UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

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

For the transition period from            to

AIRCASTLE LIMITED

(Exact name of registrant as specified in its charter)

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

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

     Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES o NO o

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

Large accelerated filer o		Accelerated filer þ		Non-accelerated filer o		Smaller reporting company o
		(Do not check if a smaller reporting company)

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES o NO þ

     As of July 30, 2010, there were 79,471,068 outstanding shares of the registrant’s common shares, par value $0.01 per share.

 

 

						Page
						No.
PART I. — FINANCIAL INFORMATION
Item 1.				Financial Statements
				Consolidated Balance Sheets as of December 31, 2009 and June 30, 2010			3
				Consolidated Statements of Income for the three and six months ended June 30, 2009 and 2010			4
				Consolidated Statements of Cash Flows for the six months ended June 30, 2009 and 2010			5
				Notes to Unaudited Consolidated Financial Statements			6
Item 2.				Management’s Discussion and Analysis of Financial Condition and Results of Operations			24
Item 3.				Quantitative and Qualitative Disclosures about Market Risk			50
Item 4.				Controls and Procedures			51
PART II. — OTHER INFORMATION
Item 1.				Legal Proceedings			52
Item 1A.				Risk Factors			52
Item 2				Unregistered Sales of Equity Securities and Use of Proceeds			52
Item 6.				Exhibits			52
SIGNATURE							54
EX-10.1
EX-10.2
EX-10.3
EX-31.1
EX-31.2
EX-32.1
EX-32.2
EX-99.1

PART I. — FINANCIAL INFORMATION

Item 1. Financial Statements

Aircastle Limited and Subsidiaries

Consolidated Balance Sheets

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

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

Aircastle Limited and Subsidiaries

Consolidated Statements of Income

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

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

Aircastle Limited and Subsidiaries

Consolidated Statements of Cash Flows
(Dollars in thousands)

		Six Months Ended
		June 30,
		2009				2010
Cash flows from operating activities:
Net income		$	46,042			$	37,018
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation			103,249				108,569
Amortization of deferred financing costs			5,731				5,760
Amortization of net lease discounts and lease incentives			3,927				9,754
Deferred income taxes			3,348				2,537
Accretion of purchase discounts on debt investments			(288	)			—
Non-cash share based payment expense			3,387				3,711
Cash flow hedges reclassified into earnings			7,796				4,074
Ineffective portion of cash flow hedges			(573	)			1,769
Loss on sale of flight equipment			—				1,291
Security deposits and maintenance payments included in earnings			(10,506	)			(9,978	)
Other			(1,164	)			546
Changes in certain assets and liabilities:
Accounts receivable			(2,281	)			(662	)
Restricted cash and cash equivalents			(16,754	)			12,436
Other assets			(4,077	)			655
Accounts payable, accrued expenses and other liabilities			(10,118	)			(5,445	)
Lease rentals received in advance			(1,228	)			(1,343	)
Net cash provided by operating activities			126,491				170,692
Cash flows from investing activities:
Acquisition and improvement of flight equipment and lease incentives			(105,746	)			(55,353	)
Proceeds from sale of flight equipment, net of gain			—				17,707
Restricted cash and cash equivalents related to sale of flight equipment			—				(17,707	)
Aircraft purchase deposits and progress payments, net of returned deposits			(39,715	)			(74,666	)
Principal repayments on debt investments			808				—
Leasehold improvements, furnishings and equipment			(82	)			(16	)
Net cash used in investing activities			(144,735	)			(130,035	)
Cash flows from financing activities:
Repurchase of shares from directors and employees			(247	)			(1,663	)
Proceeds from debt financings			70,916				57,089
Debt repayments			(65,847	)			(88,341	)
Deferred financing costs			(3,098	)			(2,023	)
Restricted secured liquidity facility collateral			(81,186	)			2,000
Secured liquidity facility collateral			81,186				(2,000	)
Security deposits received			37,475				3,917
Security deposits returned			(6,267	)			(8,760	)
Maintenance payments received			33,220				57,762
Maintenance payments returned			(14,527	)			(35,702	)
Payments for terminated cash flow hedges			(2,758	)			—
Dividends paid			(15,785	)			(15,906	)
Net cash provided by (used in) financing activities			33,082				(33,627	)
Net increase in cash and cash equivalents			14,838				7,030
Cash and cash equivalents at beginning of period			80,947				142,666
Cash and cash equivalents at end of period		$	95,785			$	149,696
Supplemental disclosures of cash flow information:
Cash paid for interest, net of capitalized interest		$	73,428			$	70,216
Cash paid for income taxes		$	1,568			$	2,595
Supplemental disclosures of non-cash financing activities:
Advance lease rentals converted to maintenance reserves		$	—			$	1,750

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

Aircastle Limited and Subsidiaries

Note 1. Summary of Significant Accounting Policies

Organization

     Aircastle Limited (“Aircastle,” the “Company,” “we,” “us” or “our”) is a Bermuda exempted company that was incorporated on October 29, 2004 by Fortress Investment Group LLC and certain of its affiliates (together, the “Fortress Shareholders” or “Fortress”) under the provisions of Section 14 of the Companies Act of 1981 of Bermuda. Aircastle’s business is investing in aviation assets, including leasing, managing and selling commercial jet aircraft to airlines throughout the world and investing in aircraft related debt investments.

Basis of Presentation

     Aircastle is a holding company that conducts its business through subsidiaries. Aircastle directly or indirectly owns all of the outstanding common shares of its subsidiaries. The consolidated financial statements presented are prepared in accordance with U.S. generally accepted accounting principles (“US GAAP”). We operate in a single segment.

     The accompanying consolidated financial statements are unaudited and have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial reporting and, in our opinion, reflect all adjustments, including normal recurring items, which are necessary to present fairly the results for interim periods. Operating results for the periods presented are not necessarily indicative of the results that may be expected for the entire year. Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with US GAAP have been omitted in accordance with the rules and regulations of the SEC; however, we believe that the disclosures are adequate to make information presented not misleading. These financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009. The Company’s management has reviewed and evaluated all events or transactions for potential recognition and/or disclosure since the balance sheet date of June 30, 2010 through the date on which the consolidated financial statements included in this Form 10-Q were issued.

Principles of Consolidation

     The consolidated financial statements include the accounts of Aircastle and all of its subsidiaries. Aircastle consolidates five Variable Interest Entities (“VIEs”) of which Aircastle is the primary beneficiary. All intercompany transactions and balances have been eliminated in consolidation.

     We consolidate VIEs in which we have determined that we are the primary beneficiary. We use judgment when deciding (a) whether an entity is subject to consolidation as a VIE, (b) who the variable interest holders are, (c) the potential expected losses and residual returns of the variable interest holders, and (d) which variable interest holder is the primary beneficiary. When determining which enterprise is the primary beneficiary, we consider (1) the entity’s purpose and design, (2) which variable interest holder has the power to direct the activities that most significantly impact the entity’s economic performance, and (3) the obligation to absorb losses of the entity or the right to receive benefits from the entity that could potentially be significant to the VIE. When certain events occur, we reconsider whether we are the primary beneficiary of VIEs. We do not reconsider whether we are a primary beneficiary solely because of operating losses incurred by an entity.

Recent Accounting Pronouncements

     Effective January 1, 2010, the Company adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2009-17 (“ASU 2009-17”), Consolidations (Topic 810): Improvements to Financial

Aircastle Limited and Subsidiaries

Reporting by Enterprises Involved with Variable Interest Entities, which requires an enterprise to perform an analysis to determine whether the enterprise’s variable interest, or interests, give it a controlling financial interest in a variable interest entity. The determination of whether a reporting entity is required to consolidate another entity is based on, among other things, the other entity’s purpose and design and the reporting entity’s ability to direct the activities of the other entity that most significantly impact the other entity’s economic performance. This ASU amends certain guidance for determining whether an entity is a variable interest entity and requires ongoing reassessments of whether an enterprise is the primary beneficiary of a variable interest entity. ASU 2009-17 requires a reporting entity to provide additional disclosures about its involvement with variable interest entities and any significant changes in risk exposure due to that involvement. The adoption of ASU 2009-17 did not have a material impact on the Company’s consolidated financial statements. See Note 4 — Variable Interest Entities.

     In January 2010, the FASB issued ASU 2010-06 (“ASU 2010-06”), Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements, which requires new disclosures (1) to disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and to describe the reasons for the transfers, and (2) in the reconciliation for fair value measurements using significant unobservable inputs (Level 3), to present separately information about purchases, sales issuances, and settlements on a gross basis rather than as one net number. ASU 2010-06 is effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. The adoption of ASU 2010-06 did not have a material impact on our consolidated financial statements.

Note 2. Fair Value Measurements

     Fair value measurements and disclosures require the use of valuation techniques to measure fair value that maximize the use of observable inputs and minimize use of unobservable inputs. These inputs are prioritized as follows:

	•		Level 1: Observable inputs such as quoted prices in active markets for identical assets or liabilities.
	•		Level 2: Inputs other than quoted prices included within Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities or market corroborated inputs.
	•		Level 3: Unobservable inputs for which there is little or no market data and which require us to develop our own assumptions about how market participants price the asset or liability.

     The valuation techniques that may be used to measure fair value are as follows:

	•		Market approach — Uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities.
	•		Income approach — Uses valuation techniques to convert future amounts to a single present amount based on current market expectation about those future amounts.
	•		Cost approach — Based on the amount that currently would be required to replace the service capacity of an asset (replacement cost).

     The following tables set forth our financial assets and liabilities as of December 31, 2009 and June 30, 2010 that we measured at fair value on a recurring basis by level within the fair value hierarchy. Assets and liabilities measured

Aircastle Limited and Subsidiaries

at fair value are classified in their entirety based on the lowest level of input that is significant to their fair value measurement.

						Fair Value Measurements at December 31, 2009
						Using Fair Value Hierarchy
						Quoted
						Prices in
						Active				Significant
		Fair Value				Markets for				Other				Significant
		as of				Identical				Observable				Unobservable
		December 31,				Assets				Inputs				Inputs				Valuation
		2009				(Level 1)				(Level 2)				(Level 3)				Technique
Assets:
Cash and cash equivalents		$	142,666			$	142,666			$	—			$	—			Market
Restricted cash and cash equivalents			207,834				207,834				—				—			Market
Total		$	350,500			$	350,500			$	—			$	—
Liabilities:
Derivative liabilities		$	179,279			$	—			$	140,372			$	38,907			Income
						Fair Value Measurements at June 30, 2010
						Using Fair Value Hierarchy
						Quoted
						Prices in
						Active				Significant
		Fair Value				Markets for				Other				Significant
		as of				Identical				Observable				Unobservable
		June 30,				Assets				Inputs				Inputs				Valuation
		2010				(Level 1)				(Level 2)				(Level 3)				Technique
Assets:
Cash and cash equivalents		$	149,696			$	149,696			$	—			$	—			Market
Restricted cash and cash equivalents			213,105				213,105				—				—			Market
Total		$	362,801			$	362,801			$	—			$	—
Liabilities:
Derivative liabilities		$	211,698			$	—			$	152,282			$	59,416			Income

     Our cash and cash equivalents, along with our restricted cash and cash equivalents balances, consist largely of money market securities that are considered to be highly liquid and easily tradable. These securities are valued using inputs observable in active markets for identical securities and are therefore classified as Level 1 within our fair value hierarchy. Our interest rate derivatives included in Level 2 consist of United States dollar denominated interest rate derivatives, and their fair values are determined by applying standard modeling techniques under the income approach to relevant market interest rates (cash rates, futures rates, swap rates) in effect at the period close to determine appropriate reset and discount rates and incorporates an assessment of the risk of non-performance by the interest rate derivative counterparty in valuing derivative assets and an evaluation of the Company’s credit risk in valuing derivative liabilities.

     Our interest rate derivatives included in Level 3 consist of United States dollar denominated interest rate swaps on Term Financing No. 1 with a guaranteed notional balance. The guaranteed notional balance has an upper notional band that matches the hedged debt and a lower notional band. The notional balance is guaranteed to match the hedged debt balance if the debt balances decreases within the upper and lower notional band. During the second quarter of 2010, we made supplemental principal payments on Term Financing No. 1 and the notional balance was adjusted to match the debt balance of Term Financing No. 1. The fair value of the interest rate derivative is determined based on the adjusted upper notional band using cash flows discounted at the relevant market interest rates in effect at the period close and

Aircastle Limited and Subsidiaries

incorporates an assessment of the risk of non-performance by the interest rate derivative counterparty in valuing derivative assets and an evaluation of the Company’s credit risk in valuing derivative liabilities. The range of the guaranteed notional between the upper and lower band represents an option that may not be exercised independently of the debt notional and is therefore valued based on unobservable market inputs.

     The following table reflects the activity for the classes of our assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and six months ended June 30, 2010:

		Three Months				Six Months
		Ended				Ended
		June 30, 2010				June 30, 2010
		Derivative Liabilities
Balance at beginning of period		$	(45,040	)		$	(38,907	)
Transfers into Level 3			—				—
Transfers out of Level 3			—				—
Total gains or (losses):
Included in interest income			—				—
Included in other income (expense)			(136	)			(275	)
Included in interest expense			(71	)			(122	)
Included in other comprehensive income			(14,169	)			(20,112	)
Balance at end of period		$	(59,416	)		$	(59,416	)

     We measure the fair value of certain assets and liabilities on a non-recurring basis, when US GAAP requires the application of fair value, including events or changes in circumstances that indicate that the carrying amounts of assets may not be recoverable. Assets subject to these measurements include aircraft. We record aircraft at fair value when we determine the carrying value may not be recoverable. Fair value measurements for aircraft in impairment tests are based on an income approach that uses Level 3 inputs, which include the Company’s assumptions and appraisal data as to future cash proceeds from leasing and selling aircraft. No assets and liabilities were measured at fair value on a non-recurring basis for the six months ended June 30, 2010.

     Our financial instruments, other than cash, consist principally of cash equivalents, restricted cash and cash equivalents, accounts receivable, accounts payable, amounts borrowed under financings and interest rate derivatives. The fair value of cash, cash equivalents, restricted cash and cash equivalents, accounts receivable and accounts payable approximates the carrying value of these financial instruments because of their short term nature.

     The fair values of our securitizations which contain third-party credit enhancements are estimated using a discounted cash flow analysis, based on our current incremental borrowing rates of borrowing arrangements that do not contain third-party credit enhancements. The fair values of our term debt financings are estimated using a discounted cash flow analysis, based on our current incremental borrowing rates for similar types of borrowing arrangements.

     The carrying amounts and fair values of our financial instruments at December 31, 2009 and June 30, 2010 are as follows:

		December 31, 2009								June 30, 2010
		Carrying Amount				Fair Value				Carrying Amount				Fair Value
		of Asset				of Asset				of Asset				of Asset
		(Liability)				(Liability)				(Liability)				(Liability)
Securitizations and term debt financings		$	(2,324,972	)		$	(2,037,718	)		$	(2,241,258	)		$	(2,017,360	)
ECA term financings			(139,588	)			(140,984	)			(134,961	)			(140,596	)
A330 PDP Facility			—				—				(57,089	)			(57,089	)

Aircastle Limited and Subsidiaries

Note 3. Lease Rental Revenues and Flight Equipment Held for Lease

     Minimum future annual lease rentals contracted to be received under our existing operating leases of flight equipment at June 30, 2010 were as follows:

Year Ending December 31,		Amount
Remainder of 2010		$	258,518
2011			493,205
2012			428,819
2013			323,533
2014			242,742
2015			188,811
Thereafter			330,793
Total		$	2,266,421

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

		Three Months Ended								Six Months Ended
		June 30,								June 30,
Region		2009				2010				2009				2010
Europe			46	%			45	%			46	%			45	%
Asia			20	%			19	%			21	%			20	%
North America			16	%			16	%			16	%			16	%
Latin America			7	%			10	%			6	%			9	%
Middle East and Africa			11	%			10	%			11	%			10	%
Total			100	%			100	%			100	%			100	%

     The classification of regions in the tables above and the table and discussion below is determined based on the principal location of the lessee of each aircraft.

     For the three months ended June 30, 2009, one customer accounted for 9% of lease rental revenue and three additional customers accounted for a combined 17% of lease rental revenue. No other customer accounted for more than 4% of lease rental revenue.

     For the three months ended June 30, 2010, one customer accounted for 9% of lease rental revenue and two additional customers accounted for a combined 13% of lease rental revenue. No other customer accounted for more than 4% of lease rental revenue.

     For the six months ended June 30, 2009, one customer accounted for 9% of lease rental revenue and three additional customers accounted for a combined 17% of lease rental revenue. No other customer accounted for more than 4% of lease rental revenue.

     For the six months ended June 30, 2010, one customer accounted for 9% of lease rental revenue and two additional customers accounted for a combined 13% of lease rental revenue. No other customer accounted for more than 4% of lease rental revenue.

Aircastle Limited and Subsidiaries

     The following tables set forth revenue attributable to individual countries representing at least 10% of total revenue based on each lessee’s principal place of business:

		Three Months Ended June 30,
		2009												2010
										Number												Number
						Percent of Total				of								Percent of Total				of
Country		Revenue				Revenue				Lessees				Revenue				Revenue				Lessees
United States		$	16,201				12	%			3			$	16,754				13	%			4
Netherlands			14,709				11	%			4				14,015				11	%			3
China(a)			—				—				—				14,037				11	%			5
India(b) (c)			13,920				10	%			3				—				—				—

		Six Months Ended June 30,
		2009												2010
										Number												Number
						Percent of Total				of								Percent of Total				of
Country		Revenue				Revenue				Lessees				Revenue				Revenue				Lessees
United States		$	32,341				12	%			3			$	33,399				13	%			4
Netherlands			29,418				11	%			4				28,027				11	%			3
China(a)			—				—				—				27,843				11	%			5

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

		December 31, 2009								June 30, 2010
		Number								Number
		of				Net Book				of				Net Book
Region		Aircraft				Value %				Aircraft				Value %
Europe			58				46	%			61				47	%
Asia			30	(1)			20	%			29				19	%
North America			15				12	%			15				12	%
Latin America			10				9	%			11				9	%
Middle East and Africa			13				12	%			12				12	%
Off-lease			3	(2)			1	%			1	(3)			1	%
Total			129				100	%			129				100	%

Aircastle Limited and Subsidiaries

     The following table sets forth net book value of flight equipment attributable to individual countries representing at least 10% of total assets based on each lessee’s principal place of business as of:

		December 31, 2009												June 30, 2010
						Net Book				Number of								Net Book				Number of
Country		Net Book Value				Value %				Lessees				Net Book Value				Value %				Lessees
Netherlands		$	435,796				11	%			3			$	422,958				11	%			3
United States(a)			—				—				—				379,784				10	%			4

     At December 31, 2009 and June 30, 2010, the amounts of lease incentive liabilities recorded in maintenance payments on the consolidated balance sheets were $14,859 and $23,212, respectively.

     At December 31, 2009 and June 30, 2010, the amounts of prepaid lease incentives, net of amortization, recorded in other assets on the consolidated balance sheets were $9,560 and $8,797 respectively.

Note 4. Variable Interest Entities

     As described in Note 1 — Summary of Significant Accounting Policies, effective January 1, 2010 ASU 2009-17 provided additional guidance for determining when to consolidate certain entities in which the investors do not have the characteristics of a controlling financial interest or the total equity investment at risk is not sufficient to permit the legal entity to finance its activities without additional subordinated financial support by any parties, including equity holders.

     Aircastle consolidates five VIEs of which it is the primary beneficiary. ACS Aircraft Finance Ireland plc (“ACS Ireland”), ACS Aircraft Finance Ireland 2 Limited (“ACS Ireland 2”), ACS Ireland 3 Limited (“ACS Ireland 3”), Air Knight 1 Leasing Limited (“Air Knight 1”) and Air Knight 2 Leasing Limited (“Air Knight 2”). The operating activities of these VIEs are limited to acquiring, owning, leasing, maintaining, operating and, under certain circumstances, selling the seventeen aircraft discussed below.

Securitizations and Term Financing

     In connection with Securitization No. 1, two of our subsidiaries, ACS Ireland and ACS Aircraft Finance Bermuda Limited (“ACS Bermuda”) issued Class A-1 notes and each have fully and unconditionally guaranteed the other’s obligations under the notes. In connection with Securitization No. 2, two of our subsidiaries, ACS Ireland 2 and ACS 2007-1 Limited (“ACS Bermuda 2”) issued Class A-1 notes and each have fully and unconditionally guaranteed the other’s obligations under the notes. In connection with Term Financing No. 1, two of our subsidiaries, ACS Ireland 3 and ACS 2008-1 Limited (“ACS Bermuda 3”) entered into a seven year term debt facility and each have fully and unconditionally guaranteed the other’s obligations under the term debt facility. ACS Bermuda, ACS Bermuda 2 and ACS Bermuda 3 are collectively referred to as the “ACS Bermuda Group”. At June 30, 2010, the assets of the three VIEs include fifteen aircraft transferred into the VIEs at historical cost basis in connection with Securitization No. 1, Securitization No 2 and Term Financing No. 1.

     Aircastle is the primary beneficiary of ACS Ireland, ACS Ireland 2 and ACS Ireland 3 (collectively, the “ACS Ireland VIEs”) as we have both the power to direct the activities of the VIEs that most significantly impact the economic performance of such VIEs and we bear the significant risk of loss and participate in gains through Class E-1 Securities. Although Aircastle has not guaranteed the ACS Ireland VIEs debt, Aircastle wholly owns the ACS Bermuda Group which has fully and unconditionally guaranteed the ACS Ireland VIEs obligations. The activity that

Aircastle Limited and Subsidiaries

most significantly impacts the economic performance is the leasing of aircraft. Aircastle Advisor (Ireland) Limited (Aircastle’s wholly owned subsidiary) is the Remarketing Servicer and is responsible for the leasing of the aircraft. An Irish charitable trust owns 95% of the common shares of the ACS Ireland VIEs. The Irish charitable trust’s risk is limited to its annual dividend of $2 per VIE.

     The combined assets of the ACS Ireland VIEs as of June 30, 2010 are $482,131. The combined liabilities of the ACS Ireland VIEs, net of $96,016 Class E-1 Securities held by the Company which is eliminated in consolidation, as of June 30, 2010 are $429,476.

ECA Term Financings

     Air Knight 1 and Air Knight 2 (collectively, the “Air Knight VIEs”) entered into two different twelve-year term loans, one with Citibank International Plc and one with Calyon, both of which are supported by a guarantee from Compagnie Francaise d’Assurance pour le Commerce Exterieur, (“COFACE”), the French government sponsored export credit agency (“ECA”), for the financing of two new Airbus Model A330-200 aircraft. The Air Knight VIEs are owned by a charitable trust. We refer to these COFACE-supported financings as ECA Term Financings.

     Aircastle is the primary beneficiary of the Air Knight VIEs as we have the power to direct the activities of the VIEs that most significantly impact the economic performance of such VIEs and we bear the significant risk of loss and participate in gains through a finance lease. The activity that most significantly impacts the economic performance is the leasing of aircraft of which Aircastle Advisor LLC (Aircastle’s wholly owned subsidiary) is the Servicer and is responsible for the leasing of the aircraft. There is a cross collateralization guarantee between the Air Knight VIEs. In addition, Aircastle guarantees the debt of the Air Knight VIEs.

     The only assets that the Air Knight VIEs have on their books are financing leases that are eliminated in the consolidated financial statements. The consolidated liabilities of the Air Knight VIEs as of June 30, 2010 are $148,252.

Note 5. Securitizations and Term Debt Financings

     The outstanding amounts of our securitizations, term debt financings and borrowings under our credit facilities were as follows:

		At
		December 31,
		2009				At June 30, 2010
		Outstanding				Outstanding								Final Stated
Debt Obligation		Borrowings				Borrowings				Interest Rate(1)				Maturity(2)
Securitizations and Term Debt Financings:
Securitization No. 1		$	436,091			$	425,722				0.62	%			6/20/31
Securitization No. 2			1,061,566				1,039,576				0.61	%			6/14/37
Term Financing No. 1			708,710				672,764				2.10	%			5/02/15
Term Financing No. 2			118,605				103,196				3.28	%			9/23/13
ECA Term Financings			139,588				134,961			4.48% and 3.96		%		5/27/21 and 12/03/21
A330 PDP Facility			—				57,089				2.86	%			12/1/11	(3)
Total		$	2,464,560			$	2,433,308

Aircastle Limited and Subsidiaries

     The following securitizations and term debt financing structures include liquidity facility commitments described in the table below:

				Available Liquidity
				December 31,				June 30,				Unused				Interest Rate
Facility		Liquidity Facility Provider		2009				2010				Fee				on any Advances
Securitization No. 1		Calyon		$	42,000			$	42,000				0.45	%		1M Libor + 1.00%
Securitization No. 2		HSH Nordbank AG(1)			79,617				77,968				0.50	%		1M Libor + 0.75%
Term Financing No. 1		Calyon			14,174				13,455				0.60	%		1M Libor + 1.20%

Term Financing No. 1

     A maintenance-adjusted appraisal of Term Financing No. 1 Portfolio must be completed each year before a date in early May by a specified appraiser. To determine the maintenance-adjusted values, the appraiser applies upward or downward adjustments of its “half-life” current market values for the aircraft in the Term Financing No. 1 Portfolio based upon the maintenance status of the airframe, engines, landing gear and auxiliary power unit (“APU”), and applies certain other upward or downward adjustments for equipment and capabilities and for utilization. Compliance with the loan to value ratio is measured each month by comparing the 75% minimum ratio against the most recently completed maintenance-adjusted appraised value, less 0.5% for each month since such appraisal was provided to the lenders, plus 75% of the cash maintenance reserve balance held on deposit for the Term Financing No. 1 Portfolio. Noncompliance with the loan to value ratio will require us to make supplemental principal payments but will not by itself result in a default under Term Financing No. 1.

     In March 2010, we completed the maintenance-adjusted appraisal for the Term Financing No. 1 Portfolio and determined that our loan to value ratio on the April 2010 payment date was approximately 78%, and therefore we anticipated being required to make supplemental principal payments of approximately $20,000 before any excess cash from Term Financing No. 1 would be paid to us. During the second quarter of 2010, we made supplemental principal payments of $11,496. In June 2010, we amended the loan documents for Term Financing No. 1 so that 75% of the stated amount of qualifying letters of credit held for maintenance events would be taken into account in the loan to value test. Based on this amendment and the supplemental principal payments previously made, we were in compliance with the loan to value ratio as of July 2010.

A330 PDP Facility

     In June 2010, one of our subsidiaries entered into a $108,500 loan facility to finance a portion of the pre-delivery payments (“PDP”) on six new Airbus Model A330-200 aircraft to be acquired under the Airbus A330 acquisition agreement (the “Airbus A330 Agreement”). See Note 10 - Commitments and Contingencies. We refer to this loan facility as the “A330 PDP Facility”. The loans are secured by, among other things, an assignment of certain rights under the Airbus A330 Agreement and an assignment of the lease agreement for each aircraft and are guaranteed by Aircastle Limited.

     Loans under the A330 PDP Facility bear interest on a floating rate basis of one-month Libor plus 2.50% per annum and are payable monthly in arrears following the initial drawdown on the outstanding balance of the facility. The loans are subject to a commitment fee of 0.25% per annum, payable quarterly in arrears, on the undrawn portion of the facility. The facility may be prepaid without penalty, subject to certain customary conditions. Each loan is payable in full on the delivery date of the relevant aircraft. There are no financial covenants associated with this facility.

Aircastle Limited and Subsidiaries

Note 6. Dividends

     On December 22, 2008, our board of directors declared a fourth quarter dividend of $0.10 per common share or an aggregate of $7,862, for the three months ended December 31, 2008, which was paid on January 15, 2009 to shareholders of record on December 31, 2008. On March 13, 2009, our board of directors declared a first quarter dividend of $0.10 per common share, or an aggregate of $7,923, for the three months ended March 31, 2009, which was paid on April 15, 2009 to shareholders of record on March 31, 2009. On June 10, 2009, our board of directors declared a second quarter dividend of $0.10 per common share, or an aggregate of $7,923 for the three months ended June 30, 2009, which was paid on July 15, 2009 to shareholders of record on June 30, 2009.

     On December 14, 2009, our board of directors declared a fourth quarter dividend of $0.10 per common share or an aggregate of $7,955, for the three months ended December 31, 2009, which was paid on January 15, 2010 to shareholders of record on December 31, 2009. On March 12, 2010, our board of directors declared a first quarter dividend of $0.10 per common share, or an aggregate of $7,951, for the three months ended March 31, 2010, which was paid on April 15, 2010 to shareholders of record on March 31, 2010. On May 25, 2010, our board of directors declared a second quarter dividend of $0.10 per common share, or an aggregate of $7,947, for the three months ended June 30, 2010, which was paid on July 15, 2010 to shareholders of record on June 30, 2010.

Note 7. Earnings Per Share

     We include all common shares granted under our incentive compensation plan which remain unvested (“restricted common shares”) and contain non-forfeitable rights to dividends or dividend equivalents, whether paid or unpaid (“participating securities”), in the number of shares outstanding in our basic and diluted earnings per share calculations using the two-class method. All of our restricted common shares are currently participating securities.

     Under the two-class method, earnings per common share are computed by dividing the sum of distributed earnings allocated to common shareholders and undistributed earnings allocated to common shareholders by the weighted average number of common shares outstanding for the period. In applying the two-class method, distributed and undistributed earnings are allocated to both common shares and restricted common shares based on the total weighted average shares outstanding during the period as follows:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2009				2010				2009				2010
Weighted-average shares:
Common shares outstanding			77,976,760				78,465,361				77,958,980				78,436,452
Restricted common shares			1,389,720				1,153,468				1,287,083				1,182,165
Total weighted-average shares			79,366,480				79,618,829				79,246,063				79,618,617
Percentage of weighted-average shares:
Common shares outstanding			98.25	%			98.55	%			98.38	%			98.52	%
Restricted common shares			1.75	%			1.45	%			1.62	%			1.48	%
Total			100.0	%			100.0	%			100.0	%			100.0	%

Aircastle Limited and Subsidiaries

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

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2009				2010				2009				2010
Earnings per share — Basic:
Net income		$	27,571			$	18,139			$	46,042			$	37,018
Less: Distributed and undistributed earnings allocated to restricted common shares (a)			(483	)			(263	)			(748	)			(550	)
Earnings available to common shareholders — Basic		$	27,088			$	17,876			$	45,294			$	36,468
Weighted-average common shares outstanding — Basic			77,976,760				78,465,361				77,958,980				78,436,452
Earnings per common share — Basic		$	0.35			$	0.23			$	0.58			$	0.46
		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2009				2010				2009				2010
Earnings per share — Diluted:
Net income		$	27,571			$	18,139			$	46,042			$	37,018
Less: Distributed and undistributed earnings allocated to restricted common shares			(483	)			(263	)			(748	)			(550	)
Earnings available to common shareholders — Diluted		$	27,088			$	17,876			$	45,294			$	36,468
Weighted-average common shares outstanding — Basic			77,976,760				78,465,361				77,958,980				78,436,452
Effect of dilutive shares			—	(b)			—	(b)			—	(b)			—	(b)
Weighted-average common shares outstanding — Diluted			77,976,760				78,465,361				77,958,980				78,436,452
Earnings per common share — Diluted		$	0.35			$	0.23			$	0.58			$	0.46

Note 8. Income Taxes

     Income taxes have been provided for based upon the tax laws and rates in countries in which our operations are conducted and income is earned. The Company received an assurance from the Bermuda Minister of Finance that it would be exempted from local income, withholding and capital gains taxes until March 2016. Consequently, the provision for income taxes recorded relates to income earned by certain subsidiaries of the Company which are located in, or earn income in, jurisdictions that impose income taxes, primarily the United States and Ireland.

Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
June 30, 2010

     The sources of income from continuing operations before income taxes for the three and six months ended June 30, 2009 and 2010 were as follows:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2009				2010				2009				2010
U.S. operations		$	502			$	487			$	959			$	1,022
Non-U.S. operations			29,118				19,167				49,048				39,846
Total		$	29,620			$	19,654			$	50,007			$	40,868

     All of our aircraft-owning subsidiaries that are recognized as corporations for U.S. tax purposes are non-U.S. corporations. These non-U.S. subsidiaries generally earn income from sources outside the United States and typically are not subject to U.S. federal, state or local income taxes unless they operate within the U.S., in which case they may be subject to federal, state and local income taxes. We also have a U.S-based subsidiary which provides management services to our non-U.S. subsidiaries and is subject to U.S. federal, state and local income taxes.

     Differences between statutory income tax rates and our effective income tax rates applied to pre-tax income consisted of the following:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2009				2010				2009				2010
Notional U.S. federal income tax expense at the statutory rate		$	10,367			$	6,879			$	17,502			$	14,304
U.S. state and local income tax, net			26				30				49				61
Non-U.S. operations			(8,638	)			(5,423	)			(13,906	)			(11,393	)
Non-deductible expenses in the U.S.			7				36				15				890
Other			287				(7	)			305				(12	)
Provision for income taxes		$	2,049			$	1,515			$	3,965			$	3,850

Note 9. Comprehensive Income (Loss)

     Total comprehensive income (loss) includes net income, the changes in the fair value and the reclassification into earnings of amounts previously deferred relating to our derivative financial instruments which qualify for hedge accounting and the change in unrealized fair value of debt securities classified as available-for-sale. Total comprehensive income (loss) for the three and six months ended June 30, 2009 and 2010 was as follows:

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2009				2010				2009				2010
Net income		$	27,571			$	18,139			$	46,042			$	37,018
Net change in fair value of derivatives, net of tax expense of $972 and $197 for the three months ended, and $1,203 and $280 for the six months ended, June 30, 2009 and 2010, respectively			65,320				(21,227	)			79,292				(29,825	)
Derivative loss reclassified into earnings			2,847				1,770				7,796				4,074
Net change in unrealized fair value of debt investments			936				—				(138	)			—
Total comprehensive income (loss)		$	96,674			$	(1,318	)		$	132,992			$	11,267

Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
June 30, 2010

     The following table sets forth the components of accumulated other comprehensive income (loss), net of tax where applicable, at December 31, 2009 and June 30, 2010:

		Accumulated
		Other
		Comprehensive
		Income (Loss)
December 31, 2009, net of tax benefit of $3,057		$	(259,848	)
Net change in fair value of derivatives, net of tax expense of $280			(29,825	)
Derivative loss reclassified into earnings			4,074
June 30, 2010		$	(285,599	)

Note 10. Commitments and Contingencies

     On June 20, 2007, we entered into the Airbus A330 Agreement, under which we agreed to acquire new A330 aircraft (the “New A330 Aircraft”), from Airbus S.A.S. We currently have ten New A330 Aircraft remaining to be delivered, with two scheduled for delivery in 2010, seven in 2011 and one in 2012. During 2009, we acquired two New A330 Aircraft.

     As of June 30, 2010, we also had a commitment to acquire three used Airbus Model A330-200 passenger configuration aircraft in a sale-leaseback transaction. The first of the three transactions closed on July 26, 2010 and the remaining two are expected to close in the third quarter of 2010.

     Committed amounts to acquire, convert, and modify aircraft including, where applicable, our estimate of adjustments for configuration changes, engine acquisition costs, contractual price escalations and other adjustments, net of amounts already paid, are approximately $300,745 in 2010, $419,491 in 2011 and $61,395 in 2012.

Note 11. Derivatives

     The objective of our hedging policy is to adopt a risk averse position with respect to changes in interest rates. Accordingly, we have entered into a number of interest rate derivatives to hedge the current and expected future interest rate payments on our variable rate debt. Interest rate derivatives are agreements in which a series of interest rate cash flows are exchanged with a third party over a prescribed period. The notional amount on an interest rate derivative is not exchanged. Our interest rate derivatives typically provide that we make fixed rate payments and receive floating rate payments to convert our floating rate borrowings to fixed rate obligations to better match the largely fixed rate cash flows from our investments in flight equipment.

Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
June 30, 2010

     We held the following interest rate derivatives as of June 30, 2010:

		Liability Derivatives
										Future
		Current								Maximum
		Notional				Effective		Maturity		Notional				Floating		Fixed				Balance Sheet
Hedged Item		Amount				Date		Date		Amount				Rate		Rate				Location		Fair Value
Interest rate derivatives designated as cash flow hedges :
Securitization No. 1		$	439,092			Jun-06		Jun-16		$	439,092			1M LIBOR + 0.27%			5.78	%		Fair value of derivative liabilities		$	65,071
Securitization No. 2			1,023,135			Jun-07		Jun-12			1,023,135			1M LIBOR		5.25% to 5.36%				Fair value of derivative liabilities			83,899
Term Financing No. 1(1)			610,808			Jun-08		May-13			610,808			1M LIBOR			4.04	%		Fair value of derivative liabilities			43,969
Term Financing No. 1(1)			—			May-13		May-15			491,718			1M LIBOR			5.31	%		Fair value of derivative liabilities			15,447
Total interest rate derivatives designated as cash flow hedges			2,073,035								2,564,753												208,386
Interest rate derivatives not designated as cash flow hedges:
Term Financing No. 2 (2)			92,856			Oct-08		Sep-13			92,856			3M LIBOR			3.17	%		Fair value of derivative liabilities			3,312
Total interest rate derivatives not designated as cash flow hedges			92,856								92,856												3,312
Total interest rate derivatives		$	2,165,891							$	2,657,609											$	211,698

     Our interest rate derivatives involve counterparty credit risk. As of June 30, 2010, our interest rate derivatives are held with the following counterparties: JP Morgan Chase Bank NA, Citibank Canada NA, HSH Nordbank AG and DVB Bank SE. All of our counterparties or guarantors of these counterparties are considered investment grade (senior unsecured ratings of A3 or above) by Moody’s Investors Service. All are also considered investment grade (long-term foreign issuer ratings of BBB+ or above) by Standard and Poor’s except HSH Nordbank AG which is not rated. We do not anticipate that any of these counterparties will fail to meet their obligations.

     In addition to the derivative liability above, another component of the fair value of our interest rate derivatives is accrued interest. As of June 30, 2010, accrued interest payable included in accounts payable, accrued expenses, and other liabilities on our consolidated balance sheet was $5,529 related to interest rate derivatives designated as cash flow hedges and $54 for interest rate derivatives not designated as cash flow hedges.

     Historically, the Company acquired its aircraft using short term credit facilities and equity. The short term credit facilities were refinanced by securitizations or term debt facilities secured by groups of aircraft. The Company

Aircastle Limited and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
(Dollars in thousands, except per share amounts)
June 30, 2010

completed two securitizations and two term financings during the period 2006 through 2008. The Company entered into interest rate derivatives to hedge interest payments on variable rate debt for acquired aircraft as well as aircraft that it expected to acquire within certain future periods. In conjunction with its financing strategy, the Company used interest rate derivatives for periods ranging from 5 to 10 years to fix the interest rates on the variable rate debt that it incurred to acquire aircraft in anticipation of the expected securitization or term debt re-financings.

     At the time of each re-financing, the initial interest rate derivatives were terminated and new interest rate derivatives were executed as required by each specific debt financing. At the time of each interest rate derivative termination, certain interest rate derivatives were in a gain position and others were in a loss position. Since the hedged interest payments for the variable rate debt associated with each terminated interest rate derivative were probable of occurring, the gain or loss was deferred in accumulated other comprehensive income (loss) and is being amortized into interest expense over the relevant period for each interest rate derivative.

     Prior to the securitizations and term debt financings, our interest rate derivatives typically required us to post cash collateral to the counterparty when the value of the interest rate derivative exceeded a defined threshold. When the interest rate derivatives were terminated and became part of a larger aircraft portfolio financing, there were no cash collateral posting requirements associated with the new interest rate derivative. As of June 30, 2010, we did not have any cash collateral pledged under our interest rate derivatives, nor do we have any existing agreements that require cash collateral postings.

     Following is the effect of interest rate derivatives on the statement of financial performance for the six months ended June 30, 2010:

Effective Portion								Ineffective Portion
		Amount of				Amount of				Amount of
Derivatives in		Gain or (Loss)		Location of		Gain or (Loss)				Gain or (Loss)
ASC 815		Recognized in		Gain or (Loss)		Reclassified from		Location of		Recognized in
Cash Flow		OCI on		Reclassified from		Accumulated		Gain or (Loss)		Income
Hedging		Derivative		Accumulated		OCI into Income		Recognized in		on Derivative
Relationships		(a)		OCI into Income		(b)		Income on Derivative		(c)
Interest rate derivatives		$(78,341)		Interest expense		$(52,137)(1)		Interest expense		$(1,978)(1)