##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the quarterly period ended June 30, 2010
 or
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 For the transition period from            to
 Commission File number 001-32959
 AIRCASTLE LIMITED
  Bermuda
    
    98-0444035(State or other jurisdiction of incorporation or organization)
    
    (IRS Employer Identification No.)c/o Aircastle Advisor LLC300 First Stamford Place, 5th Floor, Stamford, CT
    
    06902(Address of principal executive offices)
    
    (Zip Code)
 Registrants telephone number, including area code (203) 504-1020
 þ o
 o o
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o
    
    Smaller reporting company o(Do not check if a smaller reporting company)
 o þ




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##### 



Aircastle Limited and Subsidiaries
 Form 10-Q
 Table of Contents
 PageNo.PART I.  FINANCIAL INFORMATIONItem 1.
    
    Financial StatementsConsolidated Balance Sheets as of December 31, 2009 and June 30, 2010
    
    
    3Consolidated Statements of Income for the three and six months ended June 30, 2009 and 2010
    
    
    4Consolidated Statements of Cash Flows for the six months ended June 30, 2009 and 2010
    
    
    5Notes to Unaudited Consolidated Financial Statements
    
    
    6Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    24Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    50Item 4.
    
    Controls and Procedures
    
    
    51PART II.  OTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    52Item 1A.
    
    Risk Factors
    
    
    52Item 2
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    52Item 6.
    
    Exhibits
    
    
    52SIGNATURE
    
    
    54EX-10.1EX-10.2EX-10.3EX-31.1EX-31.2EX-32.1EX-32.2EX-99.1
  2




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##### Table of Contents



PART I.  FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 Aircastle Limited and Subsidiaries
 
 Consolidated Balance Sheets
 (Dollars in thousands, except share data)
 December 31,
    
    
    June 30,2009
    
    
    2010(unaudited)ASSETSCash and cash equivalents
    
    $
    142,666
    
    
    $
    149,696Accounts receivable
    
    
    2,941
    
    
    
    3,041Restricted cash and cash equivalents
    
    
    207,834
    
    
    
    213,105Restricted liquidity facility collateral
    
    
    81,000
    
    
    
    79,000Flight equipment held for lease, net of accumulated
depreciation of $586,537 and $688,492
    
    
    3,812,970
    
    
    
    3,742,080Aircraft purchase deposits and progress payments
    
    
    141,144
    
    
    
    210,297Leasehold improvements, furnishings and equipment, net
of accumulated depreciation of $2,455 and $2,654
    
    
    802
    
    
    
    619Other assets
    
    
    65,155
    
    
    
    66,504Total assets
    
    $
    4,454,512
    
    
    $
    4,464,342LIABILITIES AND SHAREHOLDERS EQUITYLIABILITIESBorrowings from securitizations and term debt
financings (including borrowings of ACS Ireland VIEs of
$331,856 and $322,453, respectively)
    
    $
    2,464,560
    
    
    $
    2,433,308Accounts payable, accrued expenses and other liabilities
    
    
    60,392
    
    
    
    58,542Dividends payable
    
    
    7,955
    
    
    
    7,947Lease rentals received in advance
    
    
    34,381
    
    
    
    31,288Liquidity facility
    
    
    81,000
    
    
    
    79,000Security deposits
    
    
    82,533
    
    
    
    74,670Maintenance payments
    
    
    253,175
    
    
    
    279,235Fair value of derivative liabilities
    
    
    179,279
    
    
    
    211,698Total liabilities
    
    
    3,163,275
    
    
    
    3,175,688Commitments and ContingenciesSHAREHOLDERS EQUITYPreference shares, $.01 par value, 50,000,000 shares
authorized, no shares issued and outstanding
    
    
    
    
    
    
    Common shares, $.01 par value, 250,000,000 shares
authorized, 79,550,421 shares issued and outstanding at
December 31, 2009; and 79,472,390 shares issued and
outstanding at June 30, 2010
    
    
    796
    
    
    
    795Additional paid-in capital
    
    
    1,479,995
    
    
    
    1,482,044Retained earnings
    
    
    70,294
    
    
    
    91,414Accumulated other comprehensive loss
    
    
    (259,848
    )
    
    
    (285,599
    )Total shareholders equity
    
    
    1,291,237
    
    
    
    1,288,654Total liabilities and shareholders equity
    
    $
    4,454,512
    
    
    $
    4,464,342
 The accompanying notes are an integral part of these unaudited consolidated financial statements.
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##### Table of Contents



Aircastle Limited and Subsidiaries
 
 Consolidated Statements of Income
 (Dollars in thousands, except per share amounts)
 (Unaudited)
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2009
    
    
    2010
    
    
    2009
    
    
    2010Revenues:Lease rental revenue
    
    $
    129,406
    
    
    $
    128,133
    
    
    $
    255,400
    
    
    $
    258,255Amortization of net lease
discounts and lease incentives
    
    
    (2,810
    )
    
    
    (4,909
    )
    
    
    (3,927
    )
    
    
    (9,754
    )Maintenance revenue
    
    
    9,637
    
    
    
    6,836
    
    
    
    16,240
    
    
    
    12,090Total lease rentals
    
    
    136,233
    
    
    
    130,060
    
    
    
    267,713
    
    
    
    260,591Interest income
    
    
    594
    
    
    
    
    
    
    
    1,227
    
    
    
    Other revenue
    
    
    86
    
    
    
    124
    
    
    
    111
    
    
    
    154Total revenues
    
    
    136,913
    
    
    
    130,184
    
    
    
    269,051
    
    
    
    260,745Expenses:Depreciation
    
    
    51,688
    
    
    
    54,424
    
    
    
    103,249
    
    
    
    108,569Interest, net
    
    
    41,482
    
    
    
    40,166
    
    
    
    84,893
    
    
    
    81,125Selling, general and
administrative (including non-cash
share based payment expense of
$1,729 and $1,929 for the three
months ended, and $3,387 and
$3,711 for the six months ended,
June 30, 2009 and 2010,
respectively)
    
    
    11,122
    
    
    
    11,036
    
    
    
    22,217
    
    
    
    22,709Maintenance and other costs
    
    
    4,502
    
    
    
    3,437
    
    
    
    10,278
    
    
    
    5,637Total expenses
    
    
    108,794
    
    
    
    109,063
    
    
    
    220,637
    
    
    
    218,040Other income (expense):Loss on sale of aircraft
    
    
    
    
    
    
    (1,291
    )
    
    
    
    
    
    
    (1,291
    )Other income (expense)
    
    
    1,501
    
    
    
    (176
    )
    
    
    1,593
    
    
    
    (546
    )Total other income (expense)
    
    
    1,501
    
    
    
    (1,467
    )
    
    
    1,593
    
    
    
    (1,837
    )Income from continuing operations
before income taxes
    
    
    29,620
    
    
    
    19,654
    
    
    
    50,007
    
    
    
    40,868Income tax provision
    
    
    2,049
    
    
    
    1,515
    
    
    
    3,965
    
    
    
    3,850Net income
    
    $
    27,571
    
    
    $
    18,139
    
    
    $
    46,042
    
    
    $
    37,018Earnings per common share  Basic
    
    $
    0.35
    
    
    $
    0.23
    
    
    $
    0.58
    
    
    $
    0.46Earnings per common share  Diluted
    
    $
    0.35
    
    
    $
    0.23
    
    
    $
    0.58
    
    
    $
    0.46Dividends declared per share
    
    $
    0.10
    
    
    $
    0.10
    
    
    $
    0.20
    
    
    $
    0.20
 The accompanying notes are an integral part of these unaudited consolidated financial statements.
 4




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Aircastle Limited and Subsidiaries
 
 Consolidated Statements of Cash Flows
(Dollars in thousands)
 (Unaudited)
 Six Months EndedJune 30,2009
    
    
    2010Cash flows from operating activities:Net income
    
    $
    46,042
    
    
    $
    37,018Adjustments to reconcile net income to net cash provided by operating activities:Depreciation
    
    
    103,249
    
    
    
    108,569Amortization of deferred financing costs
    
    
    5,731
    
    
    
    5,760Amortization of net lease discounts and lease incentives
    
    
    3,927
    
    
    
    9,754Deferred income taxes
    
    
    3,348
    
    
    
    2,537Accretion of purchase discounts on debt investments
    
    
    (288
    )
    
    
    Non-cash share based payment expense
    
    
    3,387
    
    
    
    3,711Cash flow hedges reclassified into earnings
    
    
    7,796
    
    
    
    4,074Ineffective portion of cash flow hedges
    
    
    (573
    )
    
    
    1,769Loss on sale of flight equipment
    
    
    
    
    
    
    1,291Security deposits and maintenance payments included in earnings
    
    
    (10,506
    )
    
    
    (9,978
    )Other
    
    
    (1,164
    )
    
    
    546Changes in certain assets and liabilities:Accounts receivable
    
    
    (2,281
    )
    
    
    (662
    )Restricted cash and cash equivalents
    
    
    (16,754
    )
    
    
    12,436Other assets
    
    
    (4,077
    )
    
    
    655Accounts payable, accrued expenses and other liabilities
    
    
    (10,118
    )
    
    
    (5,445
    )Lease rentals received in advance
    
    
    (1,228
    )
    
    
    (1,343
    )Net cash provided by operating activities
    
    
    126,491
    
    
    
    170,692Cash flows from investing activities:Acquisition and improvement of flight equipment and lease incentives
    
    
    (105,746
    )
    
    
    (55,353
    )Proceeds from sale of flight equipment, net of gain
    
    
    
    
    
    
    17,707Restricted cash and cash equivalents related to sale of flight equipment
    
    
    
    
    
    
    (17,707
    )Aircraft purchase deposits and progress payments, net of returned deposits
    
    
    (39,715
    )
    
    
    (74,666
    )Principal repayments on debt investments
    
    
    808
    
    
    
    Leasehold improvements, furnishings and equipment
    
    
    (82
    )
    
    
    (16
    )Net cash used in investing activities
    
    
    (144,735
    )
    
    
    (130,035
    )Cash flows from financing activities:Repurchase of shares from directors and employees
    
    
    (247
    )
    
    
    (1,663
    )Proceeds from debt financings
    
    
    70,916
    
    
    
    57,089Debt repayments
    
    
    (65,847
    )
    
    
    (88,341
    )Deferred financing costs
    
    
    (3,098
    )
    
    
    (2,023
    )Restricted secured liquidity facility collateral
    
    
    (81,186
    )
    
    
    2,000Secured liquidity facility collateral
    
    
    81,186
    
    
    
    (2,000
    )Security deposits received
    
    
    37,475
    
    
    
    3,917Security deposits returned
    
    
    (6,267
    )
    
    
    (8,760
    )Maintenance payments received
    
    
    33,220
    
    
    
    57,762Maintenance payments returned
    
    
    (14,527
    )
    
    
    (35,702
    )Payments for terminated cash flow hedges
    
    
    (2,758
    )
    
    
    Dividends paid
    
    
    (15,785
    )
    
    
    (15,906
    )Net cash provided by (used in) financing activities
    
    
    33,082
    
    
    
    (33,627
    )Net increase in cash and cash equivalents
    
    
    14,838
    
    
    
    7,030Cash and cash equivalents at beginning of period
    
    
    80,947
    
    
    
    142,666Cash and cash equivalents at end of period
    
    $
    95,785
    
    
    $
    149,696Supplemental disclosures of cash flow information:Cash paid for interest, net of capitalized interest
    
    $
    73,428
    
    
    $
    70,216Cash paid for income taxes
    
    $
    1,568
    
    
    $
    2,595Supplemental disclosures of non-cash financing activities:Advance lease rentals converted to maintenance reserves
    
    $
    
    
    
    $
    1,750
 The accompanying notes are an integral part of these unaudited consolidated financial statements.
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Aircastle Limited and Subsidiaries
 
 Notes to Unaudited Consolidated Financial Statements
 (Dollars in thousands, except per share amounts)
 June 30, 2010
 Note 1. Summary of Significant Accounting Policies
 Organization
  Basis of Presentation
   Principles of Consolidation
   Recent Accounting Pronouncements
 Consolidations (Topic 810):
Improvements to Financial
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Aircastle Limited and Subsidiaries
 Notes to Unaudited Consolidated Financial Statements
 (Dollars in thousands, except per share amounts)
 June 30, 2010
 Reporting by Enterprises Involved with Variable Interest Entities
 Fair Value Measurements and
Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements
 Note 2. Fair Value Measurements
  
    
    Level 1: Observable inputs such as quoted prices in active markets for identical assets
or liabilities.
    
    Level 2: Inputs other than quoted prices included within Level 1 that are observable,
either directly or indirectly, such as quoted prices for similar assets or liabilities or
market corroborated inputs.
    
    Level 3: Unobservable inputs for which there is little or no market data and which
require us to develop our own assumptions about how market participants price the asset or
liability.
  
    
    Market approach  Uses prices and other relevant information generated by market
transactions involving identical or comparable assets or liabilities.
    
    Income approach  Uses valuation techniques to convert future amounts to a single
present amount based on current market expectation about those future amounts.
    
    Cost approach  Based on the amount that currently would be required to replace the
service capacity of an asset (replacement cost).
  7




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Aircastle Limited and Subsidiaries
 Notes to Unaudited Consolidated Financial Statements
 (Dollars in thousands, except per share amounts)
 June 30, 2010
  Fair Value Measurements at December 31, 2009Using Fair Value HierarchyQuotedPrices inActive
    
    
    SignificantFair Value
    
    
    Markets for
    
    
    Other
    
    
    Significantas of
    
    
    Identical
    
    
    Observable
    
    
    UnobservableDecember 31,
    
    
    Assets
    
    
    Inputs
    
    
    Inputs
    
    
    Valuation2009
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)
    
    
    TechniqueAssets:Cash and cash equivalents
    
    $
    142,666
    
    
    $
    142,666
    
    
    $
    
    
    
    $
    
    
    
    MarketRestricted cash and cash equivalents
    
    
    207,834
    
    
    
    207,834
    
    
    
    
    
    
    
    
    
    
    MarketTotal
    
    $
    350,500
    
    
    $
    350,500
    
    
    $
    
    
    
    $
    Liabilities:Derivative liabilities
    
    $
    179,279
    
    
    $
    
    
    
    $
    140,372
    
    
    $
    38,907
    
    
    IncomeFair Value Measurements at June 30, 2010Using Fair Value HierarchyQuotedPrices inActive
    
    
    SignificantFair Value
    
    
    Markets for
    
    
    Other
    
    
    Significantas of
    
    
    Identical
    
    
    Observable
    
    
    UnobservableJune 30,
    
    
    Assets
    
    
    Inputs
    
    
    Inputs
    
    
    Valuation2010
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)
    
    
    TechniqueAssets:Cash and cash equivalents
    
    $
    149,696
    
    
    $
    149,696
    
    
    $
    
    
    
    $
    
    
    
    MarketRestricted cash and cash equivalents
    
    
    213,105
    
    
    
    213,105
    
    
    
    
    
    
    
    
    
    
    MarketTotal
    
    $
    362,801
    
    
    $
    362,801
    
    
    $
    
    
    
    $
    Liabilities:Derivative liabilities
    
    $
    211,698
    
    
    $
    
    
    
    $
    152,282
    
    
    $
    59,416
    
    
    Income
   8




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Aircastle Limited and Subsidiaries
 Notes to Unaudited Consolidated Financial Statements
 (Dollars in thousands, except per share amounts)
 June 30, 2010
   Three Months
    
    
    Six MonthsEnded
    
    
    EndedJune 30, 2010
    
    
    June 30, 2010Derivative LiabilitiesBalance at beginning of period
    
    $
    (45,040
    )
    
    $
    (38,907
    )Transfers into Level 3
    
    
    
    
    
    
    Transfers out of Level 3
    
    
    
    
    
    
    Total gains or (losses):Included in interest income
    
    
    
    
    
    
    Included in other income (expense)
    
    
    (136
    )
    
    
    (275
    )Included in interest expense
    
    
    (71
    )
    
    
    (122
    )Included in other comprehensive income
    
    
    (14,169
    )
    
    
    (20,112
    )Balance at end of period
    
    $
    (59,416
    )
    
    $
    (59,416
    )
     December 31, 2009
    
    June 30, 2010Carrying Amount
    
    Fair Value
    
    Carrying Amount
    
    Fair Valueof Asset
    
    of Asset
    
    of Asset
    
    of Asset(Liability)
    
    (Liability)
    
    (Liability)
    
    (Liability)Securitizations and term debt financings
    
    $
    (2,324,972
    )
    
    $
    (2,037,718
    )
    
    $
    (2,241,258
    )
    
    $
    (2,017,360
    )ECA term financings
    
    
    (139,588
    )
    
    
    (140,984
    )
    
    
    (134,961
    )
    
    
    (140,596
    )A330 PDP Facility
    
    
    
    
    
    
    
    
    
    
    (57,089
    )
    
    
    (57,089
    )
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##### Table of Contents



Aircastle Limited and Subsidiaries
 Notes to Unaudited Consolidated Financial Statements
 (Dollars in thousands, except per share amounts)
 June 30, 2010
 Note 3. Lease Rental Revenues and Flight Equipment Held for Lease
  Year Ending December 31,
    
    AmountRemainder of 2010
    
    $
    258,5182011
    
    
    493,2052012
    
    
    428,8192013
    
    
    323,5332014
    
    
    242,7422015
    
    
    188,811Thereafter
    
    
    330,793Total
    
    $
    2,266,421
  Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,Region
    
    2009
    
    2010
    
    2009
    
    2010Europe
    
    
    46
    %
    
    
    45
    %
    
    
    46
    %
    
    
    45
    %Asia
    
    
    20
    %
    
    
    19
    %
    
    
    21
    %
    
    
    20
    %North America
    
    
    16
    %
    
    
    16
    %
    
    
    16
    %
    
    
    16
    %Latin America
    
    
    7
    %
    
    
    10
    %
    
    
    6
    %
    
    
    9
    %Middle East and Africa
    
    
    11
    %
    
    
    10
    %
    
    
    11
    %
    
    
    10
    %Total
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
    
    
    100
    %
      10




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Aircastle Limited and Subsidiaries
 Notes to Unaudited Consolidated Financial Statements
 (Dollars in thousands, except per share amounts)
 June 30, 2010
  Three Months Ended June 30,2009
    
    2010Number
    
    
    
    
    
    
    
    NumberPercent of Total
    
    of
    
    
    
    
    
    Percent of Total
    
    ofCountry
    
    Revenue
    
    Revenue
    
    Lessees
    
    Revenue
    
    Revenue
    
    LesseesUnited States
    
    $
    16,201
    
    
    
    12
    %
    
    
    3
    
    
    $
    16,754
    
    
    
    13
    %
    
    
    4Netherlands
    
    
    14,709
    
    
    
    11
    %
    
    
    4
    
    
    
    14,015
    
    
    
    11
    %
    
    
    3China(a)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14,037
    
    
    
    11
    %
    
    
    5India(b) (c)
    
    
    13,920
    
    
    
    10
    %
    
    
    3
    
    
    
    
    
    
    
    
    
    
    
    
 
 (a)
    
    Total revenue attributable to China was less than 10% for the three months ended June 30, 2009.(b)
    
    Total revenue attributable to India was less than 10% for the three months ended June 30, 2010.(c)
    
    Includes maintenance revenue of $8.7 million for the three months ended June 30, 2009. Six Months Ended June 30,2009
    
    2010Number
    
    
    
    
    
    
    
    
    
    NumberPercent of Total
    
    of
    
    
    
    
    
    Percent of Total
    
    ofCountry
    
    Revenue
    
    Revenue
    
    Lessees
    
    Revenue
    
    Revenue
    
    LesseesUnited States
    
    $
    32,341
    
    
    
    12
    %
    
    
    3
    
    
    $
    33,399
    
    
    
    13
    %
    
    
    4Netherlands
    
    
    29,418
    
    
    
    11
    %
    
    
    4
    
    
    
    28,027
    
    
    
    11
    %
    
    
    3China(a)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    27,843
    
    
    
    11
    %
    
    
    5
 
 (a)
    
    Total revenue attributable to China was less than 10% for the six months ended June 30, 2009.  December 31, 2009
    
    June 30, 2010Number
    
    
    
    
    
    Numberof
    
    Net Book
    
    of
    
    Net BookRegion
    
    Aircraft
    
    Value %
    
    Aircraft
    
    Value %Europe
    
    
    58
    
    
    
    46
    %
    
    
    61
    
    
    
    47
    %Asia
    
    
    30
    (1)
    
    
    20
    %
    
    
    29
    
    
    
    19
    %North America
    
    
    15
    
    
    
    12
    %
    
    
    15
    
    
    
    12
    %Latin America
    
    
    10
    
    
    
    9
    %
    
    
    11
    
    
    
    9
    %Middle East and Africa
    
    
    13
    
    
    
    12
    %
    
    
    12
    
    
    
    12
    %Off-lease
    
    
    3
    (2)
    
    
    1
    %
    
    
    1
    (3)
    
    
    1
    %Total
    
    
    129
    
    
    
    100
    %
    
    
    129
    
    
    
    100
    %
 
 (1)
    
    Includes one Boeing Model 737-400 aircraft which was being
converted to freighter configuration and for which we had an
executed lease with a carrier in Asia post-conversion and which we
delivered in the first quarter of 2010.(2)
    
    Includes one Boeing Model 737-300 aircraft which was returned to
us on a consensual early lease termination in the third quarter of
2009 which was delivered to a customer on lease in the second
quarter of 2010 and two Boeing Model 757-200 aircraft which were
returned to us early on a consensual basis in the third quarter of
2009, one of which was sold in the second quarter of 2010 and the
other which is subject to a sale agreement with an expected
delivery date in the third quarter of 2010.(3)
    
    Represents one Boeing Model 757-200 aircraft which was returned to
us early on a consensual basis in the third quarter of 2009 for
which we have an executed sale agreement with an expected delivery
date in the third quarter of 2010. 11




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##### Table of Contents



Aircastle Limited and Subsidiaries
 Notes to Unaudited Consolidated Financial Statements
 (Dollars in thousands, except per share amounts)
 June 30, 2010
  December 31, 2009
    
    June 30, 2010Net Book
    
    Number of
    
    
    
    Net Book
    
    Number ofCountry
    
    Net Book Value
    
    Value %
    
    Lessees
    
    Net Book Value
    
    Value %
    
    LesseesNetherlands
    
    $
    435,796
    
    
    
    11
    %
    
    
    3
    
    
    $
    422,958
    
    
    
    11
    %
    
    
    3United States(a)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    379,784
    
    
    
    10
    %
    
    
    4
 
 (a)
    
    The net book value of flight equipment attributable to the United States was less than 10% as of December 31, 2009.   Note 4. Variable Interest Entities
   Securitizations and Term Financing
   12




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##### Table of Contents



Aircastle Limited and Subsidiaries
 Notes to Unaudited Consolidated Financial Statements
 (Dollars in thousands, except per share amounts)
 June 30, 2010
   ECA Term Financings
    Note 5. Securitizations and Term Debt Financings
  AtDecember 31,2009
    
    
    At June 30, 2010Outstanding
    
    
    Outstanding
    
    
    
    
    
    
    Final StatedDebt Obligation
    
    Borrowings
    
    
    Borrowings
    
    
    Interest Rate(1)
    
    
    Maturity(2)Securitizations and Term Debt Financings:Securitization No. 1
    
    $
    436,091
    
    
    $
    425,722
    
    
    
    0.62
    %
    
    
    6/20/31Securitization No. 2
    
    
    1,061,566
    
    
    
    1,039,576
    
    
    
    0.61
    %
    
    
    6/14/37Term Financing No. 1
    
    
    708,710
    
    
    
    672,764
    
    
    
    2.10
    %
    
    
    5/02/15Term Financing No. 2
    
    
    118,605
    
    
    
    103,196
    
    
    
    3.28
    %
    
    
    9/23/13ECA Term Financings
    
    
    139,588
    
    
    
    134,961
    
    
    4.48% and 3.96
    %
    
    5/27/21 and 12/03/21A330 PDP Facility
    
    
    
    
    
    
    57,089
    
    
    
    2.86
    %
    
    
    12/1/11
    (3)Total
    
    $
    2,464,560
    
    
    $
    2,433,308
 
 (1)
    
    Reflects floating rate in effect at the applicable reset date except for the ECA Term Financings, which are fixed rate.(2)
    
    For Securitization No. 1, Securitization No. 2 and Term Financing No. 1, all cash flows available after expenses and
interest will be applied to debt amortization, if the debt is not refinanced by June 2011, June 2012, and May 2013,
respectively.(3)
    
    Reflects the last scheduled delivery month for the six relevant new Airbus A330-200 delivery positions. The final
maturity date is the earlier of the aircraft delivery date or nine months after the scheduled delivery month for the
last scheduled delivery position. 13




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##### Table of Contents



Aircastle Limited and Subsidiaries
 Notes to Unaudited Consolidated Financial Statements
 (Dollars in thousands, except per share amounts)
 June 30, 2010
  Available LiquidityDecember 31,
    
    June 30,
    
    Unused
    
    Interest RateFacility
    
    Liquidity Facility Provider
    
    2009
    
    2010
    
    Fee
    
    on any AdvancesSecuritization No. 1
    
    Calyon
    
    $
    42,000
    
    
    $
    42,000
    
    
    
    0.45
    %
    
    1M Libor + 1.00%Securitization No. 2
    
    HSH Nordbank AG(1)
    
    
    79,617
    
    
    
    77,968
    
    
    
    0.50
    %
    
    1M Libor + 0.75%Term Financing No. 1
    
    Calyon
    
    
    14,174
    
    
    
    13,455
    
    
    
    0.60
    %
    
    1M Libor + 1.20%
 
 (1)
    
    Following a ratings downgrade with respect to the liquidity
facility provider in May 2009, the liquidity facility was drawn
and the proceeds, or permitted investments thereof, remain
available to provide liquidity if required. Amounts drawn
following a ratings downgrade with respect to the liquidity
facility provider do not bear interest; however, net investment
earnings will be paid to the liquidity facility provider and the
unused fee continues to apply. Term Financing No. 1
   A330 PDP Facility
   14




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##### Table of Contents



Aircastle Limited and Subsidiaries
 Notes to Unaudited Consolidated Financial Statements
 (Dollars in thousands, except per share amounts)
 June 30, 2010
 Note 6. Dividends
   Note 7. Earnings Per Share
   Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2009
    
    
    2010
    
    
    2009
    
    
    2010Weighted-average shares:Common shares outstanding
    
    
    77,976,760
    
    
    
    78,465,361
    
    
    
    77,958,980
    
    
    
    78,436,452Restricted common shares
    
    
    1,389,720
    
    
    
    1,153,468
    
    
    
    1,287,083
    
    
    
    1,182,165Total weighted-average shares
    
    
    79,366,480
    
    
    
    79,618,829
    
    
    
    79,246,063
    
    
    
    79,618,617Percentage of weighted-average shares:Common shares outstanding
    
    
    98.25
    %
    
    
    98.55
    %
    
    
    98.38
    %
    
    
    98.52
    %Restricted common shares
    
    
    1.75
    %
    
    
    1.45
    %
    
    
    1.62
    %
    
    
    1.48
    %Total
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
 15




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##### Table of Contents



Aircastle Limited and Subsidiaries
 Notes to Unaudited Consolidated Financial Statements
 (Dollars in thousands, except per share amounts)
 June 30, 2010
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2009
    
    
    2010
    
    
    2009
    
    
    2010Earnings per share  Basic:Net income
    
    $
    27,571
    
    
    $
    18,139
    
    
    $
    46,042
    
    
    $
    37,018Less: Distributed and undistributed earnings
allocated to restricted common shares
(a)
    
    
    (483
    )
    
    
    (263
    )
    
    
    (748
    )
    
    
    (550
    )Earnings available to common shareholders  Basic
    
    $
    27,088
    
    
    $
    17,876
    
    
    $
    45,294
    
    
    $
    36,468Weighted-average common shares outstanding  Basic
    
    
    77,976,760
    
    
    
    78,465,361
    
    
    
    77,958,980
    
    
    
    78,436,452Earnings per common share  Basic
    
    $
    0.35
    
    
    $
    0.23
    
    
    $
    0.58
    
    
    $
    0.46Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2009
    
    
    2010
    
    
    2009
    
    
    2010Earnings per share  Diluted:Net income
    
    $
    27,571
    
    
    $
    18,139
    
    
    $
    46,042
    
    
    $
    37,018Less: Distributed and undistributed earnings
allocated to restricted common shares
    
    
    (483
    )
    
    
    (263
    )
    
    
    (748
    )
    
    
    (550
    )Earnings available to common shareholders  Diluted
    
    $
    27,088
    
    
    $
    17,876
    
    
    $
    45,294
    
    
    $
    36,468Weighted-average common shares outstanding  Basic
    
    
    77,976,760
    
    
    
    78,465,361
    
    
    
    77,958,980
    
    
    
    78,436,452Effect of dilutive shares
    
    
    
    (b)
    
    
    
    (b)
    
    
    
    (b)
    
    
    
    (b)Weighted-average common shares outstanding 
Diluted
    
    
    77,976,760
    
    
    
    78,465,361
    
    
    
    77,958,980
    
    
    
    78,436,452Earnings per common share  Diluted
    
    $
    0.35
    
    
    $
    0.23
    
    
    $
    0.58
    
    
    $
    0.46
 
 (a)
    
    For the three months ended June 30, 2009 and 2010, distributed and undistributed
earnings to restricted shares is 1.75% and 1.45%, respectively, of net income. For
the six months ended June 30, 2009 and 2010, distributed and undistributed earnings
to restricted shares is 1.62% and 1.48%, respectively, of net income. The amount of
restricted share forfeitures for all periods present is immaterial to the allocation
of distributed and undistributed earnings.(b)
    
    For the three and six months ended June 30, 2009 and 2010, we have no dilutive shares. Note 8. Income Taxes
  16




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##### Table of Contents



Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
June 30, 2010
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2009
    
    
    2010
    
    
    2009
    
    
    2010U.S. operations
    
    $
    502
    
    
    $
    487
    
    
    $
    959
    
    
    $
    1,022Non-U.S. operations
    
    
    29,118
    
    
    
    19,167
    
    
    
    49,048
    
    
    
    39,846Total
    
    $
    29,620
    
    
    $
    19,654
    
    
    $
    50,007
    
    
    $
    40,868
   Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2009
    
    
    2010
    
    
    2009
    
    
    2010Notional U.S. federal income tax expense at the statutory rate
    
    $
    10,367
    
    
    $
    6,879
    
    
    $
    17,502
    
    
    $
    14,304U.S. state and local income tax, net
    
    
    26
    
    
    
    30
    
    
    
    49
    
    
    
    61Non-U.S. operations
    
    
    (8,638
    )
    
    
    (5,423
    )
    
    
    (13,906
    )
    
    
    (11,393
    )Non-deductible expenses in the U.S.
    
    
    7
    
    
    
    36
    
    
    
    15
    
    
    
    890Other
    
    
    287
    
    
    
    (7
    )
    
    
    305
    
    
    
    (12
    )Provision for income taxes
    
    $
    2,049
    
    
    $
    1,515
    
    
    $
    3,965
    
    
    $
    3,850
 Note 9. Comprehensive Income (Loss)
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2009
    
    
    2010
    
    
    2009
    
    
    2010Net income
    
    $
    27,571
    
    
    $
    18,139
    
    
    $
    46,042
    
    
    $
    37,018Net change in fair value of derivatives, net of tax
expense of $972 and $197 for the three months ended,
and $1,203 and $280 for the six months ended, June 30,
2009 and 2010, respectively
    
    
    65,320
    
    
    
    (21,227
    )
    
    
    79,292
    
    
    
    (29,825
    )Derivative loss reclassified into earnings
    
    
    2,847
    
    
    
    1,770
    
    
    
    7,796
    
    
    
    4,074Net change in unrealized fair value of debt investments
    
    
    936
    
    
    
    
    
    
    
    (138
    )
    
    
    Total comprehensive income (loss)
    
    $
    96,674
    
    
    $
    (1,318
    )
    
    $
    132,992
    
    
    $
    11,267
 17




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##### Table of Contents



Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
June 30, 2010
  AccumulatedOtherComprehensiveIncome (Loss)December 31, 2009, net of tax benefit of $3,057
    
    $
    (259,848
    )Net change in fair value of derivatives, net of tax expense of $280
    
    
    (29,825
    )Derivative loss reclassified into earnings
    
    
    4,074June 30, 2010
    
    $
    (285,599
    )
 Note 10. Commitments and Contingencies
    Note 11. Derivatives
  18




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##### Table of Contents



Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
June 30, 2010
  Liability DerivativesFutureCurrent
    
    
    
    
    
    
    MaximumNotional
    
    
    Effective
    
    Maturity
    
    Notional
    
    
    Floating
    
    Fixed
    
    
    Balance SheetHedged Item
    
    Amount
    
    
    Date
    
    Date
    
    Amount
    
    
    Rate
    
    Rate
    
    
    Location
    
    Fair ValueInterest rate derivatives designated as cash flow hedges :Securitization No. 1
    
    $
    439,092
    
    
    Jun-06
    
    Jun-16
    
    $
    439,092
    
    
    1M LIBOR
+ 0.27%
    
    
    5.78
    %
    
    Fair value of derivative liabilities
    
    $
    65,071Securitization No. 2
    
    
    1,023,135
    
    
    Jun-07
    
    Jun-12
    
    
    1,023,135
    
    
    1M LIBOR
    
    5.25% 
to 5.36%
    
    Fair value of derivative liabilities
    
    
    83,899Term Financing No. 1(1)
    
    
    610,808
    
    
    Jun-08
    
    May-13
    
    
    610,808
    
    
    1M LIBOR
    
    
    4.04
    %
    
    Fair value of derivative liabilities
    
    
    43,969Term Financing No. 1(1)
    
    
    
    
    
    May-13
    
    May-15
    
    
    491,718
    
    
    1M LIBOR
    
    
    5.31
    %
    
    Fair value of derivative liabilities
    
    
    15,447Total interest rate derivatives designated as cash flow hedges
    
    
    2,073,035
    
    
    
    
    
    
    
    2,564,753
    
    
    
    
    
    
    
    
    
    
    
    208,386Interest rate derivatives not designated as cash flow hedges:Term Financing No. 2 (2)
    
    
    92,856
    
    
    Oct-08
    
    Sep-13
    
    
    92,856
    
    
    3M LIBOR
    
    
    3.17
    %
    
    Fair value of derivative liabilities
    
    
    3,312Total interest rate derivatives not designated as cash flow hedges
    
    
    92,856
    
    
    
    
    
    
    
    92,856
    
    
    
    
    
    
    
    
    
    
    
    3,312Total interest rate derivatives
    
    $
    2,165,891
    
    
    
    
    
    
    $
    2,657,609
    
    
    
    
    
    
    
    
    
    
    $
    211,698
 
 (1)
    
    The interest payments related to Term Financing No. 1 are being
hedged by two consecutive interest rate derivatives. When the
first matures in May 2013, the next becomes effective.(2)
    
    Although we entered into this interest rate derivative to hedge
the variable rate interest payments in connection with Term
Financing No. 2, it has not been designated as a hedge for
accounting purposes.    19




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##### Table of Contents



Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
June 30, 2010
     Effective Portion
    
    Ineffective PortionAmount of
    
    
    
    Amount of
    
    
    
    Amount ofDerivatives in
    
    Gain or (Loss)
    
    Location of
    
    Gain or (Loss)
    
    
    
    Gain or (Loss)ASC 815
    
    Recognized in
    
    Gain or (Loss)
    
    Reclassified from
    
    Location of
    
    Recognized inCash Flow
    
    OCI on
    
    Reclassified from
    
    Accumulated
    
    Gain or (Loss)
    
    IncomeHedging
    
    Derivative
    
    Accumulated
    
    OCI into Income
    
    Recognized in
    
    on DerivativeRelationships
    
    (a)
    
    OCI into Income
    
    (b)
    
    Income on Derivative
    
    (c)Interest rate derivatives
    
    $(78,341)
    
    Interest expense
    
    $(52,137)(1)
    
    Interest expense
    
    $(1,978)(1)
 
 (a)
    
    This represents the change in fair market value of our interest rate derivatives since year end, net of taxes,
offset by the amount of actual cash paid related to the net settlements of the interest rate derivatives for
the six months ended June 30, 2010.(b)
    
    This represents the amount of actual cash paid, net of taxes, related to the net settlements of the interest
rate derivatives for each month of the six months ended June 30, 2010 plus any effective amortization of net
deferred interest rate derivative losses.(c)
    
    This represents both realized and unrealized ineffectiveness incurred during the six months ended June 30, 2010.(1)
    
    Excludes accelerated deferred loss of $453 which was charged to interest expense during the six months ended
June 30, 2010 as a result of changes in projected future debt related to Term Financing No. 1. Derivatives Not
    
    Location of Gain
    
    Amount of GainDesignated as
    
    or (Loss)
    
    or (Loss)Hedging Instruments
    
    Recognized in Income
    
    Recognized in Incomeunder ASC 815
    
    On Derivative
    
    on DerivativeInterest rate derivatives
    
    Other income (expense)
    
    $(546)
  20




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##### Table of Contents



Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
June 30, 2010
   Amount ofDeferredAmount of Deferred
    
    
    (Gain)Unamortized
    
    
    (Gain) or Loss
    
    
    orDeferred
    
    
    Amortized
    
    
    Loss(Gain)
    
    
    (including Accelerated
    
    
    Expectedor
    
    
    Amortization) into
    
    
    to beOriginal
    
    
    
    
    
    
    
    
    
    
    
    
    Deferred
    
    
    Loss
    
    
    Interest Expense for
    
    
    AmortizedMaximum
    
    
    
    
    
    
    Fixed
    
    
    
    
    (Gain) or
    
    
    at
    
    
    the Six Months
    
    
    over theNotional
    
    
    Effective
    
    Maturity
    
    Rate
    
    
    Termination
    
    Loss Upon
    
    
    June 30,
    
    
    Ended June 30,
    
    
    Next  TwelveHedged Item
    
    Amount
    
    
    Date
    
    Date
    
    %
    
    
    Date
    
    Termination
    
    
    2010
    
    
    2009
    
    
    2010
    
    
    MonthsSecuritization No. 1
    
    $
    400,000
    
    
    Dec-05
    
    Aug-10
    
    
    4.61
    
    
    Jun-06
    
    $
    (13,397
    )
    
    $
    (367
    )
    
    $
    (1,557
    )
    
    $
    (1,480
    )
    
    $
    (367
    )Securitization No. 1
    
    
    200,000
    
    
    Dec-05
    
    Dec-10
    
    
    5.03
    
    
    Jun-06
    
    
    (2,541
    )
    
    
    (191
    )
    
    
    (185
    )
    
    
    (106
    )
    
    
    (191
    )Securitization No. 2
    
    
    500,000
    
    
    Mar-06
    
    Mar-11
    
    
    5.07
    
    
    Jun-07
    
    
    (2,687
    )
    
    
    (453
    )
    
    
    (359
    )
    
    
    (345
    )
    
    
    (453
    )Securitization No. 2
    
    
    200,000
    
    
    Jan-07
    
    Aug-12
    
    
    5.06
    
    
    Jun-07
    
    
    (1,850
    )
    
    
    (695
    )
    
    
    (185
    )
    
    
    (178
    )
    
    
    (340
    )Securitization No. 2
    
    
    410,000
    
    
    Feb-07
    
    Apr-17
    
    
    5.14
    
    
    Jun-07
    
    
    (3,119
    )
    
    
    (1,825
    )
    
    
    (202
    )
    
    
    (185
    )
    
    
    (337
    )Term Financing No. 1
    
    
    150,000
    
    
    Jul-07
    
    Dec-17
    
    
    5.14
    
    
    Mar-08
    
    
    15,281
    
    
    
    10,425
    
    
    
    1,045
    
    
    
    976
    
    
    
    1,848Term Financing No. 1
    
    
    440,000
    
    
    Jun-07
    
    Feb-13
    
    
    4.88
    
    
    Partial  Mar-08 Full  Jun-08
    
    
    26,281
    
    
    
    13,084
    
    
    
    3,045
    
    
    
    2,844
    
    
    
    5,386Term Financing No. 1
    
    
    248,000
    
    
    Aug-07
    
    May-13
    
    
    5.33
    
    
    Jun-08
    
    
    9,888
    
    
    
    4,895
    
    
    
    1,130
    
    
    
    1,472
    
    
    
    1,753Term Financing No. 2
    
    
    360,000
    
    
    Jan-08
    
    Feb-19
    
    
    5.16
    
    
    Partial  Jun-08 Full  Oct-08
    
    
    23,077
    
    
    
    10,917
    
    
    
    1,361
    
    
    
    1,076
    
    
    
    1,688ECA Term Financing and New A330 Aircraft future debt
    
    
    238,000
    
    
    Jan-11
    
    Apr-16
    
    
    5.23
    
    
    Dec-08
    
    
    19,430
    
    
    
    18,445
    
    
    
    940
    
    
    
    
    
    
    
    699New A330 Aircraft future debt and securitization
    
    
    231,000
    
    
    Apr-10
    
    Oct-15
    
    
    5.17
    
    
    Partial  Jun-08 Full  Dec-08
    
    
    15,310
    
    
    
    12,437
    
    
    
    674
    
    
    
    
    
    
    
    1,735New A330 Aircraft future debt and securitization
    
    
    203,000
    
    
    Jun-07
    
    Jan-12
    
    
    4.89
    
    
    Dec-08
    
    
    2,728
    (1)
    
    
    
    
    
    
    968
    
    
    
    
    
    
    
    New A330 Aircraft future debt and securitization
    
    
    238,000
    
    
    Jul-11
    
    Sep-16
    
    
    5.27
    
    
    Dec-08
    
    
    17,254
    
    
    
    15,969
    
    
    
    1,121
    
    
    
    
    
    
    
    Total
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    105,655
    
    
    $
    82,641
    
    
    $
    7,796
    
    
    $
    4,074
    
    
    $
    11,421
 
 (1)
    
    The deferred loss for this swap is related to the period prior to
de-designation.  21




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##### Table of Contents



Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
June 30, 2010
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2009
    
    
    2010
    
    
    2009
    
    
    2010Interest Expense:Hedge ineffectiveness (gains) losses
    
    $
    (444
    )
    
    $
    902
    
    
    $
    (573
    )
    
    $
    1,769Amortization:Accelerated amortization of deferred losses
    
    
    829
    
    
    
    6
    
    
    
    3,704
    
    
    
    453Amortization of deferred losses
    
    
    2,018
    
    
    
    1,764
    
    
    
    4,092
    
    
    
    3,621Total Amortization
    
    
    2,847
    
    
    
    1,770
    
    
    
    7,796
    
    
    
    4,074Total charged to interest expense
    
    $
    2,403
    
    
    $
    2,672
    
    
    $
    7,223
    
    
    $
    5,843Other Income (Expense):Mark to market gains (losses) on
undesignated interest rate derivatives
    
    $
    1,072
    
    
    $
    (176
    )
    
    $
    1,164
    
    
    $
    (546
    )Total charged to other income (expense)
    
    $
    1,072
    
    
    $
    (176
    )
    
    $
    1,164
    
    
    $
    (546
    )
  Note 12. Interest, Net
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2009
    
    
    2010
    
    
    2009
    
    
    2010Interest on borrowings, net settlements on interest rate
derivatives, and other liabilities
    
    $
    36,642
    
    
    $
    35,348
    
    
    $
    73,412
    
    
    $
    70,946Hedge ineffectiveness (gains) losses
    
    
    (444
    )
    
    
    902
    
    
    
    (573
    )
    
    
    1,769Amortization of interest rate derivatives related to deferred losses
    
    
    2,847
    
    
    
    1,770
    
    
    
    7,796
    
    
    
    4,074Amortization of deferred financing fees
    
    
    3,198
    
    
    
    2,956
    
    
    
    5,731
    
    
    
    5,760Interest Expense
    
    
    42,243
    
    
    
    40,976
    
    
    
    86,366
    
    
    
    82,549Less interest income
    
    
    (416
    )
    
    
    (30
    )
    
    
    (857
    )
    
    
    (40
    )Less capitalized interest
    
    
    (345
    )
    
    
    (780
    )
    
    
    (616
    )
    
    
    (1,384
    )Interest, net
    
    $
    41,482
    
    
    $
    40,166
    
    
    $
    84,893
    
    
    $
    81,125
 Note 13. Shareholders Equity and Share Based Payment
   22




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##### Table of Contents



Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
June 30, 2010
 Note 14. Subsequent Events
     
    
    Sumitomo Mitsui Banking Corporation (SMBC) committed $250 million in debt to finance the
first three New A330 Aircraft delivering to South African Airways; and
    
    Citibank, N.A. committed approximately $221 million and The Bank of Tokyo-Mitsubishi
UFJ, Ltd. committed approximately $227 million, to finance the six additional New A330
Aircraft.
 
 23




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##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
   WEBSITE AND ACCESS TO COMPANYS REPORTS
   24




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##### Table of Contents



OVERVIEW
   (1)
    
    Selectively investing in additional commercial jet aircraft and other aviation assets
when attractively priced opportunities and cost effective financing are available;(2)
    
    Maintaining an efficient capital structure by using varying long-term debt structures to
obtain cost effective financing and leveraging the efficient operating platform and strong
track record we have established; and(3)
    
    Reinvesting a portion of the cash flows generated by our business and from selective
asset dispositions in additional aviation assets and/or our own debt and equity
securities.
    Revenues
   25




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##### Table of Contents



2010 Lease Expirations and Lease Placements
 
    
    Scheduled lease expirations  placements.For our 19 aircraft originally having lease
expirations in 2010, we have executed lease renewals, or commitments to lease or renew,
with respect to 16 aircraft, we have sold one aircraft, we have an agreement to sell one
aircraft and we are actively remarketing the remaining one aircraft. We estimate that for
these 19 aircraft, excluding the two we sold or expect to sell, the weighted average lease
term for the new leases or renewals will be approximately 3.5 years with monthly lease
rates that are approximately 30% to 35% percent lower than the previous rentals. The drop
in lease rates for these placements reflects more challenging market conditions when these
new leases or renewals were executed, as well as a comparatively stronger lease placement
environment, on average, when the previous leases were put in place. Given more
challenging market conditions, we generally continue to seek shorter lease terms for
placements so as to allow for the opportunity to benefit more quickly from possible market
improvements.
 
    
    Aircraft acquisitions  placements.In the second quarter of 2010, we acquired one
used Boeing Model 737-800 aircraft and immediately placed it on lease with a customer. We
are scheduled to take delivery of two of the New A330 Aircraft in 2010, both in the second
half of the year. We have executed lease agreements for both aircraft with an affiliate of
the HNA Group, the parent company of Hainan Airlines. We acquired one used Airbus Model A330-200 passenger configuration aircraft in the third quarter of 2010 in a sale - leaseback transaction. We also have commitments to acquire
two used Airbus Model A330-200 passenger configuration aircraft and one Boeing Model
737-800 aircraft, all of which will be subject to lease upon acquisition.
 2011 Lease Expirations and Lease Placements
 
    
    Scheduled lease expirations  placements.We have 13 aircraft with lease expirations
scheduled in 2011. We have executed lease renewals, or commitments to lease or renew, with
respect to three of these aircraft, and we have a signed sale agreement to sell one
aircraft. We are actively remarketing the remaining nine aircraft.
 
    
    Aircraft acquisitions  placements.We are scheduled to take delivery of seven of the
New A330 Aircraft in 2011. We executed a lease agreement for one of the New A330 Aircraft
scheduled for delivery in 2011 with an affiliate of the HNA Group, and we executed lease
agreements for six of the New A330 Aircraft scheduled
 26




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##### Table of Contents



for delivery in 2011 with South
African Airways (PTY) LTD, or SAA. We currently have no other commitments to acquire
aircraft in 2011.
 2012-2014 Lease Expirations and Lease Placements
 
    
    Scheduled lease expirations  placements.Taking into account lease and sale
commitments, we currently have the following number of aircraft with lease expirations
scheduled in the period 2012-2014:
 
    
    2012: 29 aircraft, representing 20% of our net book value of flight
equipment held for lease at June 30, 2010;
 
    
    2013: 25 aircraft, representing 12% of our net book value of flight
equipment held for lease at June 30, 2010; and
 
    
    2014: 22 aircraft, representing 16% of our net book value of flight
equipment held for lease at June 30, 2010.
 
    
    Aircraft acquisitions  placements.We are scheduled to take delivery of one of the New
A330 Aircraft in 2012 and we are actively remarketing it. We currently have no other
commitments to acquire aircraft in the period 2012-2014.
 Operating Expenses
  Income Tax Provision
   Acquisitions and Dispositions
  27




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##### Table of Contents



AIRCASTLE AIRCRAFT INFORMATION (Dollars in millions)
 OwnedAircraft as ofJune 30, 2010(1)Flight Equipment Held for Lease
    
    $
    3,742Number of Aircraft
    
    
    129Latest Generation Aircraft (Percentage of Total Aircraft)
    
    
    88
    %Number of Lessees
    
    
    63Number of Countries
    
    
    36Weighted Average Age  Passenger (years)(2)
    
    
    11.5Weighted Average Age  Freighter (years)(2)
    
    
    10.7Weighted Average Age  Combined (years)(2)
    
    
    11.3Weighted Average Remaining Passenger Lease Term (years)(3)
    
    
    3.5Weighted Average Remaining Cargo Lease Term (years)(3)
    
    
    7.2Weighted Average Remaining Combined Lease Term (years)(3)
    
    
    4.6Weighted Average Fleet Utilization for the three months ended June 30, 2010(4)
    
    
    98
    %Weighted Average Fleet Utilization for the six months ended June 30, 2010(4)
    
    
    98
    %
 
 (1)
    
    Calculated using net book value as of June 30, 2010.(2)
    
    Weighted average age (years) by net book value.(3)
    
    Weighted average remaining lease term (years) by net book value.(4)
    
    Aircraft on-lease days as a percent of total days in period weighted by net book value,
excluding aircraft in freighter conversion. 28




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##### Table of Contents



PORTFOLIO DIVERSIFICATION
 Owned Aircraft as ofJune 30, 2010Number of
    
    
    % of NetAircraft
    
    
    Book ValueAircraft TypePassenger:Narrowbody
    
    
    83
    
    
    
    44
    %Midbody
    
    
    24
    
    
    
    25
    %Widebody
    
    
    1
    
    
    
    2
    %Total Passenger
    
    
    108
    
    
    
    71
    %Freighter
    
    
    21
    
    
    
    29
    %Total
    
    
    129
    
    
    
    100
    %ManufacturerBoeing
    
    
    86
    
    
    
    64
    %Airbus
    
    
    43
    
    
    
    36
    %Total
    
    
    129
    
    
    
    100
    %Regional DiversificationEurope
    
    
    61
    
    
    
    47
    %Asia
    
    
    29
    
    
    
    19
    %North America
    
    
    15
    
    
    
    12
    %Latin America
    
    
    11
    
    
    
    9
    %Middle East and Africa
    
    
    12
    
    
    
    12
    %Off-lease(1)
    
    
    1
    
    
    
    1
    %Total
    
    
    129
    
    
    
    100
    %
 
 (1)
    
    Represents one Boeing Model 757-200 aircraft which was returned to
us early on a consensual basis in the third quarter of 2009 for
which we have an executed sale agreement with an expected delivery
date in the third quarter of 2010.  Number ofPercent of Net Book Value
    
    Customer
    
    Country
    
    AircraftGreater than 6% per customer
    
    Emirates
    
    United Arab Emirates
    
    
    2Martinair(1)
    
    Netherlands
    
    
    5US Airways
    
    USA
    
    
    83% to 6% per customer
    
    Avianca
    
    Colombia
    
    
    2China Eastern Airlines(2)
    
    China
    
    
    8Iberia Airlines
    
    Spain
    
    
    6GOL (3)
    
    Brazil
    
    
    6Airbridge Cargo(4)
    
    Russia
    
    
    1KLM (1)
    
    Netherlands
    
    
    1World Airways
    
    USA
    
    
    2Less than 3% per customer
    
    Icelandair(5)
    
    Iceland
    
    
    5Korean Air
    
    South Korea
    
    
    2Cimber-Sterling
    
    Denmark
    
    
    4SriLankan Airlines
    
    Sri Lanka
    
    
    2Malaysia Airlines
    
    Malaysia
    
    
    2
 
 (1)
    
    Martinair is a wholly owned subsidiary of KLM. Although KLM does not guarantee Martinairs obligations under the relevant lease, if
combined, the two, together with another affiliated customer, represent 11% of flight equipment held for lease. 29




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##### Table of Contents



(2)
    
    Includes the aircraft leased to Shanghai Airlines, which was recently acquired by China Eastern Airlines. China Eastern Airlines
does not guarantee the obligations of the aircraft we lease to Shanghai Airlines.(3)
    
    GOL has guaranteed the obligations of an affiliate, VRG Linhas Aereas, and accordingly, the two are shown combined in the above table.(4)
    
    Guaranteed by Volga-Dnepr.(5)
    
    Icelandair Group hf, the parent company of Icelandair, has guaranteed the obligations of an affiliate, SmartLynx, and accordingly,
the two are shown combined in the above table.  Finance
   30




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##### Table of Contents



RESULTS OF OPERATIONS
 Comparison of the three months ended June 30, 2009 to the three months ended June 30, 2010:
 Three Months EndedJune 30,2009
    
    
    2010(Dollars in thousands)Revenues:Lease rental revenue
    
    $
    129,406
    
    
    $
    128,133Amortization of net lease discounts and lease incentives
    
    
    (2,810
    )
    
    
    (4,909
    )Maintenance revenue
    
    
    9,637
    
    
    
    6,836Total lease rentals
    
    
    136,233
    
    
    
    130,060Interest income
    
    
    594
    
    
    
    Other revenue
    
    
    86
    
    
    
    124Total revenues
    
    
    136,913
    
    
    
    130,184Expenses:Depreciation
    
    
    51,688
    
    
    
    54,424Interest, net
    
    
    41,482
    
    
    
    40,166Selling, general and administrative
    
    
    11,122
    
    
    
    11,036Maintenance and other costs
    
    
    4,502
    
    
    
    3,437Total operating expenses
    
    
    108,794
    
    
    
    109,063Other income (expense):Loss on sale of aircraft
    
    
    
    
    
    
    (1,291
    )Other income (expense)
    
    
    1,501
    
    
    
    (176
    )Total other income (expense)
    
    
    1,501
    
    
    
    (1,467
    )Income from continuing operations before income taxes
    
    
    29,620
    
    
    
    19,654Income tax provision
    
    
    2,049
    
    
    
    1,515Net income
    
    $
    27,571
    
    
    $
    18,139
 Revenues:
  Lease rental revenue
 
    
    $4.0 million of revenue due to lease extensions and transitions at lower rentals; and
 
    
    $1.1 million of revenue as a result three aircraft sold during 2009.
  Amortization of net lease discounts and lease incentives.
 Maintenance revenue
 31




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##### Table of Contents



Interest income.
 Operating Expenses:
  Depreciation expense
 
    
    a $2.8 million increase in depreciation for capitalized aircraft improvements and
planned major maintenance activities; and
 
    
    a $1.1 million increase in depreciation for two aircraft acquired in 2009.
  
    
    a $1.2 million decrease in depreciation for aircraft sold.
 Interest, net
 Three Months EndedJune 30,2009
    
    
    2010(Dollars in thousands)Interest on borrowings, net settlements on interest rate derivatives, and other liabilities
    
    $
    36,642
    
    
    $
    35,348Hedge ineffectiveness (gains) losses
    
    
    (444
    )
    
    
    902Amortization of interest rate derivatives related to deferred losses
    
    
    2,847
    
    
    
    1,770Amortization of deferred financing fees
    
    
    3,198
    
    
    
    2,956Interest Expense
    
    
    42,243
    
    
    
    40,976Less interest income
    
    
    (416
    )
    
    
    (30
    )Less capitalized interest
    
    
    (345
    )
    
    
    (780
    )Interest, net
    
    $
    41,482
    
    
    $
    40,166
  
    
    a lower weighted average debt balance ($2.40 billion for the three months ended June
30, 2010 as compared to $2.46 billion for the three months ended June 30, 2009); and
 
    
    a lower average cost of borrowing during the three months ended June 30, 2010
compared to the same period in 2009.
 Selling, general and administrative expenses
 32




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##### Table of Contents



Maintenance and other costs
 
    
    a $0.7 million decrease in aircraft maintenance and other transitions costs relating to
unscheduled and scheduled lease terminations in 2009.
 Other income (expense):
  Income Tax Provision
    Other comprehensive income (loss):
 Three Months EndedJune 30,2009
    
    
    2010(Dollars in thousands)Net income
    
    $
    27,571
    
    
    $
    18,139Net change in fair value of derivatives, net of tax expense of $972 and $197, respectively
    
    
    65,320
    
    
    
    (21,227
    )Derivative loss reclassified into earnings
    
    
    2,847
    
    
    
    1,770Net change in unrealized fair value of debt investments
    
    
    936
    
    
    
    Total comprehensive income (loss)
    
    $
    96,674
    
    
    $
    (1,318
    )
  
    
    a $86.5 million increase in deferred losses resulting from changes in the fair value of
outstanding interest rate derivatives qualifying for and designated as cash flow hedges due
primarily to an increase in the forward LIBOR curve at June 30, 2009 versus March 31, 2009
compared to a decrease in the forward LIBOR curve at June 30, 2010 versus March 31, 2010;
 33




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##### Table of Contents




    
    a $1.1 million decrease in amortization into earnings of deferred net losses primarily
due to accelerated amortization from terminated interest rate derivatives in the second
quarter of 2009; and
    
    a $9.4 million decrease in net income.
 Comparison of the six months ended June 30, 2009 to the six months ended June 30, 2010:
 Six Months EndedJune 30,2009
    
    
    2010(Dollars in thousands)Revenues:Lease rental revenue
    
    $
    255,400
    
    
    $
    258,255Amortization of net lease discounts and lease incentives
    
    
    (3,927
    )
    
    
    (9,754
    )Maintenance revenue
    
    
    16,240
    
    
    
    12,090Total lease rentals
    
    
    267,713
    
    
    
    260,591Interest income
    
    
    1,227
    
    
    
    Other revenue
    
    
    111
    
    
    
    154Total revenues
    
    
    269,051
    
    
    
    260,745Expenses:Depreciation
    
    
    103,249
    
    
    
    108,569Interest, net
    
    
    84,893
    
    
    
    81,125Selling, general and administrative
    
    
    22,217
    
    
    
    22,709Maintenance and other costs
    
    
    10,278
    
    
    
    5,637Total operating expenses
    
    
    220,637
    
    
    
    218,040Other income (expense):Loss on sale of aircraft
    
    
    
    
    
    
    (1,291
    )Other income (expense)
    
    
    1,593
    
    
    
    (546
    )Total other income (expense)
    
    
    1,593
    
    
    
    (1,837
    )Income from continuing operations before income taxes
    
    
    50,007
    
    
    
    40,868Income tax provision
    
    
    3,965
    
    
    
    3,850Net income
    
    $
    46,042
    
    
    $
    37,018
 Revenues:
  Lease rental revenue
  
    
    $2.9 million of revenue due to lease extensions and transitions at lower rentals; and
    
    $2.2 million of revenue due to three aircraft sold during 2009.
 Amortization of net lease discounts and lease incentives.
 34




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##### Table of Contents



Maintenance revenue
 Interest income.
 Operating Expenses:
  Depreciation expense
 
    
    a $5.1 million increase in depreciation for capitalized aircraft improvements and
planned major maintenance activities; and
    
    a $2.5 million increase in depreciation for new aircraft acquired in 2009.
  
    
    a $2.3 million decrease in depreciation for aircraft sold.
 Interest, net
 Six Months EndedJune 30,2009
    
    
    2010(Dollars in thousands)Interest on borrowings, net settlements on interest rate derivatives, and other liabilities
    
    $
    73,412
    
    
    $
    70,946Hedge ineffectiveness (gains) losses
    
    
    (573
    )
    
    
    1,769Amortization of interest rate derivatives related to deferred losses
    
    
    7,796
    
    
    
    4,074Amortization of deferred financing fees
    
    
    5,731
    
    
    
    5,760Interest Expense
    
    
    86,366
    
    
    
    82,549Less interest income
    
    
    (857
    )
    
    
    (40
    )Less capitalized interest
    
    
    (616
    )
    
    
    (1,384
    )Interest, net
    
    $
    84,893
    
    
    $
    81,125
  
    
    a $2.5 million decrease in interest expense on our borrowings primarily due to:
 
    
    a lower weighted average debt balance ($2.43 billion for the six months ended June
30, 2010 as compared to $2.46 billion for the six months ended June 30, 2009); and
    
    a lower average cost of borrowing during the six months ended June 30, 2010 compared
to the same period in 2009; and
 
    
    a $3.7 million decrease in amortization of deferred losses on interest rate derivatives
primarily due to a decrease related to accelerated amortization of deferred losses from
terminated interest rate derivatives for borrowings that we no longer anticipate making
(i.e., that are no longer probable of occurring) as a result of a lower forecasted debt
financings.
 35




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##### Table of Contents




    
    a $2.3 million increase in losses from measured hedge ineffectiveness.
 Selling, general and administrative expenses
 Maintenance and other costs
 
    
    a $1.8 million decrease in aircraft maintenance and other transitions costs primarily
relating to unscheduled lease terminations for eight aircraft returned to us in the fourth
quarter of 2008; and
    
    a $1.4 million decrease in aircraft maintenance and other transitions costs relating to
unscheduled and scheduled lease terminations in 2009.
 Other income (expense):
  Income Tax Provision
    36




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##### Table of Contents



Other comprehensive income:
 Six Months EndedJune 30,2009
    
    
    2010(Dollars in thousands)Net income
    
    $
    46,042
    
    
    $
    37,018Net change in fair value of derivatives, net of tax expense of $1,203 and $280, respectively
    
    
    79,292
    
    
    
    (29,825
    )Derivative loss reclassified into earnings
    
    
    7,796
    
    
    
    4,074Net change in unrealized fair value of debt investments
    
    
    (138
    )
    
    
    Total comprehensive income
    
    $
    132,992
    
    
    $
    11,267
  
    
    a $109.1 million increase in deferred losses resulting from changes in the fair value of
outstanding interest rate derivatives qualifying for and designated as cash flow hedges due
primarily to an increase in the forward LIBOR curve at June 30, 2009 versus December 31,
2008 compared to a decrease in the forward LIBOR curve at June 30, 2010 versus December 31,
2009;
    
    a $3.7 million decrease in amortization into earnings of deferred net losses primarily
due to accelerated amortization from terminated interest rate derivatives in the first six
months of 2009; and
    
    a $9.0 million decrease in net income.
  RECENT ACCOUNTING PRONOUNCEMENTS
 Consolidations (Topic 810):
Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities
 Fair Value Measurements and
Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements
 37




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##### Table of Contents



LIQUIDITY AND CAPITAL RESOURCES
  
    
    lines of credit, our securitizations, term financings and, more recently, secured
borrowings supported by export credit agencies for new aircraft acquisitions;
    
    public offerings of common shares; and
    
    asset sales.
       
    
    Sumitomo Mitsui Banking Corporation (SMBC) committed $250 million in debt to finance the
first three New A330 Aircraft delivering to South African Airways; and
    
    Citibank, N.A. committed approximately $221 million and The Bank of Tokyo-Mitsubishi
UFJ, Ltd. (BOTM) committed approximately $227 million, to finance the six New A330
Aircraft.
 38




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##### Table of Contents



Cash Flows
 Six Months EndedJune 30,2009
    
    
    2010(Dollars in thousands)Net cash flow provided by operating activities
    
    $
    126,491
    
    
    $
    170,692Net cash flow used in investing activities
    
    
    (144,735
    )
    
    
    (130,035
    )Net cash flow provided by (used in) financing activities
    
    
    33,082
    
    
    
    (33,627
    )
 Operating Activities:
  
    
    a net $29.2 million increase in cash from the release of restricted cash from returned
security deposits offset by the receipt of maintenance payments;
    
    a $10.9 million increase in cash from working capital; and
    
    a $3.2 million increase in cash from a decrease in cash payments for interest.
 Investing Activities:
  39




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##### Table of Contents




    
    a $50.4 million decrease in the acquisition and improvement of flight equipment.
  
    
    a $35.0 million increase in purchase deposits under our Airbus A330 Agreement and
aircraft undergoing freighter conversion; and
    
    $0.8 million lower proceeds from the sale of and principal repayments on our debt
investments.
 Financing Activities:
  
    
    $36.1 million of lower security deposits received net of deposits returned;
    
    $22.5 million of higher financing repayments on our securitizations and term debt
financings; and
    
    $13.8 million of lower proceeds from term debt financings.
  
    
    $3.4 million of higher maintenance payments received net of maintenance payments
returned; and
    
    $2.8 million of lower payments for terminated cash flow hedges.
 Debt Obligations
  FinalOutstanding
    
    
    Number of
    
    
    Interest
    
    StatedDebt Obligation
    
    Collateral
    
    Borrowing(1)
    
    
    Aircraft
    
    
    Rate(2)
    
    Maturity(3)(Dollars in thousands)Securitization No. 1
    
    Interests in
aircraft leases,
beneficial
interests in
aircraft owning
entities and
related interests
    
    $
    425,722
    
    
    
    33
    
    
    0.62%
    
    6/20/31Securitization No. 2
    
    Interests in
aircraft leases,
beneficial
interests in
aircraft owning
entities and
related interests
    
    
    1,039,576
    
    
    
    56
    
    
    0.61%
    
    6/14/37Term Financing No. 1
    
    Interests in
aircraft leases,
beneficial
interests in
aircraft owning
entities and
related interests
    
    
    672,764
    
    
    
    28
    
    
    2.10%
    
    5/02/15Term Financing No. 2
    
    Interests in
aircraft leases,
beneficial
interests in
aircraft owning
entities and
related interests
    
    
    103,196
    
    
    
    8
    
    
    3.28%
    
    9/23/13ECA Term Financings
    
    Interests in
aircraft leases,
beneficial
interests in
aircraft leasing
entities and
related interests
    
    
    134,961
    
    
    
    2
    
    
    4.48% and 3.96%
    
    5/27/21 and 12/03/21A330 PDP Facility
    
    Interests in Airbus
A330 Agreement and
aircraft leases
    
    
    57,089
    
    
    
    6
    
    
    2.86%
    
    12/1/11(4)Total
    
    
    
    $
    2,433,308
 
 (1)
    
    Outstanding borrowing amount equals committed borrowing amount at June 30, 2010.(2)
    
    Reflects floating rate in effect at the most recent applicable reset date, except for the ECA Term Financings which are fixed rate.(3)
    
    For Securitization No. 1, Securitization No. 2 and Term Financing No. 1, all cash flows available after expenses and interest will
be applied to debt amortization, if the debt is not refinanced by June 2011, June 2012, and May 2013, respectively. 40




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##### Table of Contents



(4)
    
    Reflects the last scheduled delivery month for the six relevant new Airbus A330-200 delivery positions. The final maturity date
is the earlier of the aircraft delivery date or nine months after the scheduled delivery month for the last scheduled delivery
position.  Available LiquidityDecember 31,
    
    June 30,
    
    Unused
    
    Interest RateFacility
    
    Liquidity Facility Provider
    
    2009
    
    2010
    
    Fee
    
    on any Advances(Dollars in thousands)Securitization No. 1
    
    Calyon
    
    $
    42,000
    
    
    $
    42,000
    
    
    
    0.45
    %
    
    1M Libor + 1.00%Securitization No. 2
    
    HSH Nordbank AG(1)
    
    
    79,617
    
    
    
    77,968
    
    
    
    0.50
    %
    
    1M Libor + 0.75%Term Financing No. 1
    
    Calyon
    
    
    14,174
    
    
    
    13,455
    
    
    
    0.60
    %
    
    1M Libor + 1.20%
 
 (1)
    
    Following a ratings downgrade with respect to the liquidity
facility provider in May 2009, the liquidity facility was drawn
and the proceeds, or permitted investments thereof, remain
available to provide liquidity if required. Amounts drawn
following a ratings downgrade with respect to the liquidity
facility provider do not bear interest; however, net investment
earnings will be paid to the liquidity facility provider and the
unused fee continues to apply. Term Financing No. 1
   A330 PDP Facility
   41




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##### Table of Contents



Contractual Obligations
  
    
    principal and interest payments made under our securitizations and term financings; and
    
    lower variable interest rates and payments made under our purchase obligations.
  The following table presents our actual contractual obligations and their payment due dates as
of June 30, 2010.
 Payments Due By Period as of June 30, 2010Less than
    
    
    
    
    
    
    
    
    
    
    More thanContractual Obligations
    
    Total
    
    
    1 year
    
    
    1-3 years
    
    
    3-5 years
    
    
    5 years(Dollars in thousands)Principal payments:Securitization No. 1(1)
    
    $
    425,722
    
    
    $
    27,622
    
    
    $
    174,977
    
    
    $
    188,547
    
    
    $
    34,576Securitization No. 2(2)
    
    
    1,039,576
    
    
    
    58,642
    
    
    
    228,448
    
    
    
    343,844
    
    
    
    408,642Term Financing No. 1(3)
    
    
    672,764
    
    
    
    50,431
    
    
    
    88,802
    
    
    
    533,531
    
    
    
    Term Financing No. 2(4)
    
    
    103,196
    
    
    
    32,270
    
    
    
    65,548
    
    
    
    5,378
    
    
    
    ECA Term Financings(5)
    
    
    134,961
    
    
    
    9,552
    
    
    
    20,392
    
    
    
    22,253
    
    
    
    82,764A330 PDP Facility(6)
    
    
    57,089
    
    
    
    42,817
    
    
    
    14,272
    
    
    
    
    
    
    
    Total principal payments
    
    
    2,433,308
    
    
    
    221,334
    
    
    
    592,439
    
    
    
    1,093,553
    
    
    
    525,982Interest payments:Interest payments on debt obligations(7)
    
    
    135,466
    
    
    
    32,696
    
    
    
    52,759
    
    
    
    35,230
    
    
    
    14,781Interest payments on interest rate derivatives(8)
    
    
    298,226
    
    
    
    98,449
    
    
    
    129,367
    
    
    
    59,710
    
    
    
    10,700Total interest payments
    
    
    433,692
    
    
    
    131,145
    
    
    
    182,126
    
    
    
    94,940
    
    
    
    25,481Office leases(9)
    
    
    3,305
    
    
    
    1,086
    
    
    
    1,721
    
    
    
    332
    
    
    
    166Purchase obligations(10)
    
    
    781,631
    
    
    
    506,264
    
    
    
    275,367
    
    
    
    
    
    
    
    Total
    
    $
    3,651,936
    
    
    $
    859,829
    
    
    $
    1,051,653
    
    
    $
    1,188,825
    
    
    $
    551,629
 
 (1)
    
    Includes principal payments based on amortization schedules through October 2015 that require the securitization cash flows be applied
to the outstanding principal balance of the indebtedness so that the loan to assumed aircraft values are held constant through June
2011, after which all excess cash flow is required to reduce the principal balances of the indebtedness.(2)
    
    Includes principal payments based on amortization schedules through February 2018 that require the securitization cash flows be applied
to the outstanding principal balance of the indebtedness so that the loan to assumed aircraft values are held constant through June
2012, after which all excess cash flow is required to reduce the principal balances of the indebtedness. The Less than 1 year
commitments include repayment of $16.1 million and the 1-3 years commitments include repayments of $7.3 million related to contracted
sales for two aircraft in 2010 and one aircraft in 2011.(3)
    
    Includes scheduled principal payments through May 2013, after which all excess cash flow is required to reduce the principal balances of
the indebtedness until maturity in May 2015.(4)
    
    Includes principal payments equal to 85% of the estimated cash flow remaining after the payment of expenses, fees, interest and amounts
owing to interest rate hedge providers.(5)
    
    Includes scheduled principal payments based upon fixed rate, 12 year, fully amortizing loans.(6)
    
    Includes principal payments based upon the scheduled delivery of aircraft. The final maturity date is the earlier of the delivery date
or nine months after the scheduled delivery date. 42




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##### Table of Contents



(7)
    
    Future interest payments on variable rate, LIBOR-based debt obligations are estimated using the interest rate in effect at June 30, 2010.(8)
    
    Future interest payments on derivative financial instruments are estimated using the spread between the floating interest rates and the
fixed interest rates in effect at June 30, 2010.(9)
    
    Represents contractual payment obligations for our office leases in Stamford, Connecticut; Dublin, Ireland and Singapore.(10)
    
    At June 30, 2010, we had aircraft purchase agreements including the acquisition of 10 New A330 Aircraft from Airbus. For the two New
A330 Aircraft being delivered in 2010, we expect to debt finance 75% to 85% of the total cost of these aircraft upon delivery. After
taking into consideration pre-delivery and buyer furnished equipment payments and the anticipated debt financing, we expect to receive
an aggregate of $25.0 million to $35.0 million in net cash upon delivery. We also have confirmed commitments to purchase three used
Airbus Model A330-200 aircraft, the first of the three transactions closed on July 26, 2010 and the remaining two are expected to close
in the third quarter of 2010. Capital Expenditures
    Off-Balance Sheet Arrangements
  Foreign Currency Risk and Foreign Operations
  43




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##### Table of Contents



Hedging
   Liability DerivativesFutureCurrent
    
    
    
    
    
    
    MaximumNotional
    
    
    Effective
    
    Maturity
    
    Notional
    
    
    Floating
    
    Fixed
    
    
    Balance SheetHedged Item
    
    Amount
    
    
    Date
    
    Date
    
    Amount
    
    
    Rate
    
    Rate
    
    
    Location
    
    Fair Value(Dollars in thousands)Interest rate derivatives designated as 
cash flow hedges :Securitization No. 1
    
    $
    439,092
    
    
    Jun-06
    
    Jun-16
    
    $
    439,092
    
    
    1M LIBOR 
+ 0.27%
    
    
    5.78
    %
    
    Fair value of derivative liabilities
    
    $
    65,071Securitization No. 2
    
    
    1,023,135
    
    
    Jun-07
    
    Jun-12
    
    
    1,023,135
    
    
    1M LIBOR
    
    5.25% to 5.36%
    
    Fair value of derivative liabilities
    
    
    83,899Term Financing No. 1(1)
    
    
    610,808
    
    
    Jun-08
    
    May-13
    
    
    610,808
    
    
    1M LIBOR
    
    
    4.04
    %
    
    Fair value of derivative liabilities
    
    
    43,969Term Financing No. 1(1)
    
    
    
    
    
    May-13
    
    May-15
    
    
    491,718
    
    
    1M LIBOR
    
    
    5.31
    %
    
    Fair value of derivative liabilities
    
    
    15,447Total interest rate derivatives
designated as cash flow 
hedges
    
    
    2,073,035
    
    
    
    
    
    
    
    2,564,753
    
    
    
    
    
    
    
    
    
    
    
    208,386Interest rate derivatives not
designated as cash flow hedges:Term Financing No. 2 (2)
    
    
    92,856
    
    
    Oct-08
    
    Sep-13
    
    
    92,856
    
    
    3M LIBOR
    
    
    3.17
    %
    
    Fair value of derivative liabilities
    
    
    3,312Total interest rate derivatives
not designated as cash flow 
hedges
    
    
    92,856
    
    
    
    
    
    
    
    92,856
    
    
    
    
    
    
    
    
    
    
    
    3,312Total interest rate derivatives
    
    $
    2,165,891
    
    
    
    
    
    
    $
    2,657,609
    
    
    
    
    
    
    
    
    
    
    $
    211,698
 
 (1)
    
    The interest payments related to Term Financing No. 1 are being
hedged by two consecutive interest rate derivatives. When the
first matures in May 2013, the next becomes effective.(2)
    
    Although we entered into this interest rate derivative to hedge
the variable rate interest payments in connection with Term
Financing No. 2, it has not been designated as a hedge for
accounting purposes.  44




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45




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##### Table of Contents



Amount of Deferred(Gain) or LossAmortized (including
    
    
    Amount ofUnamortized
    
    
    Accelerated
    
    
    DeferredDeferred
    
    
    Amortization) into
    
    
    (Gain) or LossOriginal
    
    
    
    
    
    
    
    
    
    
    
    
    Deferred
    
    
    (Gain) or Loss
    
    
    Interest Expense for
    
    
    Expected to beMaximum
    
    
    
    
    
    
    Fixed
    
    
    
    
    (Gain) or
    
    
    at
    
    
    the Six Months
    
    
    AmortizedNotional
    
    
    Effective
    
    Maturity
    
    Rate
    
    
    Termination
    
    Loss Upon
    
    
    June 30,
    
    
    Ended June 30,
    
    
    over the NextHedged Item
    
    Amount
    
    
    Date
    
    Date
    
    %
    
    
    Date
    
    Termination
    
    
    2010
    
    
    2009
    
    
    2010
    
    
    Twelve Months(Dollars in Thousands)Securitization No. 1
    
    $
    400,000
    
    
    Dec-05
    
    Aug-10
    
    
    4.61
    
    
    Jun-06
    
    $
    (13,397
    )
    
    $
    (367
    )
    
    $
    (1,557
    )
    
    $
    (1,480
    )
    
    $
    (367
    )Securitization No. 1
    
    
    200,000
    
    
    Dec-05
    
    Dec-10
    
    
    5.03
    
    
    Jun-06
    
    
    (2,541
    )
    
    
    (191
    )
    
    
    (185
    )
    
    
    (106
    )
    
    
    (191
    )Securitization No. 2
    
    
    500,000
    
    
    Mar-06
    
    Mar-11
    
    
    5.07
    
    
    Jun-07
    
    
    (2,687
    )
    
    
    (453
    )
    
    
    (359
    )
    
    
    (345
    )
    
    
    (453
    )Securitization No. 2
    
    
    200,000
    
    
    Jan-07
    
    Aug-12
    
    
    5.06
    
    
    Jun-07
    
    
    (1,850
    )
    
    
    (695
    )
    
    
    (185
    )
    
    
    (178
    )
    
    
    (340
    )Securitization No. 2
    
    
    410,000
    
    
    Feb-07
    
    Apr-17
    
    
    5.14
    
    
    Jun-07
    
    
    (3,119
    )
    
    
    (1,825
    )
    
    
    (202
    )
    
    
    (185
    )
    
    
    (337
    )Term Financing No. 1
    
    
    150,000
    
    
    Jul-07
    
    Dec-17
    
    
    5.14
    
    
    Mar-08
    
    
    15,281
    
    
    
    10,425
    
    
    
    1,045
    
    
    
    976
    
    
    
    1,848Term Financing No. 1
    
    
    440,000
    
    
    Jun-07
    
    Feb-13
    
    
    4.88
    
    
    Partial  Mar-08 Full  Jun-08
    
    
    26,281
    
    
    
    13,084
    
    
    
    3,045
    
    
    
    2,844
    
    
    
    5,386Term Financing No. 1
    
    
    248,000
    
    
    Aug-07
    
    May-13
    
    
    5.33
    
    
    Jun-08
    
    
    9,888
    
    
    
    4,895
    
    
    
    1,130
    
    
    
    1,472
    
    
    
    1,753Term Financing No. 2
    
    
    360,000
    
    
    Jan-08
    
    Feb-19
    
    
    5.16
    
    
    Partial  Jun-08Full  Oct-08
    
    
    23,077
    
    
    
    10,917
    
    
    
    1,361
    
    
    
    1,076
    
    
    
    1,688ECA Term Financing and
New A330 Aircraft
future debt
    
    
    238,000
    
    
    Jan-11
    
    Apr-16
    
    
    5.23
    
    
    Dec-08
    
    
    19,430
    
    
    
    18,445
    
    
    
    940
    
    
    
    
    
    
    
    699New A330 Aircraft
future debt and
securitization
    
    
    231,000
    
    
    Apr-10
    
    Oct-15
    
    
    5.17
    
    
    Partial  Jun-08Full  Dec-08
    
    
    15,310
    
    
    
    12,437
    
    
    
    674
    
    
    
    
    
    
    
    1,735New A330 Aircraft
future debt and
securitization
    
    
    203,000
    
    
    Jun-07
    
    Jan-12
    
    
    4.89
    
    
    Dec-08
    
    
    2,728
    (1)
    
    
    
    
    
    
    968
    
    
    
    
    
    
    
    New A330 Aircraft
future debt and
securitization
    
    
    238,000
    
    
    Jul-11
    
    Sep-16
    
    
    5.27
    
    
    Dec-08
    
    
    17,254
    
    
    
    15,969
    
    
    
    1,121
    
    
    
    
    
    
    
    Total
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    105,655
    
    
    $
    82,641
    
    
    $
    7,796
    
    
    $
    4,074
    
    
    $
    11,421
 
 (1)
    
    The deferred loss for this swap is related to the period prior to
de-designation.   46




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##### Table of Contents



Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2009
    
    
    2010
    
    
    2009
    
    
    2010(Dollars in thousands)Interest Expense:Hedge ineffectiveness (gains) losses
    
    $
    (444
    )
    
    $
    902
    
    
    $
    (573
    )
    
    $
    1,769Amortization:Accelerated amortization of deferred losses
    
    
    829
    
    
    
    6
    
    
    
    3,704
    
    
    
    453Amortization of deferred losses
    
    
    2,018
    
    
    
    1,764
    
    
    
    4,092
    
    
    
    3,621Total Amortization
    
    
    2,847
    
    
    
    1,770
    
    
    
    7,796
    
    
    
    4,074Total charged to interest expense
    
    $
    2,403
    
    
    $
    2,672
    
    
    $
    7,223
    
    
    $
    5,843Other Income (Expense):Mark to market gains (losses) on
undesignated interest rate derivatives
    
    $
    1,072
    
    
    $
    (176
    )
    
    $
    1,164
    
    
    $
    (546
    )Total charged to other income (expense)
    
    $
    1,072
    
    
    $
    (176
    )
    
    $
    1,164
    
    
    $
    (546
    )
 Managements Use of EBITDA
     Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2009
    
    
    2010
    
    
    2009
    
    
    2010(Dollars in thousands)Net income
    
    $
    27,571
    
    
    $
    18,139
    
    
    $
    46,042
    
    
    $
    37,018Depreciation
    
    
    51,688
    
    
    
    54,424
    
    
    
    103,249
    
    
    
    108,569Amortization of net lease discounts and lease incentives
    
    
    2,810
    
    
    
    4,909
    
    
    
    3,927
    
    
    
    9,754Interest, net
    
    
    41,482
    
    
    
    40,166
    
    
    
    84,893
    
    
    
    81,125Income tax provision
    
    
    2,049
    
    
    
    1,515
    
    
    
    3,965
    
    
    
    3,850EBITDA
    
    $
    125,600
    
    
    $
    119,153
    
    
    $
    242,076
    
    
    $
    240,316
 47




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##### Table of Contents



Managements Use of Adjusted Net Income and Adjusted Net Income plus Depreciation and Amortization
   Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2009
    
    
    2010
    
    
    2009
    
    
    2010(Dollars in thousands)Net income
    
    $
    27,571
    
    
    $
    18,139
    
    
    $
    46,042
    
    
    $
    37,018Ineffective portion and termination of cash flow hedges(1)
    
    
    385
    
    
    
    908
    
    
    
    3,131
    
    
    
    2,222Mark to market of interest rate derivative contracts(2)
    
    
    (1,072
    )
    
    
    176
    
    
    
    (1,164
    )
    
    
    546Loss on sale of aircraft(2)
    
    
    
    
    
    
    1,291
    
    
    
    
    
    
    
    1,291Adjusted net income
    
    
    26,884
    
    
    
    20,514
    
    
    
    48,009
    
    
    
    41,077Depreciation
    
    
    51,688
    
    
    
    54,424
    
    
    
    103,249
    
    
    
    108,569Amortization of net lease discounts and lease incentives
    
    
    2,810
    
    
    
    4,909
    
    
    
    3,927
    
    
    
    9,754Adjusted net income plus depreciation and amortization
    
    $
    81,382
    
    
    $
    79,847
    
    
    $
    155,185
    
    
    $
    159,400
 
 (1)
    
    Included in Interest, net.(2)
    
    Included in Other income (expense). Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2009
    
    
    2010
    
    
    2009
    
    
    2010Weighted-average shares:Common shares outstanding
    
    
    77,976,760
    
    
    
    78,465,361
    
    
    
    77,958,980
    
    
    
    78,436,452Restricted common shares
    
    
    1,389,720
    
    
    
    1,153,468
    
    
    
    1,287,083
    
    
    
    1,182,165Total weighted-average shares
    
    
    79,366,480
    
    
    
    79,618,829
    
    
    
    79,246,063
    
    
    
    79,618,617
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2009
    
    
    2010
    
    
    2009
    
    
    2010Percentage of weighted-average shares:Common shares outstanding
    
    
    98.25
    %
    
    
    98.55
    %
    
    
    98.38
    %
    
    
    98.52
    %Restricted common shares
    
    
    1.75
    %
    
    
    1.45
    %
    
    
    1.62
    %
    
    
    1.48
    %Total
    
    
    100.00
    %
    
    
    100.00
    %
    
    
    100.00
    %
    
    
    100.00
    %
 Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2009
    
    2010
    
    2009
    
    2010Weighted-average common shares outstanding  Basic and Diluted(b)
    
    
    77,976,760
    
    
    
    78,465,361
    
    
    
    77,958,980
    
    
    
    78,436,452
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##### Table of Contents



Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2009
    
    
    2010
    
    
    2009
    
    
    2010(Dollars in thousands,except per share amounts)Adjusted net income allocation:Adjusted net income
    
    $
    26,884
    
    
    $
    20,514
    
    
    $
    48,009
    
    
    $
    41,077Less: Distributed and undistributed earnings allocated to
restricted common shares(a)
    
    
    (471
    )
    
    
    (297
    )
    
    
    (780
    )
    
    
    (610
    )Adjusted net income allocable to common shares  Basic and Diluted
    
    $
    26,413
    
    
    $
    20,217
    
    
    $
    47,229
    
    
    $
    40,467Adjusted net income per common share  Basic
    
    $
    0.34
    
    
    $
    0.26
    
    
    $
    0.61
    
    
    $
    0.52Adjusted net income per common share  Diluted
    
    $
    0.34
    
    
    $
    0.26
    
    
    $
    0.61
    
    
    $
    0.52
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2009
    
    
    2010
    
    
    2009
    
    
    2010(Dollars in thousands,except per share amounts)Adjusted net income plus depreciation and
amortization allocation:Adjusted net income plus depreciation and amortization
    
    $
    81,382
    
    
    $
    79,847
    
    
    $
    155,185
    
    
    $
    159,400Less: Distributed and undistributed earnings
allocated to restricted common shares(a)
    
    
    (1,425
    )
    
    
    (1,157
    )
    
    
    (2,520
    )
    
    
    (2,367
    )Adjusted net income plus depreciation and
amortization allocable to common shares  Basic and
Diluted
    
    $
    79,957
    
    
    $
    78,690
    
    
    $
    152,665
    
    
    $
    157,033Adjusted net income plus depreciation and
amortization per common share  Basic
    
    $
    1.03
    
    
    $
    1.00
    
    
    $
    1.96
    
    
    $
    2.00Adjusted net income plus depreciation and
amortization per common share  Diluted
    
    $
    1.03
    
    
    $
    1.00
    
    
    $
    1.96
    
    
    $
    2.00
 
 (a)
    
    For the three months ended June 30, 2009 and 2010, distributed and undistributed
earnings to restricted shares is 1.75% and 1.45%, respectively, of net income. For
the six months ended June 30, 2009 and 2010, distributed and undistributed earnings
to restricted shares is 1.62% and 1.48%, respectively, of net income. The amount of
restricted share forfeitures for all periods presented is immaterial to the
allocation of distributed and undistributed earnings.(b)
    
    For the three and six months ended June 30, 2009 and 2010, we have no dilutive shares. Limitations of EBITDA, ANI and ANIDA
   
    
    depreciation and amortization, though not directly affecting our current cash position,
represent the wear and tear and/or reduction in value of our aircraft, which affects the
aircrafts availability for use and may be indicative of future needs for capital
expenditures;
    
    the cash portion of income tax (benefit) provision generally represents charges (gains),
which may significantly affect our financial results;
    
    elements of our interest rate derivative accounting may be used to evaluate the
effectiveness of our hedging policy; and
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##### Table of Contents




    
    gains and losses from asset sales, which may not reflect the overall financial return of
the asset, may be an indicator of the current value of our portfolio of assets.
  
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 Interest Rate Risk
    Sensitivity Analysis
   50




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##### Table of Contents



Item 4. Controls and Procedures
 Managements Evaluation of Disclosure Controls and Procedures
  Changes in Internal Control over Financial Reporting
  51




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PART II.  OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
 Issuer Purchases of Equity Securities
  MaximumTotal Number of
    
    Number ofTotal
    
    
    Average
    
    
    Shares Purchased
    
    Shares that may yetNumber
    
    
    Price
    
    
    as Part of Publicly
    
    be Purchased underof Shares
    
    
    Paid
    
    
    Announced Plans or
    
    the Plans orPeriod
    
    Purchased(a)
    
    
    per Share
    
    
    Programs(b)
    
    Programs(b)April
    
    
    
    
    
    $
    
    
    
    N/A
    
    N/AMay
    
    
    67,135
    
    
    
    10.97
    
    
    N/A
    
    N/AJune
    
    
    
    
    
    
    
    
    
    N/A
    
    N/ATotal
    
    
    67,135
    
    
    $
    10.97
    
    
    N/A
    
    N/A
 
 (a)
    
    Our Compensation Committee approved the repurchase of common shares pursuant
to an irrevocable election made under the Amended and Restated Aircastle
Limited 2005 Equity and Incentive Plan, in satisfaction of minimum tax
withholding obligations associated with the vesting of restricted common
shares during the second quarter of 2010.(b)
    
    The Company does not participate in any Publicly Announced Plans or Programs. 
 Item 6. Exhibits
 Exhibit No.
    
    Description of Exhibit3.1
    
    Memorandum of Association3.2
    
    Bye-laws4.1
    
    Specimen Share Certificate4.2
    
    Amended and Restated Shareholders Agreement among Aircastle Limited and Fortress Investment
Fund III LP, Fortress Investment Fund III (Fund B) LP, Fortress Investment Fund III (Fund
C) LP, Fortress Investment Fund III (Fund D) L.P., Fortress Investment Fund III (Fund E)
LP, Fortress Investment Fund III (Coinvestment Fund A) LP, Fortress Investment Fund III
(Coinvestment Fund B) LP, Fortress Investment Fund III (Coinvestment Fund C) LP, Fortress
Investment Fund III (Coinvestment Fund D) L.P., Drawbridge Special Opportunities Fund LP,
Drawbridge Special Opportunities Fund Ltd. and Drawbridge Global Macro Master Fund Ltd.10.1
    
    Amendment No. 9 to the Acquisition Agreement, dated as of June 20, 2007, by and between AYR
Freighter LLC and Airbus SAS ∆, ◊10.2
    
    Amendment No. 1 to Form of Lease Agreement, dated as of December 16, 2009, between Wells
Fargo Bank Northwest, National Association, a national banking association, not in its
individual capacity but solely as Owner Trustee, as Lessor and South African Airways (PTY)
Ltd., as Lessee ∆, ◊
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##### Table of Contents



Exhibit No.
    
    Description of Exhibit10.3
    
    Amendment No. 1 to Intercreditor Agreement, dated as of May 2, 2008, by and among ACS
2008-1 Limited, as Borrower, ACS Aircraft Finance Ireland 3 Limited, as Guarantor,
Aircastle Advisor LLC, as Administrative Agent, Credit Agricole Corporate and Investment
Bank (formerly known as Calyon New York Branch), as Facility Agent, Collateral Agent and
Liquidity Facility Provider and Deutsche Bank Trust Company, Americas, as Operating Bank
∆10.4
    
    Separation Agreement, dated May 3, 2010, by and among Aircastle Limited, Aircastle Advisor
LLC and Michael Platt *, #10.5
    
    Letter Agreement, dated July 13, 2010, between Aircastle Advisor LLC and Ron Wainshal. **, #31.1
    
    Certification by the Chief Executive Officer pursuant to Section 302 of the Sarbanes Oxley
Act of 2002 ∆31.2
    
    Certification by the Chief Financial Officer pursuant to Section 302 of the Sarbanes Oxley
Act of 2002 ∆32.1
    
    Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 ∆32.2
    
    Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 ∆99.1
    
    Owned Aircraft Portfolio at June 30, 2010 ∆
 
 
    
    Incorporated by reference to the Companys registration statement on Form S-1, filed with the SEC on June 2, 2006, as amended on July 10, 2006,
July 25, 2006 and August 2, 2006.#
    
    Management contract or compensatory plan or arrangement.∆
    
    Filed herewith.*
    
    Incorporated by reference to the Companys current report on Form 8-K filed with the SEC on May 4, 2010.**
    
    Incorporated by reference to the Companys current report on Form 8-K filed with the SEC on July 15, 2010.◊
    
    Portions of this exhibit have been omitted pursuant to a request for confidential treatment. 53




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SIGNATURE
   AIRCASTLE LIMITED
(Registrant)By:
    /s/ Aaron DahlkeAaron DahlkeChief Accounting Officer and Authorized Officer 54