Document:

<PAGE>

                                                                  CONFORMED COPY
                                                                  --------------

================================================================================

                                 LOAN AGREEMENT

                         Dated as of December 30, 1999

                                    between

                          MIDWAY AIRLINES CORPORATION,
                                  as Borrower

                                      and

                           FLEET CAPITAL CORPORATION,
                                   as Lender

================================================================================

                                    COVERING
            TWO (2) GENERAL ELECTRIC MODEL CF34-3B1 AIRCRAFT ENGINES
<PAGE>

                               TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                                                   PAGE
                                                                                                   ----
<S>                                                                                                <C>
ARTICLE 1.  INTERPRETATION..................................................................        1
            Section 1.01.     Definitions...................................................        1
            Section 1.02.     References....................................................        1
            Section 1.03.     Headings......................................................        1
            Section 1.04.     Appendices Schedules and Exhibits.............................        2

ARTICLE 2.  THE LOANS.......................................................................        2
            Section 2.01.     The Loans and Closing.........................................        2
                              (a)  The Loans................................................        2
                                   (i)  Loan A..............................................        2
                                   (ii) Loan B..............................................        2
                              (c)  Funding Dates............................................        2
                              (d)  Closing Procedure........................................        2
                                   (i)   Time and Place.....................................        2
                                   (ii)  Making of the Loans................................        2
            Section 2.02.     Notes Evidencing the Loans....................................        3
            Section 2.03.     Interest and Principal........................................        4
            Section 2.04.     Prepayments...................................................        4
            Section 2.05.     Manner of Payments............................................        4
            Section 2.06.     Application of Payments.......................................        5

ARTICLE 3.  CONDITIONS PRECEDENT............................................................        5
            Section 3.01.     Conditions Precedent to Making of Loan A......................        5
                              (a)  Delivery of Documents....................................        6
                              (b)  Violation of Law.........................................        7
                              (c)  No Event of Default......................................        7
                              (d)  No Event of Loss.........................................        7
                              (e)  Title....................................................        8
                              (f)  Filings..................................................        8
                              (g)  Financing Statements.....................................        8
                              (h)  No Proceedings...........................................        8
                              (i)  Governmental Action......................................        8
                              (j)  Invoice..................................................        8
                              (k)  Other Documents..........................................        8
            Section 3.02.     Conditions Precedent to Making of Loan B......................        5
                              (a)  Delivery of Documents....................................        6
                              (b)  Violation of Law.........................................        7
</TABLE>

                                       i
<PAGE>

<TABLE>
<S>                                                                                                <C>
                              (c)  No Event of Default.....................................         7
                              (d)  No Event of Loss........................................         7
                              (e)  Title...................................................         8
                              (f)  Filings.................................................         8
                              (g)  Financing Statements....................................         8
                              (h)  No Proceedings..........................................         8
                              (i)  Governmental Action.....................................         8
                              (j)  Other Documents.........................................         8
            Section 3.03.     Post-Recordation Opinion.....................................         9

ARTICLE 4.  BORROWER'S REPRESENTATIONS, WARRANTIES AND COVENANTS...........................         9
            Section 4.01.     Borrower's Representations and Warranties....................         9
            Section 4.02.     Certain Covenants of Borrower................................        11
                              (a)  Filings and Recordings..................................        11
                              (b)  Privileges and Franchises...............................        12
                              (c)  Merger and Consolidation................................        12
                              (d)  Change of Location......................................        13
                              (e)  Financial Statements....................................        13
                              (f)  Filing of Documents.....................................        13
            Section 4.03.     Survival of Representations and Warranties...................        14

ARTICLE 5.  LENDER'S REPRESENTATIONS, WARRANTIES AND COVENANTS.............................        14

            Section 5.01.     Representations, Warranties and Covenants of Lender..........        14
                              (a)  Representations and Warranties..........................        14
                              (b)  Assignment of Loan......................................        15
            Section 5.02.     The Borrower's Right of Quiet Enjoyment......................        17
            Section 5.03.     Survival of Representations, Warranties and Covenants........        17

ARTICLE 6.  [INTENTIONALLY OMITTED]........................................................        25

ARTICLE 7.  GENERAL INDEMNITY..............................................................        25
            Section 7.01.     Generally....................................................        25
                              (a)  Indemnity...............................................        25
                              (b)  Exceptions..............................................        27
                              (c)  Non-Parties.............................................        28
            Section 7.02.     Notice and Payment...........................................        28
            Section 7.03.     Defense of Claims............................................        28
            Section 7.04.     Insured Claims...............................................        29
            Section 7.05.     Subrogation..................................................        29
            Section 7.06.     Information..................................................        29
            Section 7.07.     Survival of Obligations......................................        29
</TABLE>

                                      ii
<PAGE>

<TABLE>
<S>                                                                         <C>
            Section 7.08.  Effect of Other Indemnities...................   30
            Section 7.09.  Waiver of Certain Claims......................   30

ARTICLE 8.  EVENTS OF DEFAULT............................................   30
            Section 8.01.  Events of Default.............................   30

ARTICLE 9.  REMEDIES.....................................................   32
            Section 9.01.  Remedies......................................   32

ARTICLE 10. TRANSACTION COSTS............................................   33
            Section 10.01. Transaction Costs and Other Costs.............   33
                           (a) Transaction Costs.........................   33
                           (b) Amendments and Supplements................   33

ARTICLE 11. NOTICES......................................................   33
            Section 11.01. Notices.......................................   33

ARTICLE 12. MISCELLANEOUS................................................   34
            Section 12.01. Counterparts..................................   34
            Section 12.02. No Oral Modifications.........................   34
            Section 12.03. Captions......................................   34
            Section 12.04. Successors and Assigns........................   34
            Section 12.05. Severability..................................   34
            Section 12.06. Limitations of Liability......................   35
            Section 12.07. GOVERNING LAW.................................   35
            Section 12.08. Section 1110 Compliance.......................   36
            Section 12.09. Maximum Interest Rate.........................   36
            Section 12.10. Term of Agreement; Release of Liens...........   36
</TABLE>

Appendix A  Definitions

                                      iii
<PAGE>

     LOAN AGREEMENT dated as of December 30, 1999 (this "Agreement") between
MIDWAY AIRLINES CORPORATION, a Delaware corporation (herein, together with its
successors and permitted assigns, the "Borrower") and FLEET CAPITAL CORPORATION,
a Rhode Island corporation (together with its successors and permitted assigns,
the "Lender").

                              W I T N E S S E T H:
                              -------------------

          WHEREAS, capitalized terms used herein shall have the respective
meanings set forth or referred to in Article 1 hereof;

          WHEREAS, subject to the terms and conditions of this Agreement, Lender
will make the Loan to Borrower and the Loan shall be evidenced by the Note and
secured by the Security Agreement;

          NOW, THEREFORE, in consideration of the mutual covenants herein
contained and other good and valuable consideration and receipt and adequacy of
which is hereby acknowledged, and intending to be legally bound, the parties do
hereby agree as follows:

                                   ARTICLE 1.
                                 INTERPRETATION

          Section 1.01   Definitions.  Capitalized terms used herein and defined
                         -----------
in Appendix A shall, except as such definitions may be specifically modified in
the body of this Agreement for the purposes of a particular section, paragraph
or clause, have the meanings given such terms in Appendix A.

          Section 1.02   References.  References in this Agreement to sections,
                         ----------
paragraphs, clauses, appendices, schedules and exhibits are to sections,
paragraphs, clauses, appendices, schedules and exhibits in and to this Agreement
unless otherwise specified.

          Section 1.03   Headings.  The headings of the various sections,
                         --------
paragraphs and clauses of this Agreement and the table of contents are for
convenience of reference only and shall not modify, define, expand or limit any
of the terms or provisions hereof.

          Section 1.04   Appendices Schedules and Exhibits.  The appendices,
                         ---------------------------------
schedules and exhibits hereto are part of this Agreement.
<PAGE>

                                   ARTICLE 2.
                                   THE LOANS

          Section 2.01   The Loans and Closing. Subject to all the terms and
                         ---------------------
conditions of this Agreement, the Borrower and the Lender agree to enter into
the financing transaction with respect to the Engines provided for in this
Article 2.

          (a)  The Loans.
               ---------

               (i)  Loan A. Subject to satisfaction of the applicable conditions
                    ------
     set forth in Section 3.01 hereof, on the first Funding Date, Lender will
     lend to Borrower and Borrower will borrow from Lender the amount of *
     ("Loan A"), upon the terms and subject to the conditions of this Agreement.

               (ii) Loan B. Subject to satisfaction of the applicable conditions
                    ------
     set forth in Section 3.02 hereof, on the second Funding Date, Lender will
     lend to Borrower and Borrower will borrow from Lender an amount not to
     exceed * ("Loan B", and together with Loan A, the "Loans"), upon the terms
     and subject to the conditions of this Agreement; provided that the Lender
     shall not be obligated to lend to Borrower Loan B if the second Funding
     Date does not occur by March 31, 2000.

          (b)  Funding Dates. Each "Funding Date" shall be the date fixed by the
               -------------
Borrower in a notice which, in the case of the second Funding Date, shall be
given to the Lender at least five (5) Business Days prior to each Funding Date.

          (c)  Closing Procedure.
               -----------------

               (i)  Time and Place. The closing with respect to each Funding
                    --------------
     Date shall take place at 11:00 a.m. New York City local time on such
     Funding Date at the offices of Fulbright & Jaworski L.L.P., 666 Fifth
     Avenue, New York, New York or at such other time and place as the parties
     may agree. Such closing shall be preceded by a pre-closing at the same
     place, the time for which shall be fixed by the Borrower and the Lender, at
     which the forms of the Operative Agreements to be executed, the
     certificates and other documents to be delivered and the forms of the legal
     opinions to be delivered at the closing by each party or its counsel
     pursuant to this Agreement shall be available for inspection by the parties
     and their respective counsel.

               (ii) Making of the Loans. Upon satisfaction or waiver by the
                    -------------------
     Lender of the applicable conditions precedent set forth in Section 3.01 or
     3.02, as the case may be, the Lender shall on the relevant Funding Date
     make the applicable Loan to the Borrower at such account as specified by
     the Borrower prior to the relevant Funding Date.

* Confidential treatment requested for omitted information. Omitted information
  has been filed separately with the Commission.

                                       2
<PAGE>

          Section 2.02   Notes Evidencing the Loans.  Each Loan shall be
                         --------------------------
evidenced by a Note. Each Note shall be made by Borrower payable to the order of
Lender in the amount of the lesser of (i) the face amount of such Note or (ii)
the principal amount of the relevant Loan outstanding from time to time, and
shall be dated the relevant Funding Date of such Loan and shall finally mature
on the Maturity Date with respect to such Loan. Each Note shall be executed and
delivered in New York.

          Section 2.03   Interest and Principal.
                         ----------------------

          (a)  Borrower shall pay to Lender interest monthly in arrears on the
unpaid principal amount of each Loan for the period commencing on the relevant
Funding Date of such Loan until such Loan shall be paid in full, at the
following rates per annum:

               (i)  a rate per annum equal to the Applicable Rate (which, in the
     case of Loan A, shall equal *% per annum, computed on the basis of a year
     consisting of twelve 30 day months);

               (ii) if all or any portion of the principal of or interest on the
     Loans or any other amount due hereunder or under the Notes or any other
     Operative Agreement shall not be paid when due, such past due principal or
     interest or other amount shall bear interest at the Past Due Rate.

          (b)  Borrower shall repay each Loan to the Lender in monthly
installments on each Payment Date (x) with respect to Loan A, as specified in
Annex A to the Note relating to such Loan and (y) with respect to Loan B,
pursuant to a schedule to be agreed upon by the Lender and the Borrower after
the Applicable Rate for such Loan has been established, which schedule shall
provide for equal monthly payments of principal and interest over a term of 84
months, provided that on the Maturity Date for each Loan, Borrower shall pay all
remaining principal and outstanding accrued interest (and all other amounts)
then due and payable to Lender in respect of such Loan.

          Section 2.04   Prepayments.
                         -----------

          (a)  Upon the occurrence of an Event of Loss with respect to an Engine
and if the Borrower elects not to replace such Engine with a Replacement Engine
pursuant to clause (ii) of Section 4.03(e) of the Security Agreement, Borrower
shall prepay the Loan relating to such Engine on the date specified in Section
4.03(e) of the Security Agreement.  Such prepayment shall include an amount
equal to all unpaid interest then accrued with respect to such Loan, plus the
Make-Whole Premium, if any, and all other amounts due hereunder or under any
other Operative Agreement relating to the Loan being prepaid.

          (b)  Borrower may prepay, without penalty, all of the principal of
either Loan provided that together with such prepayment it pays all then accrued
interest with respect to such

* Confidential treatment requested for omitted information. Omitted information
  has been filed separately with the Commission.

                                       3
<PAGE>

Loan, plus the Make-Whole Premium, if any, and all other amounts due hereunder
or under any other Operative Agreement relating to the Loan being prepaid.

          Section 2.05   Manner of Payment.  All payments and prepayments
                         -----------------
payable by the Borrower to the Lender hereunder shall be paid to the Lender at
the following account or at such other account as the Lender shall specify in a
notice to the Borrower, in Dollars in immediately available funds, so that the
Lender receives the full amount of each payment not later than 12:00 noon
Eastern Time on the due date thereof:

            Bank: Fleet National Bank
            ABA No. 01150010
            For the account of Fleet Capital Leasing, account no. 015-5527767-02
            Re: Midway Airlines Corp., customer no. 33136
            Upon receipt contact Leslie Tordorff at (401) 278-3152

If any payment is due on a day that is not a Business Day, such payment shall be
paid on the next succeeding Business Day with the same force and effect as if
paid on the scheduled date of payment and (if paid on such next succeeding
Business Day) no interest shall accrue on the amount of such payment from and
after such scheduled date to the time of payment on such next succeeding
Business Day.

          Section 2.06   Application of Payments.  Each amount received or
                         -----------------------
realized by Lender on or with respect to a Loan or any part thereof shall be
applied by Lender as follows: first, to all accrued but unpaid interest on such
                              -----
Loan; second, to pay in full the principal then outstanding on such Loan; and
      ------
third, to pay any the Make-Whole Premium, if any,  then due in respect of such
-----
Loan.

                                   ARTICLE 3.
                              CONDITIONS PRECEDENT

          Section 3.01   Conditions Precedent to Making of Loan A.  The
                         ----------------------------------------
obligation of the Lender to make Loan A on the relevant Funding Date is subject
to satisfaction or waiver by the Lender, on or prior to such Funding Date, of
the conditions precedent set forth below in this Section 3.01:

          (a) Delivery of Documents.  The Lender shall have received executed
              ---------------------
counterparts of the following agreements, instruments, certificates or
documents, and such counterparts (x) shall have been duly authorized, executed
and delivered by the respective party or parties thereto, (y) shall be
reasonably satisfactory in form and substance to the Lender and (z) shall be in
full force and effect:

               (i)  this Agreement;

                                       4
<PAGE>

               (ii)  the Note relating to Loan A;

               (iii) the Security Agreement and the Security Agreement
     Supplement relating to Loan A Engine;

               (iv)  the broker's report and insurance certificates required by
     Section 4.05(g) of the Security Agreement;

               (v)   (A) a copy of the Certificate of Incorporation and By-Laws
     of Borrower and resolutions of the board of directors of Borrower, in each
     case certified as of such Funding Date, by the Secretary or an Assistant
     Secretary of Borrower, duly authorizing the execution, delivery and
     performance by Borrower of the Operative Agreements required to be executed
     and delivered by Borrower in accordance with the provisions hereof and
     thereof; and (B) an incumbency certificate of Borrower as to the person or
     persons authorized to execute and deliver the relevant Operative Agreements
     on behalf of Borrower; together with such other documents and evidence with
     respect to it as Lender may reasonably request in order to establish the
     consummation of the transactions contemplated by this Agreement and the
     taking of all corporate proceedings in connection therewith;

               (vi)  an Officer's Certificate of Borrower, dated as of such
     Funding Date, stating that its representations and warranties set forth in
     this Agreement are true and correct as of such Funding Date (or, to the
     extent that any such representation and warranty expressly relates to an
     earlier date, true and correct as of such earlier date);

               (vii) the following opinions of counsel, in each case dated such
     Funding Date:

               (A)   Jonathan Waller, Senior Vice President and General Counsel
     of the Borrower, substantially in the form reasonably acceptable to the
     Lender.

               (B)   Fulbright & Jaworski, L.L.P. special counsel for the
     Borrower, substantially in the form reasonably acceptable to the Lender and
     the Borrower; and

               (C)   Crowe & Dunlevy P.C., special aviation counsel,
     substantially in the form reasonably acceptable to the Lender and the
     Borrower.

          (b)  Violation of Law.  No change shall have occurred after the date
               ----------------
of this Agreement in any Applicable Law that makes it a violation of law for (a)
Lender or Borrower to execute, deliver and perform the Operative Agreements to
which either of them is a party or (b) Lender to make Loan A to the Borrower.

                                       5
<PAGE>

          (c) No Event of Default.  On such Funding Date, no event shall have
              -------------------
occurred and be continuing, or would result from the making of Loan A, which
constitutes a Default or Event of Default.

          (d) No Event of Loss.  No Event of Loss with respect to the applicable
              ----------------
Engine shall have occurred and no circumstance, condition, act or event that,
with the giving of notice or lapse of time or both, would give rise to or
constitute an Event of Loss with respect to such Engine shall have occurred.

          (e) Title.  Borrower shall have good and marketable title to the Loan
              -----
A Engine, free and clear of Liens, except Permitted Liens of the type referred
to in clause (c), (d) and (i) of the definition thereof.

          (f) Filings.  On such Funding Date the Security Agreement and the
              -------
Security Agreement Supplement relating to Loan A Engine shall have been duly
filed for recordation with the FAA in accordance with the Transportation Code.

          (g) Financing Statements.  A Uniform Commercial Code financing
              --------------------
statement or statements covering the security interest contemplated by the
Security Agreement as supplemented by the Security Agreement Supplement relating
to Loan A Engine shall have been executed and delivered by the Borrower as
debtor and by the Lender as secured party, and such financing statement or
statements shall have been duly filed in all places necessary or desirable
within the State of North Carolina or any other applicable jurisdiction.

          (h) No Proceedings.  No action or proceeding shall have been
              --------------
instituted, nor shall any action be threatened in writing, before any
governmental authority, nor shall any order, judgment or decree have been issued
or proposed to be issued by any governmental authority, to set aside, restrain,
enjoin or prevent the completion and consummation of this Agreement or any other
Operative Agreement or the transactions contemplated hereby or thereby.

          (i) Governmental Action.  All appropriate action required to have been
              -------------------
taken prior to such Funding Date by the FAA, or any governmental or political
agency, subdivision or instrumentality of the United States, in connection with
the transactions contemplated by this Agreement shall have been taken, and all
orders, permits, waivers, authorizations, exemptions and approvals of such
entities required to be in effect on such Funding Date in connection with the
transactions contemplated by this Agreement shall have been issued.

          (j) Other Documents.  The Lender receives such other documents,
              ---------------
certificates and opinions, and evidence of such other matters, in connection
with the transactions contemplated hereby as Lender may reasonably request.

          Section 3.02   Conditions Precedent to Making of Loan B.  The
                         ----------------------------------------
obligation of the Lender to make Loan B on the relevant Funding Date is subject
to satisfaction or waiver by the

                                       6
<PAGE>

Lender, on or prior to such Funding Date, of the conditions precedent set forth
below in this Section 3.02:

          (a)  Delivery of Documents.  The Lender shall have received executed
               ---------------------
counterparts of the following agreements, instruments, certificates or
documents, and such counterparts (x) shall have been duly authorized, executed
and delivered by the respective party or parties thereto, (y) shall be
reasonably satisfactory in form and substance to the Lender and (z) shall be in
full force and effect:

               (i)   the Note relating to Loan B;

               (ii)  the Security Agreement Supplement relating to Loan B
     Engine;

               (iii) the broker's report and insurance certificates required by
     Section 4.05(g) of the Security Agreement;

               (iv)  an Officer's Certificate of Borrower, dated as of such
     Funding Date, stating that its representations and warranties set forth in
     this Agreement are true and correct as of such Funding Date (or, to the
     extent that any such representation and warranty expressly relates to an
     earlier date, true and correct as of such earlier date);

               (v)   the following opinions of counsel, in each case dated such
     Funding Date:

               (A)   Jonathan Waller, Senior Vice President and General Counsel
     of the Borrower, in substantially the same form of opinion issued under
     Section 3.01(a)(vii)(A).

               (B)   Fulbright & Jaworski, L.L.P. special counsel for the
     Borrower, in substantially the same form of opinion issued under Section
     3.01(a)(vii)(B); and

               (C)   Crowe & Dunlevy P.C., special aviation counsel, in
     substantially the same form of opinion issued under Section
     3.01(a)(vii)(C).

          (b)  Violation of Law. No change shall have occurred after the date of
               ----------------
this Agreement in any Applicable Law that makes it a violation of law for (a)
Lender or Borrower to execute, deliver and perform the Operative Agreements to
which either of them is a party or (b) Lender to make Loan B to the Borrower.

          (c)  No Event of Default.  On such Funding Date, no event shall have
               -------------------
occurred and be continuing, or would result from the making of Loan B, which
constitutes a Default or Event of Default.

                                       7
<PAGE>

          (d) No Event of Loss.  No Event of Loss with respect to the applicable
              ----------------
Engine shall have occurred and no circumstance, condition, act or event that,
with the giving of notice or lapse of time or both, would give rise to or
constitute an Event of Loss with respect to such Engine shall have occurred.

          (e) Title.  Borrower shall have good title to the Loan B Engine, free
              -----
and clear of Liens, except Permitted Liens of the type referred to in clause (c)
and (d) of the definition thereof.

          (f) Filings.  On such Funding Date, the Security Agreement Supplement
              -------
relating to Loan B Engine shall have been duly filed for recordation with the
FAA in accordance with the Transportation Code.

          (g) Financing Statements.  A Uniform Commercial Code financing
              --------------------
statement or statements covering the security interest contemplated by the
Security Agreement as supplemented by the Security Agreement Supplement relating
to Loan B Engine shall have been executed and delivered by the Borrower as
debtor and by the Lender as secured party, and such financing statement or
statements shall have been duly filed in all places necessary or desirable
within the State of North Carolina or any other applicable jurisdiction.

          (h) No Proceedings.  No action or proceeding shall have been
              --------------
instituted, nor shall any action be threatened in writing, before any
governmental authority, nor shall any order, judgment or decree have been issued
or proposed to be issued by any governmental authority, to set aside, restrain,
enjoin or prevent the completion and consummation of this Agreement or any other
Operative Agreement or the transactions contemplated hereby or thereby.

          (i) Governmental Action.  All appropriate action required to have been
              -------------------
taken prior to such Funding Date by the FAA, or any governmental or political
agency, subdivision or instrumentality of the United States, in connection with
the transactions contemplated by this Agreement shall have been taken, and all
orders, permits, waivers, authorizations, exemptions and approvals of such
entities required to be in effect on such Funding Date in connection with the
transactions contemplated by this Agreement shall have been issued.

          (j) Material Advance Change.  Since the first Funding Date, there has
              -----------------------
been no material adverse change in the financial condition of the Borrower, and
a Senior Vice President of the Borrower shall so represent to the Lender.

          (k) Invoice.  The Lender shall have received a copy of the
              -------
Manufacturer's invoice with respect to the Loan B Engine.

          (l) Other Documents.  The Lender receives such other documents,
              ---------------
certificates and opinions, and evidence of such other matters, in connection
with the transactions contemplated hereby as Lender may reasonably request.

                                       8
<PAGE>

          Section 3.03   Post-Recordation Opinion.  Promptly upon the
                         ------------------------
recordation of the documents referenced in Section 3.01(f) and 3.02(f), Borrower
will direct Crowe & Dunlevy P.C., special counsel in Oklahoma City, Oklahoma, to
deliver to Borrower and Lender a favorable opinion or opinions addressed to each
of them with respect to such registration and recordation.

                                   ARTICLE 4.
              BORROWER'S REPRESENTATIONS, WARRANTIES AND COVENANTS

          Section 4.01   Borrower's Representations and Warranties.  The
                         -----------------------------------------
Borrower represents and warrants that, as of each Funding Date (unless any such
representation and warranty is specifically made as of an earlier date, in which
case the Borrower represents and warrants as of such earlier date):

          (a) the Borrower is a corporation duly organized and validly existing
and is in good standing under the laws of State of Delaware, has its principal
place of business and chief executive office (as such terms are used in Article
9 of the Uniform Commercial Code) in Morrisville, North Carolina at the address
set forth in Section 11.01(a), and is duly qualified to do business as a foreign
corporation and is in good standing in each jurisdiction where the failure to be
so qualified or in good standing would have a materially adverse effect on its
business or would impair its ability to perform its obligations under the
Borrower Documents;

          (b) the Borrower has full power, authority and legal right to conduct
its business and operations as currently conducted and to own or hold under
lease its properties and to enter into and perform its obligations under the
Borrower Documents;

          (c) the Borrower is an "air carrier" within the meaning of the
Transportation Code and a holder of a certificate under Section 41102(a) of the
Transportation Code and a "citizen of the United States" within the meaning of
Section 40102(a)(15) of the Transportation Code holding an "air carrier
operating certificate" issued under Chapter 447 of the Transportation Code for
aircraft capable of carrying ten or more individuals or 6,000 pounds or more of
cargo, and each such certificate is in full force and effect;

          (d) the Borrower possesses all necessary certificates, franchises,
licenses, permits, rights and concessions and consents (collectively "permits")
which are necessary to the conduct of its business and operations as currently
conducted and each such permit is in full force and effect, except for any such
permits the failure to have or maintain which would not have a material adverse
effect on the Borrower or its ability to perform its obligations under the
Borrower Documents;

          (e) except as provided in Section 4.07(c) of the Security Agreement,
the execution, delivery and performance of the Borrower Documents have been duly
authorized by all necessary corporate action on the part of the Borrower and do
not require any stockholder approval, or approval or consent of any trustee or
holder of any indebtedness or obligations of the Borrower,

                                       9
<PAGE>

and each such Borrower Documents has been duly executed and delivered and
constitutes the legal, valid and binding obligations of the Borrower enforceable
against it in accordance with the terms thereof except as such enforceability
may be limited by bankruptcy, insolvency, or other similar laws or by general
equitable principles;

          (f) no authorization, consent or approval of or other action by, and
no notice to or filing with, any United States federal or state governmental
authority or regulatory body is required for the execution, delivery or
performance by the Borrower of the Borrower Documents except for such
registrations, applications and recordings referred to in the opinion of Crowe
and Dunlevy P.C. delivered pursuant to Section 3.01(a)(vii)(C) and the filings
referred to in Sections 3.01(f) and 3.02(f);

          (g) except as provided in Section 4.07(c) of the Security Agreement,
neither the execution, delivery or performance by the Borrower of the Borrower
Documents nor compliance with the terms and provisions hereof or thereof,
conflicts or will conflict with or results or will result in a breach or
violation of any of the terms, conditions or provisions of, or will require any
consent or approval under, any Applicable Law or the charter documents, as
amended, or bylaws, as amended, of the Borrower or any order, writ, injunction
or decree of any court or governmental authority against the Borrower or by
which it or any of its properties is bound or any indenture, mortgage or
contract or other agreement or instrument to which the Borrower is a party or by
which it or any of its properties is bound, or constitutes or will constitute a
default thereunder or results or will result in the imposition of any Lien upon
the Engines or any of its properties (other than Permitted Liens), except for
any such conflict, breach or default which would not have a material adverse
effect on the Borrower or its ability to perform its obligations under the
Borrower Documents;

          (h) except as disclosed in any Annual Report on Form 10-K, Quarterly
Report on Form 10-Q or Current Report on Form 8-K filed by Borrower with the SEC
on or prior to the date hereof or as otherwise disclosed in writing to the
Lender, there are no pending or, to the knowledge of the Borrower, threatened
actions, suits, investigations or proceedings against or affecting the Borrower
or any of its properties before or by any court, governmental agency,
arbitration board, tribunal or other administrative agency which, (A) may
reasonably be expected to have a materially adverse effect on the Borrower's
consolidated financial condition, business, or operations, or (B) would
materially adversely affect the ability of the Borrower to consummate the
transactions contemplated by the Operative Agreements or perform its obligations
under the Borrower Documents;

          (i) except for (A) the filing with and, where appropriate, recordation
by the FAA pursuant to the Transportation Code of the Security Agreement and the
Security Agreement Supplement relating to each Engine and (B) the filing of the
financing statements referred to in Sections 3.01(g) and 3.02(g), no further
action, including any filing or recording of any document, is necessary or
advisable in order to establish the Lender's security interest in the Engines as
against the Borrower and any third parties;

                                       10
<PAGE>

          (j) the Borrower has received good and marketable title to the
relevant Engine as of the relevant Funding Date, free and clear of all Liens,
except Permitted Liens of the type referred to in clause (c), (d) and (i) of the
definition thereof;

          (k) no Default or Event of Default exists and no Event of Loss, or
event which with the passage of time would constitute an Event of Loss, exists;

          (l) neither the Borrower nor any subsidiary of the Borrower is an
"investment company" or a company "controlled by an investment company" within
the meaning of the Investment Company Act of 1940, as amended; and

          Section 4.0    Certain Covenants of Borrower.  The Borrower covenants
                         -----------------------------
and agrees as follows:

          (a) Filings and Recordings.  The Borrower will cause to be done,
              ----------------------
executed, acknowledged and delivered at the Borrower's cost and expense all such
further acts, conveyances and assurances as the Lender shall reasonably require
for accomplishing the purposes of the Operative Agreements.  Without limiting
the generality of this Section 4.02(a), the Borrower will promptly take, or
cause to be taken, at the Borrower's cost and expense, such action with respect
to the recording, filing, re-recording and re-filing of the Security Agreement
(including each supplement thereto), and any financing statements or other
instruments as may be reasonably requested by the Lender and appropriate, to
maintain the Lender's security interest in the Engines, as against the Borrower
and any third parties, or if the Borrower cannot itself take, or cause to be
taken, such action, will furnish to the Lender timely notice of the necessity of
such action, together with such instruments, in execution form, and such other
information as may be required to enable the Lender to take such action at the
Borrower's cost and expense in a timely manner.

          (b) Privileges and Franchises.  The Borrower shall at all times
              -------------------------
maintain its corporate existence, except as permitted by Section 4.02(c) hereof
and all of its rights, privileges and franchises necessary in the normal conduct
of its business, except for any right, privilege or franchise that it determines
is no longer necessary or desirable in the conduct of its business; provided
                                                                    --------
that, nothing in this Section 4.02(b) shall in any way otherwise diminish the
----
obligations of the Borrower under the Security Agreement.

          (c) Merger and Consolidation.  The Borrower shall not, at any time
              ------------------------
while any Obligations are outstanding, enter into any merger with or into or
consolidation with (which shall include a reorganization which involves the
Borrower and another Person), or sell, convey, transfer, lease or otherwise
dispose of in one or a series of transactions all or substantially all of its
assets as an entirety to any Person, unless the surviving Person which acquires
by purchase, conveyance, transfer or lease all or substantially all of the
assets of the Borrower as an entirety (i) is a domestic Person organized and
existing under the laws of the United States or any State of the United States,
(ii) is a Citizen of the United States, (iii) is a Section 1110 Person, so long
as such status is a

                                       11
<PAGE>

condition to the availability of Section 1110, (iv) immediately after giving
effect to such transaction, unless otherwise consented to by Lender which
consent shall not be unreasonably withheld, shall have a tangible net worth
(determined in accordance with generally accepted accounting principles) at
least equal to the lesser of (1) Fifty Million Dollars ($50,000,000) and (2) 75%
of Borrower's tangible net worth (determined in accordance with generally
accepted accounting principles) immediately prior to such transaction; (v) if
not the Borrower, executes a duly authorized, legal, valid, binding, and
enforceable agreement, reasonably satisfactory in form and substance to Lender,
containing an effective assumption of all of the Borrower's, as applicable,
obligations hereunder and under the other Operative Agreements, and each other
document contemplated hereby or thereby and delivers such instrument to the
Lender, (vi) provides an opinion from counsel (which counsel may be the
Borrower's General Counsel) delivered to the Lender, which opinion shall be
reasonably satisfactory to the Lender, and an officer's certificate (which may
rely, as to legal matters, on such legal opinion), each stating that such
merger, consolidation, conveyance, transfer, lease or other disposition and the
instrument noted in clause (v) above comply with this Section 4.02(c), that such
instrument is a legal, valid and binding obligation of, and is enforceable
against, such survivor or Person, and that all conditions precedent herein
provided for relating to such transaction have been complied with, and (vii)
such survivor or Person makes such filings and recordings with the FAA as may be
required pursuant to part A of subtitle VII or Title 49, United States Code to
evidence such merger or consolidation.

          Upon any permitted consolidation or merger, or any permitted
conveyance, transfer or lease of all or substantially all of the assets of the
Borrower and the satisfaction of the conditions specified in this Section
4.02(c), the successor corporation formed by such consolidation or into which
the Borrower is merged or the Person to which such conveyance, transfer or lease
is made shall succeed to, and be substituted for, and may exercise every right
and power of, the Borrower under this Agreement and each other Operative
Agreement and any other document contemplated hereby and thereby to which the
Borrower is a party with the same effect as if such successor corporation had
been named as the Borrower herein and therein.  No such consolidation or merger,
or sale, conveyance, transfer or lease of all or substantially all of the assets
of the Borrower as an entirety shall have the effect of releasing the Borrower
or any successor corporation which shall theretofore have become the Borrower
hereunder in the manner prescribed in this Section 4.02(c) from its liability
hereunder or under the other Operative Agreements.  Nothing contained herein
shall permit any lease, sublease, or other arrangement for the use, operation or
possession of the Engines except in compliance with the applicable provisions of
this Agreement and the Security Agreement.

          (d) Change of Location.  The Borrower agrees to give prompt prior
              ------------------
written notice (but in any event within 30 days prior to the expiration of the
period of time specified under Applicable Law to prevent lapse of perfection) to
the Lender of any change in the address of its chief executive office (as such
term is used in Section 9-103(3) of the North Carolina Uniform Commercial Code)
or of any change in its corporate name.

                                       12
<PAGE>

          (e) Financial Statements.  The Borrower agrees to furnish to the
              --------------------
Lender during the Term:

              (i)   within 60 days after the end of each of the first three
     fiscal quarters in each fiscal year of the Borrower, unaudited consolidated
     balance sheets of the Borrower and its subsidiaries (if any) as of the end
     of such quarter and related consolidated statements of income,
     shareholder's equity and cash flows of the Borrower and its subsidiaries
     (if any) for the period commencing at the end of the previous fiscal year
     and ending with the end of such quarter, provided that so long as the
                                              --------
     Borrower is subject to the reporting provisions of the Securities Exchange
     Act of 1934, a copy of the Borrower's quarterly report on Form 10-Q will
     satisfy this requirement;

              (ii)  within 120 days after the end of each fiscal year of the
     Borrower, a copy of the annual report for such year for the Borrower or the
     affiliated group of which the Borrower is a member (on a consolidated
     basis, if applicable) and a balance sheet of the Borrower and its
     subsidiaries (if any) as of the end of such fiscal year and related
     statements of income, shareholder's equity and cash flows of the Borrower
     for such fiscal year, in comparative form with the preceding fiscal year,
     in each case certified by independent certified public accountants of
     national standing as having been prepared in accordance with generally
     accepted accounting principles in the United States, provided that so long
                                                          --------
     as the Borrower is subject to the reporting provisions of the Securities
     Exchange Act of 1934, a copy of the Borrower's annual report on Form 10-K
     will satisfy this requirement; and

              (iii) from time to time, such other non-confidential financial
     information as the Lender may reasonably request.

          (f) Filing of Documents.  Borrower, at its sole cost and expense, will
              -------------------
cause the documents filed with the FAA pursuant to Sections 3.01(f) and 3.02(f),
the financing statements required pursuant to Sections 3.01(g) and 3.02(g) and
all continuation statements (and any amendments necessitated by any combination,
consolidation or merger pursuant to Section 4.02(c), or any relocation of its
chief executive office) in respect of such financing statements to be prepared
and, subject only to the execution and delivery thereof by Lender, duly and
timely filed and recorded, or filed for recordation, to the extent permitted
under the Transportation Code (with respect to such documents filed with the
FAA) or the Uniform Commercial Code or similar law of any other applicable
jurisdiction (with respect to such other documents).

          Section 4.03   Survival of Representations and Warranties.  The
                         ------------------------------------------
representations and warranties of the Borrower provided in Section 4.01 and in
any other Operative Agreement shall survive the making and repayment of each
Loan and the expiration or other termination of this Agreement and the other
Operative Agreements.

                                       13
<PAGE>

                                   ARTICLE 5.
               LENDER'S REPRESENTATIONS, WARRANTIES AND COVENANTS

          Section 5.01   Representations, Warranties and Covenants of Lender.
                         ---------------------------------------------------

          (a)    Representations and Warranties.  The Lender represents and
                 ------------------------------
warrants that, as of each Funding Date (unless any such representation and
warranty is specifically made as of an earlier date, in which case the Lender
represents and warrants as of such earlier date):

                 (i)   it is a corporation duly organized and validly existing
     and is in good standing under the laws of State of Rhode Island and it has
     full corporate power, authority and legal right to carry on its present
     business and operations, to own or lease its properties and to enter into
     and carry out the transactions contemplated by this Agreement and the other
     Operative Agreements to which it is a party;

                 (ii)  the Operative Agreements to which it is party have been
     duly executed and delivered by the Lender and constitute the legal, valid
     and binding obligations of the Lender enforceable against it in accordance
     with their terms except as such enforceability may be limited by
     bankruptcy, insolvency, or other similar laws or general equitable
     principles; and

                 (iii) the funds to be used by the Lender to fund each Loan to
     the Borrower pursuant to the terms hereof do not constitute assets (within
     the meaning of ERISA and any applicable rules and regulations) of an ERISA
     Plan.

          (b)    Assignment of Loan. At any time after the Funding Date of Loan
                 ------------------
B and subject to satisfaction of the conditions set forth in this Section
5.01(b), the Lender may assign, convey or otherwise transfer to any Affiliate of
Lender or to a single institutional investor or an Affiliate of an institutional
investor all (but not less than all) of the Loan, provided that (i) the Lender
                                                  --------
gives the Borrower at least 10 days' notice of such assignment, conveyance or
other transfer, and (ii) the transferee shall make a representation to the
effect that the funds to be used by the transferee to acquire the Loan do not
constitute the assets of an ERISA Plan.  No assignment, conveyance or transfer
by the Lender of the Loan shall increase the amount of the liability of the
Borrower hereunder or under any other Operative Agreements over the amount of
liability the Borrower would have incurred had such assignment, conveyance or
transfer not occurred.

          Section 5.02   The Borrower's Right of Quiet Enjoyment.
                         ---------------------------------------
Notwithstanding any other provision of any of the Operative Agreements, Lender
covenants that at any time while any Obligations are outstanding, so long as no
Event of Default shall have occurred and be continuing and the Lender has not
commenced the exercise of remedies set forth in Section 9.01 and Section 5.02 of
the Security Agreement, Lender or any Person claiming by,  through or under
Lender will not take or cause to be taken any action contrary to the Borrower's
rights hereunder, including, without limitation, its rights to possession, use
and quiet enjoyment of the Engines, provided that
                                    --------

                                       14
<PAGE>

nothing contained herein shall affect any of the rights of the Lender under
Section 9.01 or 5.02 of the Security Agreement upon the occurrence and during
the continuance of an Event of Default.

          Section 5.03   Survival of Representations, Warranties and Covenants.
                         -----------------------------------------------------
Representations, warranties and covenants of the Lender provided for in this
Article 5, and its obligations under any and all of them, shall survive the
making and repayment of each Loan and the expiration or other termination of
this Agreement and the other Operative Agreements.

                                   ARTICLE 6.
                            [INTENTIONALLY OMITTED]

                                   ARTICLE 7.
                               GENERAL INDEMNITY

          Section 7.01   Generally.
                         ---------

          (a)  Indemnity.  The Borrower agrees to assume liability for, and also
               ---------
agrees to indemnify each Indemnitee against and agrees to protect, defend, save
and keep harmless each Indemnitee from and against and in respect of, and will
pay on an After Tax Basis, any and all liabilities, obligations, losses,
damages, settlements, penalties, claims, actions, suits, costs, disbursements
and expenses, demands or judgments (including reasonable legal fees and
expenses) of every kind and nature, whether or not any of the transactions
contemplated by this Agreement are consummated and whether arising before, on or
after either Funding Date (individually, an "Expense," collectively,
"Expenses"), which may be imposed on, incurred or suffered by or asserted
against any Indemnitee, in any way relating to, arising out of or in connection
with, any one or more of the following:

               (i)   any Operative Agreement or any transaction contemplated
     thereby;

               (ii)  the operation, possession, use, non-use, maintenance,
     storage, overhaul, delivery, non-delivery, control, condition, alteration,
     modification, addition, improvement, replacement, substitution, return,
     abandonment, redelivery or other disposition, repair or testing of the
     Engines or any Part thereof by the Borrower, any Permitted Lessee or any
     other Person whatsoever, whether or not such operation, possession, use,
     non-use, maintenance, storage, overhaul, delivery, non-delivery, control,
     condition, alteration, modification, addition, improvement, replacement,
     substitution, return, abandonment, redelivery or other disposition, repair
     or testing is in compliance with the terms hereof and of the Security
     Agreement, including, without limitation, claims for death, personal injury
     or property damage or other loss or harm to any Person whatsoever,
     including, without limitation, any passengers, shippers or other Persons
     wherever located, claims or penalty relating to any laws, rules or
     regulations, including, without limitation,

                                       15
<PAGE>

     environmental control, noise and pollution laws, rules or regulation and
     any Liens in respect of the Engines or any Part;

               (iii)  the manufacture, design, sale, return, purchase,
     acceptance, nonacceptance, rejection, delivery, non-delivery, condition,
     repair, modification, servicing, rebuilding, registration, reregistration,
     deregistration, ownership, financing, import, export, performance, non-
     performance, pooling, lease, sublease, transfer, merchantability, fitness
     for use, alteration, substitution or replacement of any Engine, or Part or
     other transfer of use or possession, or other disposition of the Engines or
     any Part including, without limitation, latent and other defects, whether
     or not discoverable, tort liability, whether or not arising out of the
     negligence of any Indemnitee (whether active, passive or imputed and
     including strict or absolute liability without fault), and any claims for
     patent, trademark or copyright infringement;

               (iv)   any breach of or failure to perform or observe, or any
     other non-compliance with, any condition, covenant or agreement to be
     performed, or other obligations of the Borrower under any of the Operative
     Agreements, or the falsity or inaccuracy of any representation or warranty
     of the Borrower in any of the Operative Agreements or the occurrence of any
     Default or Event of Default; and

               (v)    the enforcement of the terms of the Operative Agreements
     (including this Section 7.01(a)).

          (b)  Exceptions.  The indemnity provided for in Section 7.01(a) shall
               ----------
not extend to any Expense to the extent it:

               (i)    is attributable to the willful misconduct or gross
     negligence of any Indemnitee (other than gross negligence or willful
     misconduct imputed to such person by reason of its interest in the Engines
     or any Part or any transaction documents);

               (ii)   is, except to the extent fairly attributable to acts or
     events occurring prior thereto, attributable to acts or events (other than
     the performance by Borrower of its obligations pursuant to the terms of the
     Operative Agreements) which occur after full repayment of the Loan by the
     Borrower;

               (iii)  is, other than as expressly provided herein or in the
     other Operative Agreements, a Tax or loss of a Tax benefit;

               (iv)   is a cost or expense expressly required to be paid by an
     Indemnitee or its permitted transferees (and not by the Borrower) pursuant
     to this Agreement or any other Operative Agreement and for which the
     Borrower is not otherwise obligated to reimburse an Indemnitee pursuant to
     the terms of this Agreement or such other Operative Agreement;

                                       16
<PAGE>

               (v)    is attributable to the incorrectness or breach by an
     Indemnitee of its representations or warranties, under any of the Operative
     Agreements;

               (vi)   is attributable to the failure by an Indemnitee to perform
     any of its obligations under any of the Operative Agreements except to the
     extent such failure was caused by a breach by Borrower of any
     representation or warranty or by any failure of Borrower to perform any
     obligation under an Operative Agreement;

               (vii)  is attributable to the offer or sale of any interest in
     the Aircraft or the Loan or any similar interest (including an offer or
     sale resulting from bankruptcy or other proceedings for the relief of
     debtors in which an Indemnitee is the debtor), unless in each case such
     offer or sale shall occur pursuant to the exercise of remedies hereunder
     and under any other Operative Agreement;

               (viii) is an Expense relating to, resulting from, arising out of
     or in connection with a "prohibited transaction" within the meaning of
     Section 406 of ERISA or Section 4975(c)(1) of the Code; and

               (ix)   constitutes an Indemnitee's  overhead.

          (c)  Non-Parties.  If an Indemnitee is not a party to this Agreement,
               -----------
in order to be entitled to the benefit of this Article 7, such Indemnitee shall
comply with the terms of this Article 7 in connection with its making any claim
for indemnification hereunder.

          Section 7.02   Notice and Payment.  Each Indemnitee shall give prompt
                         ------------------
written notice to the Borrower of any liability as to which a Responsible
Officer of such Indemnitee has actual knowledge, for which the Borrower is, or
may be, liable under this Article 7; provided, however, that failure to give
                                     --------  -------
such notice shall not terminate any of the rights of an Indemnitee under this
Article 7 and shall not release Borrower from any of its obligations to
indemnify such Indemnitee hereunder, except to the extent that such failure
adversely affects any applicable defense or counterclaim, otherwise increases
the amount the Borrower would have been liable for in the absence of such
failure to provide such notice or adversely affects the ability of Borrower's
insurers to defend such claim.

          Section 7.03   Defense of Claims.  Pursuant to the terms hereof, the
                         -----------------
Borrower or its insurers shall have the right (in each such case at the
Borrower's sole expense) to investigate, defend (and control the defense of) any
such claim for which indemnification is sought pursuant to this Article 7 and
each Indemnitee shall reasonably cooperate with the Borrower and its insurers
with respect thereto, provided that, such right of the Borrower shall be subject
                      -------- ----
to Borrower having acknowledged in writing its obligation to indemnify the
Indemnitee in respect of such claim if the defense of such claim is unsuccessful
(unless and to the extent it is determined during any related proceedings that
any of the exclusions set forth in Section 7.01(b) are applicable to such
claim); provided further that, without limiting the right of the Borrower's
        -------- ------- ----
insurers to assume and control the

                                       17
<PAGE>

defense of or to compromise, any such claim, the Borrower shall not be entitled
to assume and control the defense of or compromise any such claim (A) during the
continuance of any Event of Default, (B) if an actual or potential material
conflict of interest exists making it advisable in the good faith opinion of
such Indemnitee (on the basis of prevailing standards of professional
responsibility) for such Indemnitee to be represented by separate counsel or if
such proceeding involves the potential imposition of criminal (or any non-de
minimis risk of civil) liability on such Indemnitee (and, in any such instance,
Borrower shall pay the reasonable fees and expenses of Lender's counsel) or (C)
if such proceeding will involve any non-de minimis risk of the sale, forfeiture
or loss of, or the creation of any Lien (other than Permitted Liens) on the
Engines (unless the Borrower posts a bond or other security reasonably
acceptable in form and substance to such Indemnitee) or involve any risk of
criminal liability to such Indemnitee. Subject to the immediately foregoing
sentence, where the Borrower or the insurers under a policy of insurance
maintained by the Borrower undertake the defense of an Indemnitee with respect
to such a claim, no additional legal fees or expenses of such Indemnitee in
connection with the defense of such claim shall be indemnified hereunder unless
the fees or expenses were incurred at the written request of the Borrower or
such insurers; provided, that, subject to the rights of Borrower's insurers to
               --------  ----
assume and control the defense of or to compromise (as provided herein), any
such claim, any counsel selected by Borrower in connection with any defense
shall be reasonably acceptable to the Lender. Subject to the requirement of any
policy of insurance applicable to a claim, an Indemnitee may participate at its
own expense at any judicial proceeding controlled by the Borrower or its
insurers pursuant to the preceding provisions, to the extent that such party's
participation does not, in the reasonable opinion of the independent counsel
appointed by the Borrower or its insurers to conduct such proceedings, interfere
with the defense of such claim; and such participation shall not constitute a
waiver of the indemnification provided in this Section 7.03. No Indemnitee shall
enter into any settlement or other compromise with respect to any claim
described in this Section 7.03 without the prior written consent of the Borrower
(which consent shall not be unreasonably withheld or delayed) and its insurers,
unless such Indemnitee waives its right to be indemnified under this Article 7
with respect to such claim. Subject to the rights of Borrower's insurers to
assume and control the defense of or to compromise, any such claim, the Borrower
shall not enter into any settlement or compromise relating to any claims against
the Lessor without consent of Lender (which consent shall not be unreasonably
withheld or delayed); provided that, Borrower's insurers may not enter into any
                      -------------
such settlement or compromise without Lender's consent unless a release of all
related claims against the Lender (and any other Indemnitee) shall be obtained
in connection with such settlement or compromise.

          Section 7.04   Insured Claims.  Notwithstanding any other provision of
                         --------------
this Article 7 to the contrary, in the case of any Expense indemnified by the
Borrower hereunder which is covered by a policy of insurance maintained by the
Borrower (or a Permitted Lessee) pursuant to Section 4.05 of the Security
Agreement or otherwise, it shall be a condition of such indemnity with respect
to any particular Indemnitee that such Indemnitee shall reasonably cooperate
with the insurers in the exercise of their rights to investigate, defend or
compromise such claim as may be required to retain the benefits of such
insurance with respect to such claim.

                                       18
<PAGE>

          Section 7.05   Subrogation.  To the extent that an Expense indemnified
                         -----------
by the Borrower under this Article 7 is in fact paid in full by the Borrower
and/or an insurer under a policy of insurance maintained by the Borrower, the
Borrower and/or such insurer as the case may be shall be subrogated to the
extent of such payment to the rights and remedies of the Indemnitee on whose
behalf such Expense was paid with respect to the transaction or event giving
rise to such Expense (other than the rights and remedies in respect of insurance
policies maintained by such Indemnitee). So long as no Event of Default has
occurred and is continuing, should an Indemnitee receive any refund, in whole or
in part, with respect to any Expense paid in full by the Borrower hereunder, it
shall promptly pay over the amount refunded (but not an amount in excess of the
amount Borrower and/or such insurer has paid to such Indemnitee in respect of
such Expense) to the Borrower.

          Section 7.06   Information.  Subject to Section 7.04, Borrower will
                         -----------
provide the relevant Indemnitee with such information, not within the control of
such Indemnitee, as is in Borrower's control or is reasonably available to
Borrower, which such Indemnitee may reasonably request, and will otherwise
cooperate with such Indemnitee, so as to enable such Indemnitee to fulfill its
obligations under Section 7.03 and to control or participate in any proceeding
to the extent permitted by Section 7.03.  The Indemnitee shall supply Borrower
with such information, not within the control of Borrower, as is in such
Indemnitee's control or is reasonably available to such Indemnitee, which
Borrower may reasonably request to control or participate in any proceeding to
the extent permitted by Section 7.03.

          Section 7.07   Survival of Obligations.  The indemnities and
                         -----------------------
agreements of the Borrower provided for in this Article 7 shall survive the
expiration or other termination of this Agreement and the other Operative
Agreements.

          Section 7.08   Effect of Other Indemnities.  The Borrower's
                         ---------------------------
obligations under this Article 7 shall be those of a primary obligor whether or
not the Person indemnified shall also be indemnified with respect to the same
matter under the terms of this Agreement, or any other document or instrument or
by any other Person and regardless of any other rights that Borrower may have
against such Indemnitee pursuant to any Operative Agreement or otherwise, and
the Person seeking indemnification from the Borrower pursuant to any provision
of this Agreement may proceed directly against the Borrower without first
seeking to enforce any other right of indemnification.

          Section 7.09   Waiver of Certain Claims.  The Borrower hereby waives
                         ------------------------
and releases any Expense now or hereafter existing against any Indemnitee
arising out of death or personal injury to personnel of the Borrower, loss or
damage to property of the Borrower, or the loss of use of any property of the
Borrower, which results from or arises out of the condition, use or operation of
the Engines, including, without limitation, any latent or patent defect whether
or not discoverable.

                                       19
<PAGE>

                                   ARTICLE 8.
                               EVENTS OF DEFAULT

          Section 8.01   Events of Default.  The following events shall
                         -----------------
constitute Events of Default and each such Event of Default shall be deemed to
exist and continue so long as, but only so long as, it shall not have been
remedied:

          (a)  Borrower shall fail to make any payment of (i) principal of or
interest on the Loan, whether by acceleration or otherwise, when due and such
failure shall continue for a period of ten (10) days; or (ii) any other amount
required to be paid to Lender pursuant to any of the Borrower Documents within
20 days after receipt by the Borrower of a written demand therefor from the
Lender;

          (b)  The Borrower shall fail to procure and maintain any insurance
required pursuant to Section 4.05 of the Security Agreement or such insurance
shall be cancelled or lapse; provided that such lapse or cancellation shall not
                             --------
constitute an Event of Default until the earlier of 30 days after receipt by the
Lender of notice of such lapse or cancellation or the date that the lapse or
cancellation is effective as to the Lender;

          (c)  The Borrower shall use the Engines after having received notice
that the public liability insurance required by Section 4.05(a) of the Security
Agreement has lapsed or has been cancelled (For the avoidance of doubt, the
event specified in this Section 8.01(c) is an additional event constituting an
Event of Default hereunder and is separate and independent from the event
specified in Section 8.01(b) above.);

          (d)  The Borrower shall fail to perform or observe any other covenant
or condition to be performed or observed by it hereunder or under any other
Operative Agreement, and such failure shall continue unremedied for a period of
30 days after delivery of notice of such failure from the Lender to the
Borrower, unless such failure is curable and the Borrower shall, after the
delivery of such notice, be diligently proceeding to correct such failure and
shall in fact correct such failure 135 days after delivery of such notice;
provided that, such additional 105 period shall not apply to any such failure
-------- ----
under Section 4.01(b)(x) or 4.06 of the Security Agreement or Section 4.02(c)
hereof;

          (e)  Any representation or warranty made by the Borrower herein or in
any other Operative Agreement or in any certificate required to be delivered by
the Borrower pursuant thereto shall prove to have been incorrect in any material
respect when made and shall remain material at the time in question and shall
not be remedied within 30 days after notice thereof has been given to the
Borrower by the Lender, unless such incorrectness is curable and Borrower shall,
after delivery of such notice, be diligently proceeding to correct such failure
and shall in fact correct such failure 135 days after the delivery of such
notice;

                                       20
<PAGE>

          (f)  The Borrower shall consent to the appointment of or taking
possession by a receiver, assignee, custodian, sequestrator, trustee or
liquidator (or other similar official) of itself or of a substantial part of its
property, or the Borrower shall admit in writing its inability to pay its debts
generally as they come due (as provided in 11 U.S.C. (S)303(h)(1)), or shall
make a general assignment for the benefit of its creditors, or the Borrower
shall file a voluntary petition in bankruptcy or a voluntary petition or answer
seeking liquidation, reorganization or other relief with respect to itself or
its debts under the Federal bankruptcy laws, as now or hereafter constituted or
any other applicable Federal or State bankruptcy, insolvency or other similar
law or shall consent to the entry of an order for relief in an involuntary case
under any such law or the Borrower shall file an answer admitting the material
allegations of a petition filed against the Borrower in any such proceeding, or
otherwise seek relief under the provisions of any now existing or future Federal
or State bankruptcy, insolvency or other similar law providing for the
reorganization or winding-up of corporations, or providing for an agreement,
composition, extension or adjustment with its creditors;

          (g)  An order, judgment or decree shall be entered in any proceedings
by any court of competent jurisdiction appointing, without the consent of the
Borrower, a receiver, trustee or liquidator of the Borrower or of any
substantial part of its property, or any substantial part of the property of the
Borrower shall be sequestered, and any such order, judgment of decree of
appointment or sequestration shall remain in force undismissed, unstayed or
unvacated for a period of 60 days after the date of entry thereof;

          (h)  A petition against the Borrower in a proceeding under the Federal
bankruptcy laws or other insolvency laws as now or hereafter in effect shall be
filed and shall not be withdrawn or dismissed within 60 days thereafter, or,
under the provisions of any law providing for reorganization or winding-up of
corporations which may apply to the Borrower, any court of competent
jurisdiction shall assume jurisdiction, custody or control of the Borrower or of
any substantial part of its property and such jurisdiction, custody or control
shall remain in force unrelinquished, unstayed or unterminated for a period of
60 days;

          (i)  So long as Fleet National Bank (or any Affiliate thereof) remains
as the Lessor under the Lease Agreement [N587ML], any "Event of Default" shall
occur under the Lease Agreement [N587ML]; or

          (j)  Borrower shall receive notice of default or exercise of remedies
with respect to the payment or performance of any indebtedness or other
obligation to any third party (other than the "Lessor" under the Lease Agreement
[N587ML]) and any such default or exercise of remedies results in an
acceleration of such indebtedness or obligation; provided, however, that the
aggregate amount of any such indebtedness or obligation is in excess of
$5,000,000;

provided that, notwithstanding anything to the contrary contained herein or in
--------
any other Operative Agreement, any failure of the Borrower to perform or observe
any covenant, condition, or agreement herein or in any other Operative Agreement
shall not constitute an Event of Default under clause (d) above if such failure
is caused solely by reason of an event referred to in the definition of "Event
of

                                       21
<PAGE>

Loss" so long as the Borrower is continuing to comply with the applicable terms
of Section 4.03(e) of the Security Agreement.

                                   ARTICLE 9.
                                    REMEDIES

          Section 9.0    Remedies.
                         --------

          (a)  Upon the occurrence of any Event of Default described in Sections
8.01(f), 8.01(g) and 8.01(h) at any time thereafter so long as the same shall be
continuing,  the outstanding principal of the Loan, the accrued interest thereon
and all other obligations of Borrower to Lender under this Agreement and any
other Operative Agreement (including the Make Whole Amount, if any) shall
automatically be immediately due and payable, without presentment, demand,
protest or other notice of any kind, all of which are hereby expressly waived,
anything in this Agreement or in the Note or Security Agreement to the contrary
notwithstanding.

          (b)  Upon the occurrence and during the continuation of any other
Event of Default at any time thereafter so long as the same shall be continuing,
Lender may, in addition to exercising any and all other remedies it may have in
the Security Agreement and any other Operative Agreement, declare the
outstanding principal of the Loan, the accrued interest thereon and all other
obligations of Borrower to Lender under the Operative Agreement (including the
Make Whole Amount, if any) to be forthwith due and payable, whereupon the Loan,
all accrued interest thereon and all such obligations shall immediately become
due and payable, without presentment, demand, protest or other notice of any
kind, all of which are hereby expressly waived, anything in this Agreement or in
the Note or Security Agreement to the contrary notwithstanding.

          (c)  Upon the occurrence and during the continuation of any Event of
Default at any time thereafter so long as the same shall be continuing,
Borrower, in addition to its other obligations pursuant to this Section 9.01,
shall indemnify Lender against all reasonable out-of-pocket costs and expenses
incurred by Lender as a consequence thereof or in connection with any related
exercise of remedies hereunder, under the Security Agreement or any other
Operative Agreement. All such costs, expenses and damages shall be payable by
Borrower upon demand by notice hereunder.

          (d)  All payments received or amounts realized by Lender at any time
and from time to time from any source after the Loan shall have become due and
payable or been declared due and payable as a result of an Event of Default
shall be applied by Lender as follows: first, in payment of all amounts owed to
                                       -----
the Lender pursuant to Section 9.01(c), second, to pay any accrued and unpaid
                                        ------
interest then due in respect of such Loan; third, to pay in full the principal
                                           -----
amount then outstanding on such Loan; fourth, to pay all other amounts then due
                                      ------
owing to the Lender hereunder or under the Operative Agreements (including the
Make Whole Amount, if any) and fifth, the balance, if any, to the Borrower or as
                               -----
a court of competent jurisdiction may otherwise direct.

                                       22
<PAGE>

                                  ARTICLE 10.
                               TRANSACTION COSTS

          Section 10.01. Transaction Costs and Other Costs.
                         ---------------------------------

          (a)  Transaction Costs.  If the transactions contemplated by this
               -----------------
Agreement to occur on each Funding Date are consummated, the Borrower shall pay
(or reimburse the Lender if the Lender shall have previously made such payment)
all of the following fees and expenses relating to the transactions contemplated
hereby, following receipt by the Borrower of appropriate invoices with respect
thereto: (i) the reasonable fees and expenses of counsel for Lender; and (ii)
the reasonable fees and expenses of special aviation counsel.

          (b)  Amendments and Supplements.  Without limitation of the foregoing,
               --------------------------
the Borrower agrees to pay to the Lender all costs and expenses (including
reasonable legal fees and expenses) incurred by any of them in connection with
any amendment, supplement, waiver or consent (whether or not entered into) under
this Agreement or any other Operative Agreement or document or instrument
delivered pursuant to any of them, which amendment, supplement, waiver or
consent is required by any provision of any Operative Agreement or is requested
by the Borrower or necessitated by the action or inaction of the Borrower;
provided, however, that the Borrower shall not be responsible for fees or
--------  -------
expenses incurred in connection with the offer, sale or other transfer (whether
pursuant to Section 5.01(b) hereof or otherwise) by the Lender of any interest
in the Loan.

                                  ARTICLE 11.
                                    NOTICES

          Section 11.01. Notices.  Except as otherwise specifically provided
                         -------
herein, all notices, requests, approvals or consents required or permitted by
the terms hereof shall be in writing (it being understood that the specification
of a writing in certain instances and not in others does not imply an intention
that a writing is not required as to the latter).  Any notice shall be effective
when received.  Any notice shall either be mailed, certified or registered mail,
return receipt requested with proper first class postage prepaid, or sent in the
form of a telecopy, provided that there is receipt of such notice the next
                    --------
Business Day from an overnight courier service, or by overnight delivery service
or delivered by hand.  Any notice shall be directed to the Borrower, the Lender
or any other party hereto to the respective addresses set forth below or to such
other address or telecopy number as any such party may designate pursuant to
this Section 11.01:

          (a)  if to the Borrower, to its office at 2801 Slater Road,
Morrisville, North Carolina 27560, Attention: General Counsel, telephone (919)
595-6009, facsimile (919) 595-1705; or to such other address as the Borrower
shall from time to time designate in writing to the Lender; and

                                       23
<PAGE>

          (b)  if to the Lender, to its office at c/o Fleet Capital Corporation,
50 Kennedy Plaza, 5/th/ Floor, Providence, Rhode Island 02903-2305,  Attention:
Chief Credit Officer, telephone (401) 278-6392, facsimile (401) 278-3139; or to
such other address as the Lender shall from time to time designate in writing to
the Borrower.

                                  ARTICLE 12.
                                 MISCELLANEOUS

          Section 12.01. Counterparts.  This Agreement may be executed by the
                         ------------
parties in separate counterparts, each of which when so executed and delivered
shall be an original, but all such counterparts shall together constitute but
one and the same instrument.

          Section 12.02. No Oral Modifications.  Neither this Agreement nor any
                         ---------------------
of its terms may be terminated, amended, supplemented, waived or modified
orally, but only by an instrument in writing signed by the party against which
the enforcement of the termination, amendment, supplement, waiver or
modification is sought.  No such written termination, amendment, supplement,
waiver or modification shall be effective unless a signed copy shall have been
delivered to and executed by each party hereto.

          Section 12.03  Captions.  The table of contents preceding this
                         --------
Agreement and the headings of the various Articles and Sections of this
Agreement are for convenience of reference only and shall not modify, define,
expand or limit any of the terms or provisions of this Agreement.

          Section 12.04  Successors and Assigns.  The terms of this Agreement
                         ----------------------
shall be binding upon, and shall inure to the benefit of, the Borrower and its
successors and permitted assigns, and the Lender and its successors and
permitted assigns.

          Section 12.05  Severability.  Any provision of this Agreement which is
                         ------------
prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction,
be ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions, and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction.

          Section 12.06  Limitations of Liability.  Lender shall not have any
                         ------------------------
obligation or duty to Borrower or any other Person with respect to the
transactions contemplated hereby, except those obligations or duties of the
Lender expressly set forth in this Agreement and the other Operative Agreements.

          Section 12.07  GOVERNING LAW.  (a) THIS AGREEMENT IS BEING DELIVERED
                         -------------
IN THE STATE OF NEW YORK, AND SHALL IN ALL RESPECTS BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE

                                       24
<PAGE>

OF NEW YORK, INCLUDING ALL MATTERS OF CONSTRUCTION, VALIDITY AND PERFORMANCE,
WITHOUT GIVING EFFECT TO PRINCIPLES OF CONFLICTS OF LAWS.

          (b) TO THE EXTENT PERMITTED BY APPLICABLE LAW, EACH PARTY HERETO
IRREVOCABLY AGREES, ACCEPTS AND SUBMITS ITSELF TO THE NON-EXCLUSIVE JURISDICTION
OF THE COURTS OF THE STATE OF NEW YORK IN THE CITY AND COUNTY OF NEW YORK AND OF
THE UNITED STATES FOR THE SOUTHERN DISTRICT OF NEW YORK, IN CONNECTION WITH ANY
LEGAL ACTION, SUIT OR PROCEEDING WITH RESPECT TO ANY MATTER RELATING TO OR
ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT; PROVIDED, HOWEVER, TO THE
                                                     --------  -------
EXTENT PERMITTED BY APPLICABLE LAW, THAT NOTHING IN THIS AGREEMENT OR ANY OTHER
OPERATIVE AGREEMENTS SHALL BE DEEMED OR OPERATE TO PRECLUDE LENDER FROM BRINGING
SUIT OR TAKING OTHER LEGAL ACTION IN ANY OTHER JURISDICTION IN ORDER TO REALIZE
ON THE ENGINES OR ANY OTHER COLLATERAL OR ANY OTHER SECURITY, OR TO ENFORCE A
JUDGMENT OR OTHER COURT ORDER IN FAVOR OF LENDER, AND BORROWER EXPRESSLY WAIVES
ANY OBJECTIONS THAT IT MAY HAVE TO THE VENUE OF SUCH COURTS.

          (c) TO THE EXTENT PERMITTED BY APPLICABLE LAW, EACH PARTY HERETO
HEREBY IRREVOCABLY CONSENTS AND AGREES THAT THE SERVICE OF ANY AND ALL LEGAL
PROCESS, SUMMONS, NOTICES AND DOCUMENTS OF ANY OF THE AFOREMENTIONED COURTS IN
ANY SUCH SUIT, ACTION OR PROCEEDING MAY BE MADE BY MAILING COPIES THEREOF BY
REGISTERED OR CERTIFIED MAIL, POSTAGE PREPAID, AT THE ADDRESS SET FORTH PURSUANT
TO SECTION 11.01. EACH PARTY HERETO AGREES THAT SERVICE UPON IT, OR ANY OF ITS
AGENTS, IN EACH CASE IN ACCORDANCE WITH THIS SECTION 12.07(c), SHALL CONSTITUTE
VALID AND EFFECTIVE PERSONAL SERVICE UPON SUCH PARTY, AND EACH PARTY HERETO
HEREBY AGREES THAT THE FAILURE OF ANY OF ITS AGENTS TO GIVE ANY NOTICE OF SUCH
SERVICE TO ANY SUCH PARTY SHALL NOT IMPAIR OR AFFECT IN ANY WAY THE VALIDITY OF
SUCH SERVICE ON SUCH PARTY OR ANY JUDGMENT RENDERED IN ANY ACTION OR PROCEEDING
BASED THEREON.

          (d) EACH PARTY HERETO HEREBY IRREVOCABLY WAIVES, TO THE EXTENT
PERMITTED BY APPLICABLE LAW, AND AGREES NOT TO ASSERT, BY WAY OF MOTION, AS A
DEFENSE, OR OTHERWISE, IN ANY LEGAL ACTION OR PROCEEDING BROUGHT HEREUNDER IN
ANY OF THE ABOVE-NAMED COURTS, THAT SUCH ACTION OR PROCEEDING IS BROUGHT IN AN
INCONVENIENT FORUM, THAT VENUE FOR THE ACTION OR PROCEEDING IS IMPROPER OR THAT
THIS AGREEMENT OR ANY OTHER OPERATIVE AGREEMENT MAY NOT BE ENFORCED IN OR BY
SUCH COURTS.

          (e) TO THE EXTENT PERMITTED BY APPLICABLE LAW, EACH PARTY HERETO
HEREBY WAIVES ITS RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM

                                       25
<PAGE>

OR CAUSE OF ACTION IN ANY COURT IN ANY JURISDICTION BASED UPON OR ARISING OUT OF
OR RELATING TO THIS AGREEMENT.

          Section 12.08 Section 1110 Compliance. The parties hereto agree that
                        -----------------------
the transactions contemplated by the Operative Agreements are expressly intended
to be, shall be, and should be construed so as to be entitled to the benefits
and protection of Section 1110.

          Section 12.10  Maximum Interest Rate.  Notwithstanding anything that
                         ---------------------
may be to the contrary in any of the Operative Agreements, no amount of interest
due under any of the Operative Agreements shall in any event exceed the maximum
rate permitted by law.

          Section 12.11  Term of Agreement; Release of Liens.  This Agreement
                         -----------------------------------
and all covenants, agreements, representations and warranties made herein shall
survive the making and repayment of each Loan and the execution and delivery to
Lender of the Note and shall continue in full force and effect until the payment
in full of the Loan and all of the Obligations.  Following payment to Lender in
full of the Loan and all Obligations under the Operative Agreement, Lender, at
Borrower's request and expense, shall execute such release of the Liens of the
Security Agreement as Borrower may reasonably request.

          Section 12.11  Reinstatement.  If any payment, in whole or in part, of
                         -------------
any of the amounts due to the Lender pursuant to the terms of any Operative
Agreement is rescinded or must otherwise be restored or returned upon the
bankruptcy, insolvency, reorganization, arrangement, adjustment, composition,
dissolution, liquidation, or the like, of the Borrower, the Borrower's
obligations in respect of such returned payment (or portion thereof) shall be
continue to be effective and shall be reinstated, all as though such payment had
not been made, notwithstanding any termination of this Agreement or any other
Operative Agreement.

                       *               *               *

                                       26
<PAGE>

          IN WITNESS WHEREOF, the parties have caused this Loan Agreement to be
executed by their respective, duly authorized officers as of the day and year
first written above.

                                        MIDWAY AIRLINES CORPORATION,
                                        as Borrower

                                        By: /s/ Jonathan S. Waller
                                            ----------------------
                                            Name: Jonathan S. Waller
                                            Title: Senior Vice President
                                                   General Counsel

                                        FLEET CAPITAL CORPORATION,
                                        as Lender

                                        By: /s/ Edward W. O'Brien
                                            ---------------------
                                            Name: Edward W. O'Brien
                                            Title: Vice President

                                      27

<PAGE>

                                  APPENDIX A

                                  DEFINITIONS

GENERAL PROVISIONS

          The following terms shall have the following meanings for all purposes
of the Operative Agreements (as defined below), unless otherwise defined in an
Operative Agreement or the context thereof shall otherwise require.  In the case
of any conflict between the provisions of this Appendix and the provisions of
any Operative Agreement, the provisions of such Operative Agreement shall
control the construction of such Operative Agreement.

          Unless the context otherwise requires, (i) references to agreements
shall be deemed to mean such agreements as amended and supplemented from time to
time, and any agreement, instrument or document entered into in substitution or
replacement therefor, and (ii) references to parties to agreements shall be
deemed to include the successors and permitted assigns of such parties.

     "Additional Insureds" means the Lender.
      -------------------

     "Aeronautical Authority" means as of any time of determination, the FAA or
      ----------------------
other governmental authority having jurisdiction over the Engines under the laws
of the country in which the airframe (on which an Engine is installed) is then
registered.

     "Affiliate" means, with respect to any Person, any other Person directly
      ---------
or indirectly controlling 50% or more of any class of voting securities of such
Person or otherwise controlling, controlled by or under common control with such
Person. For the purposes of this definition, "control" (including "controlled
by" and "under common control with") shall mean the power, directly or
indirectly, to direct or cause the direction of the management and policies of
such Person whether through the ownership of voting securities or by contract or
otherwise.

     "After Tax Basis" means a basis such that any payment to be received or
      ---------------
deemed to be received by a Person shall be supplemented by a payment to such
Person so that the sum of such payments, after deduction of all taxes (taking
into account any related credits or deductions) resulting from the actual or
constructive receipt or accrual of such payments, shall be equal to the payment
to be received.

     "Applicable Law" means all applicable laws, treaties, judgments, decrees
      --------------
injunctions, writs and orders of any court, governmental agency or authority and
rules, regulations, orders, directives, licenses and permits of any governmental
body, instrumentality, agency or authority.
<PAGE>

     "Applicable Rate" shall mean, (i) with respect to Loan A the rate per
      ---------------
annum set forth in Section 2.03(a)(i) of the Loan Agreement; and (ii) with
respect to Loan B, the rate established one (1) Business Day prior to the second
Funding Date, equal to the sum of (x), the four (4) year U.S. Treasury Constant
Maturities as shown in the Federal Reserve Statistical Release H.15 as of such
date plus (y) *%.

     "Average Life Date" means, for either Note, the date which follows the
      -----------------
prepayment date by a period equal to the Remaining Weighted Average Life of such
Note.

     "Bankruptcy Code" means Title 11 of the United States Code, as amended,
      ---------------
and any successor thereto.

     "Borrower" means Midway Airlines Corporation, a Delaware corporation, and
      --------
its successors and permitted assigns.

     "Borrower Documents" means the Operative Agreements to which the Borrower
      ------------------
is a party.

     "Business Day" means any day other than a Saturday or Sunday or other
      ------------
day on which commercial banks are authorized or required by law to close in New
York City, Charlotte, North Carolina or Providence, Rhode Island.

     "Citizen of the United States" means a citizen of the United States as
      ----------------------------
defined in (S)40102(a)(15) of the Transportation Code, or any analogous part of
any successor or substituted legislation or regulation at the time in effect.

     "Code" means the United States Federal Internal Revenue Code of 1986,
      ----
as amended from time to time, or any similar legislation of the United States
enacted to supersede, amend, or supplement such Code (and any reference to a
provision of the Code shall refer to any successor provision(s), however
designated).

     "Collateral" means all property which at the time of any determination
      ----------
is subject to a Lien in favor of Lender granted by Borrower under the Security
Agreement or under any other Operative Agreements, including, but not limited
to, the Engines.

     "CRAF Program" has the meaning specified in Section 4.01(b)(vii) of the
      ------------
Security Agreement.

     "Default" means any event or condition which, with the lapse of time or the
      -------
giving of notice, or both, would constitute an Event of Default.

     "Dollars", "Dollar" and "$" means dollars in lawful currency of the United
      -------    ------       -
States.
----------
 * Confidential treatment has been requested for omitted information. Omitted
   information has been filed separately with the Commission.
<PAGE>

          "Engine" means (A) each of the two General Electric CF34-3B1 Series
           ------
200 aircraft engines, identified by manufacturer's serial number in such
Security Agreement Supplements executed and delivered from time to time pursuant
to the Security Agreement, so long as a Replacement Engine shall not have been
substituted therefor pursuant to Section 4.03(e) of the Security Agreement, and
(B) a Replacement Engine, so long as another Replacement Engine shall not have
been substituted therefor pursuant to Section 4.03(e) of the Security Agreement,
whether or not such engine or Replacement Engine, as the case may be, is from
time to time installed on any aircraft, and including in each case all Parts
incorporated or installed in or attached thereto and any and all Parts removed
therefrom so long as title to such Parts remains subject to the Lien of the
Security Agreement under the terms of Section 4.03 of the Security Agreement.
The term "Engines" means, as of any date of determination, the two engines each
          -------
of which is an Engine on that date.

          "Engine Manufacturer" means General Electric Company, a New York
           -------------------
corporation.

          "Engine Manufacturer's Consent" means the Consent and Agreement of the
           -----------------------------
Engine Manufacturer to the assignment of portions of the Engine Warranty
pursuant to Section 2.01 of the Security Agreement.

          "Engine Warranty" means the General Terms Agreement No. CF34-0897-065
           ---------------
in respect of the Engines provided to the Borrower by the Engine Manufacturer.

          "ERISA" means the Employee Retirement Income Security Act of 1974 and
           -----
any regulations and rulings issued thereunder all as amended and in effect from
time to time.

          "ERISA Plan" means, individually or collectively, an employee benefit
           ----------
plan, as defined in Section 3(3) of ERISA, which is subject to Title I of ERISA
or any applicable regulation thereunder or a plan or individual retirement
account which is subject to Section 4975(c) of the Code;

          "Event of Default" has the meaning given to such term in Section 8.01
           ----------------
of the Loan Agreement.

          "Event of Loss" means any of the following events with respect to an
           -------------
Engine:

                       (i)   any theft, hijacking or disappearance of such
          property for a period of 15 consecutive days (provided that, so long
          as Borrower shall be diligently pursuing recovery of such property,
          such period shall be extended to 45 consecutive days) or more;
<PAGE>

               (ii)  destruction, damage beyond economic repair or rendition of
          such property permanently unfit for normal use for any reason
          whatsoever;

               (iii) any event which results in an insurance settlement with
          respect to such property on the basis of an actual, constructive or
          compromised total loss;

               (iv)  condemnation, confiscation or seizure of, or requisition of
          title to or use of such property by the Government or any foreign
          government or purported government (or in the case of any such
          condemnation, confiscation, seizure or requisition of title, by the
          Government) or any agency or instrumentality thereof, for a period in
          excess of (A) in the case of any condemnation, confiscation, seizure
          or requisition of use, 180 consecutive days or (B) in the case of any
          condemnation, confiscation or seizure of, or requisition of title, 15
          consecutive days;

               (v)   as a result of any law, rule, regulation, order or other
          action by the Aeronautical Authority, the use of the Engines in the
          normal course of air transportation shall have been prohibited by
          virtue of a condition affecting all General Electric CF34-3B1 Series
          200 aircraft engines for a period of 180 consecutive days, unless the
          Borrower, prior to the expiration of such 180-day period, shall be
          diligently carrying forward all necessary and desirable steps to
          permit normal use of the Engines and shall within 12 months have
          conformed at least one General Electric CF34-3B1 Series 200 aircraft
          engine (but not necessarily an Engine) to the requirements of any such
          law, rule, regulation, order or action, and shall be diligently
          pursuing conformance of the Engines in a non-discriminatory manner;
          and

               (vi) the requisition or taking of use thereof by any government,
          and any divestiture of title or ownership deemed to be an Event of
          Loss with respect to an Engine under Section 4.01(b)(iii) or
          4.01(b)(vi) of the Security Agreement.

The date of such Event of Loss shall be (aa) the 16/th/ day following loss of
such property or its use due to theft or disappearance or the 46/th/ day
following such loss if such period shall have been extended; (bb) the date of
any destruction, damage beyond economic repair or rendition of such property
permanently unfit for normal use; (cc) the date of any insurance settlement on
the basis of an actual, constructive or compromised total loss; (dd) the 181/st/
day following condemnation, confiscation, seizure or requisition of title to
such property by the Government or a foreign government referred to in clause
(iv) above (or the 16/th/ day in the case of appropriation of title); and (ee)
the last day of the applicable period referred to in clause (v) above.
<PAGE>

          "Expenses" has the meaning given to such term in Section 7.01(a) of
           --------
the Loan Agreement.

          "Federal Aviation Administration" or "FAA" means the United States
           --------------------------------     ---
Federal Aviation Administration and any successor agency or agencies thereto.

          "Funding Date" means, in respect of each Loan, the Business Day on
           ------------
which the relevant Loan is, or is to be, advanced by the Lender to the Borrower;

          "Government" means the United States of America or an agency or
           ----------
instrumentality thereof the obligations of which bear the full faith and credit
of the United States of America.

          "Indemnitee" means Lender and each Affiliate, officer, director,
           ----------
employee, agent, servant, successor and permitted assigns of Lender.

          "Lease Agreement [N587ML]" means the Lease Agreement [N587ML] dated as
           ------------------------
of December 30, 1999, between Fleet National Bank, as Lessor and the Borrower,
as Lessee.

          "Lender" means Fleet Capital Corporation, a Rhode Island corporation,
           ------
and its successors and permitted assigns.

          "Lien" means any mortgage, pledge, lien, charge, encumbrance, lease,
           ----
security interest, claim, or other similar interest of any nature whatsoever.

          "Loan" means the aggregate unpaid principal balance at any time of the
           ----
amounts advanced by the Lender to the Borrower pursuant to the Loan Agreement,
whether as Loan A or Loan B.

          "Loan A" has the meaning specified in Section 2.01(a)(i) of the Loan
           ------
Agreement.

          "Loan A Engine" means the Engine to be financed by the proceeds of
           -------------
Loan A.

          "Loan Agreement" means the Loan Agreement, dated as of December 30,
           --------------
1999, between the Borrower and the Lender.

          "Loan B" has the meaning specified in Section 2.01(a)(ii) of the Loan
           ------
Agreement.

          "Loan B Engine" means the Engine to be financed by the proceeds of
           -------------
Loan B.

          "Make-Whole Premium" means with respect to the prepayment of any Note
           ------------------
(x) except in the case of any prepayment pursuant to Section 2.04(a) of the Loan
Agreement, until the
<PAGE>

first anniversary of the date thereof, an amount equal to 3% of the amount of
the principal being prepaid and (y) otherwise, the then current rate for United
States treasury securities (United States Treasury Bills on a discounted basis
shall be converted to a bond equivalent) with a maturity date closest to the
applicable Average Life Date (the "Treasury Rate"), plus 295 basis points, shall
be subtracted from the sum of: (1) the United States Treasury securities rate
which was used by the Lender in calculating the Applicable Rate at Note
commencement, plus (2) 295 basis points. If the result is zero or a negative
number, the Make-Whole Premium shall be zero. If the result is a positive
number, then the remaining payments due under such Note at the time of
prepayment shall be discounted to present value over the remaining term of such
Note, utilizing the then current Treasury Rate plus 295 basis points. The
remaining principal balance under such Note shall be subtracted from the result
of the present value calculation. The resulting amount of such subtraction
calculation shall be the Make-Whole Premium due Lender from Borrower. Lender and
Borrower agree that any Make-Whole Premium required to be paid in connection
with a Note does not constitute a penalty, but rather a reasonable calculation
of the investment loss that could be sustained by Lender resulting from a
prepayment of such Note. For purposes hereof, the Treasury Rate shall be the
"Bid Yield" calculated by reference to the "Treasury Bonds, Notes and Bills"
figures published in The Wall Street Journal on or next preceding the
                     -----------------------
termination date. In the event that The Wall Street Journal is not published or
                                    -----------------------
does not publish "Treasury Bonds, Notes and Bills" figures for four consecutive
business days, a comparable reference shall be selected by Lender in its
reasonable discretion.)

          "Maturity Date" means the earlier of (i) with respect to each Loan,
           -------------
the date falling eighty-four (84) months after the relevant Funding Date of such
Loan or (ii) the date upon which all amounts due to Lender under the Loan
Agreement, the Notes and the other Operative Agreements shall have been paid or
shall be payable in full in accordance with the terms thereof.

          "Minimum Liability Amount" shall mean $300,000,000.
           ------------------------

          "Note" or "Notes" means each of the secured promissory notes issued by
           ----      -----
the Borrower to the Lender from time to time pursuant to the Loan Agreement.

          "Obligations" means all indebtedness, liabilities, fees, indemnities
           -----------
and obligations of Borrower and any other Person to Lender arising under or
relating to the Operative Agreements, including, but not limited to, repayment
of the principal of the Loan and payment of interest thereon.

          "Officer's Certificate" means as to any company a certificate signed
           ---------------------
by a Responsible Officer of such company.

          "Operative Agreements" means the Loan Agreement, the Notes, the
           --------------------
Security Agreement and the Security Agreement Supplements.
<PAGE>

          "Parts" means any and all appliances, parts, instruments, components,
           -----
appurtenances, accessories, furnishings, seats, and other equipment of whatever
nature (other than complete Engines and temporary replacement parts as provided
in Section 4.03(a) of the Security Agreement) which may from time to time be
incorporated or installed in or attached to any Engine, exclusive of any items
leased by the Borrower from third parties and not required in the operation of
any Engine.

          "Past Due Rate" means a rate equal to the rate per annum announced
           -------------
from time to time by Citibank, N.A. as its prime rate plus three percent (3%)
per annum.

          "Payment Date" means, with respect to each Loan, each date listed
           ------------
under the heading "Payment Date" in Schedule I to the relevant Note.

          "Permitted Air Carrier" means (a) any Section 1110 Person and (b) any
           ---------------------
foreign air carrier that is principally based in any foreign country listed on
Exhibit B to the Security Agreement, except those that do not maintain normal
diplomatic relations with the United States.

          "Permitted Investments" means (a) direct obligations of the United
           ---------------------
States of America or any agency or instrumentality thereof, (b) obligations
fully guaranteed by the United States of America or any agency or
instrumentality thereof, (c) any mutual fund the portfolio of which is limited
to obligations of the type described in clauses (a) and (b), (d) certificates of
deposit issued by, or bankers' acceptances of, or time deposits or a deposit
account with, any bank, trust company, or national banking association
incorporated or doing business under the laws of the United States of America or
one of the states thereof, having a combined capital and surplus of at least
$100,000,000 and having a rating of "A" or better from the Keefe Bank Watch
Service.  Unless otherwise specified in writing by the Lender, all such
Permitted Investments shall mature not later than 30 days from the date of
purchase.

          "Permitted Lease" means any lease agreement between the Borrower and a
           ---------------
Permitted Lessee as permitted by Section 4.01(b) of the Security Agreement.

          "Permitted Lessee" means (a) any Permitted Air Carrier, (b) any
           ----------------
airframe or engine manufacturer, or Affiliate of such a manufacturer, who is
domiciled in the United States of America or a country listed on Exhibit B to
the Security Agreement or (c) the United States of America or any
instrumentality or agency thereof.

          "Permitted Lien" has the meaning given to such term in Section 4.06 of
           --------------
the Security Agreement.

          "Person" means any individual, sole proprietorship, partnership, joint
           ------
venture, joint stock company, trust, unincorporated organization, association,
corporation, institution, limited liability company or government (federal,
state, local, foreign or any agency, instrumentality, division or body thereof)
or other entity of whatever nature.
<PAGE>

          "Remaining Weighted Average Life" means on a given date with respect
           -------------------------------
to any Note the number of days equal to the quotient obtained by dividing (i)
the sum of each of the products obtained by multiplying (a) the amount of each
then remaining scheduled payment of principal of such Note by (b) the number of
days from and including such prepayment date to but excluding the dates on which
each such payment of principal is scheduled to be made; by (ii) the then
outstanding principal amount of such Note.

          "Replacement Engine" means a General Electric CF34-3B1 Series 200
           ------------------
engine (or engine of the same manufacturer of a comparable or an improved model)
which replaces an Engine pursuant to Section 4.03(e) of the Security Agreement
and which shall have become subject to the Lien of the Security Agreement
pursuant to Section 4.03(e) thereof.

          "Responsible Officer" means, with respect to any party, any Vice
           -------------------
President or other corporate officer of a party who, in the normal performance
of his or her operational responsibilities, with respect to the subject matter
of any covenant, agreement or obligation of such party pursuant to any Operative
Agreement, would have responsibility for and knowledge of such matter and the
requirements of any Operative Agreement with respect thereto.

          "Section 1110" means 11 U.S.C. (S) 1110 or any successor or analogous
           -------------
section of the federal bankruptcy law in effect from time to time.

          "Section 1110 Person" means a Citizen of the United States who is an
           -------------------
air carrier holding a valid air carrier operating certificate issued pursuant to
49 U.S.C. ch. 447 for aircraft capable of carrying 10 or more individuals.

          "Security Agreement" means the Engine Security Agreement, dated as of
           ------------------
December 30, 1999, between the Borrower and the Lender.

          "Security Agreement Supplement" means any supplement to the Security
           -----------------------------
Agreement, substantially in the form of Exhibit A to the Security Agreement,
entered into between the Borrower and the Lender for the purpose of identifying
the Engines (or a Replacement Engine) by manufacturer's serial numbers and
subjecting the Engines (or a Replacement Engine) to the Lien of the Security
Agreement, including any amendment thereto entered into subsequent to the first
Funding Date.

          "Specified Default" means (a) an event or condition described in
           -----------------
Section 8.01(a), (f), (g) or (h) of the Loan Agreement that, after the giving of
notice or lapse of time, or both, would become an Event of Default, or (b) any
Event of Default.

          "Tax" or "Taxes" means all license, recording, documentary,
           ---      -----
registration and other fees and all taxes (including, without limitation,
income, gross receipts, sales, rental, use, value added, property (tangible and
intangible), ad valorem, excise and stamp taxes), fees, levies,
             -- -------
<PAGE>

imposts, recording duties, duties, charges, assessments or withholdings of any
nature whatsoever, together with any assessments, penalties, fines, additions to
tax or interest thereon.

          "Transaction Costs" means those costs and expenses set forth in
           -----------------
Section 10.01(a) of the Loan Agreement.

          "Transportation Code" means Title 49 of the United States Code,
           -------------------
subtitle VII, as amended and in effect on the date of the Loan Agreement or as
subsequently amended, or any successor or substituted legislation at the time in
effect and applicable, and the regulations promulgated pursuant thereto.

          "Uniform Commercial Code" means the Uniform Commercial Code as in
           -----------------------
effect from time to time in any relevant jurisdiction.

          "United States", "U.S." or "US" means the United States of America.
           -------------    ----      --<PAGE>

                                                                  CONFORMED COPY
                                                                  --------------

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

                           ENGINE SECURITY AGREEMENT

                         Dated as of December 30, 1999

                                    Between

                         MIDWAY AIRLINES CORPORATION,
                                  as Borrower

                                      and

                          FLEET CAPITAL CORPORATION,
                                   as Lender

                                  relating to

           TWO (2) GENERAL ELECTRIC MODEL CF34-3B1 AIRCRAFT ENGINES

--------------------------------------------------------------------------------
<PAGE>

                               TABLE OF CONTENTS
                               -----------------

<TABLE>
<CAPTION>
                                                                            Page
                                                                            ----
<S>                                                                         <C>
ARTICLE 1. INTERPRETATION..................................................    1
     Section 1.01 Definitions..............................................    1
     Section 1.02 References...............................................    1
     Section 1.03 Headings.................................................    1

ARTICLE 2. SECURITY INTEREST...............................................    1
     Section 2.01 Security Interest........................................    1

ARTICLE 3. INVESTMENT OF SECURITY FUNDS....................................    3
     Section 3.01 Investment of Security Funds.............................    3

ARTICLE 4. COVENANTS.......................................................    3
     Section 4.01 Possession; Operation and Use; Maintenance; Title........    3
          (a)     General..................................................    3
          (b)     Possession...............................................    3
          (c)     Operation and Use........................................    6
          (d)     Maintenance..............................................    7
     Section 4.02 Inspection...............................................    8
     Section 4.03 Replacement and Pooling of Parts; Alterations,
                  Modification and Additions; Event of Loss................    8
          (a)     Replacement of Parts.....................................    8
          (b)     Title to Parts...........................................    9
          (c)     Pooling of Parts Leasing.................................    9
          (d)     Alterations, Modifications and Additions.................    9
          (e)     Event of Loss with Respect to an Engine..................   10
     Section 4.04 Requisition for Use......................................   12
     Section 4.05 Insurance................................................   13
          (a)     Public Liability and Property Damage Insurance...........   13
          (b)     Insurance Against Loss or Damage to the Engines..........   14
          (c)     Additional Insureds; Loss Payment........................   14
          (d)     Deductibles and Self-Insurance...........................   14
          (e)     Application of Insurance Proceeds........................   15
          (f)     Insurance for Own Account................................   15
          (g)     Reports, etc.............................................   16
          (h)     Right to Pay Premiums....................................   16
          (i)     Certain Payments Held as Security........................   16
     Section 4.06 Liens....................................................   17
     Section 4.07 Recordation and Further Assurances.......................   17
          (a)     Recordation of this Agreement............................   17
          (b)     Further Assurances.......................................   17
          (c)     Engine Warranty..........................................   18
</TABLE>
<PAGE>

<TABLE>
<CAPTION>
<S>                                                                          <C>
ARTICLE 5. EVENTS OF DEFAULT; REMEDIES.....................................   18
     Section 5.01 Events of Default........................................   18
     Section 5.02 Remedies.................................................   18
     Section 5.03 Application of Proceeds..................................   20
     Section 5.04 Lender May Purchase......................................   20

ARTICLE 6. MISCELLANEOUS...................................................   21
     Section 6.01 Notices..................................................   21
     Section 6.02 Waiver...................................................   21
     Section 6.03 Amendments...............................................   21
     Section 6.04 Successors and Assigns...................................   21
     Section 6.05 Survival of Representations, Warranties and Covenants....   21
     Section 6.06 Severability.............................................   21
     Section 6.07 Counterparts.............................................   21
     Section 6.08 Setoff...................................................   22
     Section 6.09 GOVERNING LAW............................................   22
</TABLE>

Schedule I     Description of Engines
Appendix A     Definitions
Exhibit A      Security Agreement Supplement
Exhibit B      List of Countries                                          .
<PAGE>

                           ENGINE SECURITY AGREEMENT
                           -------------------------

          This ENGINE SECURITY AGREEMENT, dated as of December 30, 1999  (this
"Agreement"), is between MIDWAY AIRLINES CORPORATION, a Delaware corporation
(herein, together with its successors and permitted assigns, the "Borrower") and
FLEET CAPITAL CORPORATION, a Rhode Island corporation (together with its
successors and permitted assigns, the "Lender").

          WHEREAS, the Lender has agreed to make the Loan to the Borrower under
the Loan Agreement dated as of December 30, 1999 (the "Loan Agreement") between
the Borrower and the Lender, upon and subject to the terms and conditions
therein contained;

          WHEREAS, it is a condition precedent to the Lender's obligations to
the Borrower under the Loan Agreement to make the Loan that the Borrower
executes and delivers this Agreement.

          NOW, THEREFORE, the parties hereto hereby agree as follows:

                                  ARTICLE 1.
                                INTERPRETATION

          Section 1.01   Definitions.  Capitalized terms used herein and defined
                         -----------
in Appendix A shall, except as such definitions may be specifically modified in
the body of this Agreement for the purposes of a particular section, paragraph
or clause, have the meanings given such terms in Appendix A.   Unless the
context otherwise requires, (i) all definitions of documents shall refer to such
documents as they may now or later be amended or supplemented, and (ii) all
definitions of parties shall be deemed to include the successors and permitted
assigns of such parties.

          Section 1.02   References.  References in this Agreement to sections,
                         ----------
paragraphs, clauses, appendices, schedules and exhibits are to sections,
paragraphs, clauses, appendices, schedules and exhibits in and to this Agreement
unless otherwise specified.

          Section 1.03   Headings.  The captions and headings of the various
                         --------
sections, paragraphs and clauses of this Agreement and the table of contents are
for convenience of reference only and shall not modify, define, expand or limit
any of the terms or provisions hereof.

                                  ARTICLE 2.
                               SECURITY INTEREST

          Section 2.01   Security Interest.  As security for the payment and
                         -----------------
performance of the Obligations (whether as scheduled, upon acceleration or
otherwise, including, without limitation,

                                       1
<PAGE>

all indebtedness, liabilities, fees, indemnities and obligations of Borrower to
Lender arising under or relating to the Operative Agreements, including, but not
limited to, repayment of the principal of the Loan and payment of interest
thereon, and of all costs of collection and enforcement of the Obligations, the
Borrower hereby mortgages, pledges and assigns to the Lender, and hereby creates
in and grants to the Lender a continuing security interest in, but none of its
obligations or liabilities respecting, all of the Borrower's right, title and
interest in and to the following, whether now owned or hereafter acquired
(collectively, the "Collateral"):

          (a) the aircraft engines listed on Schedule I hereto or as otherwise
identified in any Security Agreement Supplement hereto (each hereinafter
referred to, so long as the same shall not have been released from the Lien of
this Security Agreement pursuant to the terms hereof, as an "Engine", and
                                                             ------
collectively, the "Engines"), which terms shall also include any Replacement
                   -------
Engine which becomes subject to the Lien of this Security Agreement pursuant to
the terms hereof from and after the time such Replacement Engine becomes subject
to such Lien, unless and until thereafter released from such Lien pursuant to
the terms hereof; together, with all appliances, equipment and accessories
thereto, by whomsoever manufactured, in which the Borrower now has or in the
future acquires rights, and installed in or appurtenant to said Engines.

          (b) subject to Section 4.07(c), the Engine Warranty to the extent the
same relates to the continuing rights of the Borrower in respect of any
warranty, express or implied, as to title, materials, workmanship, design or
patent infringement with respect to the Engines and to any service life policy,
engine performance guarantee and indemnity provisions with respect to the
Engines together with all rights, powers, privileges, options and other benefits
of the Borrower thereunder with respect to the Engines; reserving to the
                                                        ----------------
Borrower, however, (i) all of the Borrower's rights and interests in and to the
-----------------
Engine Warranty as and to the extent that the same relate to engines other than
the Engines, (ii) so long as the Engine Manufacturer shall not have received
notice that the Lender has declared the Loan Agreement to be in default and has
commenced the exercise of remedies thereunder, the right to demand, accept and
retain all rights in and to all property, data and services which the Engine
Manufacturer is obligated to provide or does provide pursuant to the Engine
Warranty, as the case may be, and the right to take all other actions and enjoy
all other benefits of the "Airline" or the "Operator" thereunder and (iii) all
of the Borrower's rights under any and all letter agreements, "concessions" and
or "special guarantees" (as defined in the General Terms Agreement), including
without limitation, those found in Exhibit D of the General Terms Agreement;

          (c) all substitutions, replacements and renewals of all property
covered by the Lien hereof and all property which shall hereafter become
physically attached or incorporated in all property covered by the Lien hereof,
in each case to the extent the Borrower now has or in the future acquires rights
in the same; and

          (d) insurance proceeds to the extend the Borrower is a loss payee with
respect to such proceeds pursuant to Section 4.05(c) hereof.

                                       2
<PAGE>

          TO HAVE AND TO HOLD all and singular of the aforesaid property unto
the Lender, and its successors and assigns, as security as aforesaid.

          IT IS HEREBY COVENANTED AND DECLARED by and between the parties hereto
and their respective successors and assigns that the terms upon which the
Collateral shall be held, used and operated are as set forth in the following
provisions of this Agreement.

                                  ARTICLE 3.
                         INVESTMENT OF SECURITY FUNDS

          Section 3.01   Investment of Security Funds. Any insurance proceeds
                         ----------------------------
and other payments in respect of an Event of Loss paid to or retained by the
Lender which are required to be paid to the Borrower or applied for the benefit
of the Borrower, but which the Lender is entitled to hold under the terms hereof
pending the occurrence of some event or the performance of some act (including,
without limitation, the remedying of an Event of Default), shall, until paid to
the Borrower or applied as provided herein, be held by the Lender in a
segregated account and invested by the Lender from time to time at the
direction, risk and expense of the Borrower in Permitted Investments. There
shall be promptly remitted to the Borrower any gain (including interest
received) realized as the result of any such investment (net of any fees,
commissions and other expenses, if any, incurred in connection with such
investment) unless a Specified Default shall have occurred and be continuing, in
which case such gains shall be held or applied in accordance with the preceding
sentence. The Borrower will promptly pay to the Lender, on demand, the amount of
any loss realized as the result of any such investment (together with any fees,
commissions and other expenses, if any, incurred in connection with such
investment). Any other monies paid to or retained by the Lender which are
required to be paid to the Borrower or applied for the benefit of the Borrower,
but which the Lender is entitled to hold under the terms hereof pending the
occurrence of some event or the performance of some act (including, without
limitation, the remedying of an Event of Default), may, until paid to the
Borrower or applied as provided herein, be held by the Lender in the manner of
its discretion and the Lender shall have no obligation to hold such monies in a
separate account and may commingle such monies with its general or other funds.

                                  ARTICLE 4.
                                  COVENANTS

           Section 4.01  Possession; Operation and Use; Maintenance; Title.
                         -------------------------------------------------

                    (a)  General. Except as otherwise expressly provided herein,
                         -------
the Borrower (and any Permitted Lessee) shall be entitled to operate, use,
locate, employ or otherwise utilize or not utilize the Engines in any lawful
manner or place in accordance with the Borrower's (or such Permitted Lessee's)
business judgment.

                                       3
<PAGE>

                    (b)   Possession. The Borrower shall not lease, or otherwise
                          ----------
in any manner deliver, relinquish or transfer possession of any Engine to any
Person or install any Engine, or permit any Engine to be installed, on any
airframe without the prior consent of the Lender, provided, however, that so
                                                  --------  -------
long as (A) only in the case of clause (x) below, no Event of Default shall have
occurred and be continuing, and (B) all approvals, consents or authorizations
required from the Aeronautical Authority in connection with any such lease or
such delivery, transfer or relinquishment of possession have been obtained and
remain in full force and effect, the Borrower (or, except in the case of clause
(x) below, any Permitted Lessee) may, without the prior consent of the Lender:

                    (i)   enter into a charter or wet lease or other similar
arrangement under which the Borrower (or such Permitted Lessee) has operational
control of an airframe and the Engine installed thereon in the course of the
Borrower's business (which shall not be considered a transfer of possession
hereunder), provided that the Borrower's obligations hereunder and under the
other Operative Agreements shall continue in full force and effect
notwithstanding any such charter or wet lease or other similar arrangement;

                    (ii)  deliver possession of an Engine to the manufacturer
thereof or to any organization for testing, service, repair, maintenance,
overhaul work or other similar purposes or for alterations or modifications or
additions required or permitted by the terms hereof;

                    (iii) subject an Engine to interchange or pooling agreements
or arrangements which are applicable to other similar property owned by or
leased to the Borrower (or such Permitted Lessee) and are entered into by the
Borrower (or such Permitted Lessee) in the course of its airline business with
any air carrier, provided, that (A) no such agreement or arrangement shall under
                 --------
any circumstances result in, contemplate or require the transfer of title to any
Engine and (B) if the Borrower's title to any Engine shall nevertheless be
divested under any such agreement or arrangement, such divestiture shall be
deemed to be an Event of Loss with respect to such Engine and the Borrower shall
comply with Section 4.03(e) hereof in respect thereof;

                    (iv)  install an Engine on an airframe owned by the Borrower
(or such Permitted Lessee) free and clear of all Liens except (A) Permitted
Liens, (B) those which apply only to the engines (other than the Engines),
appliances, parts, instruments, appurtenances, accessories, furnishings and
other equipment (other than Parts) installed on such airframe, and (C) those
created by the rights of other air carriers under interchange or pooling
agreements or other arrangements customary in the airline industry which do not
contemplate, permit or require the transfer of title to such airframe or engines
installed thereon;

                    (v)   install an Engine on an airframe leased to the
Borrower (or such Permitted Lessee) or purchased by the Borrower (or such
Permitted Lessee) subject to a conditional sale or other security agreement, but
only if such airframe is free and clear of all Liens, except (i) the rights of
the parties to such lease, or any such secured financing arrangement, covering
such airframe and (ii) Liens of the type permitted by Section 4.01(b)(iv);

                                       4
<PAGE>

                    (vi)   install an Engine on an airframe owned by the
Borrower (or such Permitted Lessee), leased by the Borrower (or such Permitted
Lessee) or purchased by the Borrower (or such Permitted Lessee) subject to a
conditional sale or other security agreement under circumstances where neither
clause (iv) nor clause (v) above is applicable, provided that any such
                                                --------
installation (so long as the same shall be continuing) shall be deemed an Event
of Loss with respect t o such Engine and the Borrower shall comply with Section
4.03(e) hereof;

                    (vii)  transfer possession of an Engine while installed on
an aircraft which is subject to the CRAF Program (as defined below) to the
United States of America or any instrumentality thereof pursuant to the Civil
Reserve Air Fleet Program (as established and administered pursuant to Executive
Order 11490, as amended, as superseded by United States Executive Order No.
12656) or any similar or substitute program ("CRAF Program"), in which event
Borrower (or such Permitted Lessee) shall promptly notify Lender in writing of
any such transfer of possession and, in the case of any transfer pursuant to the
CRAF Program, in such notification shall identify by name, address and telephone
numbers the Contracting Office Representatives of the Military Airlift Command
of the United States Air Force to whom notices must be given and to whom
requests or claims must be made to the extent applicable under the CRAF Program;

                    (viii) transfer possession of an Engine to the United States
of America, or to a foreign government, when required by Applicable Law (it
being understood that nothing in this clause (viii) shall relieve the Borrower
from its obligations under Section 4.03(e) if such transfer becomes an Event of
Loss), in which event Borrower shall promptly notify Lender in writing of any
such transfer of possession;

                    (ix)   transfer possession of an Engine to the United States
of America or any instrumentality or agency thereof pursuant to a lease,
contract or other instrument;

                    (x)    subject to the provisions of this Section 4.01(b),
enter into a lease with respect to any Engine to any Permitted Lessee if (A)
Borrower shall provide written notice to Lender at least 10 days prior to
entering into any such lease, (B) in any such case, the lessee under such lease
is not subject to a proceeding or final order under applicable bankruptcy,
insolvency or reorganization laws on the date such lease is entered into, (C) in
the event that the lessee under such lease is a foreign air carrier or Person
based in a country other than the United States, the United States maintains
normal diplomatic relations with the country in which such proposed lessee is
principally based at the time such lease is entered into and (D) in the event
that the lessee under such lease is a foreign air carrier or Person based in a
country other than the United States, prior to the effectiveness of such lease
Lender shall have received an opinion of counsel to Borrower (reasonably
acceptable to Lender) to the effect that (I) the terms of the proposed lease
will be legal, valid, binding and (subject to customary exceptions) enforceable
against the proposed lessee in the country in which the proposed lessee is
principally based, (II) there exist no possessory rights in favor of the lessee
under such lease under the laws of such lessee's country of domicile that would,
upon bankruptcy or insolvency of or other default by the Borrower and assuming
that at such time such

                                       5
<PAGE>

lessee is not insolvent or bankrupt, prevent or unreasonably delay the return or
repossession of the Engines in accordance with and when permitted by the terms
of Section 5.02(a) upon the exercise by Lender of its remedies under Section
5.02(a), (III) the laws of such lessee's country of domicile would give
recognition to Borrower's title to such Engine, (IV) all filings, if any,
required to be made in such jurisdiction in connection with the execution of
such lease in order to protect the interest of Lender in such Engine have been
made, (V) it is not necessary for the Lender to register or qualify to do
business in such jurisdiction, if not already so registered or qualified, as a
result of the proposed lease, and (VI) there is no tort liability for owners not
in possession of aircraft in such country more onerous than under the laws of
the United States or any state thereof (it being agreed that in the event such
opinion cannot be given in a form reasonably satisfactory to the Lender, such
opinion will be waived if insurance reasonably satisfactory to the Lender is
provided to cover the risk of such tort liability);

provided that (1) the rights of any transferee who receives possession by reason
--------
of a transfer permitted by this Section 4.01(b) (other than by a transfer of an
Engine which is deemed an Event of Loss) shall be subject and subordinate to all
the terms hereof; (2) no pooling agreement, sublease or other relinquishment of
possession of any Engine shall discharge or diminish any of Borrower's
obligations to Lender hereunder or under any other Operative Agreements or
constitute a waiver of Lender's rights or remedies thereunder, and the Borrower
shall remain primarily liable hereunder for the performance of all the terms and
conditions of this Agreement and all of the terms and conditions of this
Agreement and the other applicable Operative Agreements shall remain in effect;
(3) the Borrower shall provide evidence reasonably satisfactory to Lender that
the insurance required by Section 4.05 remains in effect; (4) all necessary
documents shall have been duly filed or recorded in applicable public offices as
may be required to preserve the first priority security interest of Lender in
the Engines; and (5) Borrower shall reimburse Lender, on an After Tax Basis, for
all of their reasonable out-of-pocket expenses (including fees and disbursements
of counsel) in connection with any such lease or transfer.

          In the case of any lease permitted under this Section 4.01(b), (i) the
Borrower will include in such lease appropriate provisions which (a) make such
lease expressly subject and subordinate to all of the terms of this Agreement,
including the rights of the Lender to avoid such lease in the exercise of its
rights to repossession of the Engines hereunder and thereunder; and (b)
expressly prohibit any further subleasing of the Engines.  Except as otherwise
provided herein and without in any way relieving the Borrower from its primary
obligation for the performance of its obligations under this Agreement, the
Borrower may in its sole discretion permit a Permitted Lessee to exercise any or
all rights which the Borrower would be entitled to exercise under this
Agreement, and may cause a Permitted Lessee to perform any or all of the
Borrower's obligations under this Agreement, and the Lender agrees that full
performance by a Permitted Lessee of the obligations of the Borrower hereunder
shall constitute performance by the Borrower.

          (c) Operation and Use.  The Borrower shall not operate, use or locate
              -----------------
any Engine, or suffer any Engine to be operated, used or located (i) in any area
excluded from coverage by any insurance required by the terms of Section 4.05
hereof, except in the case of a requisition by the

                                       6
<PAGE>

United States of America where the Borrower obtains (and provides evidence of)
indemnity from the Government for the benefit of the Additional Insureds against
substantially the same risks and for at least the amounts of the insurance
required by Section 4.05 hereof covering such area, or (ii) outside the United
States or Canada in any recognized or, in the Borrower's reasonable judgment,
threatened area of hostilities unless covered by war risk insurance, or in
either case (x) unless such Engine is operated or used under contract with the
Government under which contract the Government assumes liability for
substantially the same risks in at least the same amounts as would be covered by
such insurance, or (y) except to the extent attributable primarily to causes
beyond the reasonable control of the Borrower or any Permitted Lessee or
primarily to circumstances involving an isolated occurrence or series of events
not in the ordinary course of the regular operations of the Borrower or any
Permitted Lessee, and the Borrower or Permitted Lessee is diligently trying to
rectify the situation. The Borrower shall not permit any Engine to be used or
operated in violation of any Applicable Law or in violation of any certificate,
license or registration relating to such Engines issued by any competent
governmental authority, unless (i) the validity thereof is being contested in
good faith and by appropriate proceedings which do not involve a non-de minimis
danger of the sale, forfeiture or loss of such Engine or the first priority Lien
of this Agreement, any risk of criminal liability or any material risk of civil
liability against Lender, (ii) it is not possible for the Borrower (or a
Permitted Lessee) to comply with the laws of a jurisdiction other than the
United States (or other than any jurisdiction in which the aircraft (on which
such Engine is installed) is then registered) because of a conflict with the
applicable laws of the United States (or such jurisdiction in which the aircraft
(on which such Engine is installed) is then registered), or (iii) it is for
minor, unanticipated, or non-recurring violations that the Borrower is
diligently trying to rectify which do not render such Engine liable to any risk
of condemnation, destruction, seizure or confiscation by any authority.

          (d) Maintenance.  The Borrower, at its own cost and expense, shall
              -----------
service, repair, maintain, overhaul and test each Engine or cause the same to be
done in accordance with (1)(i) a maintenance program approved by the
Aeronautical Authority and (ii) maintenance standards required by, or no less
stringent than those required by, the FAA or the central civil aviation
authority of Canada, France, Germany, Japan, The Netherlands or the United
Kingdom, and shall keep or cause to be kept each Engine in such operating
condition as may be necessary to enable the applicable certificate, license and
registration relating to such Engine to be maintained in good standing at all
times under the applicable rules and regulations of the Aeronautical Authority,
except when the applicable certificate, license or registration relating to
engines of the same type as such Engines has been withdrawn by the Aeronautical
Authority, provided, however, that in the event of such withdrawal, subject to
           --------  -------
Section 4.05 hereof, so long as the Borrower (or a Permitted Lessee) is taking
or causing to be taken all necessary action to promptly correct the condition
which caused such withdrawal, no Event of Default shall arise from such
withdrawal and (2) except during periods when a Permitted Lease is in effect,
the same standards Borrower uses with respect to similar engines of similar
powers in its fleet and operated (whether owned or leased) by Borrower in
similar circumstances and during any period in which a Permitted Lease is in
effect, the same standards the Permitted Lessee uses with respect to similar
engines of similar powers in its fleet and operated (whether owned or leased) by
the Permitted Lessee in similar circumstances.  Nothing herein shall

                                       7
<PAGE>

be deemed to prevent the Borrower (or a Permitted Lessee) from taking such
Engine out of service for maintenance or modifications permitted hereunder or
storage in accordance with applicable Aeronautical Authority requirements and
sound practice for such storage. The Borrower shall maintain or cause to be
maintained all records, logs and other documents required by the Aeronautical
Authority to be maintained in respect of such Engine in English. Borrower
further agrees that the Engines will be maintained, used, serviced, repaired,
overhauled or inspected in compliance with Applicable Law with respect to the
maintenance of the Engines and compliance with each applicable certificate,
license and registration relating to any Engine issued by the Aeronautical
Authority.

           Section 4.02  Inspection.
                         ----------

           (a) At all reasonable times, but upon at least 5 Business Days' prior
notice to the Borrower (unless an Event of Default shall have occurred and be
continuing, in which event no prior notice of any kind is required) and at a
time and place reasonably acceptable to the Borrower, the Lender or its
authorized representatives (which may include the Engine Manufacturer) may at
its own expense and risk conduct a visual walk-around inspection of any Engine
and may inspect the books and records of the Borrower relating to the operation
and maintenance thereof and the Borrower shall provide copies of such books and
records to the Lender or its authorized representatives at its reasonable
request; provided that (a) any such inspection shall be subject to the safety,
         --------
security and workplace rules applicable at the location where such inspection is
conducted and any applicable governmental rules or regulations, (b) in the case
of an inspection during a maintenance visit, such inspection shall not interfere
with the normal conduct of such maintenance visit or extend the time required
for such maintenance visit or, in any event, at any time interfere with the use
or operation of any Engine or with the normal conduct of the Borrower's or a
Permitted Lessee's business, and (c) the Borrower shall not be required to
undertake or incur any additional liabilities in connection with any such
inspection.  All information obtained in connection with any such inspection
shall be held confidential by the Lender and shall not be furnished or disclosed
by it to anyone other than its bank examiners, auditors, accountants, agents and
legal counsel and any Person with whom the Lender is in good faith conducting
negotiations relating to the possible transfer and sale of the Loan, if such
Person shall have entered into an agreement similar to that contained in this
Section 4.02 whereby such Person agrees to hold such information confidential,
and except as may be required by an order of any court or administrative agency
or by any statute, rule, regulation or order of any governmental authority or as
may be necessary to enforce the terms of this Agreement.  The Lender shall have
no duty to make any such inspection and shall not incur any liability or
obligation by reason of not making any such inspection.

           (b) If requested by Lender, Borrower shall provide, or shall cause
any Permitted Lessee to provide, with respect to any Engine, the date (if then
scheduled) upon which the next scheduled off the airframe maintenance, and shall
advise Lender of the name and location (if then known) of the relevant
maintenance performer.

                                       8
<PAGE>

           Section 4.03  Replacement and Pooling of Parts; Alterations,
                         ----------------------------------------------
Modification and Additions; Event of Loss.
-----------------------------------------

           (a) Replacement of Parts.  Except as otherwise provided in the
               --------------------
proviso to the third sentence of Section 4.03(d) or if an Engine to which a Part
relates has suffered an Event of Loss, the Borrower, at its own cost and
expense, will promptly replace all Parts that may from time to time become worn
out, lost, stolen, destroyed, seized, confiscated, damaged beyond repair or
permanently rendered unfit for use for any reason whatsoever. In addition, in
the ordinary course of maintenance, service, repair, overhaul or testing, the
Borrower (or a Permitted Lessee), at its own cost and expense, may remove any
Parts, whether or not worn out, lost, stolen, destroyed, seized, confiscated,
damaged beyond repair or permanently rendered unfit for use, provided that the
                                                             --------
Borrower (or such Permitted Lessee), at its own cost and expense, shall, except
as otherwise provided in the proviso to the third sentence of Section 4.03(d),
replace such Parts as promptly as practicable with replacement Parts or
temporary replacement parts as provided in Section 4.03(c) hereof. All
replacement Parts shall be free and clear of all Liens except for pooling
arrangements to the extent permitted by Section 4.03(c) and Permitted Liens and
shall be in as good operating condition as, and shall have a value and utility
at least equal to, the Parts replaced assuming such replaced Parts were in the
condition and repair required to be maintained by the terms hereof.

           (b) Title to Parts.  Except as otherwise provided in the proviso to
               --------------
the third sentence of Section 4.03(d), all Parts at any time removed from any
Engine shall remain subject to the Lien of this Agreement, no matter where
located, until such time as such Parts shall be replaced by Parts that have been
incorporated or installed in or attached to such Engine and that meet the
requirements for replacement Parts specified in Section 4.03(a).  Immediately
upon any replacement Part becoming incorporated or installed in or attached to
an Engine as provided in Section 4.03(a), without further act, (i) title to the
replaced Part shall thereupon be free and clear of all rights of the Lender and
shall no longer be deemed a Part hereunder; (ii) title to such replacement Part
shall thereupon become subject to the Lien of this Agreement and be deemed part
of such Engine for all purposes hereof to the same extent as the Parts
originally incorporated or installed in or attached to such Engine.

           (c) Pooling of Parts Leasing.  Any Part removed from any Engine as
               ------------------------
provided in Section 4.03(a) may be subjected by the Borrower (or a Permitted
Lessee) to a pooling or parts leasing agreement or arrangement of a type
customary in the airline industry entered into in the ordinary course of the
Borrower's (or such Permitted Lessee's) business, provided the part replacing
such removed Part shall be incorporated or installed in or attached to such
Engine in accordance with Sections 4.03(a) and 4.03(b) as promptly as
practicable after the removal of such removed Part.  In addition, any
replacement part when incorporated or installed in or attached to any Engine in
accordance with Section 4.03(a) may be owned by another airline or vendor as
customary in the airline industry, subject to a pooling or parts leasing
arrangement, provided that the Borrower (or a Permitted Lessee), at its expense
             --------
as promptly thereafter as reasonably practicable, either (i) causes title to
such temporary replacement part to become subject to the Lien of this Agreement,
free and clear of all Liens except Permitted Liens, at which time such temporary
replacement part shall

                                       9
<PAGE>

become a Part or (ii) replaces such temporary replacement part by incorporating
or installing in or attaching to such Engine a further replacement Part owned by
the Borrower (or such Permitted Lessee) free and clear of all Liens except
Permitted Liens and which meets the requirements of Section 4.03(a) and which
shall become subject to the Lien of this Agreement in accordance with Section
4.03(b).

          (d) Alterations, Modifications and Additions.  The Borrower, at its
              ----------------------------------------
own expense, shall make (or cause to be made) alterations and modifications in
and additions to any Engine as may be required to be made from time to time by
Applicable Law or in order to maintain the insurance required under Section 4.05
regardless of upon whom such requirements are, by their terms, nominally
imposed; provided, that the Borrower may, in good faith and with due diligence
         --------
and by appropriate procedure, contest the validity or application of any such
standard in any reasonable manner which does not adversely affect in a non de
minimis way the first priority Lien of this Agreement and does not involve any
non-de minimis risk of sale, forfeiture or loss of any Engine or the first
priority Lien of this Agreement, any in a non de minimis way risk of civil
penalty or any risk of criminal liability being imposed on Lender.  In addition,
the Borrower (or a Permitted Lessee), at its own expense, may from time to time
make or cause to be made such alterations and modifications in and additions to
any Engine as the Borrower (or such Permitted Lessee) may deem desirable in the
proper conduct of its business, provided further that no such alteration,
                                --------
modification or addition diminishes, the value, utility or condition of such
Engine below the value, utility or condition thereof immediately prior to such
alteration, modification or addition, assuming such Engine was then in the
condition required to be maintained by the terms of this Agreement.  Title to
all Parts incorporated or installed in or attached or added to any Engine as the
result of any alteration, modification or addition effected by the Borrower (or
a Permitted Lessee) shall, without further act, become subject to the Lien of
this Agreement; provided that the Borrower (or such Permitted Lessee) may, at
                --------
any time remove any such Part from an Engine if (i) such Part is in addition to,
and not in replacement of or in substitution for, any Part originally
incorporated or installed in or attached to such Engine at the time of delivery
thereof hereunder or any Part in replacement of, or in substitution for, any
such original Part, (ii) such Part is not required to be incorporated or
installed in or attached or added to such Engine pursuant to the terms of
Section 4.01(d) or the first sentence of this Section 4.03(d) and (iii) such
Part can be removed from such Engine without diminishing or impairing the value,
condition or utility which such Engine would have had at the time of removal had
such alteration, modification or addition not been effected by the Borrower (or
such Permitted Lessee) assuming such Engine was otherwise maintained in the
condition required by this Agreement.  Upon the removal by the Borrower (or such
Permitted Lessee) of any such Part as above provided and the installation of a
Replacement Part as provided herein (if applicable), title thereto shall,
without further act, be free and clear of all rights of the Lender and such Part
shall no longer be deemed a Part hereunder.  Borrower shall repair all damage to
an Engine resulting from any such installation and/or removal of additions so as
to restore such Engine to its condition prior to installation, ordinary wear and
tear excepted assuming such Engine was in the condition and repair then required
to be maintained by the terms hereof.

                                       10
<PAGE>

          (e)  Event of Loss with Respect to an Engine.  Upon the occurrence of
               ---------------------------------------
an Event of Loss with respect to an Engine, Borrower shall forthwith (and in any
event within five (5) Business Days after such occurrence) give the Lender
written notice of such Event of Loss and within thirty (30) days of such Event
of Loss, Borrower shall give Lender written notice and of its election to
perform one of the following options (it being agreed that if the Borrower shall
not have given the Lender such notice of such election, the Borrower shall be
deemed to have elected to perform the option identified in clause (i) below):

               (i)   on a date specified by the Borrower in such notice, which
date shall be a date not later than forty-five (45) days after the occurrence of
such Event of Loss, prepay in whole the Loan made in respect of such Engine
pursuant to Section 2.04(a) of the Loan Agreement and immediately upon such
prepayment and without further act, such Engine shall thereupon be released from
the Lien of this Agreement and no longer be deemed an Engine hereunder; provided
that if the Borrower shall elect to perform the option referred to in clause
(ii) below and shall fail for any reason to make the replacement in accordance
with such clause (ii) on or prior to the date of replacement specified therein,
the Borrower, shall, on the next succeeding Business Day following the date of
replacement specified therein, prepay in whole the Loan made in respect of such
Engine pursuant to Section 2.04(a) of the Loan Agreement; or

               (ii)  so long as no Specified Default has occurred and is
continuing at the time notice is given or at the time of replacement, on a date
specified by the Borrower in such notice, which date shall be a date not later
than forty-five (45) days after the occurrence of such Event of Loss, substitute
a Replacement Engine for such Engine and in such event, immediately upon the
effectiveness of such substitution on the date set forth in such notice and
without further act, (x) the Replacement Engine shall thereupon be deemed an
Engine hereunder for all purposes hereof and become subject to the Lien of this
Agreement, and (y) the replaced Engine shall thereupon be released from the Lien
of this Agreement and no longer be deemed an Engine hereunder; provided that,
upon the substitution of a Replacement Engine, the following conditions shall be
satisfied at the Borrower's sole cost and expense and the Lender agrees to
reasonably cooperate with the Borrower to the extent necessary to enable it to
timely satisfy such conditions:

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

                         (1) a Security Agreement Supplement covering the
     Replacement Engine, which shall have been duly filed for recordation with
     the FAA;

                         (2) a full warranty bill of sale (as to title) covering
     the Replacement Engine, executed by the owner thereof in favor of the
     Borrower;

                         (3) Uniform Commercial Code financing statements
     covering the interest created by this Agreement as are deemed necessary or
     desirable

                                       11
<PAGE>

     by counsel for the Lender to protect the first priority security interest
     of the Lender in the Replacement Engine;

                         (4) an opinion of qualified FAA counsel as to the due
     recordation of the Security Agreement Supplement and all other documents or
     instruments the recordation of which is necessary to perfect and protect
     the first priority security interest of the Lender in the Replacement
     Engine; and

                         (5) evidence of compliance with the insurance
     provisions of Section 4.05 with respect to such Replacement Engine;

                    (b)  the Borrower shall furnish (or cause to be furnished
to) the Lender with an opinion, reasonably satisfactory in form and substance to
the Lender, of the Borrower's counsel, which may be the Borrower's General
Counsel, to the effect that such bills of sale or other documents reasonably
requested by the Lender are sufficient to convey title to such Replacement
Engine to the Borrower; and

                    (c)  the Replacement Engine, in Lender's reasonable
judgment, shall be of at least equal value, remaining useful life and utility,
and in as good operating condition, as the Engine it replaces assuming such
Engine had been maintained in the condition required hereunder (but in any such
case, without regard to hours or cycles remaining to such Engine's next expected
removal)and the Borrower shall furnish an Officer's Certificate to the Lender to
such effect;

          Upon prepayment by the Borrower as set forth in clause (i) above, (x)
the Lender shall, at the expense of the Borrower, execute and deliver to the
Borrower such documents and instruments as the Borrower shall reasonably request
to evidence (on public record or otherwise) the release of the Lender's security
interest in and to the Engine subject to an Event of Loss; (y) the Lender shall,
at the request and expense of the Borrower, assign to the Borrower all claims it
may have against any other Person relating to an Event of Loss giving rise to
such prepayment (other than those in respect of insurance maintained by the
Lender pursuant to Section 4.05(f)) and (z) the Borrower shall be entitled to
receive all insurance proceeds (other than those reserved to others under
Section 4.05(f) hereof) and proceeds in respect of any Event of Loss giving rise
to such prepayment to the extent not previously applied to the reduction of the
Borrower's prepayment obligation under clause (i) above.

          Upon satisfaction of all conditions to the substitution of the
replaced Engine as set forth in clause (ii) above, (x) the Lender shall, at the
expense of the Borrower, execute and deliver to the Borrower such documents and
instruments as the Borrower shall reasonably request to evidence (on public
record or otherwise) the release of the Lender's security interest in and to the
replaced Engine; (y) the Lender shall, at the request and expense of the
Borrower, assign to the Borrower all claims it may have against any other Person
relating to an Event of Loss giving rise to such substitution (other than those
in respect of insurance maintained by the Lender pursuant to

                                       12
<PAGE>

Section 4.05(f)) and (z) the Borrower shall be entitled to receive all insurance
proceeds (other than those reserved to others under Section 4.05(f) hereof) and
proceeds in respect of any Event of Loss giving rise to such replacement to the
extent not previously applied to the purchase price of the Replacement Engine as
provided in Sections 4.05(e)(i) and 4.04.

          Section 4.04  Requisition for Use.  In the event of a requisition for
                        -------------------
use by any government of an Engine (including the Government pursuant to the
CRAF Program), the Borrower shall promptly notify the Lender of such requisition
and, if the same does not constitute an Event of Loss, all of the Borrower's
obligations under this Agreement shall continue to the same extent as if such
requisition had not occurred except to the extent that the performance or
observance of any obligation by the Borrower shall have been prevented or
delayed by such requisition, provided that the Borrower's obligations for the
                             --------
payment of money and under Section 4.05 (except, in the case of Section 4.05,
while an assumption of liability by the government of the United States of the
scope referred to in Section 4.01(c) is in effect) shall not be reduced, delayed
or affected by such requisition. Any payments received by the Lender or the
Borrower from such government with respect to the use of such Engine shall be
paid over to, or retained by, the Borrower.  In the event of an Event of Loss of
an Engine resulting from the requisition for use by a government of such Engine,
the Borrower will comply with the terms of Section 4.03(e).

          Section 4.05  Insurance.
                        ---------

          (a)  Public Liability and Property Damage Insurance.  Subject to the
               ----------------------------------------------
rights of the Borrower under Section 4.05(d), the Borrower shall, without
expense to the Lender, maintain or cause to be maintained in effect at all times
with insurers of nationally or internationally recognized responsibility public
liability insurance (including, without limitation, aircraft third party,
passenger legal liability, property damage, general third party legal liability
and product liability coverage but excluding manufacturer's product liability
coverage) with respect to the Engines in an amount not less than the greater of
(i) the amount which Borrower may carry from time to time on other similar
engines in its fleet and operated by Borrower (whether owned or leased) and (ii)
the Minimum Liability Amount; provided that an agreement of the Government for
                              --------
the benefit of the Additional Insureds to insure against or indemnify for
substantially the same risks to at least the same amount shall satisfy the
requirements of this Section 4.05(a), provided that on or prior to the date of
                                      --------
such agreement, the Borrower shall provide an Officer's Certificate of the
Borrower certifying that any such insurance or indemnity provides protection no
less favorable than insurance coverage that would comply with this Section 4.05.
Such insurance shall be of the type usually carried by the Borrower with respect
to similar engines, and covering risks of the kind customarily insured against
by the Borrower.

          During any period that an Engine is not used or in operation , the
Borrower may modify the insurance required by this Section 4.05(a) to modify the
amounts of public liability and property damage insurance, the scope of the
risks covered and the type of insurance, in all circumstances to conform to such
insurance customary in the United States airlines industry for regional air
carriers similarly situated with the Borrower in respect of similar engines
which are not

                                       13
<PAGE>

used or in operation, and stored or hangared, except that in all instances, the
amounts of coverage and scope of risk covered and the type of insurance shall be
at a minimum no less favorable than the insurance as from time to time
applicable to similar engines owned or leased by Borrower not used, not in
operation, and stored or hangared.

          (b)  Insurance Against Loss or Damage to the Engines.  Subject to the
               -----------------------------------------------
rights of the Borrower under Section 4.05(d), the Borrower shall, without
expense to the Lender, maintain or cause to be maintained in effect at all times
with insurers of nationally recognized responsibility either (x) all risk,
agreed value, ground and flight hull insurance, which may, except as provided
below, exclude war risks and allied perils, or (y) other personal property
insurance, in any such case, covering the Engines for an amount at all times
(even when an Engine is not used and operated or in storage), with respect to
each Engine, not less than (A) in the case of clause (x), such amounts as are
customarily carried by Borrower under its hull insurance policies for similar
aircraft and (B) in the case of clause (y), at any time, 110% of the principal
amount of the related Loan then outstanding. Such insurance shall be of the type
usually carried by the Borrower with respect to similar engines, and covering
risks of the kind customarily insured against by the Borrower. If and to the
extent that the Borrower or a Permitted Lessee installs an Engine on an aircraft
which is being operated (A) on routes where it maintains war risk, hijacking or
allied perils insurance in effect with respect to other similar owned or leased
aircraft in its fleet, (B) on routes (other than routes within the United
States, Canada, Mexico, Bermuda and islands other than Cuba in the Caribbean
Basin) where the custom in the industry is to carry war risk insurance or (C) in
any area of recognized hostilities, the Borrower or such Permitted Lessee shall
maintain or cause to be maintained such insurance in effect with respect to such
Engine which is installed on such aircraft in the amount at least equal to
replacement value from time to time.  An agreement by the Government to insure
against or indemnify for substantially the same risks to at least the same
amount will satisfy any of the requirements of this Section 4.05(b).

          (c)  Additional Insureds; Loss Payment.  The Borrower shall cause all
               ---------------------------------
policies of insurance carried in accordance with Section 4.05(a) to name the
Additional Insureds as their respective interests may appear as additional
insureds.  Such policies shall provide with respect to such Additional Insureds
that (i) none of their respective interests in such policies shall be
invalidated by any act or omission or breach of warranty or condition contained
in such policies by the Borrower or, in the case of any particular Additional
Insured, any other Additional Insured; (ii) no cancellation or lapse of coverage
for nonpayment of premium or otherwise, and no substantial change of coverage
which adversely affects the interests of any such Additional Insured, shall be
effective as to such Additional Insured until 30 days (or such lesser period as
may be applicable in the case of any war risk coverage) after receipt by such
Additional Insured of written notice from the insurers of such cancellation,
lapse or change; (iii) they shall have no liability for premiums, commissions,
calls, assessments or advances with respect to such policies; (iv) such policies
will be primary without any right of contribution from any other insurance
carried by such Additional Insureds; (v) the insurers waive any rights of set-
off, counterclaim, deduction or subrogation against such Additional Insureds;
(vi) shall apply worldwide and have no territorial restrictions or limitations
(except, in the case of war, hijacking or related perils insurance, as otherwise
permitted hereunder);

                                       14
<PAGE>

and (vii) shall contain a 50/50% Clause per Lloyd's Aviation Underwriter's
Association Standard Policy Form AVS 103. Each liability policy shall provide
that all the provisions thereof, except the limits of liability, shall operate
in the same manner as if there were a separate policy covering each insured and
each hull policy shall provide that the exercise by the insurer of rights of
subrogation derived from rights retained by the Borrower will not delay payment
of any claim that would otherwise be payable but for such rights of subrogation.
Each policy of insurance (except in the case of any hull policy maintained by
the Borrower in respect of an aircraft to which the Engine is attached or has
been removed but not yet replaced) shall name the Lender as loss payee; provided
                                                                        --------
that, so long as the insurers shall not have received written notice that an
----
Event of Default has occurred and is continuing, if insurance proceeds in the
aggregate equal $2,000,000 or less, then such proceeds shall be payable to the
Borrower and, notwithstanding the foregoing, any amounts up to the aggregate
amount of principal of and interest accrued on the Loan outstanding from time to
time (i) of any proceeds which in the aggregate exceed $2,000,000, (ii) of any
proceeds in respect of a total loss or an Event of Loss or (iii) if the insurers
shall have received written notice that an Event of Default has occurred and is
continuing, any proceeds with respect to any single loss, shall be payable to
such loss payee.

          (d)  Deductibles and Self-Insurance.  The Borrower may from time to
               ------------------------------
time self-insure, by way of deductible or premium adjustment provisions in
insurance policies or otherwise, the risks required to be insured against
pursuant to this Section 4.05 in such amounts as are then self-insured with
respect to similar owned or leased engines in the Borrower's fleet but in no
case shall such self-insurance in the aggregate exceed on an annual basis, on a
per occurrence or on fleetwide basis, an amount equal to 4% of the Borrower's
tangible net worth, calculated as at the end of the Borrower's immediately
preceding fiscal year (but in no event to exceed $15,000,000).  A deductible per
occurrence that is not in excess of the prevailing standard market deductible
for similar aircraft and engines shall be permitted, for each aircraft and
engine in the Borrower's fleet, in addition to such self-insurance.

          (e)  Application of Insurance Proceeds.  As between the Lender and the
               ---------------------------------
Borrower, any payments received under policies of property insurance required to
be maintained under Section 4.05(b) (except in the case of any hull policy
maintained by the Borrower in respect of an aircraft to which the Engine is
attached or has been removed but not yet replaced), shall be applied as follows:

               (i)    if such payments are received with respect to loss or
damage not constituting an Event of Loss with respect to an Engine, payments in
the aggregate of $2,000,000 or less shall be paid over to or retained by the
Borrower and, subject to Section 4.05(c), any payments which in the aggregate
are greater than $2,000,000 shall be paid over to or retained by the Lender for
payment to the Borrower only upon performance of its repair or replacement
obligation; and

               (ii)   if such payments are received with respect to an Event of
Loss with respect to an Engine and the Engine is not being replaced pursuant to
Section 4.03(e), so much of

                                       15
<PAGE>

such payments as shall not exceed the amount required to be prepaid by the
Borrower pursuant to Section 2.04(a) of the Loan Agreement shall, if not already
paid by the Borrower, be applied in reduction of the Borrower's prepayment
obligation and if such amounts shall have been paid, to reimburse the Borrower,
and the balance, if any, of such payments shall be promptly paid over to or
retained by the Borrower; and

               (iii)  if such payments are received with respect to an Event of
Loss with respect to the an Engine and the Engine is being replaced by the
Borrower pursuant to clause (i) of Section 4.03(e), such payments shall be paid
over to, or retained by the Borrower, provided that if the Borrower has not
                                      --------
completed such replacement, such payments shall be paid over to, or retained by,
the Lender as security, and upon completion of such replacement, be paid over to
or retained by the Borrower.

          (f)  Insurance for Own Account.  Nothing in this Section 4.05 shall
               -------------------------
prohibit the Lender, the Borrower or any Additional Insured from obtaining
insurance with respect to the Engines for its own account (including, without
limitation, in the case of the Borrower, hull insurance under the same policies
maintained pursuant to this Section 4.05 in amounts in excess of those required
to be maintained pursuant to this Section 4.05) and any proceeds payable
thereunder shall be payable as provided in the insurance policy relating
thereto, provided that no such insurance may be obtained which would limit or
         --------
otherwise adversely affect the availability of coverage or payment of any
insurance required to be obtained or maintained pursuant to this Section 4.05,
it being understood that all salvage rights to the Engines shall remain with the
Borrower's insurers at all times.

          (g)  Reports, etc.  Borrower will furnish to the Lender (A) on or
               ------------
prior each Funding Date, insurance certificates describing in reasonable detail
the insurance maintained by Borrower as required pursuant to this Section 4.05,
(B) prior to the cancellation, lapse or expiration of the insurance policies
required pursuant to this Section 4.05, evidence of renewal of such insurance
policies, and (C) on or prior to each Funding Date and on or before the renewal
dates of the insurance policies carried by the Borrower pursuant to this Section
4.05, a report signed by a firm of aircraft insurance brokers, not affiliated
with the Borrower, appointed by the Borrower and reasonably satisfactory to the
Lender, stating the opinion of such firm that all premiums in connection with
the insurance then due have been paid and the insurance then carried and
maintained on the Engines complies with the terms hereof and, in the case of
renewal insurance, that such renewal insurance will on and after the effective
date thereof so comply with the terms hereof, provided that all information
                                              --------
contained in such report shall be held confidential by the Lender, and shall not
be furnished or disclosed by it to anyone except its legal counsel, insurance
brokers or advisors, bona fide prospective transferees of the Lender and their
respective agents (provided that they shall agree for the benefit of the
                   --------
Borrower to hold all such information similarly confidential) or as may be
required by Applicable Law. The Borrower will instruct such firm to give prompt
written advice to the Lender of any default in the payment of any premium and of
any other act or omission on the part of the Borrower of which it has knowledge
and which would in such firm's opinion invalidate or render unenforceable, in
whole or in any material part, any insurance on the Engines. The Borrower will
also instruct such firm to advise the Lender in writing at least 30 days

                                       16
<PAGE>

prior to the termination or cancellation of, or material adverse change in, such
insurance carried and maintained on the Engines pursuant to this Section 4.05
(or such lesser period as may be applicable in the case of war risk coverage).

          (h)  Right to Pay Premiums.  The Additional Insureds shall have the
               ---------------------
rights but not the obligations of an additional named insured.  None of Lender
and the other Additional Insureds shall have any obligation to pay any premium,
commission, assessment or call due on any such insurance (including
reinsurance).  Notwithstanding the foregoing, in the event of cancellation of
any insurance due to the nonpayment of premiums, each of Lender and the other
Additional Insureds shall have the option, in its sole discretion, to pay any
such premium in respect of the Engines that is due in respect of the coverage
pursuant to this Agreement and to maintain such coverage, as Lender or the other
Additional Insureds may require, until the scheduled expiry date of such
insurance and, in such event, Borrower shall, upon demand, reimburse Lender and
the other Additional Insureds for amounts so paid by them.

          (i)  Certain Payments Held as Security.  Any amount referred to in
               ---------------------------------
this Section 4.05 which is payable to the Borrower shall not be paid to the
Borrower, or, if it has been previously paid directly to the Borrower, shall not
be retained by the Borrower, if at the time of such payment a Specified Default
shall have occurred and be continuing, but shall be paid to and held by the
Lender as security for the Obligations, unless and until applied by Lender to
Lender's obligations and at such time as there shall not be continuing any such
Specified Default, to the extent such amounts have not been so applied, such
amount and any gain realized as a result of Permitted Investments required to be
made pursuant to Section 3.01 shall be paid over to the Lender.

          Section 4.06  Liens.  The Borrower shall not directly or indirectly
                        -----
voluntarily or involuntarily create, incur, assume or suffer to exist any Lien
on or with respect to any Engine or title thereto or any interest therein or in
this Agreement except (a) the respective rights of the Lender and the Borrower
as provided herein and the rights of the parties to the other Operative
Agreements; (b) the rights of others under agreements or arrangements to the
extent expressly permitted in Sections 4.01(b) and 4.03(c); (c) Liens for taxes
either not yet due or being contested in good faith by appropriate proceedings
(and for which adequate reserves have been provided if required in accordance
with generally accepted accounting principles) so long as such proceedings do
not involve any non-de minimis risk of the sale, forfeiture or loss of an Engine
or the Lien of this Agreement or any risk of criminal liability or any material
risk of civil penalty against Lender; (d) Liens of suppliers, mechanics,
workers, repairers, employees, airport operators, air traffic control
authorities or other like Liens arising in the ordinary course of business and
for amounts the payment of which is either not yet delinquent or is being
contested in good faith (and for which adequate reserves have been provided if
required in accordance with generally accepted accounting principles) by
appropriate proceedings, so long as such proceedings do not involve a non-de
minimis risk of the sale, forfeiture or loss of an Engine or the first priority
Lien of this Agreement or any risk of criminal liability or any material risk of
civil penalty against Lender; (e) Liens arising out of judgments or awards
against the Borrower so long as there shall be in effect with respect to which a
stay of execution; (f) salvage and similar rights of insurers under policies of
insurance maintained with

                                       17
<PAGE>

respect to the Engines; (h) Liens with respect to which the Borrower (or any
Permitted Lessee) has provided a bond or other security adequate in the good
faith opinion of the Lender; and (i) any Lien which may be created pursuant to
the Chattel Mortgage and Security Agreement between the Borrower and American
Airlines, Inc. dated as of April 25, 1996, provided any such Lien shall only
constitute a "Permitted Lien" to the extent it is waived by the American
Airlines, Inc. on or prior to January 31, 2000. Liens described in clauses (a)
through (i) above are referred to herein as "Permitted Liens." The Borrower
shall promptly, at its own expense, take such action as may be necessary to duly
discharge (by bonding or otherwise) any Lien other than a Permitted Lien arising
at any time.

          Section 4.07  Recordation and Further Assurances.
                        ----------------------------------

          (a)  Recordation of this Agreement.  The Borrower shall cause this
               -----------------------------
Agreement, any Security Agreement Supplements, and any and all additional
instruments which shall be executed pursuant to the terms hereof to be kept,
filed and recorded and to be re-executed, refiled and re-recorded at all times
with the FAA or other Aeronautical Authority to the extent required to perfect
and preserve the first priority security interest of the Lender in the Engines
and/or as Lender shall reasonably request.

          (b)  Further Assurances.  The Borrower and the Lender will each
               ------------------
promptly and duly execute and deliver to the other such further documents and
assurances and take such further action as the other may from time to time
reasonably request in order to more effectively carry out the intent and purpose
of this Agreement and to establish and protect the rights and remedies created
or intended to be created in favor of the Lender and the Borrower hereunder,
including, without limitation, if requested by the Lender or the Borrower, the
execution and delivery of supplements or amendments hereto, in recordable form,
subjecting any replacement or substituted engine to this Agreement and the
recording or filing of counterparts hereof, or of financing statements with
respect hereto; provided, however, the Lender will not be required to take any
                --------  -------
action under this Section 4.07(b)  to the extent such action would be
inconsistent with the terms of this Agreement or impose any additional liability
on Lender hereunder or under any other Operative Agreement.

          (c)  Engine Warranty.  The Borrower shall use commercially reasonable
               ---------------
efforts to obtain the consent of the Engine Manufacturer to the collateral
assignment of the Borrower's right, title and interest in, to and under the
Engine Warranty to the Lender pursuant to the Granting Clauses hereof.  If such
consent is obtained, the Borrower shall send an executed original of such
consent to the Lender promptly after execution thereof.

                                  ARTICLE 5.
                          EVENTS OF DEFAULT; REMEDIES

          Section 5.01  Events of Default.  The occurrence of any Event of
                        -----------------
Default under the Loan Agreement shall constitute an Event of Default hereunder.

                                       18
<PAGE>

          Section 5.02  Remedies.  Upon the occurrence of any Event of Default
                        --------
and at any time thereafter so long as the same shall be continuing, the Lender
may, at its option, declare this Agreement to be in default by a notice to the
Borrower (provided that this Agreement shall be deemed to have been declared in
          --------
default without the necessity of such notice upon the occurrence of any Event of
Default described in paragraph (f), (g) or (h) of Section 8.01 of the Loan
Agreement); and at any time thereafter unless the Borrower shall have remedied
all outstanding Events of Default prior to the Lender having (w) accelerated the
Loans pursuant to Section 9.01 of the Loan Agreement, (x) taken any action to
physically repossess the Engines, or (y) incurred any obligation or commitment
to a third party or otherwise irreversibly changed its position in reliance upon
the occurrence and continuation of such Event of Default, the Lender may do, and
the Borrower shall comply with, one or more of the following with respect to all
or any part of the Engines, as the Lender in its sole discretion shall elect, to
the extent permitted by, and subject to compliance with any mandatory
requirements of, Applicable Law then in effect and without any way affecting any
rights which the Borrower may have under Applicable Law (except as otherwise
waived or limited (to extent permitted by Applicable Law) hereunder or under any
other Operative Agreement); provided that during any period an Engine is
                            --------
installed on an aircraft which is subject to the Civil Reserve Air Fleet Program
in accordance with the provisions of Section 4.01(b) and in the possession of
the United States government or an instrumentality or agency thereof, the Lender
shall not, on account of any Event of Default, be entitled to do any of the
following in such manner as to limit the Borrower's control under this Agreement
(or any Permitted Lessee's control under any Permitted Lease permitted by the
terms of this Agreement) of any of the Engines, unless at least 60 days' (or
such lesser period, if any, as may then be applicable under the Military Airlift
Command Program of the United States Government) notice of default hereunder
shall have been given by the Lender by registered or certified mail to the
Borrower (or any Permitted Lessee) with a copy addressed to the Contracting
Office Representative for the Military Airlift Command of the United States Air
Force under any contract with Borrower (or any Permitted Lessee) relating to the
aircraft on which an Engine is then installed:

          (a)  cause the Borrower, upon the written demand of the Lender, at
the Borrower's expense, to deliver promptly, and the Borrower shall deliver
promptly, all or such part of the Engines (together with all records, logs,
manuals, data, and inspection, modification and overhaul records and other
documents maintained with respect thereto or pertaining thereto, but only to the
extent any such records and other items are required to be maintained by
Applicable Law ("Required Records")) as the Lender may so demand to the Borrower
or its order, or the Lender, at its option, may enter upon the premises where
all or any part of the Engines (or any such Required Records) is located and
take immediate possession (to the exclusion of the Borrower and all Persons
claiming under or through the Borrower) of and remove any and all Engines, all
without liability accruing to the Lender for or by reason of such entry or
taking of possession or removal, whether for the restoration of damage to
property caused by such taking or otherwise;

          (b)  sell all or any part of the Engines at public or private sale,
whether or not the Lender shall at the time have possession thereof, as the
Lender may determine, or otherwise dispose of, hold, use, operate, lease to
others or keep idle all or any part of the Engines as the Lender, in its

                                       19
<PAGE>

sole discretion, may determine (and in connection therewith, Lender may use
Borrower's premises for storage pending lease or sale or for holding a sale
without liability for rent or costs or any other matter whatsoever for a period
not to exceed sixty (60) days following the date that the Lender takes actual
possession of the Engines after the occurrence of an Event of Default), all free
and clear of any rights or claims of whatsoever kind of the Borrower;

          (c)  apply to any court having jurisdiction to appoint a receiver or
receivers for the Engines, such receivers to have all the powers and rights of
the Lender as provided herein and by applicable law and all the normal power and
rights of receivers in like circumstances (including the right to sell, lease,
dispose of, repair, improve or modify any of the Engines) until the sale of all
the Engines or sooner termination of any such receivership; or

          (d)  exercise any or all of the rights and powers and pursue any and
all remedies of a secured party under the Uniform Commercial Code of the State
of New York (whether or not in effect in the jurisdiction where the Engine is
located) and under any other applicable law.

          Upon every taking of possession of any part of the Engines under this
Section 4.02, to the extent permitted by Applicable Law, the Lender may, from
time to time, at the expense of the Borrower, make all such expenditures for
maintenance, insurance, repairs, replacements, alterations, additions and
improvements to and of any of the Engines, as it may reasonably deem proper. In
each such case, the Lender shall have the right to maintain, use, operate,
store, lease, control or manage all or any part of the Engines and to exercise
all rights and powers of the Borrower in relation to any part of the Engines in
connection therewith, as the Lender shall deem best, including the right to
enter into any and all such agreements with respect to the maintenance,
insurance, use, operation, storage, leasing, control, management or disposition
of any and all of the Engines as the Lender may determine; and the Lender shall
be entitled to collect and receive directly all tolls, rents, revenues, income,
and profits of all or any part of the Engines, without prejudice, however, to
the right of the Lender under any provision of this Agreement to collect and
receive all cash held by, or required to be deposited with, the Agreement
hereunder.  Such tolls, rents, revenues, income, and profits may be applied to
pay the expenses of use, operation, storage, leasing, control, management or
disposition of all or any part of the Engines, and of all maintenance, repairs,
replacements, alterations, additions and improvements, and to make all payments
which the Lender may be required or may elect to make, if any, for taxes,
assessments, insurance or other proper charges upon any or all of the Engines
(including the employment of engineers and accountants to examine, inspect and
make reports upon the properties and books and records of the Borrower), and all
other payments which the Lender may be required or authorized to make under any
provision of this Agreement, as well as just and reasonable compensation for the
services of all Persons (other than the Lender's employees) properly engaged and
employed by the Lender.

          In addition, the Borrower shall be liable for all reasonable legal
fees and other costs and expenses incurred by reason of the occurrence of any
Event of Default or the exercise of the Lender's remedies with respect thereto,
including all costs and expenses incurred in connection with the retaking or
return of the Engines (or any Required Records) in accordance with the terms
hereof

                                       20
<PAGE>

and under the Uniform Commercial Code of the State of New York, which amounts
shall, until paid, be secured by the Lien of this Agreement.

          If an Event of Default shall have occurred and be continuing, at the
request of the Lender, the Borrower shall promptly execute and deliver to the
Lender such instruments of title and other documents as the Lender may deem
necessary or advisable to enable the Lender or an agent or representative
designated by the Lender, at such time or times and place or places as the
Lender may specify, to obtain possession of any or all of the Engines.  If the
Borrower shall for any reason fail to execute and deliver such instruments and
documents after such request by the Lender, the Lender may obtain a judgment
conferring on the Lender the right to immediate possession and requiring the
Borrower to execute and deliver such instruments and documents to the Lender, to
the entry of which judgment the Borrower hereby specifically consents to the
fullest extent it may lawfully do so.

          The Lender shall give the Borrower at least five (5) Business Days
prior written notice of any public sale or of the date on or after which any
private sale will be held, which notice the Borrower hereby agrees is reasonable
notice.

          Section 5.03  Application of Proceeds.  Except as may otherwise be
                        -----------------------
required by Applicable Law, any moneys or property actually received by the
Lender pursuant to the exercise of any rights or remedies referred to in this
Article 5 shall (subject to the determination of the Lender as to use of such
moneys and property in connection with the exercise of such rights or remedies
and as to the manner of such exercise) be applied in accordance with Section
9.01(d) of the Loan Agreement.

          Section 5.04  Lender May Purchase.  At any public sale under this
                        -------------------
Article 5, the Lender or its nominee may bid for and purchase the property
offered for sale, and, upon compliance with the terms of sale, may hold, retain
and dispose of such property without further accountability therefor, except as
otherwise required by Applicable Law.  The Lender need not be present at such
sale.  For the purpose of making payment for the Subject Collateral or any part
thereof so purchased, any claim for any amounts owing under the Note, the Loan
Agreement or hereunder or under any other Obligation owed by the Borrower to the
Lender may be used by the Lender as a credit against the purchase price.

                                  ARTICLE 6.
                                 MISCELLANEOUS

          Section 6.01  Notices.  All notices or other communications pursuant
                        -------
hereto shall be in writing and shall be given as provided in Section 11.01 of
the Loan Agreement.

          Section 6.02  Waiver.  To the extent permitted by Applicable Law, no
                        ------
failure on the part of the Lender to exercise and no delay in exercising, and no
course of dealing with respect to, any right, remedy, power or privilege under
this Agreement shall operate as a waiver of such right,

                                       21
<PAGE>

remedy, power or privilege, nor shall any single or partial exercise of any
right, remedy, power or privilege under this Agreement preclude any other or
further exercise of any such right, remedy, power or privilege or the exercise
of any other right, remedy, power or privilege. The rights, remedies, powers and
privileges provided in this Agreement are cumulative and not exclusive of any
rights, remedies, powers and privileges provided by law.

          Section 6.03  Amendments.  Neither this Agreement nor any of the terms
                        ----------
hereof may be terminated, amended, supplemented, waived or modified orally, but
only by an instrument in writing signed by the Lender and the Borrower.

          Section 6.04  Successors and Assigns.  This Agreement shall be binding
                        ----------------------
upon and inure to the benefit of the Borrower, the Lender and their respective
successors and permitted assigns. The Borrower shall not assign or transfer its
rights under this Agreement without the prior written consent of the Borrower.

          Section 6.05  Survival of Representations, Warranties and Covenants.
                        -----------------------------------------------------
All representations, warranties and covenants made in this Agreement or in any
certificate or other document delivered pursuant to or in connection with this
Agreement shall survive the execution and delivery of this Agreement or such
certificate or other document (as the case may be) or any deemed repetition of
any such representation or warranty.

          Section 6.06  Severability.  To the extent permitted by Applicable
                        ------------
Law, any provision of this Agreement that is prohibited or unenforceable in any
jurisdiction shall, as to such jurisdiction, be ineffective to the extent of
such prohibition or unenforceability without invalidating the remaining
provisions of this Agreement, and any such prohibition or unenforceability in
any jurisdiction shall not invalidate or render unenforceable such provision in
any other jurisdiction.

          Section 6.07  Counterparts.  This Agreement may be executed in any
                        ------------
number of counterparts, all of which taken together shall constitute one and the
same instrument and any of the parties to this Agreement may execute this
Agreement by signing any such counterpart.

          Section 6.08  Setoff.  Whenever an Event of Default shall have
                        ------
occurred and be continuing, Borrower hereby irrevocably authorizes Lender to set
off the Obligations under this Agreement and the other Operative Agreements or
otherwise owed to Lender against all deposits and credits of Borrower with, and
any and all claims of Borrower against, Lender (excluding any amounts held by
the Lender (or held by the any Affiliate thereof) pursuant to Lease Agreement
[587ML]).

          Section 6.09  GOVERNING LAW.
                        -------------

           (a)  THIS AGREEMENT SHALL IN ALL RESPECTS BE GOVERNED BY THE LAW OF
THE STATE OF NEW YORK, INCLUDING ALL MATTERS OF

                                       22
<PAGE>

CONSTRUCTION, VALIDITY AND PERFORMANCE. THIS AGREEMENT HAS BEEN DELIVERED IN THE
STATE OF NEW YORK.

           (b)  TO THE EXTENT PERMITTED BY APPLICABLE LAW, EACH PARTY HERETO
IRREVOCABLY AGREES, ACCEPTS AND SUBMITS ITSELF TO THE NON-EXCLUSIVE JURISDICTION
OF THE COURTS OF THE STATE OF NEW YORK IN THE CITY AND COUNTY OF NEW YORK AND OF
THE UNITED STATES FOR THE SOUTHERN DISTRICT OF NEW YORK, IN CONNECTION WITH ANY
LEGAL ACTION, SUIT OR PROCEEDING WITH RESPECT TO ANY MATTER RELATING TO OR
ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT; PROVIDED, HOWEVER, TO THE
                                                     --------  -------
EXTENT PERMITTED BY APPLICABLE LAW, NOTHING IN THIS AGREEMENT SHALL BE DEEMED OR
OPERATE TO PRECLUDE LENDER FROM BRINGING SUIT OR TAKING OTHER LEGAL ACTION IN
ANY OTHER JURISDICTION IN ORDER TO REALIZE ON THE ENGINES OR ANY OTHER
COLLATERAL OR ANY OTHER SECURITY, OR TO ENFORCE A JUDGMENT OR OTHER COURT ORDER
IN FAVOR OF LENDER, AND BORROWER EXPRESSLY WAIVES ANY OBJECTIONS THAT IT MAY
HAVE TO THE VENUE OF SUCH COURTS.

           (c)  TO THE EXTENT PERMITTED BY APPLICABLE LAW, EACH PARTY HERETO
HEREBY IRREVOCABLY CONSENTS AND AGREES THAT THE SERVICE OF ANY AND ALL LEGAL
PROCESS, SUMMONS, NOTICES AND DOCUMENTS OF ANY OF THE AFOREMENTIONED COURTS IN
ANY SUCH SUIT, ACTION OR PROCEEDING MAY BE MADE BY MAILING COPIES THEREOF BY
REGISTERED OR CERTIFIED MAIL, POSTAGE PREPAID, AT THE ADDRESS SET FORTH PURSUANT
TO SECTION 11.01 OF THE LOAN AGREEMENT.  EACH PARTY HERETO AGREES THAT SERVICE
UPON IT, OR ANY OF ITS AGENTS, IN EACH CASE IN ACCORDANCE WITH THIS SECTION
6.09(c), SHALL CONSTITUTE VALID AND EFFECTIVE PERSONAL SERVICE UPON SUCH PARTY,
AND EACH PARTY HERETO HEREBY AGREES THAT THE FAILURE OF ANY OF ITS AGENTS TO
GIVE ANY NOTICE OF SUCH SERVICE TO ANY SUCH PARTY SHALL NOT IMPAIR OR AFFECT IN
ANY WAY THE VALIDITY OF SUCH SERVICE ON SUCH PARTY OR ANY JUDGMENT RENDERED IN
ANY ACTION OR PROCEEDING BASED THEREON.

           (d)  EACH PARTY HERETO HEREBY IRREVOCABLY WAIVES, TO THE EXTENT
PERMITTED BY APPLICABLE LAW, AND AGREES NOT TO ASSERT, BY WAY OF MOTION, AS A
DEFENSE, OR OTHERWISE, IN ANY LEGAL ACTION OR PROCEEDING BROUGHT HEREUNDER IN
ANY OF THE ABOVE-NAMED COURTS, THAT SUCH ACTION OR PROCEEDING IS BROUGHT IN AN
INCONVENIENT FORUM, THAT VENUE FOR THE ACTION OR PROCEEDING IS IMPROPER OR THAT
THIS AGREEMENT OR ANY OTHER OPERATIVE AGREEMENT MAY NOT BE ENFORCED IN OR BY
SUCH COURTS.

           (e)  TO THE EXTENT PERMITTED BY APPLICABLE LAW, EACH PARTY HERETO
HEREBY WAIVES ITS RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM

                                       23
<PAGE>

OR CAUSE OF ACTION IN ANY COURT IN ANY JURISDICTION BASED UPON OR ARISING OUT OF
OR RELATING TO THIS AGREEMENT.

                                       24
<PAGE>

          IN WITNESS WHEREOF, the Lender and the Borrower have each caused this
Agreement to be duly executed by their authorized officers as of the day and
year first above written.

                              MIDWAY AIRLINES CORPORATION, as Borrower

                              By:  /s/ Jonathan S. Waller
                                   ----------------------
                                   Name:  Jonathan S. Waller
                                   Title: Senior Vice President
                                            General Counsel

          :                   FLEET CAPITAL CORPORATION, as Lender

                              By:  /s/ Edward W. O'Brien
                                   ---------------------
                                   Name:  Edward W. O'Brien
                                   Title: Vice President

                                       25
<PAGE>

                                                                   Schedule I to
                                                       Engine Security Agreement
                                                       -------------------------

        Each aircraft engine listed below shall constitute an "Engine"
              as such term is defined in the Security Agreement:

                                    ENGINES
                                    -------

     Manufacturer             Manufacturer's Model     Manufacturer's Serial No.
     ------------             --------------------     -------------------------

General Electric Company            CF34-3B1                  GE-E-872554

Each Engine is of 750 or more "rated take-off horsepower" or the equivalent of
such horsepower.
<PAGE>

                                  APPENDIX A

                                  DEFINITIONS

GENERAL PROVISIONS

          The following terms shall have the following meanings for all purposes
of the Operative Agreements (as defined below), unless otherwise defined in an
Operative Agreement or the context thereof shall otherwise require.  In the case
of any conflict between the provisions of this Appendix and the provisions of
any Operative Agreement, the provisions of such Operative Agreement shall
control the construction of such Operative Agreement.

          Unless the context otherwise requires, (i) references to agreements
shall be deemed to mean such agreements as amended and supplemented from time to
time, and any agreement, instrument or document entered into in substitution or
replacement therefor, and (ii) references to parties to agreements shall be
deemed to include the successors and permitted assigns of such parties.

     "Additional Insureds" means the Lender.
      -------------------

     "Aeronautical Authority" means as of any time of determination, the FAA or
      ----------------------
other governmental authority having jurisdiction over the Engines under the laws
of the country in which the airframe (on which an Engine is installed) is then
registered.

     "Affiliate" means, with respect to any Person, any other Person directly or
      ---------
indirectly controlling 50% or more of any class of voting securities of such
Person or otherwise controlling, controlled by or under common control with such
Person.  For the purposes of this definition, "control" (including "controlled
by" and "under common control with") shall mean the power, directly or
indirectly, to direct or cause the direction of the management and policies of
such Person whether through the ownership of voting securities or by contract or
otherwise.

     "After Tax Basis" means a basis such that any payment to be received or
      ---------------
deemed to be received by a Person shall be supplemented by a payment to such
Person so that the sum of such payments, after deduction of all taxes (taking
into account any related credits or deductions) resulting from the actual or
constructive receipt or accrual of such payments, shall be equal to the payment
to be received.

     "Applicable Law" means all applicable laws, treaties, judgments, decrees,
      --------------
injunctions, writs and orders of any court, governmental agency or authority and
rules, regulations, orders, directives, licenses and permits of any governmental
body, instrumentality, agency or authority.

     "Applicable Rate" shall mean, (i) with respect to Loan A the rate per annum
      ---------------
set forth in Section 2.03(a)(i) of the Loan Agreement; and (ii) with respect to
Loan B, the rate established one (1) Business Day prior to the second Funding
Date, equal to the sum of (x), the four (4) year U.S.
<PAGE>

Treasury Constant Maturities as shown in the Federal Reserve Statistical Release
H.15 as of such date plus (y) 2.95%.

     "Average Life Date" means, for either Note, the date which follows the
      -----------------
prepayment date by a period equal to the Remaining Weighted Average Life of such
Note.

     "Bankruptcy Code" means Title 11 of the United States Code, as amended, and
      ---------------
any successor thereto.

     "Borrower" means Midway Airlines Corporation, a Delaware corporation, and
      --------
its successors and permitted assigns.

     "Borrower Documents" means the Operative Agreements to which the Borrower
      ------------------
is a party.

     "Business Day" means any day other than a Saturday or Sunday or other day
      ------------
on which commercial banks are authorized or required by law to close in New York
City, Charlotte, North Carolina or Providence, Rhode Island.

     "Citizen of the United States" means a citizen of the United States as
      ----------------------------
defined in (S)40102(a)(15) of the Transportation Code, or any analogous part of
any successor or substituted legislation or regulation at the time in effect.

     "Code" means the United States Federal Internal Revenue Code of 1986, as
      ----
amended from time to time, or any similar legislation of the United States
enacted to supersede, amend, or supplement such Code (and any reference to a
provision of the Code shall refer to any successor provision(s), however
designated).

     "Collateral" means all property which at the time of any determination is
      ----------
subject to a Lien in favor of Lender granted by Borrower under the Security
Agreement or under any other Operative Agreements, including, but not limited
to, the Engines.

     "CRAF Program" has the meaning specified in Section 4.01(b)(vii) of the
      ------------
Security Agreement.

     "Default" means any event or condition which, with the lapse of time or the
      -------
giving of notice, or both, would constitute an Event of Default.

     "Dollars", "Dollar" and "$" means dollars in lawful currency of the United
      -------    ------       -
States.

     "Engine" means (A) each of the two General Electric CF34-3B1 Series 200
      ------
aircraft engines, identified by manufacturer's serial number in such Security
Agreement Supplements executed and delivered from time to time pursuant to the
Security Agreement, so long as a Replacement Engine shall not have been
substituted therefor pursuant to Section 4.03(e) of the Security Agreement, and
(B) a Replacement Engine, so long as another Replacement Engine shall not have
been substituted therefor pursuant to Section 4.03(e) of the Security Agreement,
whether or not such engine or
<PAGE>

Replacement Engine, as the case may be, is from time to time installed on any
aircraft, and including in each case all Parts incorporated or installed in or
attached thereto and any and all Parts removed therefrom so long as title to
such Parts remains subject to the Lien of the Security Agreement under the terms
of Section 4.03 of the Security Agreement. The term "Engines" means, as of any
                                                     -------
date of determination, the two engines each of which is an Engine on that date.

     "Engine Manufacturer" means General Electric Company, a New York
      -------------------
corporation.

     "Engine Manufacturer's Consent" means the Consent and Agreement of the
      -----------------------------
Engine Manufacturer to the assignment of portions of the Engine Warranty
pursuant to Section 2.01 of the Security Agreement.

     "Engine Warranty" means the General Terms Agreement No. CF34-0897-065 in
      ---------------
respect of the Engines provided to the Borrower by the Engine Manufacturer.

     "ERISA" means the Employee Retirement Income Security Act of 1974 and any
      -----
regulations and rulings issued thereunder all as amended and in effect from time
to time.

     "ERISA Plan" means, individually or collectively, an employee benefit plan,
      ----------
as defined in Section 3(3) of ERISA, which is subject to Title I of ERISA or any
applicable regulation thereunder or a plan or individual retirement account
which is subject to Section 4975(c) of the Code;

     "Event of Default" has the meaning given to such term in Section 8.01 of
      ----------------
the Loan Agreement.

     "Event of Loss" means any of the following events with respect to an
      -------------
Engine:

          (i)    any theft, hijacking or disappearance of such property for a
     period of 15 consecutive days (provided that, so long as Borrower shall be
     diligently pursuing recovery of such property, such period shall be
     extended to 45 consecutive days) or more;

          (ii)   destruction, damage beyond economic repair or rendition of such
     property permanently unfit for normal use for any reason whatsoever;

          (iii)  any event which results in an insurance settlement with respect
     to such property on the basis of an actual, constructive or compromised
     total loss;

          (iv)   condemnation, confiscation or seizure of, or requisition of
     title to or use of such property by the Government or any foreign
     government or purported government (or in the case of any such
     condemnation, confiscation, seizure or requisition of title, by the
     Government) or any agency or instrumentality thereof, for a period in
     excess of (A) in the case of any condemnation, confiscation, seizure or
     requisition of use, 180 consecutive days or (B) in the case of any
     condemnation, confiscation or seizure of, or requisition of title, 15
     consecutive days;
<PAGE>

          (v)  as a result of any law, rule, regulation, order or other action
     by the Aeronautical Authority, the use of the Engines in the normal course
     of air transportation shall have been prohibited by virtue of a condition
     affecting all General Electric CF34-3B1 Series 200 aircraft engines for a
     period of 180 consecutive days, unless the Borrower, prior to the
     expiration of such 180-day period, shall be diligently carrying forward all
     necessary and desirable steps to permit normal use of the Engines and shall
     within 12 months have conformed at least one General Electric CF34-3B1
     Series 200 aircraft engine (but not necessarily an Engine) to the
     requirements of any such law, rule, regulation, order or action, and shall
     be diligently pursuing conformance of the Engines in a non-discriminatory
     manner; and

          (vi) the requisition or taking of use thereof by any government, and
     any divestiture of title or ownership deemed to be an Event of Loss with
     respect to an Engine under Section 4.01(b)(iii) or 4.01(b)(vi) of the
     Security Agreement.

The date of such Event of Loss shall be (aa) the 16/th/ day following loss of
such property or its use due to theft or disappearance or the 46/th/ day
following such loss if such period shall have been extended; (bb) the date of
any destruction, damage beyond economic repair or rendition of such property
permanently unfit for normal use; (cc) the date of any insurance settlement on
the basis of an actual, constructive or compromised total loss; (dd) the 181/st/
day following condemnation, confiscation, seizure or requisition of title to
such property by the Government or a foreign government referred to in clause
(iv) above (or the 16/th/ day in the case of appropriation of title); and (ee)
the last day of the applicable period referred to in clause (v) above.

     "Expenses" has the meaning given to such term in Section 7.01(a) of the
      --------
Loan Agreement.

     "Federal Aviation Administration" or "FAA" means the United States Federal
      --------------------------------     ---
Aviation Administration and any successor agency or agencies thereto.

     "Funding Date" means, in respect of each Loan, the Business Day on which
      ------------
the relevant Loan is, or is to be, advanced by the Lender to the Borrower;

     "Government" means the United States of America or an agency or
      ----------
instrumentality thereof the obligations of which bear the full faith and credit
of the United States of America.

     "Indemnitee" means Lender and each Affiliate, officer, director, employee,
      ----------
agent, servant, successor and permitted assigns of Lender.

     "Lease Agreement [N587ML]" means the Lease Agreement [N587ML] dated as of
      ------------------------
December 30, 1999, between Fleet National Bank, as Lessor and the Borrower, as
Lessee.

     "Lender" means Fleet Capital Corporation, a Rhode Island corporation, and
      ------
its successors and permitted assigns.
<PAGE>

     "Lien" means any mortgage, pledge, lien, charge, encumbrance, lease,
      ----
security interest, claim, or other similar interest of any nature whatsoever.

     "Loan" means the aggregate unpaid principal balance at any time of the
      ----
amounts advanced by the Lender to the Borrower pursuant to the Loan Agreement,
whether as Loan A or Loan B.

     "Loan A" has the meaning specified in Section 2.01(a)(i) of the Loan
      ------
Agreement.

     "Loan A Engine" means the Engine to be financed by the proceeds of Loan A.
      -------------

     "Loan Agreement" means the Loan Agreement, dated as of December 30, 1999,
      --------------
between the Borrower and the Lender.

     "Loan B" has the meaning specified in Section 2.01(a)(ii) of the Loan
      ------
Agreement.

     "Loan B Engine" means the Engine to be financed by the proceeds of Loan B.
      -------------

     "Make-Whole Premium" means with respect to the prepayment of any Note (x)
      ------------------
except in the case of any prepayment pursuant to Section 2.04(a) of the Loan
Agreement, until the first anniversary of the date thereof, an amount equal to
3% of the amount of the principal being prepaid and (y) otherwise, the then
current rate for United States treasury securities (United States Treasury Bills
on a discounted basis shall be converted to a bond equivalent) with a maturity
date closest to the applicable Average Life Date (the "Treasury Rate"), plus 295
basis points, shall be subtracted from the sum of: (1) the United States
Treasury securities rate which was used by the Lender in calculating the
Applicable Rate at Note commencement, plus (2) 295 basis points.  If the result
is zero or a negative number, the Make-Whole Premium shall be zero.  If the
result is a positive number, then the remaining payments due under such Note at
the time of prepayment shall be discounted to present value over the remaining
term of such Note, utilizing the then current Treasury Rate plus 295 basis
points.  The remaining principal balance under such Note shall be subtracted
from the result of the present value calculation.  The resulting amount of such
subtraction calculation shall be the Make-Whole Premium due Lender from
Borrower.  Lender and Borrower agree that any Make-Whole Premium required to be
paid in connection with a Note does not constitute a penalty, but rather a
reasonable calculation of the investment loss that could be sustained by Lender
resulting from a prepayment of such Note.  For purposes hereof, the Treasury
Rate shall be the "Bid Yield" calculated by reference to the "Treasury Bonds,
Notes and Bills" figures published in The Wall Street Journal on or next
                                      -----------------------
preceding the termination date.  In the event that The Wall Street Journal is
                                                   -----------------------
not published or does not publish "Treasury Bonds, Notes and Bills" figures for
four consecutive business days, a comparable reference shall be selected by
Lender in its reasonable discretion.)

     "Maturity Date" means the earlier of (i) with respect to each Loan, the
      -------------
date falling eighty-four (84) months after the relevant Funding Date of such
Loan or (ii) the date upon which all amounts due to Lender under the Loan
Agreement, the Notes and the other Operative Agreements shall have been paid or
shall be payable in full in accordance with the terms thereof.

     "Minimum Liability Amount" shall mean $300,000,000.
      ------------------------
<PAGE>

     "Note" or "Notes" means each of the secured promissory notes issued by the
      ----      -----
Borrower to the Lender from time to time pursuant to the Loan Agreement.

     "Obligations" means all indebtedness, liabilities, fees, indemnities and
      -----------
obligations of Borrower and any other Person to Lender arising under or relating
to the Operative Agreements, including, but not limited to, repayment of the
principal of the Loan and payment of interest thereon.

     "Officer's Certificate" means as to any company a certificate signed by a
      ---------------------
Responsible Officer of such company.

     "Operative Agreements" means the Loan Agreement, the Notes, the Security
      --------------------
Agreement and the Security Agreement Supplements.

     "Parts" means any and all appliances, parts, instruments, components,
      -----
appurtenances, accessories, furnishings, seats, and other equipment of whatever
nature (other than complete Engines and temporary replacement parts as provided
in Section 4.03(a) of the Security Agreement) which may from time to time be
incorporated or installed in or attached to any Engine, exclusive of any items
leased by the Borrower from third parties and not required in the operation of
any Engine.

     "Past Due Rate" means a rate equal to the rate per annum announced from
      -------------
time to time by Citibank, N.A. as its prime rate plus three percent (3%) per
annum.

     "Payment Date" means, with respect to each Loan, each date listed under the
      ------------
heading "Payment Date" in Schedule I to the relevant Note.

     "Permitted Air Carrier" means (a) any Section 1110 Person and (b) any
      ---------------------
foreign air carrier that is principally based in any foreign country listed on
Exhibit B to the Security Agreement, except those that do not maintain normal
diplomatic relations with the United States.

     "Permitted Investments" means (a) direct obligations of the United States
      ---------------------
of America or any agency or instrumentality thereof, (b) obligations fully
guaranteed by the United States of America or any agency or instrumentality
thereof, (c) any mutual fund the portfolio of which is limited to obligations of
the type described in clauses (a) and (b), (d) certificates of deposit issued
by, or bankers' acceptances of, or time deposits or a deposit account with, any
bank, trust company, or national banking association incorporated or doing
business under the laws of the United States of America or one of the states
thereof, having a combined capital and surplus of at least $100,000,000 and
having a rating of "A" or better from the Keefe Bank Watch Service.  Unless
otherwise specified in writing by the Lender, all such Permitted Investments
shall mature not later than 30 days from the date of purchase.

     "Permitted Lease" means any lease agreement between the Borrower and a
      ---------------
Permitted Lessee as permitted by Section 4.01(b) of the Security Agreement.

     "Permitted Lessee" means (a) any Permitted Air Carrier, (b) any airframe or
      ----------------
engine manufacturer, or Affiliate of such a manufacturer, who is domiciled in
the United States of America
<PAGE>

or a country listed on Exhibit B to the Security Agreement or (c) the United
States of America or any instrumentality or agency thereof.

     "Permitted Lien" has the meaning given to such term in Section 4.06 of the
      --------------
Security Agreement.

     "Person" means any individual, sole proprietorship, partnership, joint
      ------
venture, joint stock company, trust, unincorporated organization, association,
corporation, institution, limited liability company or government (federal,
state, local, foreign or any agency, instrumentality, division or body thereof)
or other entity of whatever nature.

     "Remaining Weighted Average Life" means on a given date with respect to any
      -------------------------------
Note the number of days equal to the quotient obtained by dividing (i) the sum
of each of the products obtained by multiplying (a) the amount of each then
remaining scheduled payment of principal of such Note by (b) the number of days
from and including such prepayment date to but excluding the dates on which each
such payment of principal is scheduled to be made; by (ii) the then outstanding
principal amount of such Note.

     "Replacement Engine" means a General Electric CF34-3B1 Series 200 engine
      ------------------
(or engine of the same manufacturer of a comparable or an improved model) which
replaces an Engine pursuant to Section 4.03(e) of the Security Agreement and
which shall have become subject to the Lien of the Security Agreement pursuant
to Section 4.03(e) thereof.

     "Responsible Officer" means, with respect to any party, any Vice President
      -------------------
or other corporate officer of a party who, in the normal performance of his or
her operational responsibilities, with respect to the subject matter of any
covenant, agreement or obligation of such party pursuant to any Operative
Agreement, would have responsibility for and knowledge of such matter and the
requirements of any Operative Agreement with respect thereto.

     "Section 1110" means 11 U.S.C. (S) 1110 or any successor or analogous
      -------------
section of the federal bankruptcy law in effect from time to time.

     "Section 1110 Person" means a Citizen of the United States who is an air
      -------------------
carrier holding a valid air carrier operating certificate issued pursuant to 49
U.S.C. ch. 447 for aircraft capable of carrying 10 or more individuals.

     "Security Agreement" means the Engine Security Agreement, dated as of
      ------------------
December 30, 1999, between the Borrower and the Lender.

     "Security Agreement Supplement" means any supplement to the Security
      -----------------------------
Agreement, substantially in the form of Exhibit A to the Security Agreement,
entered into between the Borrower and the Lender for the purpose of identifying
the Engines (or a Replacement Engine) by manufacturer's serial numbers and
subjecting the Engines (or a Replacement Engine) to the Lien of the Security
Agreement, including any amendment thereto entered into subsequent to the first
Funding Date.
<PAGE>

     "Specified Default" means (a) an event or condition described in Section
      -----------------
8.01(a), (f), (g) or (h) of the Loan Agreement that, after the giving of notice
or lapse of time, or both, would become an Event of Default, or (b) any Event of
Default.

     "Tax" or "Taxes" means all license, recording, documentary, registration
      ---      -----
and other fees and all taxes (including, without limitation, income, gross
receipts, sales, rental, use, value added, property (tangible and intangible),
ad valorem, excise and stamp taxes), fees, levies, imposts, recording duties,
-- -------
duties, charges, assessments or withholdings of any nature whatsoever, together
with any assessments, penalties, fines, additions to tax or interest thereon.

     "Transaction Costs" means those costs and expenses set forth in Section
      -----------------
10.01(a) of the Loan Agreement.

     "Transportation Code" means Title 49 of the United States Code, subtitle
      -------------------
VII, as amended and in effect on the date of the Loan Agreement or as
subsequently amended, or any successor or substituted legislation at the time in
effect and applicable, and the regulations promulgated pursuant thereto.

     "Uniform Commercial Code" means the Uniform Commercial Code as in effect
      -----------------------
from time to time in any relevant jurisdiction.

     "United States", "U.S." or "US" means the United States of America.
      -------------    ----      --

<PAGE>

                                                                    Exhibit A to
                                                       Engine Security Agreement
                                                       -------------------------

                     ENGINE SECURITY AGREEMENT SUPPLEMENT
                     ------------------------------------

          This ENGINE SECURITY AGREEMENT SUPPLEMENT, dated as of December ___,
1999  (this "Security Agreement Supplement"), is between MIDWAY AIRLINES
CORPORATION, a Delaware corporation (herein, together with its successors and
permitted assigns, the "Borrower") and FLEET CAPITAL CORPORATION, a Rhode Island
corporation (together with its successors and permitted assigns, the "Lender").

          WHEREAS, the Borrower and the Lender have entered into the Engine
Security Agreement dated as of December 30, 1999 (the "Security Agreement"),
covering two (2) General Electric model CF34-3B1 aircraft engines bearing
manufacturer's serial numbers GE-E-_____ and  GE-E-_____, each of which  is of
750 or more "rated take-off horsepower" or the equivalent of such horsepower
(collectively, the "Engines") (terms used in this Security Agreement Supplement
having the meanings assigned thereto in the Security Agreement).

          WHEREAS, the Security Agreement has been duly recorded with the FAA
on _______________, as Conveyance Number ________________ pursuant to the
Transportation Code;

          WHEREAS, this Security Agreement Supplement relates to the engine(s)
and/or lease(s) described in Schedule I hereto; and

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

          NOW, THEREFORE, as security for the payment and performance of the
Obligations (whether as scheduled, upon acceleration or otherwise, including,
without limitation, all indebtedness, liabilities, fees, indemnities and
obligations of Borrower and any other Person to Lender arising under or relating
to the Operative Agreements, including, but not limited to, repayment of the
principal of the Loan and payment of interest thereon and of all costs of
collection and enforcement of the Obligations, the Borrower hereby mortgages,
pledges and assigns to the Lender, and hereby creates in and grants to the
Lender a continuing security interest in, but none of its obligations or
liabilities respecting, all of the Borrower's right, title and interest in and
to the property described in Schedule I to this Security Agreement Supplement.

          This Security Agreement Supplement shall be construed as supplemental
to the Security Agreement and shall form a part thereof; and the Security
Agreement is hereby incorporated by reference herein to the same extent as if
fully set forth herein and is hereby ratified, approved and confirmed in all
respects.
<PAGE>

          IN WITNESS WHEREOF, the Lender and the Borrower have each caused this
Security Agreement Supplement to be duly executed by their authorized officers
as of the day and year first above written.

                         MIDWAY AIRLINE CORPORATION, as Borrower

                         By:  __________________________________________
                              Name:
                              Title:

                         FLEET CAPITAL CORPORATION, as Lender

                         By:  __________________________________________
                              Name:
                              Title:
<PAGE>

                                                                    Exhibit B to
                                                       Engine Security Agreement
                                                       -------------------------

       List of Countries - Permitted for Re-Registration and Subleasing
       ----------------------------------------------------------------

Argentina                  Italy
Australia                  Japan
Austria                    Luxembourg
Belgium                    Mexico
Canada                     Netherlands
Denmark                    New Zealand
Finland                    Norway
France                     Portugal
Germany                    Spain
Iceland                    Sweden
Ireland                    Switzerland
                           United Kingdom

Source: [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00005-of-00352.parquet"}, [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00005-of-00352.parquet"}]]