated for
this purpose without regard to the otherwise applicable requirement that foreign
source gain or income exceed the "Permitted Percentage" of 5%) equal to the
aggregate amount of unindemnified tax increases (reduced by any utilization of
foreign tax credit carryovers or carryforwards that would, under principles
applicable to clause (A) above, have resulted in an obligation to made a payment
to the Lessee if the Permitted Percentage during the year in which the
unindemnified tax increase occurred were zero) suffered by the Lessor resulting
from the application of the Permitted Percentages during the Tax Attribute
Period.  For purposes of this Section 6(d)(ii), in determining the order in
which the Lessor utilizes any foreign tax credits against the Lessor's Federal
income taxes, the Lessor shall be deemed to utilize (A) first, all foreign tax
credits other than those described in clause (B) of this sentence, and (B) then,
on a pro rata basis, all foreign tax credits, the utilization of which by the
     --- ----                                                                
Lessor results from either (x) the carryover or the carryforward of foreign tax
credits which were unutilized due to foreign source losses arising from
equipment leasing transactions that provided the Lessor with indemnification for
the loss of foreign tax credits (including this transaction), or (y) foreign
source income or gain generated by such transactions to the extent such foreign
source income or gain is sufficient to give rise to a  payment obligation to the
Lessee thereunder (except any such transaction entered into prior to the
Delivery Date which provides that foreign tax credits arising out of such
transaction are deemed utilized prior to or after those credits arising out of
other lease transactions).

     Once a foreign tax, the loss of the credit in respect of which Lessor was
indemnified and paid by Lessee in accordance with Section 6(d) hereof, is deemed
to be utilized pursuant to the ordering rules set forth above, it shall not
subsequently be recharacterized as not having been utilized as a result of a
foreign tax liability arising in a subsequent year.

          (iii)  Each payment by the Lessee pursuant to this Section 6(d) shall
be made within 30 days after receipt of a written demand therefor accompanied by
a written statement describing in reasonable detail the Foreign Tax Credit Loss
in question, the amount of additional Federal income tax, interest, penalties
and additions to tax and the calculation of the payment due in request thereof
(but in no event earlier than five (5) Business Days prior to the date such
additional Federal income taxes are due); provided that, if a contest of the
                                          -------- ----                     
Foreign Tax Credit Loss is being conducted pursuant to Section 8 hereof, payment
(other than payments required under Section 8) shall not be required from the
Lessee until 30 days after the Final Determination of such contest.  Each

                                       6
<PAGE>
 
payment by the Lessor to the Lessee pursuant to this Section 6(d) in respect of
an actual increase in available foreign tax credits shall be made within 30 days
after the Lessor files a tax return (or receives a refund or adjustment) which
reflects the utilization of such increased foreign tax credit.  Notwithstanding
anything herein to the contrary, any taxes that are imposed on the Lessor as a
result of the subsequent disallowance of the reduction of the Lessor's tax
liability, for which reduction the Lessor has made payment pursuant to this
Section 6(d), shall be treated a as Foreign Tax Credit Loss subject to
indemnification under this Agreement without regard to Section 7 hereof.

     (e)  Upon request of the Lessee, the accuracy of the Lessor's calculation
of the amount or amounts payable to either the Lessor or the Lessee pursuant to
this Section 6 shall be verified by the independent accounting firm regularly
                                        -----------                          
engaged by the Lessor and, in order to enable such accountants to verify such
adjustments, the Lessor shall provide to such accountants (for their own
confidential use and not be disclosed to the Lessee or any other person) all
information reasonably necessary for such verification, including any computer
analyses used by the Lessor to calculate such amount or amounts.  The cost of
such verification shall be borne by the Lessee unless it is the determination of
such verification that the actual amount payable deviates, in a manner favorable
to the Lessee, by more than 5% from the amount originally determined by the
Lessor in which case such cost shall be borne by the Lessor.

     SECTION 7.  Excluded Events.  The Lessor shall not be entitled to any
                 ---------------                                          
payment from the Lessee under Section 6 hereof in respect of any Tax Loss or
Foreign Tax Credit Loss to the extent such Tax Loss or Foreign Tax Credit Loss
would not have occurred but for one or more of the following events:

     (a)  any voluntary sale, assignment, transfer or other disposition
(including any deemed disposition under Section 338 of the Code or any similar
provision) by the Lessor of any interest in the Aircraft or any part thereof or
the lease, unless such sale, assignment, transfer or other disposition occurs in
connection with the exercise of remedies in connection with an Event of Default
under the Lease that has occurred and is continuing, or any involuntary sale,
assignment, transfer or disposition (including any deemed disposition under
Section 338 of the Code or any similar provision) of any such interest resulting
from the bankruptcy or insolvency of, or proceedings for the relief of debtors,
or foreclosure proceedings, against the Lessor unless, in each case, such
involuntary sale, assignment, transfer, disposition (including any deemed
disposition under Section 338 of the Code or any similar provision) bankruptcy
or insolvency or foreclosure results from such Event of Default;

     (b)  the failure of the Lessor properly and in a timely manner to claim the
MACRS Deductions or the inclusion by the Lessor of any Recapture in the Lessor's
gross income as reported on its Federal income tax returns, (i) unless the
Lessor shall have received a written opinion of independent tax counsel selected
by the Lessor and reasonably satisfactory to Lessee that no Reasonable Basis
exists for making such claim or failing to so include in gross income or (ii)
unless such failure or inclusion is caused by the Lessee's failure to provide
accurate and timely information pursuant to the Lessee's obligations under this
Agreement or the Lease to furnish information to the Lessor.

                                       7
<PAGE>
 
     (c)  except in the case of a Tax Loss resulting from a substitution or
replacement of the Aircraft or any part thereof, any amendment or addition to,
or change in, the Code or Income Tax Regulations, which is enacted or adopted
after the Delivery Date, provided that a change in Federal income tax rates
                         --------                                          
shall be taken into account in determining the indemnity amounts payable to the
extent specified in Sections 6(a) and 6(d) above;

     (d)  the failure of the Lease to be a "true lease", or the Lessor to be
treated as the owner of the Aircraft, for Federal income tax purposes, unless,
in either case, as a result of a Lessee Act;

     (e)  any failure of the Lessor to take in a timely manner all actions in
contesting a claim if the Lessor was required to take such actions pursuant to
Section 8 hereof and such failure precludes the Lessee from exercising its
contest rights under Section 8 hereof;

     (f)  the willful misconduct or gross negligence of the Lessor or any
Affiliate thereof;

     (g)  the status for Federal income tax purposes of the Lessor as a "tax-
exempt entity" within the meaning of Section 168(h) of the Code or as a Person
that is not a "United States person" within the meaning of Section 7701(a)(30)
of the Code;
 
     (h)  a change in the Lessor's taxable year from the calendar year to a
fiscal year or the Lessor's having a taxable year other than a full calendar
year but only to the extent of a resulting increase in Lessee's indemnity
obligation hereunder;

     (i)  the failure of the Lessor to have sufficient taxable income or tax
liability for U.S. Federal income tax purposes to benefit from the Federal
income tax benefits described in Section 2(c);

     (j)  a determination that the basis of the Aircraft is or was not equal to
Lessor's Cost on the Delivery Date;

     (k)  the application of any federal or state minimum tax, including the
alternative minimum tax imposed under Sections 55 et seq. of the Code;

     (l)  any Loss to the extent incurred or imposed solely in respect of or
relating to any period after the later of (i) the expiration or earlier
termination of the Lease in accordance with the terms thereof or (ii) delivery
of possession of the Aircraft to the Lessor (or any designee of the Lessor); or

     (m)  application of the mid-quarter convention described in Section
168(d)(4)(C) of the Code.

                                       8
<PAGE>
 
     SECTION 8.  Contest Provisions and Proceedings.
                 ---------------------------------- 

     (a)  The Lessor shall promptly (but in no event less than twenty (20) days
prior to the last day for submitting a protest to the Internal Revenue Service)
notify the Lessee in writing of receipt from the Internal Revenue Service of a
written proposed or final revenue agent's report, a 30-day letter or a notice of
deficiency (as described in Section 6212 of the Code), in which an adjustment is
proposed to the Federal income taxes of the Lessor for which the Lessee would be
required to indemnify the Lessor pursuant to this agreement if such adjustment
were sustained.  Such notice shall specify the name of  Lessor's counsel (if the
existence of a Lessor's counsel is at that point necessary under this
Agreement), the terms of the proposed adjustment, and any action taken or
proposed to be taken by the Internal Revenue Service with respect to the
proposed adjustment.  After the giving of such notice, the Lessor shall for at
least 20 days after the giving of such notice forbear (if such forbearance is
permitted by law) payment of any tax (including interest, penalties and
additions to tax thereon) asserted to be payable as a result of such proposed
adjustment.  If the Lessee promptly (and in any event within 20 days of receipt
of notice from the Lessor) requests, in writing, the Lessor to do so, the Lessor
shall contest the proposed adjustment, shall consider in good faith any
suggestion made by the Lessee as to the method of pursuing such contest, and,
provided the Lessee is complying with its obligations under this Section 8,
shall not, without the consent of the Lessee, except as provided in the last
sentence of this Section 8(a), settle such proposed adjustment; provided,
                                                                -------- 
however, that the Lessor shall not be obligated to contest such adjustment
-------                                                                   
unless (i) independent tax counsel selected by the Lessor and reasonably
acceptable to Lessee ("Tax Counsel") delivers an opinion that there is a
Reasonable Basis for contesting the matter in question, (ii) the amount of the
proposed adjustment is in excess of $50,000, (iii) no Event of Default shall
have occurred and be continuing, (iv) the Lessor has determined, in good faith,
that the contest shall not result in a material risk of the loss or forfeiture
of the Aircraft (unless the Lessee has provided to the Lessor a bond or other
sufficient protection against such risk of loss or forfeiture reasonably
satisfactory to the Lessor) or the imposition of criminal penalties and (v) the
Lessee shall have acknowledged, in writing, that the contest is with respect to
a liability that is the Lessee's responsibility pursuant to this Agreement
except that the Lessee shall not be bound by its acknowledgment of liability if
the Final Determination articulates conclusions of law and fact that clearly and
unambiguously demonstrate that the Lessee has not liability for the contested
amounts hereunder.  The Lessor shall afford Lessee reasonable opportunities to
consult the Lessor and shall keep Lessee reasonably informed of the nature of
all actions taken to contest such proposed adjustment, including (x) whether any
action to contest such proposed adjustment will initially be by way of judicial
or administrative proceedings, or both, (y) whether any such proposed adjustment
will be contested by resisting paying thereof or by paying the same and seeking
a refund thereof and (z) if the Lessor shall undertake judicial action with
respect to such proposed adjustment, the court or other judicial body before
which such action will be commenced; but in all cases the Lessor shall have
ultimate discretion to determine the nature (and forum) of, and shall control
the prosecution of, all such action.  The Lessor shall upon the conclusion of
any administrative proceedings, promptly notify the Lessee of the outcome of
such proceedings, and shall notify the Lessee at least 60 days in advance of the
last date for filing a petition in the Tax Court.  In the event of an
unfavorable resolution of 

                                       9
<PAGE>
 
administrative proceedings, the Lessor shall, if requested by the Lessee in a
timely manner, (x) contest any proposed adjustment beyond the level of
administrative proceedings, (y) consider in good faith any advice offered by the
Lessee's counsel concerning the court of competent jurisdiction in which the
adjustment is most likely to be favorably resolved, and (z) keep the Lessee
reasonably informed as to the progress of any litigation and, if requested by
the Lessee, shall consult with the Lessee's counsel and consider in good faith
any recommendations by the Lessee's counsel concerning the conduct of such
proceedings, and shall permit Lessee's counsel to review and comment in advance
on all submissions to the extent relating to the Loss provided that the final
form and substance of such submissions shall be determined by Lessor's Counsel.
The Lessor shall take such reasonable action during the course of such
proceedings as the Lessor's counsel deems advisable after consultation with the
Lessee's counsel to preserve as a basis for appeal any legal issue that the
Lessee or the Lessee's counsel has identified in writing. The Lessor shall be
required to appeal any adverse judicial determination only if (A) an appeal is
timely requested in writing by the Lessee, and (B) the Lessor is furnished with
an opinion of Tax Counsel selected by the Lessor and reasonably acceptable to
the Lessee that it is more likely than not that Lessor will prevail on such
appeal; provided, however, that in no event shall the Lessor be required to
appeal any adverse decision in the U. S. Supreme Court. At any time, whether
before or after commencing to take the actions set forth in this Section 8, the
Lessor may decline to contest or appeal all or any portion of a proposed
adjustment, or may compromise or settle any such proposed adjustment, by
notifying the Lessee in writing that the Lessee is relieved of its obligation to
indemnify the Lessor with respect to such adjustment or such portion, as the
case may be; provided, however, that (x) the Lessor shall promptly notify the
Lessee of the Lessor's intent to decline to contest or appeal all or any portion
of proposed adjustment, or to compromise or settle all or any portion of a
proposed adjustment and (y) the Lessee shall not be obligated to indemnify the
Lessor hereunder with respect to any other Tax Loss or Foreign Tax Credit Loss
for which a successful contest or appeal is foreclosed as a result of the
failure to take action with respect to such contest or appeal (or the settlement
or compromise of such contest or appeal without the consent of the Lessee), and
the Lessor shall repay to the Lessee such amounts theretofore advanced or paid
by the Lessee related to such adjustment, contest or appeal (other than
reimbursement of costs and expenses of the Lessor), plus interest at the rate
that would have been payable if such contest had been successfully concluded at
such time.

     (b)  The Lessor shall not be required to take any action pursuant to this
Section 8 unless and until the Lessee shall have agreed in writing to reimburse
the Lessor (on demand and on a basis grossed-up for all applicable Federal,
state, local and foreign taxes for all reasonable fees and expenses, any
statutory or regulatory penalties, interest, additions to tax, or other
liabilities, costs or losses which the Lessor may incur as a result of
contesting the validity of any proposed adjustment (including, without
limitation, any reasonable fees and disbursements of counsel incurred in
connection with taking any action or rendering any opinion described in Section
8(a)).  If the Lessor determined to contest any adjustment by paying the
additional tax and suing for a refund, the Lessee shall timely lend to the
Lessor on an interest-free basis an amount equal to the sum of any tax,
interest, penalties and additions to tax required to be paid and shall indemnify
the Lessor in a manner satisfactory to the Lessor against any adverse tax
consequences 

                                      10
<PAGE>
 
resulting from such advance. Upon receipt by the Lessor of a refund (or upon
application of amounts otherwise refundable against other tax liability of the
Lessor) of any amount paid by it, in respect of which amount the Lessor shall
have been paid or advanced an equivalent amount by the Lessee, the Lessor shall
pay to the Lessee the amount of such refund (plus any amounts otherwise
refundable but applied against other tax liability of the Lessor) (which, in the
case of any contest in which a loan has been advanced pursuant to this
paragraph, shall be deemed to be in repayment of the loan advanced by the Lessee
to the extent fairly attributable thereto), together with any interest received
by the Lessor on such refund (or application) that is fairly attributable to the
amount and the period of such payment or advance by the Lessee (net of any taxes
actually payable by the Lessor with respect to the receipt or accrual of such
interest), plus any net additional Federal, state local and foreign tax benefits
actually realized by the Lessor as the result of such payment; and, upon
disallowance of any such refund, the Lessee shall forgive the amount of the loan
fairly attributable thereto and shall pay to the Lessor the balance of the
amount of its indemnity obligation hereunder (including such amount as shall be
equal to the sum, on an after-tax basis, of any tax, interest, penalties or
additions to tax payable with respect to the forgiveness of such loan) (or if
such advance exceeds the amount of such disallowance, the Lessor shall pay such
excess to the Lessee). Any subsequent loss of such refund (or of such
application of amounts otherwise refundable) to the extent having resulted in a
payment to Lessee, shall be treated as a Tax Loss subject to indemnification
pursuant to Section 6 hereof without regard to Section 7 hereof. If the Lessor
receives an award of attorney's fees or related expenses in a contest for which
the Lessee has paid or reimbursed all or any portion of such fees and expenses,
the Lessor shall pay to the Lessee the portion of such award attributable to
such fees and expenses paid or reimbursed by the Lessee.

     (c)  If any adjustment referred to in this Section 8 shall be proposed and
the Lessee shall have requested the Lessor to contest such adjustment as above
provided and the Lessee shall have duly complied with the terms of this Section
8, then notwithstanding any provision to the contrary in Section 6 hereof, the
Lessee's liability with respect to such adjustment shall become fixed upon a
"Final Determination" of such adjustment.  A "Final Determination" with respect
to a Tax Loss shall mean (i) a decision, judgment, decree or other order by any
court of competent jurisdiction, which decision, judgment, decree or other order
has become final after all allowable appeals (in the case of the Lessor as
required under this Section 8) by either party to the action have been exhausted
or the time for filing such appeal has expired, (ii) a closing agreement entered
into under Section 7121 of the Code, or any other settlement agreement entered
into in connection with an administrative or judicial proceeding and with the
consent of the Lessee where required, (iii) the expiration of the time for
instituting suit with respect to the claimed deficiency, or (iv) the expiration
of the time for instituting a claim for refund, or if such a claim was filed,
the expiration of the time for instituting suit with respect thereto.

     SECTION 9.  Survival of Agreement.  The representations, warranties,
                 ---------------------                                   
covenants, obligations and liabilities of the Lessee and the Lessor arising
under this Agreement shall continue in full force and effect, notwithstanding
the expiration or other termination of the Lease, until all such obligations
under this Agreement have been met and all such 

                                      11
<PAGE>
 
liabilities under this Agreement have been paid in full. This Agreement shall
inure to the benefit of any successor or assign to the Lessor or the Lessee
permitted pursuant to the Lease; provided, however, that (a) such successor or
                                 --------  -------                  
assign which is not a Permitted Transferee as defined in the Lease shall have
specifically agreed in writing to be bound by the terms and conditions of this
Agreement to perform the obligations imposed hereunder on the Lessor or the
Lessee, as the case may be, in accordance with the interest of such successor or
assign in the Aircraft and the Lease, (b) the successor or assign shall not be
entitled to indemnity payment or other rights or benefits greater than the
payments, rights or benefits to which the Lessor or the Lessee, as the case may
be, would have been entitled if no transfer or assignment had occurred, and (c)
in applying the terms hereof to such successor or assign, the terms "Lessor" and
"Lessee" as used herein shall mean such respective successor or assign.

     SECTION 10.  Notices.  Any notice, request, or other communication provided
                  -------                                                       
for in this Agreement shall be given in the manner provided in the Lease.

     SECTION 11.  Payments.  Payments made by the Lessee or the Lessor pursuant
                  --------                                                     
to this Agreement shall be made by wire transfer of immediately available funds
to such bank and/or account in the continental United States as specified by the
other party in written directions to the paying party at least five (5) Business
Days prior to the due date thereof, and if no such direction shall have been
given, by check payable in immediately available funds to the order of such
payee and mailed to such payee by certified mail, postage prepaid, at its
address provided for purposes of the Lease.

     SECTION 12.  No Setoff.  No payment required to be made by the Lessee
                  ---------                                               
pursuant to this Agreement shall be subject to any right of setoff,
counterclaim, defense, abatement, suspension, deferment or reduction; and,
except in accordance with the express terms hereof, neither the Lessor nor the
Lessee shall have the right to terminate this Agreement or to be released,
relieved or discharged from any obligation or liability under this Agreement for
any reason whatsoever.
 
     SECTION 13.  Late Payments, Interest.  Any late payment by any party hereto
                  -----------------------                                       
of any of its obligations under this Agreement shall bear interest at the
Interest Rate set forth in Letter Agreement No. 1.

     SECTION 14.  Exclusive Remedy.  The indemnities and other rights provided
                  ----------------                                            
to the Lessor in this Agreement shall be the sole remedy of the Lessor for a
breach or inaccuracy of any representation, warranty or covenant contained
herein or for loss of income tax benefits.

     SECTION 15.  Governing Law.  This Agreement shall be governed by and
                  -------------                                          
construed in accordance with the laws of the State of California applicable to
contracts made and to be performed entirely within such state.

     SECTION 16.  Counterparts.  This Agreement may be simultaneously executed
                  ------------                                                
in any number of counterparts, each of which so executed shall be deemed to be
an original, and such counterparts together shall constitute and be one and the
same instrument.

                                      12
<PAGE>
 
     SECTION 17.  Confidentiality.  Lessee and Lessor shall keep this Tax
                  ---------------                                        
Indemnity Agreement confidential and shall not disclose, or cause to be
disclosed, the same to any Person, except (A) to prospective and permitted
transferees of Lessee's or Lessor's interests or their respective counsel or
special counsel, auditors, or other agents who agree to hold such information
confidential, (B) to Lessee's or Lessor's counsel or special counsel, auditors,
or other agents or Affiliates who agree to hold such information confidential,
(C) as may be required by any statute, court or administrative order or decree,
legal process or governmental ruling or regulation, or by Internal Revenue
Service auditors, (D) by mutual agreement by the parties hereto, or (E) such
other Persons as are reasonably deemed necessary by the disclosing party in
order to protect the interests of such party or for the purposes of enforcing
this document by such party; provided that any and all disclosures permitted
                             --------                                       
above shall be made only to the extent necessary to meet the specific
requirements or needs of the Persons making such disclosures.

     SECTION 18.  Assignment.  This Agreement shall not be assignable by either
                  ----------                                                   
party without the consent of the other; provided, however, that either party may
assign this Agreement without such consent in connection with the sale of all of
its interests in the Aircraft and the Lease.

                                      13
<PAGE>
 
     IN WITNESS WHEREOF, the Lessee and the Lessor have caused this instrument
to be duly executed as of the day and year first above written.


                                        FRONTIER AIRLINES, INC.


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

                                        Title:
                                              -----------------------------



                                        GENERAL ELECTRIC CAPITAL CORPORATION


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

                                        Title:
                                              -----------------------------

                                      14