Aircastle Limited
Annual Report 2012

Plain-text annual report

a i r c a s t l e l i m i t e d 2 0 1 2 a n n u a l r e p o r t a n n ua l r e p o rt 2 0 1 2 dear shareholders: 2012 was a good and eventful year for Aircastle despite a complicated and often challenging business environment. We achieved healthy revenue growth thanks to excellent portfolio management as well as an investment program that was disciplined, differentiated and, fundamentally, value-driven. during the year we also continued the transformation of Aircastle’s funding structure through several unsecured bond issuances to one that is longer-dated, more flexible and increasingly well priced. Aircastle continued to return value to shareholders during the past year through both share repurchases and further increases to our dividend to reflect growth in the company’s earnings base. We entered 2013 with a significant cash position, a very good investment opportunity set and cautious optimism about the overall business environment. the Year in review slowing global economic growth and trying business conditions in some regions and sectors of the economy affected many of our customers, particularly airlines based in europe and air cargo carriers. despite this backdrop, Aircastle continued to demonstrate the strong asset management skills that have been our hallmark as shown by the 99% fleet utilization rate we recorded last year while maintaining the portfolio rental yield at 14%. these world class results highlight our consistently strong asset management track record throughout the business cycle. the 13% increase in revenues we achieved in 2012 was through good performance from our base portfolio as well as from the contributions provided by more than $840 million in new investments made in 2012, and another $1 billion completed the previous year. these aircraft acquisitions reflect both what we see as the best investment value in the market, and where we believe Aircastle’s capabilities provide us with a competitive advantage. indeed, we view ourselves as aircraft “value investors” with the expertise, flexibility and discipline to direct investment capital to assets that we believe offer the best risk-adjusted returns. As the market has evolved, so too have our acquisition targets. though Aircastle has traditionally been—and continues to be—an investor in mid-aged aircraft, for the past two years we’ve seen attractive investment opportunities in newer, twin-aisle aircraft such as Airbus A330s and Boeing 777-300ers. these aircraft benefit from strong supply side dynamics (i.e., relatively modest increases in production rates and significant delays relating to the introduction of the Boeing 787 and Airbus A350 XWB) as well as growing demand. since 2011, more than half of our new investments have been in these newer wide- body aircraft types. over the past year we reshaped and enhanced our capital structure, raising $1.6 billion in new debt, to increase significantly the proportion of unsecured debt and better establish ourselves in the U.s. capital markets. this provides Aircastle with greater flexibility to pursue new investments and manage our assets optimally. With each new bond issuance we were able to decrease our cost of funding which will enhance our net interest margin over time. We also increased our unencumbered asset base to more than $2 billion in aircraft and had in excess of $600 million of unrestricted cash at year end. our growing operating cash flow allowed us to provide value for our shareholders in the form of higher dividends and share repurchases. We increased the dividend during the third quarter of 2012, and a total of three times over the past two years, for an overall increase of 65% during this time. i’m pleased to say Aircastle has paid a dividend for 27 consecutive quarters. Following a $28.5 million share repurchase in August, when our founding shareholder exited, we also bought back $20 million of our shares in december of 2012 into January of 2013. in fact, over the past two years we’ve completed nearly $140 million in share repurchases—that’s a total of 11.7 million shares at an average price per share of $11.87, which represents a significant discount to our book value. looking ahead We entered 2013 in a very good position. Aircastle has significant investment capacity, no major capital commitments and no significant debt maturities until 2017. While there continue to be economic challenges ahead for many parts of the global economy, we have a sense of cautious optimism about demand for leased aircraft and are quite bullish about the investment opportunities for Aircastle in 2013. We are also in a strong position to capitalize on the work we’ve done to enhance our capital structure. in short, we are well positioned to continue generating strong operating results and we intend to continue to return value to our shareholders. appreciation of support our shareholder base has evolved and grown as our founding investor, Fortress investment Group, gradually sold down their stake and then completed their exit in 2012. to both our new and long-time shareholders, i would like to thank you for the confidence you’ve shown in Aircastle and express our commitment to deploy our capital in a disciplined and accretive manner. i’d also like to thank our employees and Board of directors for their hard work and continued support. sincerely, Ron Wainshal Chief Executive Officer, Aircastle Limited UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Fiscal Year Ended December 31, 2012 or Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from to Commission file number 001-32959 AIRCASTLE LIMITED (Exact name of Registrant as Specified in its Charter) Bermuda (State or other Jurisdiction of Incorporation or organization) 98-0444035 (I.R.S. Employer Identification No.) 300 First Stamford Place, 5th Floor, Stamford, Connecticut 06902 (Address of Principal Executive Offices) Registrant’s telephone number, including area code: (203) 504-1020 ______________________________________ Securities registered pursuant to Section 12(b) of the Act: Title of Each Class Name of Each Exchange on Which Registered Common Shares, par value $.01 per share New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes 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 No No No Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, 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 No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. 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 Non-accelerated filer (Do not check if a smaller reporting company) Accelerated filer 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 The aggregate market value of the Registrant’s Common Shares based upon the closing price on the New York Stock Exchange on June 30, 2012 (the last business day of registrant’s most recently completed second fiscal quarter), beneficially owned by non-affiliates of the Registrant was approximately $707.8 million. For purposes of the foregoing calculation, which is required by Form 10-K, the Registrant has included in the shares owned by affiliates those shares owned by directors and executive officers and shareholders owning 10% or more of the outstanding common shares of the Registrant, and such inclusion shall not be construed as an admission that any such person is an affiliate for any purpose. No As of February 14, 2013, there were 68,089,517 outstanding shares of the registrant’s common shares, par value $0.01 per share. DOCUMENTS INCORPORATED BY REFERENCE Documents of Which Portions Are Incorporated by Reference Parts of Form 10-K into Which Portion Of Documents Are Incorporated Proxy Statement for Aircastle Limited 2012 Annual General Meeting of Shareholders Part III (Items 10, 11, 12, 13 and 14) TABLE OF CONTENTS Page Item 1. Business Item 1A. Risk Factors Item 1B. Unresolved Staff Comments Item 2. Properties Item 3. Legal Proceedings Item 4. Mine Safety Disclosures PART I PART II Item 5. Item 6. Item 7. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Selected Financial Data Management’s Discussion and Analysis of Financial Condition and Results of Operation Item 7A. Quantitative and Qualitative Disclosures About Market Risk Item 8. Item 9. Financial Statements and Supplementary Data Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Item 9A. Controls and Procedures Item 9B. Other Information Item 10. Directors, Executive Officers and Corporate Governance Item 11. Executive Compensation PART III Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Item 13. Certain Relationships and Related Transactions, and Director Independence Item 14. Principal Accounting Fees and Services PART IV Item 15. Exhibits and Financial Statement Schedules SIGNATURES 1 9 29 29 29 29 31 34 37 69 69 70 70 72 73 73 73 73 73 74 S - 1 SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 Certain items in this Annual Report on Form 10-K (this “report”), and other information we provide from time to time, may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 including, but not necessarily limited to, statements relating to our ability to acquire, sell, lease or finance aircraft, raise capital, pay dividends, and increase revenues, earnings, EBITDA, Adjusted EBITDA and Adjusted Net Income and the global aviation industry and aircraft leasing sector. Words such as “anticipates,” “expects,” “intends,” “plans,” “projects,” “believes,” “may,” “will,” “would,” “could,” “should,” “seeks,” “estimates” and variations on these words and similar expressions are intended to identify such forward-looking statements. These statements are based on management's current expectations and beliefs and are subject to a number of factors that could lead to actual results materially different from those described in the forward-looking statements; Aircastle can give no assurance that its expectations will be attained. Accordingly, you should not place undue reliance on any forward-looking statements contained in this report. Factors that could have a material adverse effect on our operations and future prospects or that could cause actual results to differ materially from Aircastle expectations include, but are not limited to, capital markets disruption or volatility which could adversely affect our continued ability to obtain additional capital to finance new investments or our working capital needs; government fiscal or tax policies, general economic and business conditions or other factors affecting demand for aircraft or aircraft values and lease rates; our continued ability to obtain favorable tax treatment in Bermuda, Ireland and other jurisdictions; our ability to pay dividends; high or volatile fuel prices, lack of access to capital, reduced load factors and/or reduced yields, operational disruptions caused by political unrest in North Africa, the Middle East or elsewhere, and other factors affecting the creditworthiness of our airline customers and their ability to continue to perform their obligations under our leases; termination payments on our interest rate hedges; and other risks detailed from time to time in Aircastle's filings with the Securities and Exchange Commission (“SEC”), including as described in Item 1A. “Risk Factors” and elsewhere in this report. In addition, new risks and uncertainties emerge from time to time, and it is not possible for Aircastle to predict or assess the impact of every factor that may cause its actual results to differ from those contained in any forward-looking statements. Such forward-looking statements speak only as of the date of this report. Aircastle expressly disclaims any obligation to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in its expectations with regard thereto or change in events, conditions or circumstances on which any statement is based. WEBSITE AND ACCESS TO COMPANY’S REPORTS The Company’s Internet website can be found at www.aircastle.com. Our annual reports on Forms 10-K, quarterly reports on Forms 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act are available free of charge through our website under “Investors — SEC Filings” as soon as reasonably practicable after they are electronically filed with, or furnished to, the SEC. Statements and information concerning our status as a Passive Foreign Investment Company (“PFIC”) for U.S. taxpayers are also available free of charge through our website under “Investors — SEC Filings”. Our Corporate Governance Guidelines, Code of Business Conduct and Ethics, and Board of Directors committee charters (including the charters of the Audit Committee, Compensation Committee, and Nominating and Corporate Governance Committee) are available free of charge through our website under “Investors — Corporate Governance”. In addition, our Code of Ethics for the Chief Executive and Senior Financial Officers, which applies to our Chief Executive Officer, Chief Financial Officer, Chief Accounting Officer, Treasurer and Controller, is available in print, free of charge, to any shareholder upon request to Investor Relations, Aircastle Limited, c/o Aircastle Advisor LLC, 300 First Stamford Place, 5th Floor, Stamford, Connecticut 06902. The information on the Company’s website is not part of, or incorporated by reference, into this report, or any other report we file with, or furnish to, the SEC. PART I. ITEM 1. BUSINESS Unless the context suggests otherwise, references in this report to “Aircastle,” the “Company,” “we,” “us,” or “our” refer to Aircastle Limited and its subsidiaries. References in this report to “AL” refer only to Aircastle Limited. References in this report to “Aircastle Bermuda” refer to Aircastle Holding Corporation Limited and its subsidiaries. Throughout this report, when we refer to our aircraft, we include aircraft that we have transferred into grantor trusts or similar entities for purposes of financing such assets through securitizations and term financings. These grantor trusts or similar entities are consolidated for purposes of our financial statements. All amounts in this report are expressed in U.S. dollars and the financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“US GAAP”). We are a global company that acquires, leases, and sells high-utility commercial jet aircraft to customers throughout the world. High-utility aircraft are generally modern, operationally efficient jets with a large operator base and long useful lives. As of December 31, 2012, our aircraft portfolio consisted of 159 aircraft that were leased to 69 lessees located in 36 countries. We manage our fleet through offices in the United States, Ireland and Singapore. As of December 31, 2012, the net book value of our flight equipment and finance lease aircraft was $4.78 billion compared to $4.39 billion at the end of 2011. Our revenues and net income for the year ended December 31, 2012 were $686.6 million and $32.9 million respectively, and for the fourth quarter 2012 were $176.6 million and $29.8 million, respectively. Typically, we invest in aircraft that we place on operating or finance leases. From time to time we also make investments in other aviation assets, including debt investments secured by commercial jet aircraft. Commercial air travel and air freight activity have been long-term growth sectors, broadly correlated with world economic activity and expanding at a rate of one to two times the rate of global GDP growth. The expansion of air travel and air cargo has driven a rise in the world aircraft fleet. There are currently more than 17,000 commercial mainline passenger and freighter aircraft in operation worldwide. This fleet is expected to continue expanding at an average annual rate, net of retirements, of approximately 3.5% to 3.8% through 2031. In addition, aircraft leasing companies own an increasing share of the world’s commercial jet fleet, and now account for more than one-third of this fleet. Notwithstanding the sector’s long-term growth trend, the aviation markets have been, and are expected to remain, subject to economic cyclicality. The industry is also susceptible to external shocks, such as regional conflicts, terrorist events and to disruptions caused by severe weather events and other natural phenomena. Mitigating these risks is the portability of the assets, allowing aircraft to be redeployed in locations where demand is higher. Air traffic data for 2012 showed moderate passenger market growth while the air cargo traffic dropped modestly as global trade levels contracted. According to the International Air Transport Association, during 2012 global passenger traffic increased by 5.3% while air cargo traffic, measured in freight ton kilometers, decreased 1.5%. Passenger traffic growth began moderating during the second half of 2012, and, in total, was slightly lower than the 5.9% growth in 2011. The air cargo market, which is more sensitive than the passenger sector to economic conditions, deteriorated during 2012 after a weak performance in 2011. The air cargo results were driven by slowing global economic growth rates and weak business confidence levels There are significant regional variations in both passenger and air cargo demand. Emerging market economies such as China, Brazil, and Turkey, among others, are experiencing significant increases in air traffic, driven by rising levels of per capita air travel. In contrast, more mature markets such as North America and Western Europe are likely to grow more slowly. Additionally, airlines operating in areas with political instability, such as those in North Africa and parts of the Middle East, have seen more modest growth and their outlook is more uncertain. In aggregate, we believe that passenger and cargo traffic will likely increase over time, and as a result, we expect demand for high-utility aircraft will continue to remain strong over the long-term. Moreover, the portable and fungible nature of commercial aircraft allows them to be redeployed to markets where demand is strongest. Capital availability for aircraft improved over the past year, though access to financing varied significantly depending on the asset and obligor. Strong US capital markets conditions benefited borrowers with access to such financing. On the other hand, European banks, which had traditionally played a critical role in the air finance market, continued to contract as a result of increased funding costs and regulatory challenges. Thanks in part to a continued high level of export credit agency (“ECA”) -backed support for new deliveries, along with increased lending from Asian banks for top tier customers, 1 financing for newer aircraft transactions remains adequate notwithstanding a higher level of new aircraft deliveries. However, financing for used aircraft and for smaller airlines was much more limited. Moreover, an increase in the ECA debt pricing scheme may drive more opportunities to aircraft lessors and other commercial financiers. We believe these market forces should generate attractive new investment and trading opportunities upon which we are well placed to capitalize given our access to the U.S. capital markets. We intend to pay quarterly dividends to our shareholders based on the Company’s sustainable earnings levels; however, our ability to pay quarterly dividends will depend upon many factors, including those described in Item 1A. “Risk Factors” and elsewhere in this report. The table below is a summary of our quarterly dividend history for the years ended December 31, 2010, 2011 and 2012, respectively. These dividends may not be indicative of the amount of any future dividends. Declaration Date Dividend per Common Share Aggregate Dividend Amount (Dollars in Thousands) December 14, 2009 March 12, 2010 May 25, 2010 September 21, 2010 December 6, 2010 March 8, 2011 June 27, 2011 September 14, 2011 November 7, 2011 February 17, 2012 May 2, 2012 August 1, 2012 November 5, 2012 Competitive Strengths $ $ $ $ $ $ $ $ $ $ $ $ $ 0.100 0.100 0.100 0.100 0.100 0.100 0.125 0.125 0.150 0.150 0.150 0.150 0.165 $ $ $ $ $ $ $ $ $ $ $ $ $ 7,955 7,951 7,947 7,947 7,964 7,857 9,364 9,035 10,839 10,865 10,847 10,464 11,493 Record Date Payment Date December 31, 2009 January 15, 2010 March 31, 2010 June 30, 2010 April 15, 2010 July 15, 2010 September 30, 2010 October 15, 2010 December 31, 2010 January 14, 2011 March 31, 2011 July 7, 2011 April 15, 2011 July 15, 2011 September 30, 2011 October 14, 2011 November 30, 2011 December 15, 2011 February 29, 2012 March 15, 2012 May 31, 2012 June 15, 2012 August 31, 2012 September 14, 2012 November 30, 2012 December 14, 2012 We believe that the following competitive strengths will allow us to capitalize on future growth opportunities in the global aviation industry: • Diversified portfolio of high-utility aircraft. We have a portfolio of high-utility aircraft that is diversified with respect to lessees, geographic markets, end markets (i.e., passenger and freight), lease maturities and aircraft types. As of December 31, 2012, our aircraft portfolio consisted of 159 aircraft comprising a variety of passenger and freighter aircraft types that were leased to 69 lessees located in 36 countries. We owned 133 passenger aircraft, representing approximately 71% of the net book value of flight equipment, while our 26 freighter aircraft account for 29% of our portfolio value. Our lease expirations are well dispersed, with a weighted average remaining lease term of 5.0 years for aircraft we owned at December 31, 2012. Over the next two years, only approximately 20% of our fleet by net book value has scheduled lease expirations, after taking into account lease commitments, providing the company with a long-dated base of contracted revenues. We believe our focus on portfolio diversification reduces the risks associated with individual lessee defaults and adverse geopolitical or economic issues, and results in generally predictable cash flows. • Experienced management team with significant expertise. Our management team has significant experience in the acquisition, leasing, financing, technical management, restructuring/repossession and sale of aviation assets. This experience enables us to access a wide array of placement opportunities throughout the world and also evaluate a broad range of potential investments and sales opportunities in the global aviation industry. With extensive industry contacts and relationships worldwide, we believe our management team is highly qualified to manage and grow our aircraft portfolio and to address our long-term capital needs. • Access to a wide range of financing sources. Aircastle is a publicly listed company trading on the New York Stock Exchange. We have a $1 billion shelf registration statement on Form S-3 in effect and, through this, would expect to have relatively efficient and quick access to additional equity or debt capital. The Company secured corporate credit ratings from Standard & Poor’s Ratings Group, Inc. ("Standard and Poor's") and Moody’s 2 Investors Services ("Moody's") and completed a $800.0 million unsecured bond offering in April 2012 and an additional $500.0 million unsecured bond offering in November 2012. In December 2012, we also replaced our revolving credit facility with a new three year $150.0 million unsecured revolving credit facility, which was undrawn at December 31, 2012. In addition to demonstrating access to the export credit agency-backed, commercial bank and securitization markets for secured debt, we believe having access to the unsecured bond market is a competitive differentiator which allows us to pursue a more flexible and opportunistic investment strategy. • Disciplined acquisition approach and broad sourcing network. We evaluate the risk and return of any potential acquisition first as a discrete investment and then from a portfolio management perspective. To evaluate potential acquisitions, we employ a rigorous due diligence process focused on (i) cash flow generation with careful consideration of macro trends, industry cyclicality and product life cycles; (ii) aircraft specifications and maintenance condition; (iii) when applicable, lessee credit worthiness and the local jurisdiction’s rules for enforcing a lessor’s rights; and (iv) other legal and tax implications. We source our acquisitions through well- established relationships with airlines, other aircraft lessors, financial institutions and other aircraft owners. Since our formation in 2004, we have built our aircraft portfolio through more than 90 transactions with more than 60 counterparties. • Existing fleet financed on a long-term basis with limited future funding commitments. Our aircraft are currently financed under secured and unsecured debt financings with the earliest unsecured bond maturity date being in 2017, thereby limiting our near-term financial markets exposure on our owned aircraft portfolio. As such, we are free to deploy our capital base flexibly to take advantage of what we anticipate will be more attractive investment environment. • Global and scalable business platform. We operate through offices in the United States, Ireland and Singapore, using a modern asset management system designed specifically for aircraft operating lessors and capable of handling a significantly larger aircraft portfolio. We believe that our facilities, systems and personnel currently in place are capable of supporting an increase in our revenue base and asset base without a proportional increase in overhead costs. Business Strategy The availability of equity and debt capital remains somewhat limited for the type of aircraft investments we are currently pursuing. In spite of these near-term challenges, we plan to grow our business and profits over the long-term by continuing to employ the following elements of our fundamental business strategy: • Investing in additional commercial jet aircraft and other aviation assets when attractively priced opportunities and cost effective financing are available. We believe the large and growing aircraft market, together with ongoing fleet replacements, will provide significant acquisition opportunities. We regularly evaluate potential aircraft acquisitions and expect to continue our investment program through additional passenger and cargo aircraft purchases when attractively priced opportunities and cost effective financing are available. • • Maintaining efficient access to financing from multiple sources. We have financed our aircraft acquisitions using various long-term debt structures obtained through several different markets to obtain cost effective financing. In this regard, we believe having corporate credit ratings from Standard & Poor's and Moody's enables us to access a broader pool of capital than many of our peers, enhancing our competitiveness and ability to source attractive investment opportunities. This, in turn, will allow us to grow our business and profits. Leveraging our efficient operating platform and strong operating track record. We believe our team's capabilities in the global aircraft leasing market place us in a favorable position to explore new income-generating activities and we intend to continue to focus our efforts in areas where we believe we have competitive advantages and on transactions that offer attractive risk/return profiles after taking into consideration available financing options. Reinvesting a portion of the cash flows generated by our business in additional aviation assets and/or our own debt and equity securities. Aircraft have finite useful lives, but typically provide reliable cash flows. Our strategy is to reinvest a portion of our cash flows from operations and asset sales in our business to grow our asset and earnings bases. Selling assets when attractive opportunities arise and for portfolio management purposes. We pursue asset sales as opportunities over the course of the business cycle with the aim of realizing profits and reinvesting proceeds where more accretive investments are available. We also use asset sales for portfolio management • • 3 purposes such as reducing lessee specific concentrations and lowering residual value exposures to certain aircraft types, and also to exit from an investment when a sale or part-out would provide the greatest expected cash flow for us. We also believe our team’s capabilities in the global aircraft leasing market place us in a favorable position to explore new income-generating activities as capital becomes available for such activities. We intend to continue to focus our efforts on investment opportunities in areas where we believe we have competitive advantages and on transactions that offer attractive risk/return profiles after taking into consideration available financing options. In any case, there can be no assurance that we will be able to access capital on a cost-effective basis, and a failure to do so could have a material adverse effect on our business, financial condition or results of operations. Acquisitions and Disposals We originate acquisitions and disposals through well-established relationships with airlines, other aircraft lessors, financial institutions and brokers, as well as other sources. We believe that sourcing such transactions both globally and through multiple channels provides for a broad and relatively consistent set of opportunities. Our objective is to develop and maintain a diverse and stable operating lease portfolio; however, we review our operating lease portfolio periodically to sell aircraft opportunistically, to manage our portfolio diversification and to exit from aircraft investments when we believe that selling will achieve the maximum expected cash flow rather than reinvesting in and re-leasing the aircraft. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Overview — Acquisitions and Disposals.” We have an experienced acquisitions and sales team based in Stamford, Connecticut; Dublin, Ireland and Singapore that maintains strong relationships with a wide variety of market participants throughout the world. We believe that our seasoned personnel and extensive industry contacts facilitate our access to acquisition and sales opportunities and that our strong operating track record facilitates our access to debt and equity capital markets. Potential investments and disposals are evaluated by teams comprised of marketing, technical, credit, financial and legal professionals. These teams consider a variety of aspects before we commit to purchase or sell an aircraft, including price, specification/configuration, age, condition and maintenance history, operating efficiency, lease terms, financial condition and liquidity of the lessee, jurisdiction, industry trends and future redeployment potential and values, among other factors. We believe that utilizing a cross-functional team of experts to consider the investment parameters noted above will help us assess more completely the overall risk and return profile of potential acquisitions and will help us move forward expeditiously on letters of intent and acquisition documentation. Our letters of intent are typically non-binding prior to internal approval, and upon internal approval are binding subject to the fulfillment of customary closing conditions. Finance We intend to fund new investments through cash on hand, cash flows from operations and potentially through medium - to longer-term financings on a secured or unsecured basis. We may repay all or a portion of such borrowings from time to time with the net proceeds from subsequent long-term debt financings, additional equity offerings, cash generated from operations and asset sales. Therefore, our ability to execute our business strategy, particularly the acquisition of additional commercial jet aircraft or other aviation assets, depends to a significant degree on our ability to obtain additional debt and equity capital on terms we deem attractive. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Secured Debt Financings” and ”Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Unsecured Debt Financings.” Segments We operate in a single segment. Aircraft Leases Typically, we lease our aircraft on an operating lease basis. Under an operating lease, we retain the benefit, and bear the risk, of re-leasing and of the residual value of the aircraft upon expiration or early termination of the lease. Operating leasing can be an attractive alternative to ownership for airlines because leasing increases fleet flexibility, requires a lower 4 capital commitment for the airline, and significantly reduces aircraft residual value risk for the airline. Under our leases, the lessees agree to lease the aircraft for a fixed term, although certain of our operating leases allow the lessee the option to extend the lease for an additional term or, in rare cases, terminate the lease prior to its expiration. As a percentage of lease rental revenue for the year ended December 31, 2012, our three largest customers, Martinair (including its affiliates, KLM, Transavia and Transavia France), U.S. Airways, Inc., and Hainan Airlines Company, accounted for 9%, 6% and 6%, respectively. The scheduled maturities of our aircraft leases by aircraft type grouping currently are as follows, taking into account lease placement and renewal commitments as of December 31, 2012: 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 Off- Lease(1) Total A319/A320/A321 A330-200/200F/300 737-300/300QC/400 737-700/800 747-400 Freighters 757-200 767-200ER/300ER 777-200ER/300ER E-195 Other Aircraft Types Total _______ _______ 1 — 3 6 — 2 6 6 10 2 4 — 4 1 2 — 6 9 2 — 10 2 3 — — — — — — — 8 1 1 1 4 2 1 2 4 — 1 — — — — — — — 9 1 1 4 3 2 5 — 4 — — — — 3 — 2 — 1 — — 1 — — — — — — 1 — 2 2 2 — — — — — — — — 1 1 — — — — — — — — — — — — — — — — — 4 1 — 2 — — 1 — — — — — — 19 34 18 24 22 14 3 9 4 3 1 6 — — — — 1 — 1 — — — 2 29 24 14 40 15 11 16 2 4 4 159 (1) Includes one Boeing Model 767-300ER aircraft and one Boeing Model 747-400BDSF aircraft that we are marketing for lease or sale. 2012 Lease Expirations and Lease Placements At the beginning of 2012, we had 17 aircraft with scheduled lease expirations in 2012 and we leased, extended or sold, or committed to lease, extend or sell, 16 of these aircraft. We are marketing one Boeing Model 767-300ER that was returned to us in the third quarter of 2012. 2013 Lease Expirations and Lease Placements • Scheduled lease expirations — placements. We started the year with 19 aircraft having scheduled lease expirations in 2013 and we have lease or lease extension commitments for two of these aircraft. The remaining 17 aircraft with scheduled expiries in 2013 that we are marketing for lease or sale represented 5% of our total net book value of flight equipment held for lease (including net investment in finance leases) at December 31, 2012. In addition: • We entered into early termination agreements for two Boeing Model 737-700 aircraft, one Airbus model A330-200 aircraft, one Boeing Model 767-300ER aircraft and one Airbus Model A319-100 aircraft, all of which were returned to us in the first quarter of 2013 and which we are marketing for sale or lease. • We are also marketing one 747-400 BDSF that was returned to us in the fourth quarter of 2012 following the bankruptcy of one of our customers. These additional six aircraft represented 3% of our total net book value of flight equipment held for lease (including net investment in finance leases) at December 31, 2012. 5 2014-2016 Lease Expirations and Lease Placements • Scheduled lease expirations — placements. Taking into account lease and sale commitments, we currently have the following number of aircraft with lease expirations scheduled in the period 2014-2016 representing the percentage of our net book value of flight equipment held for lease (including net investment in finance leases) at December 31, 2012 specified below: • • • 2014: 32 aircraft, representing 15%; 2015: 18 aircraft, representing 7%; and 2016: 25 aircraft, representing 11%. Lease Payments and Security. Each of our leases requires the lessee to pay periodic rentals during the lease term. As of December 31, 2012, rentals on more than 99% of our leases then in effect, as a percentage of net book value, are fixed and do not vary according to changes in interest rates. For the remaining leases, rentals are payable on a floating interest- rate basis. Most lease rentals are payable either monthly or quarterly in advance, and all lease rentals are payable in U.S. dollars. Under our leases, the lessee must pay operating expenses accrued or payable during the term of the lease, which would normally include maintenance, overhaul, fuel, crew, landing, airport and navigation charges, certain taxes, licenses, consents and approvals, aircraft registration and insurance premiums. Typically, under an operating lease, the lessee is required to make payments for heavy maintenance, overhaul or replacement of certain high-value components of the aircraft. These maintenance payments are based on hours or cycles of utilization or on calendar time, depending upon the component, and are required to be made monthly in arrears or at the end of the lease term. Our determination of whether to permit a lessee to make maintenance payments at the end of the lease term, rather than requiring such payments to be made monthly, depends on a variety of factors, including the creditworthiness of the lessee, the amount of security deposit which may be provided by the lessee and market conditions at the time. If a lessee is making monthly maintenance payments, we would typically be obligated to use the funds paid by the lessee during the lease term to reimburse the lessee for costs they incur for heavy maintenance, overhaul or replacement of certain high-value components, usually shortly following completion of the relevant work. Many of our leases also contain provisions requiring us to pay a portion of the cost of modifications to the aircraft performed by the lessee at its expense, if such modifications are mandated by recognized airworthiness authorities. Typically, these provisions would set a threshold, below which the lessee would not have a right to seek reimbursement and above which we may be required to pay a portion of the cost incurred by the lessee. The lessees are obliged to remove liens on the aircraft other than liens permitted under the leases. Our leases generally provide that the lessees’ payment obligations are absolute and unconditional under any and all circumstances and require lessees to make payments without withholding payment on account of any amounts the lessor may owe the lessee or any claims the lessee may have against the lessor for any reason, except that under certain of the leases a breach of quiet enjoyment by the lessor may permit a lessee to withhold payment. The leases also generally include an obligation of the lessee to gross up payments under the lease where lease payments are subject to withholding and other taxes, although there may be some limitations to the gross up obligation, including provisions which do not require a lessee to gross up payments if the withholdings arise out of our ownership or tax structure. In addition, changes in law may result in the imposition of withholding and other taxes and charges that are not reimbursable by the lessee under the lease or that cannot be so reimbursed under applicable law. Lessees may fail to reimburse us even when obligated under the lease to do so. Our leases also generally require the lessee to indemnify the lessor for tax liabilities relating to the leases and the aircraft, including in most cases, value added tax and stamp duties, but excluding income tax or its equivalent imposed on the lessor. Portfolio Risk Management Our objective is to build and maintain an operating lease portfolio which is balanced and diversified and delivers returns commensurate with risk. We have portfolio concentration objectives to assist in portfolio risk management and highlight areas where action to mitigate risk may be appropriate, and take into account the following: • • • • individual lessee exposures; geographic concentrations; aircraft type concentrations; portfolio credit quality distribution; 6 • • aircraft age distribution; and lease maturity distribution. We have a risk management team which undertakes detailed credit due diligence on lessees when aircraft are being acquired with a lease already in place and for placement of aircraft with new lessees following lease expiration or termination. Lease Management and Remarketing Our aircraft re-leasing strategy is to develop opportunities proactively, well in advance of scheduled lease expiration, to enable consideration of a broad set of alternatives, including passenger or freighter deployments, or part-out or other disposal, and to allow for reconfiguration or maintenance lead times where needed. We also take a proactive approach to monitoring the credit quality of our customers, and seek early return and redeployment of aircraft if we feel that a lessee is unlikely to perform its obligations under a lease. We have invested significant resources in developing and implementing what we consider to be state-of-the-art lease management information systems and processes to enable efficient management of aircraft in our portfolio. Other Aviation Assets and Alternative New Business Approaches As of December 31, 2012, our overall portfolio of assets consists of commercial jet aircraft. We believe the lack of traditional aviation bank debt capacity with respect to financing mid-age, current technology aircraft may present attractive aircraft and debt investment opportunities, including our own securities, although financing for such acquisitions may be limited and more costly than in the past. Additionally, we believe that investment opportunities may arise in such sectors as jet engine and spare parts leasing and financing and commercial turboprop aircraft and helicopter leasing and financing. In the future, we may make opportunistic investments in these or other sectors or in other aviation-related assets and we intend to continue to explore other income-generating activities and investments that leverage our experience and contacts, provided that capital is available to fund such investments on attractive terms. We believe we have a world class servicing platform and may also pursue opportunities to capitalize on these capabilities such as providing aircraft management services for third party aircraft owners. Competition The aircraft leasing industry is highly competitive with a significant number of active participants that are active in leasing and trading aircraft markets. We face competition in several different ways, including for the acquisition of aircraft from airlines and other aircraft owners, for the placement of aircraft on lease with airlines and for buyers with an interest in acquiring aircraft assets which we may wish to divest. Competition for aircraft acquisitions comes from both larger, typically more established aircraft leasing companies as well as from smaller players and new entrants. Larger lessors are generally more focused on acquiring new aircraft and include companies such as GE Commercial Aviation Services, International Lease Finance Corporation ("ILFC"), AerCap Holdings NV, Air Lease Corporation, Aviation Capital Group, CIT Aerospace, AWAS, SMBC Aviation Capital (formerly RBS Aviation Capital), BOC Aviation, FLY Leasing, Ltd. and Avolon. Competition for mid-aged and older aircraft typically comes from smaller players that, in many cases, rely on private equity or hedge fund capital sources. Such competitors include Guggenheim Aviation Partners, Volito, Deucalion, Oak Hill Aviation and AerSale. The global financial crisis led several large participants to restructure or revisit their investment strategies in the aircraft leasing sector. In June 2012, RBS Aviation Capital was sold to a consortium led by the Sumitomo Mitsui Financial Group. In October, Jackson Square announced it will be purchased by the Mitsubishi UFJ group. Finally, in December, American International Group, Inc. announced an agreement to sell up to 90% of ILFC to a consortium led by New China Trust Co. Ltd. In addition, the global financial crisis curtailed the availability of bank debt, particularly for transactions involving mid- aged and older aircraft and has led to a reduction in aircraft trading volumes, Competition for leasing or re-leasing of aircraft, as well as aircraft sales is based principally upon the availability, type and condition of aircraft, lease rates, prices and other lease terms. Aircraft manufacturers, airlines and other operators, distributors, equipment managers, leasing companies, financial institutions and other parties engaged in leasing, managing, marketing or remarketing aircraft compete with us, although their focus may be on different market segments and aircraft types. Some of our competitors have, or may obtain, greater financial resources than us and may have a lower cost of capital. A number also place speculative orders for new aircraft, to be placed on operating lease upon delivery from the manufacturer 7 in competition with new and used aircraft offered by other lessors. However, we believe that we are able to compete favorably in aircraft acquisition, leasing and sales activities due to the reputation and experience of our management, our extensive market contacts and our expertise in sourcing and acquiring aircraft. We also believe our access of unsecured capital markets debt provides us with a competitive advance in acquiring mid-aged aircraft. Employees We operate in a capital intensive, rather than a labor intensive, business. As of December 31, 2012, we had 83 employees. None of our employees are covered by a collective bargaining agreement and we believe that we maintain excellent employee relations. We provide certain employee benefits, including retirement benefits, and health, life, disability and accident insurance plans. Insurance We require our lessees to carry airline general third-party legal liability insurance, all-risk aircraft hull insurance (both with respect to the aircraft and with respect to each engine when not installed on our aircraft) and war-risk hull and legal liability insurance. We are named as an additional insured on liability insurance policies carried by our lessees, and we or one of our lenders would typically be designated as a loss payee in the event of a total loss of the aircraft. We maintain contingent hull and liability insurance coverage with respect to our aircraft which is intended to provide coverage for certain risks, including the risk of cancellation of the hull or liability insurance maintained by any of our lessees without notice to us, but which excludes coverage for other risks such as the risk of insolvency of the primary insurer or reinsurer. We maintain insurance policies to cover non-aviation risks related to physical damage to our equipment and property, as well as with respect to third-party liabilities arising through the course of our normal business operations (other than aircraft operations). We also maintain limited business interruption insurance to cover a portion of the costs we would expect to incur in connection with a disruption to our main facilities, and we maintain directors’ and officers’ liability insurance providing coverage for liabilities related to the service of our directors, officers and certain employees. Consistent with industry practice, our insurance policies are generally subject to deductibles or self-retention amounts. We believe that the insurance coverage currently carried by our lessees and by Aircastle provides adequate protection against the accident-related and other covered risks involved in the conduct of our business. However, there can be no assurance that we have adequately insured against all risks, that lessees will at all times comply with their obligations to maintain insurance, that our lessees’ insurers and re-insurers will be or will remain solvent and able to satisfy any claims, that any particular claim will ultimately be paid or that we will be able to procure adequate insurance coverage at commercially reasonable rates in the future. Government Regulation The air transportation industry is highly regulated; however, we generally are not directly subject to most of these regulations because we do not operate aircraft. In contrast, our lessees are subject to extensive, direct regulation under the laws of the jurisdictions in which they are registered and under which they operate. Such laws govern, among other things, the registration, operation and maintenance of our aircraft. Our customers may also be subject to noise or emissions regulations in the jurisdictions in which they operate our aircraft. For example, the United States and other jurisdictions impose more stringent limits on nitrogen oxide (“NOx”), carbon monoxide (“CO”) and carbon dioxide (“CO2”) emissions from engines. In addition, European countries generally have more strict environmental regulations and, in particular, the European Union ("EU") has included aviation in the European Emissions Trading Scheme (“ETS”), although the United States, China and other countries continue to oppose the inclusion of aviation emissions in ETS. Most of our aircraft are registered in the jurisdiction in which the lessee of the aircraft is certified as an air operator. As a result, our aircraft are subject to the airworthiness and other standards imposed by such jurisdictions. Laws affecting the airworthiness of aircraft generally are designed to ensure that all aircraft and related equipment are continuously maintained under a program that will enable safe operation of the aircraft. Most countries’ aviation laws require aircraft to be maintained under an approved maintenance program having defined procedures and intervals for inspection, maintenance and repair. Our lessees are sometimes obligated by us to obtain governmental approval to import and lease our aircraft, to operate our aircraft on certain routes and to pay us in U.S. dollars. Usually, these approvals are obtained prior to lease commencement as a condition to our delivery of the aircraft. Governmental leave to deregister and/or re-export an aircraft at lease expiration or termination may also be required. 8 We are also subject to U.S. regulations governing the lease and sale of aircraft to foreign entities. Specifically, the U.S. Department of Commerce (through its Bureau of Industry and Security) and the U.S. Department of the Treasury (through its Office of Foreign Assets Control) impose restrictions on the operation of U.S.-made goods, such as aircraft and engines, in sanctioned countries, and also impose restrictions on the ability of U.S. companies to conduct business with entities in certain countries and with certain individuals. We structure our aircraft lease and sale documentation to require compliance with these restrictions. Inflation Inflation affects our lease rentals, asset values and costs, including SG&A expenses and other expenses. We do not believe that our financial results have been, or will be, adversely affected by inflation in a material way. Subsequent Events The Company’s management has reviewed and evaluated all events or transactions for potential recognition and/or disclosure since the balance sheet date of December 31, 2012 through the date of this filing, the date on which the consolidated financial statements included in this Form 10-K were issued. ITEM 1A. RISK FACTORS Risks Related to Our Business Risks Related to Our Operations Volatile financial market conditions and the European sovereign debt crisis may adversely impact our liquidity, our access to capital and our cost of capital or our ability to pay dividends to our shareholders, and may adversely impact the airline industry and the financial condition of our lessees. The financial crisis that began in the second half of 2008 resulted in significant global market volatility and disruption and a lack of liquidity. While these conditions have stabilized and the capital markets generally have shown signs of improvement since the first quarter of 2009, the availability and pricing of capital in the bank market and in the unsecured bond market can be significantly impacted by global events, including for example the sovereign debt crisis, and there is no assurance that we will be able to raise capital in the unsecured bond market at any particular time to fund future growth or for other purposes. In Europe, countries such as Greece, Italy, Spain, Portugal and Ireland have been particularly affected by the recent financial and economic conditions, creating a heightened perceived risk of default on the sovereign debt of those countries, with concerns about the effect it would have on European Union economies and the ongoing viability of the euro currency and the European Monetary Union. We do not have any direct European sovereign debt exposure, but a very substantial part of our portfolio is leased into Europe, as further described in “Risks Related to Our Lessees — European Concentration,” below, and it is difficult to predict with any certainty the impact that a sovereign debt default or a breakup of the European Monetary Union would have on our lessees, but continuing concerns about default risk on sovereign debt, the austerity packages being put into place by a number of European countries and other related effects are likely to continue to have an adverse effect on growth in Europe, which may have a material adverse impact on our customers based in Europe and our customers operating to or within Europe. Concerns about sovereign debt defaults also puts pressure on banks holding such debt, leading some banks to reduce lending in order to shore up their balance sheets, making bank debt more difficult to access within our industry. Any of these risks could have an adverse effect, which may be material, on our ability to access capital, on our cost of capital or on our business, financial condition, results of operations or our ability to pay dividends to our shareholders. Risks affecting the airline industry may adversely affect our customers and have a material adverse impact on our financial results. We operate as a supplier to airlines and are indirectly impacted by all the risks facing airlines today. The ability of each lessee to perform its obligations under the relevant lease will depend primarily on the lessee’s financial condition and cash flow, which may be affected by factors beyond our control, including: 9 • • • • • • • • • • • • passenger and air cargo demand; competition; passenger fare levels and air cargo rates; the continuing availability of government-funded programs, including military cargo or troop movement contracts, or other forms of government support, whether through subsidies, loans, guarantees, equity investments or otherwise; availability of financing and other circumstances affecting airline liquidity, including covenants in financings, terms imposed by credit card issuers, collateral posting requirements contained in fuel hedging contracts and the ability of airlines to make or refinance principal payments as they come due; geopolitical and other events, including war, acts or threats of terrorism, outbreaks of epidemic diseases and natural disasters; aircraft accidents; operating costs, including the price and availability of jet fuel, labor costs and insurance costs and coverages; restrictions in labor contracts and labor difficulties; economic conditions, including recession, financial system distress and currency fluctuations in the countries and regions in which the lessee operates or from which the lessee obtains financing; losses on investments; and governmental regulation of, or affecting the air transportation business, including noise regulations, emissions regulations, climate change initiatives, and age limitations. These factors, and others, may lead to defaults by our customers, delay or prevent aircraft deliveries or transitions, result in payment or other restructurings, and increase our costs from repossessions and reduce our revenues due to downtime or lower re-lease rates, which would have an adverse impact on our financial results or our ability to pay dividends to our shareholders. We bear the risk of re-leasing and selling our aircraft in order to meet our debt obligations, finance our growth and operations, pay dividends and, ultimately, realize upon the investment in the aircraft in our portfolio. We bear the risk of re-leasing and selling or otherwise disposing of our aircraft in order to continue to generate sufficient revenues to meet our debt obligations, to finance our growth and operations, to pay dividends on our common shares and, ultimately, to realize upon our investment in the aircraft in our portfolio. In certain cases we commit to purchase aircraft that are not subject to lease and therefore are subject to lease placement risk for aircraft we are obliged to purchase. Because only a portion of an aircraft’s value is covered by contractual cash flows from an operating lease, we are exposed to the risk that the residual value of the aircraft will not be sufficient to permit us to fully recover or realize a gain on our investment in the aircraft and to the risk that we may have to record impairment charges. Further, our ability to re-lease, lease or sell aircraft on favorable terms, or at all, or without significant off-lease time and transition costs is likely to be adversely impacted by risks affecting the airline industry generally. Other factors that may affect our ability to realize upon the investment in our aircraft and that may increase the likelihood of impairment charges, include higher fuel prices which may increase demand for newer, fuel efficient aircraft, additional environmental regulations, customer preferences and other factors that may effectively shorten the useful life of older aircraft. Such impairment charges may adversely impact our financial results. We wrote down the value of some of our assets during 2012, and if conditions worsen, or in the event of a customer default, we may be required to record further write-downs. We test our assets for impairment whenever events or changes in circumstances indicate that the carrying amounts for such assets are not recoverable from their expected, undiscounted cash flows. We also perform a recoverability analysis for all of our aircraft assets at least once a year, regardless of whether a triggering event or change in circumstances has occurred. We performed a recoverability analysis for all of our aircraft in the third quarter of 2012 and recorded an aggregate of $78.7 million in impairments on 15 aircraft, with an average age of 21 years. For the full year 2012, we recorded an aggregate of $96.5 million in impairments on 18 aircraft. If economic conditions or aircraft lease or sales values worsen, or a lessee customer defaults, we may have to reassess the carrying value of one or more of our aircraft assets. In particular, we believe that the carrying value of older aircraft may be more susceptible to non-recoverable declines in value because, among other reasons, such assets have less remaining useful life in which to benefit from a market recovery, and as of December 31, 2012, based on net book value, 22% of our 10 aircraft portfolio was 15 years or older. Any such impairment may have a material and adverse impact on our financial results and the market price for our shares. Our financial reporting for lease revenue may be significantly impacted by a proposed new model for lease accounting. On August 17, 2010, the International Accounting Standards Board, (“IASB”), and FASB published for public comment joint proposals (the “Proposals”) to change the financial reporting of lease contracts (“Lease ED”). The Proposals set out a model for lessee accounting under which as lessee would recognize a “right-of-use” asset representing its right to use the underlying asset and a liability representing its obligation to pay lease rentals over the lease term. The Proposals set out two alternative accounting models for lessors, a “performance obligation” approach and a “derecognition approach”. If a lessor retains exposure to significant risks and benefits associated with the underlying asset, then it would apply the performance obligation approach to the lease of the asset. If a lessor does not retain such an exposure, then it would adopt the derecognition approach to the lease of the asset. The Proposals do not contain an effective date for the proposed changes, and it is possible that an alternative approach may be developed; however, if the Proposals are adopted in the current form, the changes could adversely impact our financial results and the market price for our shares. See “Recent Unadopted Accounting Pronouncements” for recent developments. Our ability to obtain debt financing and our cost of debt financing is, in part, dependent upon our credit ratings and a credit downgrade could adversely impact our financial results or our ability to pay dividends to our shareholders. Our ability to obtain debt financing and our cost of debt financing is dependent, in part, on our credit ratings. Maintaining our credit ratings depends in part on strong financial results and in part on other factors, including the outlook of the ratings agencies on our sector and on the market generally. A credit rating downgrade may result in higher pricing or less favorable terms under secured financings, including Export Credit Agency backed financings, or may make it more difficult or more costly for us to raise debt financing in the unsecured bond market. Credit rating downgrades may therefore make it more difficult to satisfy our funding requirements, adversely impact our financial results or our ability to pay dividends to our shareholders. An increase in our borrowing costs may adversely affect our earnings and cash available for distribution to our shareholders, and our interest rate hedging contracts would require us to pay significant termination payments in order to terminate in connection with a refinancing. Our aircraft are financed under long-term debt financings. As these financings mature, we will be required to either refinance these instruments by entering into new financings, which could result in higher borrowing costs, or repay them by using cash on hand or cash from the sale of our assets. Our securitizations are London Interbank Offered Rate (“LIBOR”) based floating-rate obligations which we hedged with interest rate swaps into fixed-rate obligations. As interest rates declined, the fair value of these interest rate swaps has also declined, and we would incur a significant termination payment if we were to terminate any of these interest rate swaps prior to its scheduled maturity. Because we would likely be obligated to terminate an interest rate swap in order to refinance one of these financings, these interest rate swaps make refinancing our securitizations more difficult. Departure of key officers could harm our business and financial results. Our senior management’s reputations and relationships with lessees, sellers, buyers and financiers of aircraft are a critical element of our business. We encounter intense competition for qualified employees from other companies in the aircraft leasing industry, and we believe there are only a limited number of available qualified executives in our industry. Our future success depends, to a significant extent, upon the continued service of our senior management personnel, and if we lose one or more of these individuals, our business and financial results could be adversely affected. We may not be able to pay or maintain dividends, or we may choose not to pay dividends, and the failure to pay or maintain dividends may adversely affect our share price. On November 5, 2012, our board of directors declared a regular quarterly dividend of $0.165 per common share, or an aggregate of approximately $11.5 million, which was paid on December 14, 2012 to holders of record on November 30, 2012. This dividend may not be indicative of the amount of any future quarterly dividends. Our ability to pay, maintain or increase cash dividends to our shareholders is subject to the discretion of our board of directors and will depend on many factors, including our ability to comply with financial covenants in our financing documents and others that limit our ability 11 to pay dividends and make certain other restricted payments; the difficulty we may experience in raising and the cost of additional capital and our ability to finance our aircraft acquisition commitments; our ability to re-finance our securitizations and other long-term financings; our ability to negotiate and enforce favorable lease rates and other contractual terms; the level of demand for our aircraft; the economic condition of the commercial aviation industry generally; the financial condition and liquidity of our lessees; unexpected or increased aircraft maintenance or other expenses; the level and timing of capital expenditures, principal repayments and other capital needs; maintaining our credit ratings, our results of operations, financial condition and liquidity; general business conditions; legal restrictions on the payment of dividends, including a statutory dividend test and other limitations under Bermuda law; and other factors that our board of directors deems relevant. Some of these factors are beyond our control, and a change in any such factor could affect our ability to pay dividends on our common shares. In the future we may not choose to pay dividends or may not be able to pay dividends, maintain our current level of dividends, or increase them over time. Increases in demand for our aircraft and operating lease payments may not occur and may not increase our actual cash available for dividends to our common shareholders. The failure to maintain or pay dividends may adversely affect our share price. We are subject to risks related to our indebtedness that may limit our operational flexibility, our ability to compete with our competitors and our ability to pay dividends to our shareholders. General Risks As of December 31, 2012, our total indebtedness was approximately $3.6 billion, representing approximately 71.8% of our total capitalization. As a result of our substantial amount of indebtedness, we may be unable to generate sufficient cash to pay, when due, the principal of, interest on or other amounts due with respect to our indebtedness, and our substantial amount of indebtedness may increase our vulnerability to adverse economic and industry conditions, reduce our flexibility in planning for or reaction to changes in the business environment or in our business or industry, and adversely affect our cash flow and our ability to operate our business, compete with our competitors and pay dividends to our shareholders. Our indebtedness subjects us to certain risks, including: • • • • a significant percentage of our aircraft and aircraft leases serve as collateral for our secured indebtedness and the terms of certain of our indebtedness require us to use proceeds from sales of aircraft, in part, to repay amounts outstanding under such indebtedness; under terms of certain debt facilities, we may be required to dedicate a substantial portion of our cash flows from operations, if available, to debt service payments, thereby reducing the amount of our cash flow available to pay dividends, fund working capital, make capital expenditures and satisfy other needs; our failure to comply with the terms of our indebtedness, including restrictive covenants contained therein, may result in additional interest being due or defaults that could result in the acceleration of the principal, and unpaid interest on, the defaulted debt, as well as the forfeiture of the aircraft pledged as collateral; and non-compliance with covenants prohibiting certain investments and other restricted payments, including limitations on our ability to pay dividends, repurchase our common shares, raise additional capital or refinance our existing debt, may reduce our operational flexibility and limit our ability to refinance or grow the business. Risks Relating to Our Long-term Financings The provisions of our long-term financings require us to comply with financial and other covenants. Our compliance with these ratios, tests and covenants depends upon, among other things, the timely receipt of lease payments from our lessees and upon our overall financial performance. • ECA Term Financings. Our ECA term financings contain a $500 million minimum net worth covenant and also contain, among other customary provisions, a material adverse change default and cross-default to other ECA- or EXIM (“Export-Import Bank of the United States”) — supported financings or other recourse financings of the Company. • Bank Financings. Our bank financings contain, among other customary provisions, a $500 million minimum net worth covenant and, in some cases, a cross-default to other financings with the same lender. 12 • Senior Notes. Our senior notes indenture imposes operating and financial restrictions on our activities. These restrictions limit our ability to, or in certain cases prohibit us from, incurring or guaranteeing additional indebtedness, refinancing our existing indebtedness, paying dividends, repurchasing our common shares, making other restricted payments or making certain investments or entering into joint ventures. In addition, under the terms of the securitizations, certain transactions will require the consent or approval of one or more of the independent directors, the rating agencies that rated the applicable portfolio’s certificates or the financial guaranty insurance policy issuer for the applicable securitization or the bank providing the financing for certain activities, including aircraft sales or leasing aircraft to certain airlines. Absent the aforementioned consent, which we may not receive, the limits under the securitization may place limits on our ability to lease our aircraft to certain customers in certain jurisdictions or to sell an aircraft, even if to do so would provide the best risk/return outcome at that time. In addition, because the financial guarantee insurance policy issuer is currently experiencing financial distress, it is unclear whether such policy issuer will be in a position to continue to consider to any request for consent, or may refuse or be unable to grant its consent, to any such proposed transaction which may, with respect to aircraft financed under the securitizations, limit our ability to place aircraft on lease to provide the best returns or to sell aircraft that we believe would be in our best interest to sell. In addition, the terms of our financings restrict our ability to incur or guarantee additional indebtedness or engage in mergers, amalgamations or consolidations among our subsidiary companies or between a subsidiary company and a third party or otherwise dispose of all or substantially all of our assets. We are subject to various risks and requirements associated with transacting business in foreign jurisdictions. The international nature of our business exposes us to trade and economic sanctions and other restrictions imposed by the U.S. and other governments. The U.S. Departments of Justice, Commerce, Treasury and other agencies and authorities have a broad range of civil and criminal penalties they may seek to impose against companies for violations of export controls, the Foreign Corrupt Practices Act (“FCPA”), and other federal statutes, sanctions and regulations, including those established by the Office of Foreign Assets Control (“OFAC”) and, increasingly, similar or more restrictive foreign laws, rules and regulations, including the U.K. Bribery Act ("UKBA"), which may also apply to us. By virtue of these laws and regulations, and under laws and regulations in other jurisdictions, we may be obliged to limit our business activities, we may incur costs for compliance programs and we may be subject to enforcement actions or penalties for noncompliance. In recent years, U.S. and foreign governments have increased their oversight and enforcement activities with respect to these laws and we expect the relevant agencies to continue to increase these activities. A violation of these laws, sanctions or regulations could adversely impact our business, results of operations or ability to pay dividends to our shareholders. We have compliance policies and training programs in place for our employees with respect to FCPA, OFAC, UKBA and similar laws, but there can be no assurance that our employees, consultants or agents will not engage in conduct for which we may be held responsible. Violations of FCPA, OFAC, UKBA and other laws, sanctions or regulations may result in severe criminal or civil penalties, and we may be subject to other liabilities, which could adversely affect our business, results of operations or ability to pay dividends to our shareholders. We are dependent upon information technology systems, which are subject to disruption, damage, failure and risks associated with implementation and integration. We are dependent upon information technology systems in the conduct of our operations. Our information technology systems are subject to disruption, damage or failure from a variety of sources, including, without limitation, computer viruses, security breaches, cyber attacks, natural disasters and defects in design. Damage, disruption, or failure of one or more information technology systems may result in interruptions to our operations in the interim or may require a significant investment to fix or replace them or may result in significant damage to our reputation. Various measures have been implemented to manage our risks related to the information technology systems and network disruptions, but our business, financial position or results of our operations could be adversely impacted by such disruption, damage, failure, cyber attach or breach. 13 Risks Related to Our Aviation Assets The variability of supply and demand for aircraft could depress lease rates for our aircraft, which would have an adverse effect on our financial results and growth prospects and on our ability to meet our debt obligations and to pay dividends to our shareholders. The aircraft leasing and sales industry has experienced periods of aircraft oversupply and undersupply. The oversupply of a specific type of aircraft in the market is likely to depress aircraft lease rates for, and the value of, that type of aircraft. The supply and demand for aircraft is affected by various cyclical and non-cyclical factors that are not under our control, including: passenger and air cargo demand; operating costs, including fuel costs, and general economic conditions affecting our lessees’ operations; geopolitical events, including war, prolonged armed conflict and acts of terrorism; outbreaks of communicable diseases and natural disasters; governmental regulation; interest rates; foreign exchange rates; airline restructurings and bankruptcies; the availability of credit; changes in control of, or restructurings of, other aircraft leasing companies; • • • • • • • • • • • manufacturer production levels and technological innovation; • climate change initiatives, technological change, aircraft noise and emissions regulations, aircraft age limits and other factors leading to retirement and obsolescence of aircraft models; • manufacturers merging, exiting the industry or ceasing to produce aircraft types; • new-entrant manufacturers producing additional aircraft models, or existing manufacturers producing newly engined aircraft models or new aircraft models, in competition with existing aircraft models; reintroduction into service of aircraft previously in storage; and airport and air traffic control infrastructure constraints. • • These and other factors may produce sharp decreases or increases in aircraft values and lease rates, which would impact our cost of acquiring aircraft, and which may result in lease defaults and also prevent the aircraft from being re- leased or sold on favorable terms. This could have an adverse effect on our financial results and growth prospects and on our ability to meet our debt obligations or to pay dividends to our shareholders. Other factors that increase the risk of decline in aircraft value and lease rates could have an adverse affect on our financial results and growth prospects and on our ability to meet our debt obligations and to pay dividends to our shareholders. In addition to factors linked to the aviation industry generally, other factors that may affect the value and lease rates of our aircraft include: the age of the aircraft; the particular maintenance and operating history of the airframe and engines; the number of operators using that type of aircraft; • • • • whether the aircraft is subject to a lease and, if so, whether the lease terms are favorable to us; • applicable airworthiness directives or manufacturer’s service bulletins that have not yet been performed to the aircraft; grounding orders or other regulatory action that could prevent or limit utilization of our aircraft; any regulatory and legal requirements that must be satisfied before the aircraft can be purchased, sold or re- leased; and compatibility of our aircraft configurations or specifications with those desired by the operators of other aircraft of that type. • • • Any decrease in the values of and lease rates for commercial aircraft which may result from the above factors or other unanticipated factors may have a material adverse effect on our financial results and growth prospects and on our ability to meet our debt obligations or to pay dividends to our shareholders. 14 The advent of superior aircraft technology could cause our existing aircraft portfolio to become outdated and therefore less desirable, which could adversely affect our financial results and growth prospects, our ability to compete in the marketplace or our ability to pay dividends to our shareholders. As manufacturers introduce technological innovations and new types of aircraft, including the Boeing 787 and Airbus A350 and re-engined and/or replacement types for the Boeing 737 and A320 families of aircraft, certain aircraft in our existing aircraft portfolio may become less desirable to potential lessees or purchasers. In 2010 Airbus announced that it intends to produce the A320 NEO family aircraft for 2016, which it claims will reduce fuel burn, cut noise emission and maintenance costs. In 2011, Boeing announced a plan to produce the 737 MAX for 2017, which it also claims will reduce fuel burn. In 2012, Embraer announced that it intends to produce a second generation of E-Jets with Pratt & Whitney of aircraft for 2018 which it claims will result in improvements in fuel burn, maintenance costs, emissions and external noise. Further, Bombardier Inc., Commercial Aircraft Corporation of China Ltd and Sukhoi Company (JSC) are developing aircraft models that will compete with Airbus Model A319 and Boeing Model 737-700 aircraft in our fleet In addition, although all of the aircraft in our portfolio are Stage 3 noise-compliant, the imposition of more stringent noise or emissions standards or the introduction of additional age limitation regulations may limit the potential customer base for certain aircraft in our portfolio or make certain of our aircraft less desirable in the marketplace. Any of these risks could adversely affect our ability to lease or sell our aircraft on favorable terms, or at all, which could have an adverse affect on our financial condition and results of operations or on our ability to pay dividends to our shareholders. The effects of various energy, emissions, and noise regulations and initiatives may negatively affect the airline industry. This may cause lessees to default on their lease payment obligations to us and may limit the market for certain aircraft in our portfolio. Governmental regulations regarding aircraft and engine noise and emissions levels apply based on where the relevant aircraft is registered and operated. For example, jurisdictions throughout the world have adopted noise regulations which require all aircraft to comply with noise level standards. In addition to the current requirements, the United States and the International Civil Aviation Organization (“ICAO”) have adopted a new, more stringent set of standards for noise levels which applies to engines manufactured or certified on or after January 1, 2006. Currently, U.S. regulations would not require any phase-out of aircraft that qualify with the older standards applicable to engines manufactured or certified prior to January 1, 2006, but the EU has established a framework for the imposition of operating limitations on aircraft that do not comply with the new standards. These regulations could limit the economic life of the aircraft and engines, reduce their value, limit our ability to lease or sell the non-compliant aircraft and engines or, if engine modifications are permitted, require us to make significant additional investments in the aircraft and engines to make them compliant. In addition to more stringent noise restrictions, the United States and other jurisdictions impose more stringent limits on other aircraft engine emissions, such as NOx, CO and CO2, consistent with current ICAO standards. These limits generally apply only to engines manufactured after 1999. Certain of the aircraft engines owned by us were manufactured after 1999. Because aircraft engines are retired or replaced from time to time in the usual course, it is likely that the number of such engines may increase over time. Also, the U.S.has adopted more stringent NOx emission standards for newly manufactured aircraft engines, beginning in 2013, and ICAO has recently adopted a resolution designed to cap greenhouse gas emissions from aircraft and has committed to propose a greenhouse gas emission standard for aircraft engines by 2012. Concerns over energy security, environmental sustainability, and climate change could result in more stringent limitations on the operation of our aircraft; particularly aircraft equipped with older-technology engines, or could result in decreased demand for air travel. The Environmental Protection Agency (the “EPA”) has periodically revised its NOx, CO, and CO2 emission standards to incorporate the ICAO’s standards. In July 2012, EPA promulgated final regulations that would set more stringent NOx emission standards for aircraft gas turbine engines in line with those already endorsed by the ICAO. EPA anticipates establishing a future production cutoff to require all engine models that were originally certified prior to January 1, 2014 to comply with the new standards. These regulations also include several new reporting requirements applicable to manufacturers of aircraft gas turbine engines. Furthermore, since 2006, EPA has seen significant pressure from environmental groups to make a finding under the Clean Air Act ("CAA") that greenhouse gas (“GHG”) emissions and lead emissions from aircrafts endanger public health. In both instances, environmental groups filed petitions urging EPA to make this finding, and later filed suit against the agency when it did not act. The court in both cases held that EPA was required to respond to the petitions. In the summer of 2012, EPA stated that it intends to initiate a notice and comment proceeding regarding whether 15 regulation of GPH is required under the CAA. However, it is unclear whether (and if so, when) EPA will initiate such a proceeding. The legal challenge against EPA regarding lead emissions from aviation fuel remains pending. European countries generally have relatively strict environmental regulations that can restrict operational flexibility and decrease aircraft productivity. The EU has attempted to include the aviation sector in its Emissions Trading Scheme (“ETS”), which was slated to become effective in January 2012, but has now been put on hold in light of the ICAO's effort to introduce a global program to reduce aircraft GHGs. The United States, China, and other countries continue to oppose the inclusion of aviation emissions in the ETS, and the U.S. supports the ICAO as the proper venue for international regulation of emissions, and maintains that the EU’s approach is contrary to ICAO’s charter. In November 2012, the U.S. passed legislation prohibiting U.S. airlines from taking part in an EU emissions program. The U.S. continues to engage in discussions within other nations regarding methods for reducing GHGs from aircrafts, as an alternative to including aircraft in the ETS. The group will meet again in early 2013. Over time, it is possible that governments will adopt additional regulatory requirements and/or market-based policies that are intended to reduce energy usage, emissions, and noise levels from aircraft. Such initiatives may be based on concerns regarding climate change, energy security, public health, local impacts, or other factors, and may also impact the global market for certain aircraft and cause behavioral shifts that result in decreased demand for air travel. Compliance with current or future regulations, taxes or duties imposed to deal with energy usage, fuel type, emissions, noise levels, or related issues could cause the lessees to incur higher costs and, due to higher ticket prices, lower demand for travel, leading to lower net airline revenues, resulting in an adverse impact on the financial condition of our lessees. Consequently, such compliance may affect the lessees’ ability to make rental and other lease payments and limit the market for certain of our aircraft in our portfolio, which may adversely affect our ability to lease or sell our aircraft on favorable terms, or at all, which could have an adverse effect on our financial condition and results of operations or on our ability to pay dividends to our shareholders. The advanced age, or older technology, of some of our aircraft may expose us to higher than anticipated maintenance related expenses, which could adversely affect our financial results and our ability to pursue additional acquisitions or our ability to pay dividends to our shareholders. As of December 31, 2012, based on net book value, 22% of our aircraft portfolio was 15 years or older. In general, the costs of operating an aircraft, including maintenance expenditures, increase with the age of the aircraft. Additionally, older aircraft typically are less fuel-efficient than newer aircraft and may be more difficult to re-lease or sell, particularly if, due to airline insolvencies or other distress, older aircraft are competing with newer aircraft in the lease or sale market. Variable expenses like fuel, crew size or aging aircraft corrosion control or inspection or modification programs and related airworthiness directives could make the operation of older aircraft less economically feasible and may result in increased lessee defaults. We may also incur some of these increased maintenance expenses and regulatory costs upon acquisition or re-leasing of our aircraft. In addition, a number of countries have adopted or may adopt age limits on aircraft imports, which may result in greater difficulty placing affected aircraft on lease or re-lease on favorable terms. Any of these expenses, costs or risks will have a negative impact on our financial results, our ability to pursue additional acquisitions or on our ability to pay dividends to our shareholders. We operate in a highly competitive market for investment opportunities in aviation assets and for the leasing of aircraft. We compete with other operating lessors, airlines, aircraft manufacturers, financial institutions (including those seeking to dispose of repossessed aircraft at distressed prices), aircraft brokers and other investors with respect to aircraft acquisitions and aircraft leasing. The aircraft leasing industry is highly competitive and may be divided into three basic activities: (i) aircraft acquisition, (ii) leasing or re-leasing of aircraft, and (iii) aircraft sales. Competition varies among these three basic activities. The competitive playing field for new acquisitions has changed considerably in the wake of the financial crisis, as many large players are restructuring or revisiting their investment appetite, and a number of new entrants with private equity investors or Asian bank or other equity backing have entered the market. A number of our competitors are substantially larger and have considerably greater financial, technical and marketing resources than we do. Some competitors may have a lower cost of funds and access to funding sources that are not available to us. In addition, some of our competitors may have higher risk tolerances or different risk or residual value assessments, which could allow them to consider a wider variety of investments, establish more relationships, bid more aggressively on 16 aviation assets available for sale and offer lower lease rates than we can. For instance, some of our competitors may provide financial services, maintenance services or other inducements to potential lessees that we cannot provide. As a result of competitive pressures, we may not be able to take advantage of attractive investment opportunities from time to time, and we may not be able to identify and make investments that are consistent with our investment objectives. Additionally, we may not be able to compete effectively against present and future competitors in the aircraft leasing market or aircraft sales market. The competitive pressures we face may have a material adverse effect on our business, financial condition and results of operations or on our ability to pay dividends to our shareholders. Risks Related to Our Leases If lessees are unable to fund their maintenance obligations on our aircraft, our cash flow and our ability to meet our debt obligations or to pay dividends to our shareholders could be adversely affected. The standards of maintenance observed by the various lessees and the condition of the aircraft at the time of sale or lease may affect the future values and rental rates for our aircraft. Under our leases, the relevant lessee is generally responsible for maintaining the aircraft and complying with all governmental requirements applicable to the lessee and the aircraft, including, without limitation, operational, maintenance, and registration requirements and airworthiness directives (although in certain cases we have agreed to share the cost of complying with certain airworthiness directives). Failure of a lessee to perform required maintenance with respect to an aircraft during the term of a lease could result in a decrease in value of such aircraft, an inability to lease the aircraft at favorable rates or at all, or a potential grounding of such aircraft, and will likely require us to incur maintenance and modification costs upon the expiration or earlier termination of the applicable lease, which could be substantial, to restore such aircraft to an acceptable condition prior to sale or re-leasing. Certain of our leases provide that the lessee is required to make periodic payments to us during the lease term in order to provide cash reserves for the payment of maintenance tied to the usage of the aircraft. In these leases there is an associated liability for us to reimburse the lessee for such scheduled maintenance performed on the related aircraft. Our operational cash flow and available liquidity may not be sufficient to fund our maintenance obligations, particularly as our aircraft age. Actual rental and maintenance payments by lessees and other cash that we receive may be significantly less than projected as a result of numerous factors, including defaults by lessees and our potential inability to obtain satisfactory maintenance terms in leases. Certain of our leases do not provide for any periodic maintenance reserve payments to be made by lessees to us in respect of their maintenance obligations, and it is possible that future leases will not contain such requirements. Typically, these lessees are required to make payments at the end of the lease term. Even if we are entitled to receive maintenance payments, these payments may not cover the entire expense of the scheduled maintenance they are intended to fund. In addition, maintenance payments typically cover only certain scheduled maintenance requirements and do not cover all required maintenance and all scheduled maintenance. Furthermore, lessees may not meet their maintenance payment obligations or perform required scheduled maintenance. Any significant variations in such factors may materially adversely affect our business and particularly our cash position, which would make it difficult for us to meet our debt obligations or to pay dividends to our shareholders. Failure to pay certain potential additional operating costs could result in the grounding or arrest of our aircraft and prevent the re-lease, sale or other use of our aircraft, which would negatively affect our financial condition and results of operations or our ability to pay dividends to our shareholders. As in the case of maintenance costs, we may incur other operational costs upon a lessee default or where the terms of the lease require us to pay a portion of those costs. Such costs include: • • • • the costs of casualty, liability and political risk insurance and the liability costs or losses when insurance coverage has not been or cannot be obtained as required, or is insufficient in amount or scope; the costs of licensing, exporting or importing an aircraft, airport charges, customs duties, air navigation charges, landing fees and similar governmental or quasi-governmental impositions, which can be substantial; penalties and costs associated with the failure of lessees to keep the aircraft registered under all appropriate local requirements or obtain required governmental licenses, consents and approvals; and carbon taxes or other fees, taxes or costs imposed under emissions limitations, climate change regulations or other initiatives. 17 The failure to pay certain of these costs can result in liens on the aircraft and the failure to register the aircraft can result in a loss of insurance. These matters could result in the grounding or arrest of the aircraft and prevent the re-lease, sale or other use of the aircraft until the problem is cured, which would negatively affect our financial condition and results of operations or on our ability to pay dividends to our shareholders. Our lessees may have inadequate insurance coverage or fail to fulfill their respective indemnity obligations, which could result in us not being covered for claims asserted against us and may negatively affect our business, financial condition and results of operations or our ability to pay dividends to our shareholders. By virtue of holding title to the aircraft directly or through a special purpose entity, in certain jurisdictions around the world aircraft lessors are held strictly liable for losses resulting from the operation of aircraft or may be held liable for those losses based on other legal theories. Liability may be placed on an aircraft lessor even under circumstances in which the lessor is not directly controlling the operation of the relevant aircraft. Lessees are required under our leases to indemnify us for, and insure against, liabilities arising out of the use and operation of the aircraft, including third-party claims for death or injury to persons and damage to property for which we may be deemed liable. Lessees are also required to maintain public liability, property damage and hull all risk and hull war risk insurance on the aircraft at agreed upon levels. However, they are not generally required to maintain political risk insurance. Following the terrorist attacks of September 11, 2001, aviation insurers significantly reduced the amount of insurance coverage available to airlines for liability to persons other than employees or passengers for claims resulting from acts of terrorism, war or similar events. At the same time, they significantly increased the premiums for such third-party war risk and terrorism liability insurance and coverage in general. As a result, the amount of such third-party war risk and terrorism liability insurance that is commercially available at any time may be below the amount stipulated in our leases and required by the market in general. Our lessees’ insurance, including any available governmental supplemental coverage, may not be sufficient to cover all types of claims that may be asserted against us. Any inadequate insurance coverage or default by lessees in fulfilling their indemnification or insurance obligations or the lack of political risk, hull, war or third-party war risk and terrorism liability insurance will reduce the proceeds that would be received by us upon an event of loss under the respective leases or upon a claim under the relevant liability insurance, which could negatively affect our business, financial condition and results of operations or our ability to pay dividends to our shareholders. Failure to obtain certain required licenses and approvals could negatively affect our ability to re-lease or sell aircraft, which would negatively affect our financial condition and results of operations or our ability to pay dividends to our shareholders. A number of leases require specific licenses, consents or approvals for different aspects of the leases. These include consents from governmental or regulatory authorities for certain payments under the leases and for the import, export or deregistration of the aircraft. Subsequent changes in applicable law or administrative practice may increase such requirements and a governmental consent, once given, might be withdrawn. Furthermore, consents needed in connection with future re- leasing or sale of an aircraft may not be forthcoming. Any of these events could adversely affect our ability to re-lease or sell aircraft, which would negatively affect our financial condition and results of operations or our ability to pay dividends to our shareholders. Due to the fact that many of our lessees operate in emerging markets, we are indirectly subject to many of the economic and political risks associated with competing in such markets. Emerging markets are countries which have less developed economies that are vulnerable to economic and political problems, such as significant fluctuations in gross domestic product, interest and currency exchange rates, civil disturbances, government instability, nationalization and expropriation of private assets and the imposition of taxes or other charges by governments. The occurrence of any of these events in markets served by our lessees and the resulting instability may adversely affect our ownership interest in an aircraft or the ability of lessees which operate in these markets to meet their lease obligations and these lessees may be more likely to default than lessees that operate in developed economies. For the year ended December 31, 2012, 44 of our lessees which operated 100 aircraft and generated lease rental revenue representing 59% of our lease rental revenue are domiciled or habitually based in emerging markets. 18 Risks Related to Our Lessees Lessee defaults could materially adversely affect our business, financial condition and results of operations or our ability to pay dividends to our shareholders. As a general matter, airlines with weak capital structures are more likely than well-capitalized airlines to seek operating leases, and, at any point in time, investors should expect a varying number of lessees and sub-lessees to experience payment difficulties. As a result of their weak financial condition, a large portion of lessees over time may be significantly in arrears in their rental or maintenance payments. Many of our existing lessees are in a weak financial condition and suffer liquidity problems, and this is likely to be the case in the future and with other lessees and sub-lessees of our aircraft as well, particularly in a difficult economic or operating environment. These liquidity issues will be more likely to lead to airline failures in the context of financial system distress, volatile commodity (fuel) prices, and economic slowdown, with additional liquidity being more difficult and expensive to source. In addition, many of our lessees are exposed to currency risk due to the fact that they earn revenues in their local currencies and certain of their liabilities and expenses are denominated in U.S. dollars, including lease payments to us. Given the size of our aircraft portfolio, we expect that from time to time some lessees will be slow in making, or will fail to make, their payments in full under their leases. The financial condition of our lessees will be greatly influenced by the overall demand for air travel; in a weak demand environment, airline yields may come under pressure, which may negatively impact airline financial performance in a significant way. To the extent that airline operating costs increase, because of changes in fuel, labor costs, or otherwise, demand for air travel and/or airline financial performance may be negatively impacted. We may not correctly assess the credit risk of each lessee or charge risk-adjusted lease rates, and lessees may not be able to continue to perform their financial and other obligations under our leases in the future. A delayed, missed or reduced rental payment from a lessee decreases our revenues and cash flow and may adversely affect our ability to make payments on our indebtedness, to comply with debt service coverage or interest coverage ratios, and to pay dividends on our common shares. While we may experience some level of delinquency under our leases, default levels may increase over time, particularly as our aircraft portfolio ages and if economic conditions continue to deteriorate. A lessee may experience periodic difficulties that are not financial in nature, which could impair its performance of maintenance obligations under the leases. These difficulties may include the failure to perform under the required aircraft maintenance program in a sufficient manner and labor-management disagreements or disputes. In the event that a lessee defaults under a lease, any security deposit paid or letter of credit provided by the lessee may not be sufficient to cover the lessee’s outstanding or unpaid lease obligations and required maintenance and transition expenses. If our lessees encounter financial difficulties and we decide to restructure our leases with those lessees, this would result in less favorable leases and could result in significant reductions in our cash flow and affect our ability to meet our debt obligations or to pay dividends to our shareholders. When a lessee is late in making payments, fails to make payments in full or in part under the lease or has otherwise advised us that it will in the future fail to make payments in full or in part under the lease, we may elect to or be required to restructure the lease. Restructuring may involve anything from a simple rescheduling of payments to the termination of a lease without receiving all or any of the past due amounts. If any requests for payment restructuring or rescheduling are made and granted, reduced or deferred rental payments may be payable over all or some part of the remaining term of the lease, although the terms of any revised payment schedules may be unfavorable and such payments may not be made. We may be unable to agree upon acceptable terms for any requested restructurings and as a result may be forced to exercise our remedies under those leases. If we, in the exercise of our remedies, repossess the aircraft, we may not be able to re-lease the aircraft promptly at favorable rates, or at all. The terms and conditions of payment restructurings or reschedulings may result in significant reductions of rental payments, which may adversely affect our cash flows and our ability to meet our debt obligations and to pay dividends to our shareholders. Significant costs resulting from lease defaults could have a material adverse effect on our business or our ability to pay dividends to our shareholders. Although we have the right to repossess the aircraft and to exercise other remedies upon a lessee default, repossession of an aircraft after a lessee default would result in us incurring costs in excess of those incurred with respect to an aircraft 19 returned at the end of the lease. Those costs include legal and other expenses of court or other governmental proceedings (including the cost of posting surety bonds or letters of credit necessary to effect repossession of aircraft), particularly if the lessee is contesting the proceedings or is in bankruptcy, to obtain possession and/or de-registration of the aircraft and flight and export permissions. Delays resulting from any of these proceedings would also increase the period of time during which the relevant aircraft is not generating revenue. In addition, we may incur substantial maintenance, refurbishment or repair costs that a defaulting lessee has failed to incur or pay and that are necessary to put the aircraft in suitable condition for re- lease or sale and we may need to pay off liens, taxes and other governmental charges on the aircraft to obtain clear possession and to remarket the aircraft effectively. We may also incur other costs in connection with the physical possession of the aircraft. We may also suffer other adverse consequences as a result of a lessee default and the related termination of the lease and the repossession of the related aircraft. Our rights upon a lessee default vary significantly depending upon the jurisdiction and the applicable laws, including the need to obtain a court order for repossession of the aircraft and/or consents for de- registration or re-export of the aircraft. When a defaulting lessee is in bankruptcy, protective administration, insolvency or similar proceedings, additional limitations may apply. Certain jurisdictions will give rights to the trustee in bankruptcy or a similar officer to assume or reject the lease or to assign it to a third party, or will entitle the lessee or another third party to retain possession of the aircraft without paying lease rentals or performing all or some of the obligations under the relevant lease. Certain of our lessees are owned in whole or in part by government-related entities, which could complicate our efforts to repossess our aircraft in that government’s jurisdiction. Accordingly, we may be delayed in, or prevented from, enforcing certain of our rights under a lease and in re-leasing the affected aircraft. If we repossess an aircraft, we will not necessarily be able to export or de-register and profitably redeploy the aircraft. For instance, where a lessee or other operator flies only domestic routes in the jurisdiction in which the aircraft is registered, repossession may be more difficult, especially if the jurisdiction permits the lessee or the other operator to resist de- registration. Significant costs may also be incurred in retrieving or recreating aircraft records required for registration of the aircraft and obtaining a certificate of airworthiness for the aircraft. If our lessees fail to appropriately discharge aircraft liens, we might find it necessary to pay such claims, which could have a negative effect on our cash position and our business or our ability to pay dividends to our shareholders. In the normal course of business, liens that secure the payment of airport fees and taxes, custom duties, air navigation charges (including charges imposed by Eurocontrol), landing charges, crew wages, repairer’s charges, salvage or other liens (“Aircraft Liens”), are likely, depending on the jurisdiction in question, to attach to the aircraft. The Aircraft Liens may secure substantial sums that may, in certain jurisdictions or for limited types of Aircraft Liens (particularly fleet liens), exceed the value of the particular aircraft to which the Aircraft Liens have attached. Although the financial obligations relating to these Aircraft Liens are the responsibilities of our lessees, if they fail to fulfill their obligations, Aircraft Liens may attach to our aircraft and ultimately become our responsibility. In some jurisdictions, Aircraft Liens may give the holder thereof the right to detain or, in limited cases, sell or cause the forfeiture of the aircraft. Until they are discharged, Aircraft Liens could impair our ability to repossess, re-lease or sell our aircraft. Our lessees may not comply with their obligations under their respective leases to discharge Aircraft Liens arising during the terms of their leases, whether or not due to financial difficulties. If they do not, we may, in some cases, find it necessary to pay the claims secured by such Aircraft Liens in order to repossess the aircraft. Such payments could adversely affect our cash position and our business generally, and our ability to pay dividends to our shareholders. Failure to register aircraft in certain jurisdictions could result in adverse effects and penalties which could materially adversely affect our business or our ability to pay dividends to our shareholders. Pursuant to our existing leases, all of our aircraft are required to be duly registered at all times with the appropriate governmental civil aviation authority. Generally, in jurisdictions outside the United States, failure to maintain the registration of any aircraft that is on-lease would be a default under the applicable lease, entitling us to exercise our rights and remedies thereunder if enforceable under applicable law. If an aircraft were to be operated without a valid registration, the lessee operator or, in some cases, the owner or lessor might be subject to penalties, which could constitute or result in an Aircraft Lien being placed on such aircraft. Lack of registration could have other adverse effects, including the inability to operate the aircraft and loss of insurance coverage, which in turn could have a material adverse effect on our business or our ability to pay dividends to our shareholders. 20 If our lessees fail to comply with government regulations regarding aircraft maintenance, we could be subject to costs that could adversely affect our cash position and our business or our ability to pay dividends to our shareholders. Our aircraft are subject to aviation authority regulations and requirements regarding maintenance of aircraft in the jurisdictions in which the aircraft are registered and operate, including requirements imposed by airworthiness directives (“Airworthiness Directives”) issued by aviation authorities. Airworthiness Directives typically set forth particular special maintenance actions or modifications to certain aircraft types or models that the owners or operators of aircraft must implement. Each lessee generally is responsible for complying with all of the Airworthiness Directives and is required to maintain the aircraft’s maintenance and airworthiness. However, if a lessee fails to satisfy its obligations, or we have undertaken some obligations as to maintenance or airworthiness under a lease, we may be required to bear (or, to the extent required under the relevant lease, to share) the cost. If any of our aircraft are not subject to a lease, we would be required to bear the entire cost of compliance. Such payments could adversely affect our cash position and our business generally or our ability to pay dividends to our shareholders. Risks associated with the concentration of our lessees in certain geographical regions could harm our business or adversely impact our ability to pay dividends to our shareholders. Our business is sensitive to local economic and political conditions that can influence the performance of lessees located in a particular region. Such adverse economic and political conditions include additional regulation or, in extreme cases, requisition. In 2012, increasing fuel prices, the inability of many companies to access the capital markets and a fragile economic recovery impacted the global aviation market, causing severe financial strain and a number of bankruptcies. The effect of these conditions on payments to us will be more or less pronounced, depending on the concentration of lessees in the region with adverse conditions. For the year ended December 31, 2012, lease rental revenues from lessees by region, were 39% in Europe, 11% in North America, 32% in Asia (including 12% in China), 7% in Latin America, and 11% in the Middle East and Africa. European Concentration Forty-one lessees based in Europe accounted for 39% of our lease rental revenues for the year ended December 31, 2012 and accounted for 68 aircraft totaling 35% of the net book value of our aircraft at December 31, 2012. Six aircraft, representing 3% of the net book value of our aircraft at December 31, 2012, were leased to a customer in Spain and one aircraft, representing less than 1% of the net book value of our aircraft at December 31, 2012, was leased to a customer based in Italy. We have no lessees based in Greece, Portugal or Ireland. Commercial airlines in Europe face, and can be expected to continue to face, increased competitive pressures due to the expansion of low cost carriers as well as the rise of stronger airline groupings that are have emerged through consolidation efforts. Moreover, the sovereign debt market concerns surrounding Greece, Italy, Spain and other European countries, austerity programs and general weakness in European home market economies is hampering growth and causing financial hardship for airlines in Europe, large and small. While several of the continent’s larger airlines have announced comprehensive restructuring efforts (including significant cost cutting measures), we are generally more concerned about the ability of smaller players to continue to honor contractual lease obligations. Russia accounted for 10% of our lease rental revenues for the year ended December 31, 2012 and accounted for 12 aircraft totaling 9% of the net book value of our aircraft at December 31, 2012. Russia has a market-based economy that is in large part dependent on natural resources, particularly oil, natural gas, and metals. The economy has grown steadily in recent years (except during the recent financial crisis) but remains exposed to volatility in commodity values. The incumbent government is facing increased civilian pressures to enact political reforms and continued political instability and resulting economic uncertainty could potentially have an effect on economic growth, and demand for air transportation. Asian Concentration Nineteen lessees based in Asia accounted for 32% of our lease rental revenues for the year ended December 31, 2012 and accounted for 50 aircraft totaling 34% of the net book value of our aircraft at December 31, 2012. Growth in most of Asia has been strong, driven in large part by emerging economies including China and India, but also markets such as the Philippines and Indonesia. However, certain markets are plagued by oversupply and crowded competitive landscapes. Demand weakness resulting from slowing economic growth in the region, a recurrence of SARS or avian influenza or the outbreak of another epidemic disease would likely adversely affect the Asian airline industry. 21 Four lessees based in China accounted for 12% of our lease rental revenues for the year ended December 31, 2012 and accounted for 20 aircraft totaling 11% of the net book value of our aircraft at December 31, 2012. Chinese airline industry performance during 2012 was relatively strong, but airline performance could suffer if economic growth moderates. North American Concentration Seven lessees based in North America accounted for 11% of our lease rental revenues for the year ended December 31, 2012 and accounted for 17 aircraft totaling 10% of the net book value of our aircraft at December 31, 2012. Consolidation among major airlines in the U.S. has helped drive capacity discipline and pricing power, but despite recent improvements in the financial results of many carriers, airlines remain highly susceptible to macroeconomic and geopolitical factors outside their control. Concerns about terrorist attacks have resulted in tightened security measures and reduced demand for air travel, which, together with high and volatile fuel costs, have imposed additional financial burdens on most U.S. airlines. Latin American Concentration Six lessees based in Latin America accounted for 7% of our lease rental revenues for the year ended December 31, 2012 and accounted for 14 aircraft totaling 8% of the net book value of our aircraft at December 31, 2012. Air travel demand in Latin America remains robust, fueled by economic growth in the region. The proliferation of low cast carriers has also played a meaningful role in stimulating travel demand. Among the more established regional players, we have witnessed an increase in consolidation activity including the combinations of Gol and Webjet, Avianca and Taca and LAN and TAM. Airlines in certain countries are implementing large capacity additions, and any restrictions imposed on airport or other infrastructure usage or further degradation of the region’s aviation safety record, high and volatile fuel prices, or other economic reversal or slow downs, could have a material adverse effect on carriers’ financial performance and thus our ability to collect lease payments. Middle East and African Concentration Four lessees based in the Middle East and Africa accounted for 11% of our lease rental revenues for the year ended December 31, 2012 and accounted for eight aircraft totaling 12% of the net book value of our aircraft at December 31, 2012. Middle Eastern, and particularly Gulf-based carriers, have a large number of aircraft on order and continue to capitalize on the region’s favorable geographic position as an East-West transfer hub. However, ongoing geopolitical tension and any aviation related act of terrorism in the region could adversely affect financial performance. In 2011 and 2012, a number of countries in the Middle East and North Africa experienced significant political instability in the form of widespread demonstrations, calls for political reform, and, in certain cases, revolution, negatively impacting tourism and air travel. Other countries in the region have seen similar activity, and continued unrest and instability would again negatively impact the financial performance of airlines operating to, from, and within this region. South African Airways accounted for 6% of our lease rental revenues for the year ended December 31, 2012 and accounted for four aircraft totaling 7% of the net book value of our aircraft at December 31, 2012. South Africa’s economy is heavily dependent on natural resources, particularly precious metals, and it is exposed to economic and social risks arising from volatility in commodity prices. South African Airways relies upon government support for its significant capital requirements. Risks Related to the Aviation Industry High fuel prices impact the profitability of the airline industry. If fuel prices rise, our lessees might not be able to meet their lease payment obligations, which would have an adverse effect on our financial results and growth prospects or our ability to pay dividends to our shareholders. Fuel costs represent a major expense to companies operating within the airline industry. Fuel prices fluctuate widely depending primarily on international market conditions, geopolitical and environmental events and currency/exchange rates. As a result, fuel costs are not within the control of lessees and significant changes would materially affect their operating results. Due to the competitive nature of the airline industry, airlines have been, and may continue to be, unable to pass on increases in fuel prices to their customers by increasing fares in a manner that fully compensates for the costs incurred. Higher and more volatile fuel prices may also have an impact on consumer confidence and spending, and thus may adversely impact demand for air transportation. In addition, airlines may not be able to successfully manage their exposure to fuel price fluctuations. If fuel prices increase due to future terrorist attacks, acts of war, armed hostilities, natural disasters or for 22 any other reason, they are likely to cause our lessees to incur higher costs and/or generate lower revenues, resulting in an adverse impact on their financial condition and liquidity. Fuel cost volatility may contribute to the reluctance of airlines to make future commitments to lease aircraft and, accordingly, reduce the demand for lease aircraft. Consequently, these conditions may (i) affect our lessees’ ability to make rental and other lease payments, (ii) result in lease restructurings and/ or aircraft repossessions, (iii) increase our costs of servicing and marketing our aircraft, (iv) impair our ability to re-lease our aircraft or re-lease or otherwise dispose of our aircraft on a timely basis at favorable rates or terms, or at all, and (v) reduce the proceeds received for the aircraft upon any disposition. These results could have an adverse effect on our financial results and growth prospects or our ability to pay dividends to our shareholders. If the effects of terrorist attacks and geopolitical conditions adversely impact the financial condition of the airlines, our lessees might not be able to meet their lease payment obligations, which would have an adverse effect on our financial results and growth prospects or our ability to pay dividends to our shareholders. As a result of the September 11, 2001 terrorist attacks in the United States and subsequent actual and attempted terrorist attacks, notably in the Middle East, South Asia and Europe, increased security restrictions were implemented on air travel, airline costs for aircraft insurance and enhanced security measures have increased, and airlines in certain countries continue to rely on government-sponsored programs to acquire war risk insurance. In addition, war or armed hostilities in the Middle East, Iran, North Korea, North Africa, South Asia or elsewhere, or the fear of such events, could further exacerbate many of the problems experienced as a result of terrorist attacks. The situation in Iraq remains unsettled; tension over Iran’s nuclear program continues; the war in Afghanistan continues for the near term, and more recently the events in Libya, Tunisia, Egypt and Syria have resulted or are expected to result in changes to long-standing regimes, and other regimes in the Middle East and North Africa, have been destabilized and/or have used extreme measures to retain power. Any or all of these may lead to further instability in the Middle East. Future terrorist attacks, war or armed hostilities, large protests or government instability, or the fear of such events, could further negatively impact the airline industry and may have an adverse effect on the financial condition and liquidity of our lessees, aircraft values and rental rates and may lead to lease restructurings or aircraft repossessions, all of which could adversely affect our financial results and growth prospects or our ability to pay dividends to our shareholders. Terrorist attacks and geopolitical conditions have negatively affected the airline industry, and concerns about geopolitical conditions and further terrorist attacks could continue to negatively affect airlines (including our lessees) for the foreseeable future, depending upon various factors, including (i) higher costs to the airlines due to the increased security measures; (ii) decreased passenger demand and revenue due to the inconvenience of additional security measures; (iii) the price and availability of jet fuel and the cost and practicability of obtaining fuel hedges under current market conditions; (iv) higher financing costs and difficulty in raising the desired amount of proceeds on favorable terms, or at all; (v) the significantly higher costs of aircraft insurance coverage for future claims caused by acts of war, terrorism, sabotage, hijacking and other similar perils, and the extent to which such insurance has been or will continue to be available; (vi) the ability of airlines to reduce their operating costs and conserve financial resources, taking into account the increased costs incurred as a consequence of terrorist attacks and geopolitical conditions, including those referred to above; and (vii) special charges recognized by some airlines, such as those related to the impairment of aircraft and other long lived assets stemming from the grounding of aircraft as a result of terrorist attacks, the economic slowdown and airline reorganizations. Future terrorist attacks, acts of war, armed hostilities or civil unrest may further increase airline costs, depress air travel demand, depress aircraft values and rental rates or cause certain aviation insurance to become available only at significantly increased premiums (which may be for reduced amounts of coverage that are insufficient to comply with the levels of insurance coverage currently required by aircraft lenders and lessors or by applicable government regulations) or not be available at all. If the current industry conditions should continue or become exacerbated due to future terrorist attacks, acts of war or armed hostilities, they are likely to cause our lessees to incur higher costs and to generate lower revenues, resulting in an adverse effect on their financial condition and liquidity. Consequently, these conditions may affect their ability to make rental and other lease payments to us or obtain the types and amounts of insurance required by the applicable leases (which may in turn lead to aircraft groundings), may result in additional lease restructurings and aircraft repossessions, may increase our cost of re-leasing or selling the aircraft and may impair our ability to re-lease or otherwise dispose of the aircraft on a timely basis, at favorable rates or on favorable terms, or at all, and may reduce the proceeds received for the aircraft upon any disposition. These results could have an adverse effect on our financial results and growth prospects or our ability to pay dividends to our shareholders. 23 The effects of epidemic diseases may negatively impact the airline industry in the future, which might cause our lessees to not be able to meet their lease payment obligations to us, which would have an adverse effect on our financial results and growth prospects or our ability to pay dividends to our shareholders. The spread of SARS in 2003 was linked to air travel early in its development and negatively impacted passenger demand for air travel at that time. While the World Health Organization’s travel bans related to SARS have been lifted, SARS had a severe impact on the aviation industry, which was evidenced by a sharp reduction in passenger bookings, cancellation of many flights and employee layoffs. While these effects were felt most acutely in Asia, SARS did spread to other areas, including North America. Since 2003, there have been several outbreaks of avian influenza, and, most recently, H1N1 influenza outbreaks in Mexico, spreading to other parts of the world, although the impact has so far been relatively limited. In the event of a human influenza pandemic, numerous responses, including travel restrictions, might be necessary to combat the spread of the disease. Additional outbreaks of SARS or other epidemic diseases such as avian influenza, or the fear of such events, could negatively impact passenger demand for air travel and the aviation industry, which could result in our lessees’ inability to satisfy their lease payment obligations to us, which in turn would have an adverse effect on our financial results and growth prospects or our ability to pay dividends to our shareholders. If recent industry economic losses and airline reorganizations continue, our lessees might not be able to meet their lease payment obligations to us, which would have an adverse effect on our financial results and growth prospects or our ability to pay dividends to our shareholders. As a result of international economic conditions, significant volatility in oil prices and financial markets distress, airlines may be forced to reorganize. Historically, airlines involved in reorganizations have undertaken substantial fare discounting to maintain cash flows and to encourage continued customer loyalty. Such fare discounting has in the past led to lower profitability for all airlines, including certain of our lessees. Bankruptcies and reduced demand may lead to the grounding of significant numbers of aircraft and negotiated reductions in aircraft lease rental rates, with the effect of depressing aircraft market values. Additional reorganizations by airlines under Chapter 11 or liquidations under Chapter 7 of the U.S. Bankruptcy Code or other bankruptcy or reorganization laws in other countries or further rejection of aircraft leases or abandonment of aircraft by airlines in a Chapter 11 proceeding under the U.S. Bankruptcy Code or equivalent laws in other countries may have already exacerbated, and would be expected to further exacerbate, such depressed aircraft values and lease rates. Additional grounded aircraft and lower market values would adversely affect our ability to sell certain of our aircraft on favorable terms, or at all, or re-lease other aircraft at favorable rates comparable to the then current market conditions, which collectively would have an adverse effect on our financial results and growth prospects and our ability to pay dividends to our shareholders. Risks Related to Our Organization and Structure We are a holding company with no operations and rely on our operating subsidiaries to provide us with funds necessary to meet our financial obligations and to pay dividends to our shareholders. We are a holding company with no material direct operations. Our principal assets are the equity interests we directly or indirectly hold in our operating subsidiaries. As a result, we are dependent on loans, dividends and other payments from our subsidiaries to generate the funds necessary to meet our financial obligations and to pay dividends to our shareholders. Although there are currently no material legal restrictions on our operating subsidiaries ability to distribute assets to us, legal restrictions, including governmental regulations and contractual obligations, could restrict or impair our operating subsidiaries ability to pay dividends or make loan or other distributions to us. Our subsidiaries are legally distinct from us and may be prohibited or restricted from paying dividends or otherwise making funds available to us under certain conditions. We are a Bermuda company, and it may be difficult for you to enforce judgments against us or our directors and executive officers. We are a Bermuda exempted company and, as such, the rights of holders of our common shares will be governed by Bermuda law and our memorandum of association and bye-laws. The rights of shareholders under Bermuda law may differ from the rights of shareholders of companies incorporated in other jurisdictions. A substantial portion of our assets are located outside the United States. As a result, it may be difficult for investors to effect service of process on those persons in the United States or to enforce in the United States judgments obtained in U.S. courts against us or those persons based on the civil liability provisions of the U.S. securities laws. Uncertainty exists as to whether courts in Bermuda will enforce judgments obtained in other jurisdictions, including the United States, against us or our directors or officers under the 24 securities laws of those jurisdictions or entertain actions in Bermuda against us or our directors or officers under the securities laws of other jurisdictions. Our bye-laws restrict shareholders from bringing legal action against our officers and directors. Our bye-laws contain a broad waiver by our shareholders of any claim or right of action, both individually and on our behalf, against any of our officers or directors. The waiver applies to any action taken by an officer or director, or the failure of an officer or director to take any action, in the performance of his or her duties, except with respect to any matter involving any fraud or dishonesty on the part of the officer or director. This waiver limits the right of shareholders to assert claims against our officers and directors unless the act or failure to act involves fraud or dishonesty. We have anti-takeover provisions in our bye-laws that may discourage a change of control. Our bye-laws contain provisions that could make it more difficult for a third party to acquire us without the consent of our board of directors. These provisions include: • • • • • • • provisions providing for a classified board of directors with staggered three-year terms; provisions regarding the election of directors, classes of directors, the term of office of directors and amalgamations to be rescinded, altered or amended only upon approval by a resolution of the directors and by a resolution of our shareholders, including the affirmative votes of at least 66% of the votes attaching to all shares in issue entitling the holder to vote on such resolution; provisions in our bye-laws dealing with the removal of directors and corporate opportunity to be rescinded, altered or amended only upon approval by a resolution of the directors and by a resolution of our shareholders, including the affirmative votes of at least 80% of the votes attaching to all shares in issue entitling the holder to vote on such resolution; provisions providing for the removal of directors by a resolution, including the affirmative votes of at least 80% of all votes attaching to all shares in issue entitling the holder to vote on such resolution; provisions providing for our board of directors to determine the powers, preferences and rights of our preference shares and to issue such preference shares without shareholder approval; provisions providing for advance notice requirements by shareholders for director nominations and actions to be taken at annual meetings; and no provision for cumulative voting in the election of directors; all the directors standing for election may be elected by our shareholders by a plurality of votes cast at a duly convened annual general meeting, the quorum for which is two or more persons present in person or by proxy at the start of the meeting and representing in excess of 50% of all votes attaching to all shares in issue entitling the holder to vote at the meeting. In addition, these provisions may make it difficult and expensive for a third party to pursue a tender offer, change in control or takeover attempt that is opposed by our management and/or our board of directors. Public shareholders who might desire to participate in these types of transactions may not have an opportunity to do so. These anti-takeover provisions could substantially impede the ability of public shareholders to benefit from a change in control or change our management and board of directors and, as a result, may adversely affect the market price of our common shares and your ability to realize any potential change of control premium. There are provisions in our bye-laws that may require certain of our non-U.S. shareholders to sell their shares to us or to a third party. Our bye-laws provide that if our board of directors determines that we or any of our subsidiaries do not meet, or in the absence of repurchases of shares will fail to meet, the ownership requirements of a limitation on benefits article of any bilateral income tax treaty with the U.S. applicable to us, and that such tax treaty would provide material benefits to us or any of our subsidiaries, we generally have the right, but not the obligation, to repurchase, at fair market value (as determined pursuant to the method set forth in our bye-laws), common shares from any shareholder who beneficially owns more than 5% of our issued and outstanding common shares and who fails to demonstrate to our satisfaction that such shareholder is either a U.S. citizen or a qualified resident of the U.S. or the other contracting state of any applicable tax treaty with the U.S. (as determined for purposes of the relevant provision of the limitation on benefits article of such treaty). We will have the option, but not the obligation, to purchase all or a part of the shares held by such shareholder (to the extent the board of directors, in the reasonable exercise of its discretion, determines it is necessary to avoid or cure adverse 25 consequences), provided that the board of directors will use its reasonable efforts to exercise this option equitably among similarly situated shareholders (to the extent feasible under the circumstances). Instead of exercising the repurchase right described above, we will have the right, but not the obligation, to cause the transfer to, and procure the purchase by, any U.S. citizen or a qualified resident of the U.S. or the other contracting state of the applicable tax treaty (as determined for purposes of the relevant provision of the limitation on benefits article of such treaty) of the number of issued and outstanding common shares beneficially owned by any shareholder that are otherwise subject to repurchase under our bye-laws as described above, at fair market value (as determined in the good faith discretion of our board of directors). Risks Related to Our Common Shares The market price and trading volume of our common shares may be volatile or may decline regardless of our operating performance, which could result in rapid and substantial losses for our shareholders. If the market price of our common shares declines significantly, shareholders may be unable to resell their shares at or above their purchase price. The market price or trading volume of our common shares could be highly volatile and may decline significantly in the future in response to various factors, many of which are beyond our control, including: • • • • • • • • • • • • • • • • variations in our quarterly or annual operating results; failure to meet any earnings estimates; actual or perceived reduction in our growth or expected future growth; actual or anticipated accounting issues; publication of research reports about us, other aircraft lessors or the aviation industry or the failure of securities analysts to cover our common shares or the decision to suspend or terminate coverage in the future; additions or departures of key management personnel; increased volatility in the capital markets and more limited or no access to debt financing, which may result in an increased cost of, or less favorable terms for, debt financing or may result in sales to satisfy collateral calls or other pressure on holders to sell our shares; redemptions, or similar events affecting funds or other investors holding our shares, which may result in large block trades that could significantly impact the price of our common shares; adverse market reaction to any indebtedness we may incur or preference or common shares we may issue in the future; changes in or elimination of our dividend; actions by shareholders; changes in market valuations of similar companies; announcements by us, our competitors or our suppliers of significant contracts, acquisitions, disposals, strategic partnerships, joint ventures or capital commitments; speculation in the press or investment community; changes or proposed changes in laws or regulations affecting the aviation industry or enforcement of these laws and regulations, or announcements relating to these matters; and general market, political and economic conditions and local conditions in the markets in which our lessees are located. In addition, the equity markets in general have frequently experienced substantial price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of companies traded in those markets. Changes in economic conditions in the U.S., Europe or globally could also impact our ability to grow profitably. These broad market and industry factors may materially affect the market price of our common shares, regardless of our business or operating performance. In the past, following periods of volatility in the market price of a company’s securities, securities class-action litigation has often been instituted against that company. Such litigation, if instituted against us, could cause us to incur substantial costs and divert management’s attention and resources, which could have a material adverse effect on our business, financial condition and results of operations. 26 Future debt, which would be senior to our common shares upon liquidation, and additional equity securities, which would dilute the percentage ownership of our then current common shareholders and may be senior to our common shares for the purposes of dividends and liquidation distributions, may adversely affect the market price of our common shares. In the future, we may attempt to increase our capital resources by incurring debt or issuing additional equity securities, including commercial paper, medium-term notes, senior or subordinated notes or loans and series of preference shares or common shares. Upon liquidation, holders of our debt investments and preference shares and lenders with respect to other borrowings would receive a distribution of our available assets prior to the holders of our common shares. Additional equity offerings would dilute the holdings of our then current common shareholders and could reduce the market price of our common shares, or both. Preference shares, if issued, could have a preference on liquidating distributions or a preference on dividend payments. Restrictive provisions in our debt and/or preference shares could limit our ability to make a distribution to the holders of our common shares. Because our decision to incur more debt or issue additional equity securities in the future will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future capital raising activities. Thus, holders of our common shares bear the risk of our future debt and equity issuances reducing the market price of our common shares and diluting their percentage ownership. The issuance of additional common shares in connection with acquisitions or otherwise will dilute all other shareholdings. As of February 14, 2013, we had an aggregate of 168,152,746 common shares authorized but unissued and not reserved for issuance under our incentive plan. We may issue all of these common shares without any action or approval by our shareholders. We intend to continue to actively pursue acquisitions of aviation assets and may issue common shares in connection with these acquisitions. Any common shares issued in connection with our acquisitions, our incentive plan, and the exercise of outstanding share options or otherwise would dilute the percentage ownership held by existing shareholders. Risks Related to Taxation If Aircastle were treated as engaged in a trade or business in the United States, it would be subject to U.S. federal income taxation on a net income basis, which would adversely affect our business and result in decreased cash available for distribution to our shareholders. If, contrary to expectations, Aircastle were treated as engaged in a trade or business in the United States, the portion of its net income, if any, that was “effectively connected” with such trade or business would be subject to U.S. federal income taxation at a maximum rate of 35%. In addition, Aircastle would be subject to the U.S. federal branch profits tax on its effectively connected earnings and profits at a rate of 30%. The imposition of such taxes would adversely affect Aircastle's business and would result in decreased cash available for distribution to our shareholders. If there is not sufficient trading in our shares, or if 50% of our shares are held by certain 5% shareholders, we could lose our eligibility for an exemption from U.S. federal income taxation on rental income from our aircraft used in “international traffic” and could be subject to U.S. federal income taxation which would adversely affect our business and result in decreased cash available for distribution to our shareholders. We expect that we are currently eligible for an exemption under Section 883 of the Internal Revenue Code of 1986, as amended (the “Code”), which provides an exemption from U.S. federal income taxation with respect to rental income derived from aircraft used in international traffic by certain foreign corporations. No assurances can be given that we will continue to be eligible for this exemption as our stock is traded on the market and changes in our ownership or the amount of our shares that are traded could cause us to cease to be eligible for such exemption. To qualify for this exemption in respect of rental income, the lessor of the aircraft must be organized in a country that grants a comparable exemption to U.S. lessors (Bermuda and Ireland each do), and certain other requirements must be satisfied. We can satisfy these requirements in any year if, for more than half the days of such year, our shares are primarily and regularly traded on a recognized exchange and certain shareholders, each of whom owns 5% or more of our shares (applying certain attribution rules), do not collectively own more than 50% of our shares. Our shares will be considered to be primarily and regularly traded on a recognized exchange in any year if (i) the number of trades in our shares effected on such recognized stock exchanges exceed the number of our shares (or direct interests in our shares) that are traded during the year on all securities markets; (ii) trades in our shares are effected on such stock exchanges in more than de minimis quantities on at least 60 days during every calendar quarter in the year; and (iii) the aggregate number of our shares traded on such stock exchanges during the taxable year is at least 10% of the average number of our shares outstanding in that class during that year. If our shares cease to satisfy these requirements, then we may no longer be eligible for the Section 883 exemption with respect to rental 27 income earned by aircraft used in international traffic. If we were not eligible for the exemption under Section 883 of the Code, we expect that the U.S. source rental income of Aircastle Bermuda generally would be subject to U.S. federal taxation, on a gross income basis, at a rate of not in excess of 4% as provided in Section 887 of the Code. If, contrary to expectations, Aircastle Bermuda did not comply with certain administrative guidelines of the Internal Revenue Service, such that 90% or more of Aircastle Bermuda’s U.S. source rental income were attributable to the activities of personnel based in the United States, Aircastle Bermuda’s U.S. source rental income would be treated as income effectively connected with the conduct of a trade or business in the United States. In such case, Aircastle Bermuda’s U.S. source rental income would be subject to U.S. federal income taxation on its net income at a maximum rate of 35% as well as state and local taxation. In addition, Aircastle Bermuda would be subject to the U.S. federal branch profits tax on its effectively connected earnings and profits at a rate of 30%. The imposition of such taxes would adversely affect our business and would result in decreased cash available for distribution to our shareholders. One or more of our Irish subsidiaries could fail to qualify for treaty benefits, which would subject certain of their income to U.S. federal income taxation, which would adversely affect our business and result in decreased cash available for distribution to our shareholders. Qualification for the benefits of the double tax treaty between the United States and Ireland (the “Irish Treaty”) depends on many factors, including being able to establish the identity of the ultimate beneficial owners of our common shares. Each of the Irish subsidiaries may not satisfy all the requirements of the Irish Treaty and thereby may not qualify each year for the benefits of the Irish Treaty or may be deemed to have a permanent establishment in the United States. Moreover, the provisions of the Irish Treaty may change. Failure to so qualify, or to be deemed to have a permanent establishment in the United States, could result in the rental income from aircraft used for flights within the United States being subject to increased U.S. federal income taxation. The imposition of such taxes would adversely affect our business and would result in decreased cash available for distribution to our shareholders. We may become subject to an increased rate of Irish taxation which would adversely affect our business and would result in decreased earnings available for distribution to our shareholders. Our Irish subsidiaries and affiliates are expected to be subject to corporation tax on their income from leasing, managing and servicing aircraft at the 12.5% tax rate applicable to trading income. This expectation is based on certain assumptions, including that we will maintain at least the current level of our business operations in Ireland. If we are not successful in achieving trading status in Ireland, the income of our Irish subsidiaries and affiliates will be subject to corporation tax at the 25% rate applicable to non-trading activities, which would adversely affect our business and would result in decreased earnings available for distribution to our shareholders. We may become subject to income or other taxes in the non-U.S. jurisdictions in which our aircraft operate, where our lessees are located or where we perform certain services which would adversely affect our business and result in decreased cash available for distributions to shareholders. Certain Aircastle entities are expected to be subject to the income tax laws of Ireland and/or the United States. In addition, we may be subject to income or other taxes in other jurisdictions by reason of our activities and operations, where our aircraft operate or where the lessees of our aircraft (or others in possession of our aircraft) are located. Although we have adopted operating procedures to reduce the exposure to such taxation, we may be subject to such taxes in the future and such taxes may be substantial. In addition, if we do not follow separate operating guidelines relating to managing a portion of our aircraft portfolio through offices in Ireland and Singapore, income from aircraft not owned in such jurisdictions would be subject to local tax. The imposition of such taxes would adversely affect our business and would result in decreased earnings available for distribution to our shareholders. We expect to continue to be a passive foreign investment company (“PFIC”) and may be a controlled foreign corporation (“CFC”), for U.S. federal income tax purposes. We expect to continue to be treated as a PFIC and may be a CFC for U.S. federal income tax purposes. If you are a U.S. person and do not make a qualified electing fund (“QEF”) election with respect to us and each of our PFIC subsidiaries, unless we are a CFC and you own 10% of our voting shares, you would be subject to special deferred tax and interest charges with respect to certain distributions on our common shares, any gain realized on a disposition of our common shares and certain other events. The effect of these deferred tax and interest charges could be materially adverse to you. Alternatively, if you are such a shareholder and make a QEF election for us and each of our PFIC subsidiaries, or if we are a CFC and you own 10% or more of our voting shares, you will not be subject to those charges, but could recognize taxable income in a 28 taxable year with respect to our common shares in excess of any distributions that we make to you in that year, thus giving rise to so-called “phantom income” and to a potential out-of-pocket tax liability. Distributions made to a U.S. person that is an individual will not be eligible for taxation at reduced tax rates generally applicable to dividends paid by certain United States corporations and “qualified foreign corporations” on or after January 1, 2003. The more favorable rates applicable to regular corporate dividends could cause individuals to perceive investment in our shares to be relatively less attractive than investment in the shares of other corporations, which could adversely affect the value of our shares. ITEM 1B. UNRESOLVED STAFF COMMENTS None. ITEM 2. PROPERTIES We lease approximately 19,200 square feet of office space in Stamford, Connecticut for our corporate operations. On January 30, 2012, we signed a ten-year extension lease for the office space in Stamford, Connecticut. We lease approximately 3,380 square feet of office space in Dublin, Ireland for our acquisition, aircraft leasing and asset management operations in Europe. The lease for the Irish facility expires in June 2016. On July 17, 2012, we signed a four-year lease for the office space in Singapore. We lease approximately 2,600 square feet of office space in Singapore for our acquisition, aircraft leasing and asset management operations in Asia. The lease for the Singapore facility expires in July 2016. We believe our current facilities are adequate for our current needs and that suitable additional space will be available as and when needed. ITEM 3. LEGAL PROCEEDINGS The Company is not a party to any material legal or adverse regulatory proceedings. ITEM 4. MINE SAFETY DISCLOSURES Not applicable. Executive Officers of the Registrant Executive officers are elected by our board of directors, and their terms of office continue until the next annual meeting of the board or until their successors are elected and have been duly qualified. There are no family relationships among our executive officers. Set forth below is information pertaining to our executive officers who held office as of February 14, 2013: Ron Wainshal, 48, became our Chief Executive Officer in May 2005 and a member of our Board in May 2010. Prior to joining Aircastle, Mr. Wainshal was in charge of the Asset Management group of General Electric Commercial Aviation Services (“GECAS”) from 2003 to 2005. After joining GECAS in 1998, Ron led many of GECAS’ U.S. airline restructuring efforts and its bond market activities, and played a major marketing and structured finance role in the Americas. Before joining GECAS, he was a principal and co-owner of a financial advisory company specializing in transportation infrastructure from 1994 to 1998 and prior to that held positions at Capstar Partners and The Transportation Group in New York and Ryder System in Miami. He received a BS in Economics from the Wharton School of the University of Pennsylvania and an MBA from the University of Chicago’s Booth Graduate School of Business. Michael Inglese, 51, became our Chief Financial Officer in April 2007. Prior to joining the Company, Mr. Inglese served as an Executive Vice President and Chief Financial Officer of PanAmSat Holding Corporation, where he served as Chief Financial Officer from June 2000 until the closing of PanAmSat’s sale to Intelsat in July 2006. Mr. Inglese joined PanAmSat in May 1998 as Vice President, Finance after serving as Chief Financial Officer for DIRECTV Japan, Inc. He is a Chartered Financial Analyst who holds a BS in Mechanical Engineering from Rutgers University College of Engineering and his MBA from Rutgers Graduate School of Business Management. 29 David Walton, 51, became our General Counsel in March 2005 and our Chief Operating Officer in January 2006 and our Secretary in August 2006. Prior to joining Aircastle, Mr. Walton was Chief Legal Officer of Boullioun Aviation Services, Inc. from 1996 to 2005. Prior to that, Mr. Walton was a partner at the law firm of Perkins Coie in Seattle and Hong Kong. Mr. Walton has over 20 years of experience in aircraft leasing and finance. He received a BA in Political Science from Stanford University and a JD from Boalt Hall School of Law, University of California, Berkeley. Joseph Schreiner, 55, became our Executive Vice President, Technical in October 2004. Prior to joining Aircastle, Mr. Schreiner oversaw the technical department at AAR Corp, a provider of products and services to the aviation and defense industries from 1998 to 2004 where he managed aircraft and engine evaluations and inspections, aircraft lease transitions, reconfiguration and heavy maintenance. Prior to AAR, Mr. Schreiner spent 19 years at Boeing (McDonnell-Douglas) in various technical management positions. Mr. Schreiner received a BS from the University of Illinois and an MBA from Pepperdine University. Aaron Dahlke, 44, became our Chief Accounting Officer in June 2005. Prior to that, Mr. Dahlke was Vice President and Controller of Boullioun Aviation Services Inc. from January 2003 to May 2005. Prior to Boullioun, Mr. Dahlke was at ImageX.com, Inc. and Ernst & Young LLP. He received a B.S. in Accounting from California State University, San Bernardino. He is a Certified Public Accountant. 30 PART II ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTER AND ISSUER PURCHASES OF EQUITY SECURITIES Our common shares are listed for trading on the New York Stock Exchange under the symbol “AYR.” As of February 14, 2013, there were approximately 16,752 record holders of our common shares. The following table sets forth the quarterly high and low prices of our common shares on the New York Stock Exchange for the periods indicated since our initial public offering and dividends during such periods: Year Ending December 31, 2011: First Quarter Second Quarter Third Quarter Fourth Quarter Year Ending December 31, 2012: First Quarter Second Quarter Third Quarter Fourth Quarter High Low $ 13.00 $ 10.25 $ 13.81 $ 11.43 $ 12.93 $ 12.95 $ $ 9.63 8.56 $ 14.55 $ 12.13 $ 12.66 $ 10.77 $ 13.04 $ 11.26 $ 12.69 $ 10.91 Dividends Declared Per Share ($) $ $ $ $ $ $ $ $ 0.100 0.125 0.125 0.150 0.150 0.150 0.150 0.165 Our ability to pay, maintain or increase cash dividends to our shareholders is subject to the discretion of our board of directors and will depend on many factors, including the difficulty we may experience in raising capital in a market that has experienced significant volatility in recent years and our ability to finance our aircraft acquisition commitments; our ability to negotiate favorable lease and other contractual terms; the level of demand for our aircraft; the economic condition of the commercial aviation industry generally; the financial condition and liquidity of our lessees; the lease rates we are able to charge and realize; our leasing costs; unexpected or increased expenses; the level and timing of capital expenditures; principal repayments and other capital needs; the value of our aircraft portfolio; our compliance with loan to value, debt service coverage, interest rate coverage and other financial covenants in our financings; our results of operations, financial condition and liquidity; general business conditions; restrictions imposed by our securitizations or other financings; legal restrictions on the payment of dividends, including a statutory dividend test and other limitations under Bermuda law; and other factors that our board of directors deems relevant. Some of these factors are beyond our control and a change in any such factor could affect our ability to pay dividends on our common shares. In the future we may not choose to pay dividends or may not be able to pay dividends, maintain our current level of dividends, or increase them over time. Increases in demand for our aircraft and operating lease payments may not occur and may not increase our actual cash available for dividends to our common shareholders. The failure to maintain or pay dividends may adversely affect our share price. 31 Issuer Purchases of Equity Securities During the fourth quarter of 2012, we purchased our common shares as follows: Total Number of Shares Purchased Average Price Paid per Share Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs(a) (Dollars in thousands, except per share amounts) Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs(a) — $ — 936,500 (a) 936,500 $ — — 12.20 12.20 — $ — 936,500 936,500 $ 21,500 50,000 38,579 38,579 Period October November December Total ______________ (a) On May 24, 2012, the Company's Board of Directors authorized the repurchase of up to $50,000 of the Company's common shares. In August 2012, we repurchased 2,500,002 common shares from affiliates of Fortress Investment Group LLC at a total cost of $28,500 under the repurchase program and we paid no commissions on this transaction. On November 5, 2012, the Company's Board of Directors authorized an increase in the Company's share repurchase program by up to an additional $28,500 of its common shares, bringing the total back up to $50,000 of its common shares in the aggregate. During the fourth quarter of 2012, we repurchased an additional 936,500 common shares at a total cost of $11,421 including commissions. In addition, as of February 14, 2013, we repurchased an additional 679,292 common shares during 2013. Accordingly, as of February 14, 2013, we have repurchased under this program a total of 1,615,792 common shares at a total cost of $20,000 including commissions, at an average price per share of $12.38, and the remaining dollar value of common shares that may be purchased under the program is $30,000. Performance Graph The following stock performance graph shall not be deemed “filed” with the SEC or subject to Section 18 of the Exchange Act, nor shall it be deemed incorporated by reference in any of our filings under the Securities Act of 1933, as amended. The following graph compares the cumulative five year total return to holders of our common shares relative to the cumulative total returns of the S&P 500 Index and a customized peer group over the five year period ended December 31, 2012. The peer group consists of three companies: AerCap Holdings NV (NYSE: AER), Air Lease Corporation (NYSE: AL) and FLY Leasing Limited (NYSE: FLY). An investment of $100 (with reinvestment of all dividends) is assumed to have been made in our common shares, the S&P 500 Index and in the peer group on December 31, 2007, and the relative performance of each is tracked through December 31, 2012. The stock performance shown on the graph below represents historical stock performance and is not necessarily indicative of future stock price performance. 32  * $100 invested on 12/31/07 in stock or index, including reinvestment of dividends. Aircastle Limited S&P 500 Peer Group 12/31/07 12/31/08 12/31/09 12/31/10 12/31/11 12/31/12 $ 100.00 $ 20.04 $ 43.65 $ 48.33 $ 61.52 $ 100.00 100.00 63.00 22.18 79.67 50.97 91.67 80.42 93.61 66.47 63.84 108.59 68.62 33 ITEM 6. SELECTED FINANCIAL DATA The selected historical consolidated financial, operating and other data as of December 31, 2011 and 2012 and for each of the three years in the period ended December 31, 2012 presented in this table are derived from our audited consolidated financial statements and related notes thereto appearing elsewhere in this Annual Report. The selected consolidated financial data as of December 31, 2008 and 2009 presented in this table are derived from our audited consolidated financial statements and related notes thereto, which are not included in this Annual Report. You should read these tables along with Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes thereto included elsewhere in this Annual Report. Selected Financial Data: Consolidated Statements of Operation: Total revenues Selling, general and administrative expenses Depreciation Interest, net Net income Earnings per common share — Basic: Net income Earnings per common share — Diluted: Net income Cash dividends declared per share Other Operating Data: EBITDA Adjusted EBITDA Adjusted net income Consolidated Statements of Cash Flows: Cash flows provided by operations Cash flows provided by (used in) investing activities Cash flows (used in) provided by financing activities Consolidated Balance Sheet Data: Cash and cash equivalents Year Ended December 31, 2008 2009 2010 2011 2012 (Dollars in thousands, except share data) $ 582,587 $ 570,585 $ 527,710 $ 605,197 $ 686,572 46,806 201,759 203,529 115,291 46,016 209,481 169,810 102,492 45,774 220,476 178,262 65,816 45,953 242,103 204,150 124,270 48,370 269,920 222,808 32,868 $ $ $ 1.47 1.47 0.85 $ $ $ 1.29 1.29 0.40 $ $ $ 0.83 0.83 0.40 $ $ $ 1.64 1.64 0.50 $ $ $ 0.46 0.46 0.615 $ 526,305 $ 501,672 $ 491,231 $ 594,800 $ 546,285 544,280 162,855 529,792 117,788 506,942 82,461 607,870 144,963 647,622 57,009 $ 333,626 $ 327,641 $ 356,530 $ 359,377 $ 427,277 37,640 (269,434) (541,115) (445,420) (741,909) (303,865) 3,512 281,876 141,608 637,327 $ 80,947 $ 142,666 $ 239,957 $ 295,522 $ 618,217 Flight equipment held for lease, net of accumulated depreciation 3,837,543 3,812,970 4,065,780 4,387,986 4,662,661 Net investment in finance leases Total assets — — — — 119,951 4,251,572 4,454,512 4,859,059 5,224,459 5,812,160 Borrowings under securitizations and term debt financings 2,476,296 2,464,560 2,707,958 2,986,516 3,598,676 Shareholders’ equity Other Data: Number of Aircraft (at the end of period) Total debt to total capitalization 1,112,166 1,291,237 1,342,718 1,404,608 1,415,626 130 69.0% 129 65.6% 136 66.9% 144 68.0% 159 71.8% 34 We define EBITDA as income (loss) from continuing operations before income taxes, interest expense, and depreciation and amortization. We use EBITDA to assess our consolidated financial and operating performance, and we believe this non- US GAAP measure is helpful in identifying trends in our performance. This measure provides an assessment of controllable expenses and affords management the ability to make decisions which are expected to facilitate meeting current financial goals as well as achieving optimal financial performance. It provides an indicator for management to determine if adjustments to current spending decisions are needed. EBITDA provides us with a measure of operating performance because it assists us in comparing our operating performance on a consistent basis as it removes the impact of our capital structure (primarily interest charges on our outstanding debt) and asset base (primarily depreciation and amortization) from our operating results. Accordingly, this metric measures our financial performance based on operational factors that management can impact in the short-term, namely the cost structure, or expenses, of the organization. EBITDA is one of the metrics used by senior management and the board of directors to review the consolidated financial performance of our business. We define Adjusted EBITDA as EBITDA (as defined above) further adjusted to give effect to adjustments required in calculating covenant ratios and compliance as that term is defined in the indenture governing our senior unsecured notes. Adjusted EBITDA is a material component of these covenants. The table below shows the reconciliation of net income to EBITDA and Adjusted EBITDA for the years ended December 31, 2008, 2009, 2010, 2011 and 2012. Year Ended December 31, 2008 2009 2010 2011 2012 (Dollars in thousands) $ 115,291 $ 102,492 $ 65,816 $ 124,270 $ 32,868 201,759 209,481 220,476 242,103 Net income Depreciation Amortization of net lease premiums (discounts) and lease incentives (1,815) 11,229 20,081 16,445 Interest, net Income tax provision EBITDA Adjustments: Impairment of aircraft Non-cash share based payment expense Loss (gain) on mark to market of interest rate derivative contracts Contract termination expense Adjusted EBITDA 203,529 169,810 178,262 204,150 7,541 8,660 6,596 7,832 $ 526,305 $ 501,672 $ 491,231 $ 594,800 $ 546,285 — 6,529 11,446 — 18,211 6,868 (959) 4,000 7,342 7,509 860 — 6,436 5,786 848 — 96,454 4,232 (597) 1,248 $ 544,280 $ 529,792 $ 506,942 $ 607,870 $ 647,622 269,920 12,844 222,808 7,845 Beginning with our quarterly report for the quarter ended March 31, 2012, management, to be more consistent with reporting practices of peer aircraft leasing companies, has revised the calculation of ANI to no longer exclude gains (losses) on sales of assets, and to exclude non-cash share based payment expense in the calculation of ANI. Beginning with our quarterly report for the quarter ended June 30, 2012, we also excluded Term Financing No. 1 hedge loss amortization charges which will be reported in Interest, net on our consolidated statement of income from the calculation of ANI. The calculation of ANI for the years ended December 31, 2008, 2009, 2010 and 2011 has been revised to be comparable with the current period presentation. Management believes that Adjusted Net Income ("ANI") when viewed in conjunction with the Company's results under US GAAP and the below reconciliation, provides useful information about operating and period-over-period performance, and provides additional information that is useful for evaluating the underlying operating performance of our business without regard to periodic reporting elements related to interest rate derivative accounting. 35 The table below shows the reconciliation of net income to ANI for the years ended December 31, 2008, 2009, 2010, 2011 and 2012. Net income $ 115,291 $ 102,492 $ 65,816 $ 124,270 $ 32,868 Year Ended December 31, 2008 2009 2010 2011 2012 (Dollars in thousands) Ineffective portion and termination of cash flow hedges(1) Mark to market of interest rate derivative contracts(2) Loan termination payment(1) Write-off of deferred financing fees(1) Stock compensation expense(3) Term Financing No. 1 hedge loss amortization charges(1) Contract termination expense Adjusted net income _____________ (1) (2) (3) Included in Interest, net. Included in Other income (expense) Included in Selling, general and administrative expenses 29,589 11,446 — — 6,529 — — 5,387 (959) — — 6,868 — 4,000 5,805 860 — 2,471 7,509 — — 8,407 848 3,196 2,456 5,786 — — 2,893 (597) — 3,034 4,232 13,331 1,248 $ 162,855 $ 117,788 $ 82,461 $ 144,963 $ 57,009 36 ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This management’s discussion and analysis of financial condition and results of operations contains forward-looking statements that involve risks, uncertainties and assumptions. You should read the following discussion in conjunction with Item 6 — “Selected Financial Data” and our historical consolidated financial statements and the notes thereto appearing elsewhere in this report. The results of operations for the periods reflected herein are not necessarily indicative of results that may be expected for future periods, and our actual results may differ materially from those discussed in the forward- looking statements as a result of various factors, including but not limited to those described under Item 1A. — “Risk Factors” and elsewhere in this report. Please see “Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995” for a discussion of the uncertainties, risks and assumptions associated with these statements. Our consolidated financial statements are prepared in accordance with US GAAP and, unless otherwise indicated, the other financial information contained in this report has also been prepared in accordance with US GAAP. Unless otherwise indicated, all references to “dollars” and “$” in this report are to, and all monetary amounts in this report are presented in, U.S. dollars. OVERVIEW We are a global company that acquires, leases, and sells high-utility commercial jet aircraft to passenger and cargo airlines throughout the world. High-utility aircraft are generally modern, operationally efficient jets with a large operator base and long useful lives. As of December 31, 2012, our aircraft portfolio consisted of 159 aircraft that were leased to 69 lessees located in 36 countries, and managed through our offices in the United States, Ireland and Singapore. Typically, our aircraft are subject to net operating leases whereby the lessee is generally responsible for maintaining the aircraft and paying operational, maintenance and insurance costs, although in a majority of cases we are obligated to pay a portion of specified maintenance or modification costs. From time to time, we also make investments in other aviation assets, including debt investments secured by commercial jet aircraft. Our revenues and net income for the year ended December 31, 2012 were $686.6 million and $32.9 million respectively, and for the fourth quarter 2012 were $176.6 million and $29.8 million, respectively. Revenues Our revenues are comprised primarily of operating lease rentals on flight equipment held for lease, revenue from retained maintenance payments related to lease expirations, lease termination payments, lease incentive amortization and interest recognized from finance leases. Typically, our aircraft are subject to net operating leases whereby the lessee pays lease rentals and is generally responsible for maintaining the aircraft and paying operational, maintenance and insurance costs, although in a majority of cases we are obligated to pay a portion of specified maintenance or modification costs. Our aircraft lease agreements generally provide for the periodic payment of a fixed amount of rent over the life of the lease and the amount of the contracted rent will depend upon the type, age, specification and condition of the aircraft and market conditions at the time the lease is committed. The amount of rent we receive will depend on a number of factors, including the credit-worthiness of our lessees and the occurrence of delinquencies, restructurings and defaults. Our lease rental revenues are also affected by the extent to which aircraft are off-lease and our ability to remarket aircraft that are nearing the end of their leases in order to minimize their off-lease time. Our success in re-leasing aircraft is affected by market conditions relating to our aircraft and by general industry conditions and trends. An increase in the percentage of off-lease aircraft or a reduction in lease rates upon remarketing would negatively impact our revenues. Under an operating lease, the lessee will be responsible for performing maintenance on the relevant aircraft and will typically be required to make payments to us for heavy maintenance, overhaul or replacement of certain high-value components of the aircraft. These maintenance payments are based on hours or cycles of utilization or on calendar time, depending upon the component, and would be made either monthly in arrears or at the end of the lease term. For maintenance payments made monthly in arrears during a lease term, we will typically be required to reimburse all or a portion of these payments to the lessee upon their completion of the relevant heavy maintenance, overhaul or parts replacement. We record maintenance payments paid by the lessee during a lease as accrued maintenance liabilities in recognition of our obligation in the lease to refund such payments, and therefore we do not recognize maintenance revenue during the lease. Maintenance revenue recognition would occur at the end of a lease, when we are able to determine the amount, if any, by which reserve payments received exceed the amount we are required under the lease to reimburse to the lessee for heavy maintenance, overhaul or parts replacement. The amount of maintenance revenue we recognize in any reporting period is inherently 37 volatile and is dependent upon a number of factors, including the timing of lease expiries, including scheduled and unscheduled expiries, the timing of maintenance events and the utilization of the aircraft by the lessee. Many of our leases contain provisions which may require us to pay a portion of the lessee's costs for heavy maintenance, overhaul or replacement of certain high-value components. We account for these expected payments as lease incentives, which are amortized as a reduction of revenue over the life of the lease. We estimate the amount of our portion for such costs, typically for the first major maintenance event for the airframe, engines, landing gear and auxiliary power units, expected to be paid to the lessee based on assumed utilization of the related aircraft by the lessee, the anticipated cost of the maintenance event and the estimated amounts the lessee is responsible to pay. This estimated lease incentive is not recognized as a lease incentive liability at the inception of the lease. We recognize the lease incentive as a reduction of lease revenue on a straight-line basis over the life of the lease, with the offset being recorded as a lease incentive liability which is included in maintenance payments on the balance sheet. The payment to the lessee for the lease incentive liability is first recorded against the lease incentive liability and any excess above the lease incentive liability is recorded as a prepaid lease incentive asset which is included in other assets on the balance sheet and continues to amortize over the remaining life of the lease. Operating Expenses Operating expenses are comprised of depreciation of flight equipment held for lease, interest expense, selling, general and administrative expenses, aircraft impairment charges and maintenance and other costs. Because our operating lease terms generally require the lessee to pay for operating, maintenance and insurance costs, our portion of maintenance and other costs relating to aircraft reflected in our statement of income primarily relates to expenses for unscheduled lease terminations. Income Tax Provision We have obtained an assurance from the Minister of Finance of Bermuda under the Exempted Undertakings Tax Protection Act 1966 that, in the event that any legislation is enacted in Bermuda imposing any tax computed on profits or income, or computed on any capital asset, gain or appreciation or any tax in the nature of estate duty or inheritance tax, such tax shall not, until March 2035, be applicable to us or to any of our operations or to our shares, debentures or other obligations except insofar as such tax applies to persons ordinarily resident in Bermuda or to any taxes payable by us in respect of real property owned or leased by us in Bermuda. 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 Ireland and the United States. 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. In addition, those subsidiaries that are resident in Ireland are subject to Irish tax. Segments We operate in one segment. History Aircastle Limited, formerly Aircastle Investment Limited, is a Bermuda exempted company that was incorporated on October 29, 2004. 38 Acquisitions and Disposals In 2012, we invested $798.8 million in 23 aircraft acquisitions as follows: • High quality midbody aircraft for $291.2 million with a weighted average age by net book value of 1.4 years; • E-Jet aircraft for $131.8 million with a weighted average age by net book value of less than one year; • Mid-aged aircraft for $318.6 million with a weighted average age by net book value of 13.6 years; and • Freighter aircraft for $57.2 million with a weighted average age by net book value of 13.3 years. During 2012, we sold eight aircraft with a weighted average age by net book value of 17.4 years for an aggregate sales price of $65.3 million. The following table sets forth certain information with respect to the aircraft owned by us as of December 31, 2010, 2011 and 2012: AIRCASTLE AIRCRAFT INFORMATION (dollars in millions) Owned Aircraft as of December 31, 2010(1) Owned Aircraft as of December 31, 2011(1) Owned Aircraft as of December 31, 2012(1) Flight Equipment Held for Lease Unencumbered Flight Equipment included in Flight Equipment Held for Lease $ $ Number of Aircraft Number of Unencumbered Aircraft Number of Lessees Number of Countries Weighted Average Age — Passenger (years)(2) Weighted Average Age — Freighter (years)(2) Weighted Average Age — Combined (years)(2) Weighted Average Remaining Passenger Lease Term (years)(3) Weighted Average Remaining Cargo Lease Term (years)(3) Weighted Average Remaining Combined Lease Term (years)(3) Weighted Average Fleet Utilization during the Fourth Quarter(4) Weighted Average Fleet Utilization for the year ended(4) Portfolio Yield for the Fourth Quarter(5) Portfolio Yield for the year ended(5) ____________ $ $ 4,066 595 136 18 64 36 11.9 9.4 11.0 3.4 7.4 4.7 99% 99% 14% 14% $ $ 4,388 677 144 27 65 36 11.2 10.0 10.9 4.1 6.4 4.9 99% 99% 14% 14% 4,783 2,092 159 72 69 36 10.5 11.1 10.7 4.8 5.3 5.0 99% 99% 14% 14% (1) Calculated using net book value of flight equipment held for lease and net investment in finance leases as at period end. (2) Weighted average age (years) by net book value. (3) Weighted average remaining lease term (years) by net book value. (4) Aircraft on-lease days as a percent of total days in period weighted by net book value. (5) Lease rental revenue for the period as a percent of the average net book value of flight equipment held for lease for the period; quarterly information is annualized. Our owned aircraft portfolio as of December 31, 2012 is listed in Exhibit 99.1 to this report. 39 PORTFOLIO DIVERSIFICATION Aircraft Type Passenger: Narrowbody Midbody Widebody Total Passenger Freighter Total Manufacturer Boeing Airbus Embraer Total Regional Diversification Europe Asia and Pacific North America Latin America Middle East and Africa Off-lease(1) Total _______________ Owned Aircraft as of December 31, 2012 Number of Aircraft % of Net Book Value 94 37 2 133 26 159 101 54 4 159 68 50 17 14 8 2 37% 30% 4% 71% 29% 100% 55% 43% 2% 100% 35% 34% 10% 8% 12% 1% 159 100% (1) Includes one Boeing Model 767-300ER aircraft and one Boeing Model 747-400BDSF aircraft that we are marketing for lease or sale. 40 Our largest customer represents less than 8% of the net book value of flight equipment held for lease (includes net book value of flight equipment held for lease and net investment in finance leases) at December 31, 2012. Our top 15 customers for aircraft we owned at December 31, 2012, representing 69 aircraft and 57% of the net book value of flight equipment held for lease, are as follows: Percent of Net Book Value Greater than 6% per customer 3% to 6% per customer Less than 3% per customer _____________ Customer Country Number of Aircraft South African Airways Hainan Airlines Company South Africa China Emirates US Airways SriLankan Airlines Airbridge Cargo(1) Martinair(2) Jet Airways GOL(3) Garuda Asiana Airlines Iberia Cathay Pacific KLM(2) China Eastern Airlines(4) United Arab Emirates USA Sri Lanka Russia Netherlands India Brazil Indonesia South Korea Spain Hong Kong Netherlands China 4 9 2 11 5 2 4 6 7 3 2 6 1 1 6 (1) Guaranteed by Volga-Dnepr. (2) Martinair is a wholly owned subsidiary of KLM. If combined with KLM and two other affiliated customers, the four customers represent 7% of flight equipment held for lease. (3) GOL has guaranteed the obligations of an affiliate, VRG Linhas Aereas. (4) Does not include the aircraft leased by Shanghai Airlines and China Cargo Airlines which are wholly owned subsidiaries of China Eastern Airlines. Although China Eastern Airlines does not guarantee the obligations of these subsidiaries under their relevant leases, if combined, the three customers represent 5% of flight equipment held for lease. Finance Historically, our debt financing arrangements typically have been secured by aircraft and related operating leases, and in the case of our securitizations, the financing parties have limited recourse to Aircastle Limited. While we have continued to access the bank market for debt secured by aircraft, since mid-2010 the bulk of our debt financing has been raised in the unsecured bond market. U.S. capital markets conditions have generally been strong during that period of time, though market volatility could in the future affect the cost or availability of debt we may seek to raise in the U.S. capital markets. In April 2012, we closed an offering of $500.0 million aggregate principal amount of 6.75% Senior Notes due 2017 (the “Senior Notes due 2017”) and $300.0 million aggregate principal amount of 7.625% Senior Notes due 2020 (the “Senior Notes due 2020”). We used the net proceeds of the private placement to repay outstanding indebtedness under our Term Financing No. 1, to terminate the associated interest rate derivatives, and to fund general corporate purposes, including the purchase of aviation assets. In November 2012, we closed an offering of $500.0 million aggregate principal amount of 6.25% Senior Notes due 2019 (the "Senior Notes due 2019"). We used the net proceeds of the private placement for general corporate purposes, including the purchase of aviation assets. During the near-term, we intend to focus our efforts on investment opportunities that are attractive on an unleveraged basis, that tap commercial financial capacity where it is accessible on reasonable terms or for which debt financing that benefits from government guarantees either from the ECAs or from EXIM is available. We intend to fund new investments through cash on hand, cash flows from operations and potentially through medium- to longer-term financings on a secured or unsecured basis. We may repay all or a portion of such borrowings from time to time with the net proceeds from subsequent long-term debt financings, additional equity offerings or cash generated from 41 operations and asset sales. Therefore, our ability to execute our business strategy, particularly the acquisition of additional commercial jet aircraft or other aviation assets, depends to a significant degree on our ability to obtain additional debt and equity capital on terms we deem attractive. See “Liquidity and Capital Resources — Secured Debt Financings” and ”Liquidity and Capital Resources — Unsecured Debt Financings” below. Comparison of the year ended December 31, 2011 to the year ended December 31, 2012: Revenues: Lease rental revenue Amortization of net lease discounts and lease incentives Maintenance revenue Total lease rentals Other revenue Total revenues Expenses: Depreciation Interest, net Selling, general and administrative Impairment of aircraft Maintenance and other costs Total operating expenses Other income: Gain on sale of flight equipment Other Total other income Income from continuing operations before income taxes Income tax provision Net income Revenues: Year Ended December 31, 2011 2012 (Dollars in thousands) $ 580,209 $ 623,503 (16,445) (12,844) 36,954 53,320 600,718 663,979 4,479 22,593 605,197 686,572 242,103 269,920 204,150 222,808 45,953 6,436 13,277 48,370 96,454 14,656 511,919 652,208 39,092 (268) 38,824 5,747 602 6,349 132,102 40,713 7,832 7,845 $ 124,270 $ 32,868 Total revenues increased by 13.5%, or $81.4 million, for the year ended December 31, 2012 as compared to the year ended December 31, 2011, primarily as a result of the following: Lease rental revenue. The increase in lease rental revenue of $43.3 million for the year ended December 31, 2012 as compared to the same period in 2011 was primarily the result of: • $106.1 million of revenue from 17 aircraft purchased in 2012, and the full year revenue of 17 aircraft purchased in 2011. This increase was offset partially by a decrease in revenue of: • • • $28.6 million due to aircraft sales and disposals; $18.8 million due to lease extensions and transitions at lower rentals; and $15.4 million due to lease terminations and other changes. 42 Amortization of net lease discounts and lease incentives. Amortization of lease discounts Amortization of lease premiums Amortization of lease incentives Amortization of net lease discounts and lease incentives Year Ended December 31, 2011 2012 (Dollars in thousands) $ 2,401 $ 1,684 (1,844) (17,002) (5,141) (9,387) $ (16,445) $ (12,844) As more fully described above under “Overview — Revenues,” lease incentives represent our estimated portion of the lessee’s cost for heavy maintenance, overhaul or replacement of certain high-value components, which is amortized over the life of the related lease. As we enter into new leases, the amortization of lease incentives generally increases, and conversely, if a related lease terminates, the related unused lease incentive liability is reversed and will reduce the amortization of lease incentives. The decrease in amortization of lease incentives of $7.6 million for the year ended December 31, 2012 as compared to the same period in 2011 primarily resulted from eight unscheduled lease terminations, three scheduled lease terminations, two unscheduled changes in lease terms and one change in lease incentive estimate. The increase in amortization of lease premiums of $3.3 million is primarily due to 11 aircraft acquired in 2012 with lease rentals at premiums. Maintenance revenue. Unscheduled lease terminations Scheduled lease terminations Maintenance revenue Year Ended December 31, 2011 2012 Dollars (in thousands) Number of Leases Dollars (in thousands) Number of Leases $ $ 15,257 21,697 36,954 $ 6 8 14 $ 34,894 18,426 53,320 10 5 15 Unscheduled lease terminations. For the year ended December 31, 2011, we recorded maintenance revenue of $15.3 million from unscheduled lease terminations primarily associated with six aircraft returned in 2011. Comparatively, for the same period in 2012, we recorded maintenance revenue totaling $34.9 million from unscheduled lease terminations associated with ten aircraft returned in 2012. Scheduled lease terminations. For the year ended December 31, 2011, we recorded maintenance revenue from scheduled lease terminations totaling $21.7 million associated with eight aircraft. Comparatively, for the same period in 2012, we recorded $18.4 million, associated with maintenance revenue from five scheduled lease terminations. Other revenue was $4.5 million during the year ended December 31, 2011, which was primarily due to additional fees paid by lessees in connection with early termination or the agreement to early terminate five leases. For the year ended December 31, 2012, other revenue was $22.6 which was primarily due to $3.8 million of interest income on our debt investments, $8.4 million of interest income recognized from finance leases and approximately $10.4 million recognized in additional fees paid by lessees in connection with the early termination of 11 leases. Operating Expenses: Total operating expenses increased by 27.4%, or $140.3 million, for the year ended December 31, 2012 as compared to the year ended December 31, 2011 primarily as a result of the following: Depreciation expense increased by $27.8 million for the year ended December 31, 2012 over the same period in 2011. The net increase is primarily the result of: • • a $33.5 million increase in depreciation for aircraft acquired; and a $3.2 million increase in depreciation for capitalized aircraft improvements. 43 This increase was offset partially by: • a $10.9 million decrease in depreciation for aircraft sold. Interest, net consisted of the following: Interest on borrowings, net settlements on interest rate derivatives, and other liabilities(1) Hedge ineffectiveness losses (gains) Amortization of interest rate derivatives related to deferred losses(2) Amortization of deferred financing fees and notes discount(3) Interest Expense Less interest income Less capitalized interest Interest, net ______________ Year Ended December 31, 2011 2012 (Dollars in thousands) $ 172,798 $ 178,601 (101) 23,078 15,271 2,893 30,777 12,449 211,046 224,720 (390) (597) (6,506) (1,315) $ 204,150 $ 222,808 (1) For the year ended December 31, 2011, includes the loan termination fee of $3,196 related to an aircraft sold in June 2011. (2) For the year ended December 31, 2011, includes accelerated amortization of deferred hedge losses in the amount of $8,508 related to three aircraft sold in 2011. (3) For the year ended December 31, 2011, includes the write-off of deferred financing fees of $2,456 related to an aircraft sold in June 2011. For the year ended December 31, 2012, includes the write-off of deferred financing fees of $2,914 related to the pay-off of Term Financing No. 1 and $120 related to the replacement of the 2010 Revolving Credit Facility. Interest, net increased by $18.7 million, or 9.1%, over the year ended December 31, 2011. The net increase is primarily a result of: • • • • a $5.8 million increase in interest on our borrowings driven by the impact of higher weighted average debt outstanding ($3.12 billion for the year ended December 31, 2012 as compared to $2.78 billion for the year ended December 31, 2011) of $19.6 million, offset by the effect of lower rates in 2012 of $10.6 million and $3.2 million of loan termination fees incurred during the second quarter of 2011; a $7.7 million increase in the amortization of deferred losses which includes $13.3 million of additional amortization as a result of the repayment of Term Financing in April 2012; a $3.0 million increase resulting from changes in measured hedge ineffectiveness due to changes in our debt forecast; and a $5.2 million decrease in capitalized interest reflecting the final aircraft delivery from our A330 program in April 2012. These increases were offset partially by: • a $2.8 million decrease in amortization of deferred financing fees due to lower amortization from Securitization No. 1 and Securitization No. 2, offset by a write-off of deferred financing fees of $2.9 million as a result of the repayment of Term Financing No. 1 and $0.1 million related to the replacement of the 2010 Revolving Credit Facility. Selling, general and administrative expenses for the year ended December 31, 2012 increased by $2.4 million or 5.3% over the same period in 2011 primarily due to an increase in professional service fees. Non-cash share based expense was $5.8 million and $4.2 million for the years ended December 31, 2011 and 2012, respectively. Impairment of aircraft was $6.4 million during the year ended December 31, 2011, which related to a Boeing Model 737-400 aircraft which we repossessed following termination of the lease agreement in the second quarter of 2011. Impairment of aircraft was $96.5 million during the year ended December 31, 2012, related to eight Boeing Model 737-300 / -400 aircraft, one Boeing Model 757-200 aircraft and five Boeing Model 767-300ER aircraft, one Airbus Model 44 A310-300F aircraft and three Airbus Model A320-200 aircraft, all of which did not pass their recoverability assessments. See “Summary of Recoverability Assessment” below for a detailed discussion of the related impairment charge for these aircraft. Maintenance and other costs were $14.7 million for the year ended December 31, 2012, an increase of $1.4 million over the same period in 2011. The net increase is primarily related to higher maintenance costs of $3.6 million in 2012 over the same period in 2011, partially offset by lower aircraft maintenance and other transitions costs relating to unscheduled lease terminations returned to us in 2012 as compared to aircraft returned to us in 2011 of $1.8 million. Other Income: Total other income for the year ended December 31, 2012 was $6.3 million as compared to $38.8 million for the same period in 2011. The decrease is primarily a result of $33.3 million of lower gains on sale of aircraft sold in 2012 as compared to aircraft sold in 2011. Income Tax Provision: Our provision for income taxes for the years ended December 31, 2011 and 2012 was $7.8 million and $7.8 million, respectively. Income taxes have been provided based on the applicable tax laws and rates of those countries in which operations are conducted and income is earned, primarily Ireland and the United States. The tax provision remained relatively constant for the year ended December 31, 2012 as compared to the same period in 2011, because of minor increases in operating income subject to tax in the U.S., Ireland, and other jurisdictions. The aircraft impairment charges of $96.5 million were related to Bermuda operations and thus provided no tax benefit. 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. In addition, those subsidiaries that are resident in Ireland are subject to Irish tax. 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 2035. 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. Other Comprehensive Income: Net income Net change in fair value of derivatives, net of tax expense of $857 and $586, respectively Derivative loss reclassified into earnings Total comprehensive income (loss) Year Ended December 31, 2011 2012 (Dollars in thousands) $ 124,270 $ 32,868 37,461 23,078 30,614 30,777 $ 184,809 $ 94,259 Other comprehensive income was $94.3 million for the year ended December 31, 2012, a decrease of $90.6 million from the $184.8 million of other comprehensive income for the year ended December 31, 2011. Other comprehensive income for the year ended December 31, 2012 primarily consisted of: • • • $32.9 million of net income; $30.6 million gain from a change in fair value of interest rate derivatives, net of taxes which is due primarily to net settlements for the year ended December 31, 2012 partially offset by a slight downward shift in the 1 Month LIBOR forward curve; and $30.8 million of amortization of deferred net losses reclassified into earnings related to terminated interest rate derivatives. 45 Other comprehensive income for the year ended December 31, 2011 primarily consisted of: • • • $124.3 million of net income; $37.4 million gain from a change in fair value of interest rate derivatives, net of taxes which is due primarily to net settlements for the year ended December 31, 2011 partially offset by a downward shift in the 1 Month LIBOR forward curve; and $23.1 million of amortization of deferred net losses reclassified into earnings related to terminated interest rate derivatives. The amount of loss expected to be reclassified from accumulated other comprehensive income into interest expense over the next 12 months consists of net interest settlements on active interest rate derivatives in the amount of $17.5 million and the amortization of deferred net losses from terminated interest rate derivatives in the amount of $29.2 million. See “Liquidity and Capital Resources — Hedging” below for more information on deferred net losses as related to terminated interest rate derivatives. Comparison of the year ended December 31, 2010 to the year ended December 31, 2011: Year Ended December 31, 2010 2011 (Dollars in thousands) $ 531,076 $ 580,209 (20,081) (16,445) 15,703 36,954 526,698 600,718 1,012 4,479 527,710 605,197 220,476 242,103 178,262 204,150 45,774 7,342 9,612 45,953 6,436 13,277 461,466 511,919 7,084 39,092 (916) (268) 6,168 38,824 72,412 132,102 6,596 7,832 $ 65,816 $ 124,270 Revenues: Lease rental revenue Amortization of net lease discounts and lease incentives Maintenance revenue Total lease rentals Other revenue Total revenues Expenses: Depreciation Interest, net Selling, general and administrative Impairment of aircraft Maintenance and other costs Total operating expenses Other income: Gain on sale of flight equipment Other Total other income Income from continuing operations before income taxes Income tax provision Net income 46 Revenues: Total revenues increased by 14.7%, or $77.5 million, for the year ended December 31, 2011 as compared to the year ended December 31, 2010, primarily as a result of the following: Lease rental revenue. The increase in lease rental revenue of $49.1 million for the year ended December 31, 2011 as compared to the same period in 2010 was primarily the result of: • $87.9 million of revenue from five new aircraft and twelve mid-aged aircraft purchased in 2011, and the full year revenue of two new aircraft and nine mid-aged aircraft purchased in 2010. This increase was offset partially by a decrease in revenue of: • • • $18.1 million due to aircraft sales and disposals during 2011; $10.5 million due to lease extensions and transitions at lower rentals; and $10.2 million due to lease terminations. Amortization of net lease discounts and lease incentives. Amortization of lease discounts Amortization of lease premiums Amortization of lease incentives Amortization of net lease discounts and lease incentives Year Ended December 31, 2010 2011 (Dollars in thousands) $ 2,447 $ 2,401 (367) (1,844) (22,161) (17,002) $ (20,081) $ (16,445) As more fully described above under “Overview — Revenues,” lease incentives represent our estimated portion of the lessee’s cost for heavy maintenance, overhaul or replacement of certain high-value components, which is amortized over the life of the related lease. As we enter into new leases, the amortization of lease incentives generally increases and conversely if a related lease terminates, the related unused lease incentive liability will reduce the amortization of lease incentives. The decrease in amortization of lease incentives of $5.2 million for the year ended December 31, 2011 as compared to the same period in 2010 primarily resulted from unscheduled lease terminations associated with six aircraft. Maintenance revenue. Unscheduled lease terminations Scheduled lease terminations Maintenance revenue Year Ended December 31, 2010 2011 Dollars (in thousands) Number of Leases Dollars (in thousands) Number of Leases $ $ 4,069 11,634 15,703 3 3 6 $ $ 15,257 21,697 36,954 6 8 14 Unscheduled lease terminations. For the year ended December 31, 2010, we recorded maintenance revenue of $4.1 million from unscheduled lease terminations primarily associated with three aircraft returned in 2010. Comparatively, for the same period in 2011, we recorded maintenance revenue totaling $15.3 million from unscheduled lease terminations associated with six aircraft returned in 2011. Scheduled lease terminations. For the year ended December 31, 2010, we recorded maintenance revenue from scheduled lease terminations totaling $11.6 million associated with three aircraft. Comparatively, for the same period in 2011, we recorded $21.7 million, associated with maintenance revenue from eight scheduled lease terminations. 47 Other revenue was $4.5 million during the year ended December 31, 2011, which was primarily due to additional fees paid by lessees in connection with early termination or the agreement to early terminate five leases. We did not receive any similar fees from early lease terminations in the year ended December 31, 2010. Operating Expenses: Total operating expenses increased by 10.9%, or $50.5 million, for the year ended December 31, 2011 as compared to the year ended December 31, 2010 primarily as a result of the following: Depreciation expense increased by $21.6 million for the year ended December 31, 2011 over the same period in 2010. The net increase is primarily the result of: • a $24.3 million increase in depreciation for aircraft acquired. This increase was offset partially by: • a $4.8 million decrease in depreciation for aircraft sold. Interest, net consisted of the following: Interest on borrowings, net settlements on interest rate derivatives, and other liabilities(1) Hedge ineffectiveness losses (gains) Amortization of interest rate derivatives related to deferred losses(2) Amortization of deferred financing fees and notes discount(3) Interest Expense Less interest income Less capitalized interest Interest, net _____________ Year Ended December 31, 2010 2011 (Dollars in thousands) $ 153,064 $ 172,798 5,039 9,634 15,065 (101) 23,078 15,271 182,802 211,046 (413) (390) (4,127) (6,506) $ 178,262 $ 204,150 (1) For the year ended December 31, 2011, includes the loan termination fee of $3,196 related to an aircraft sold in June 2011. (2) For the year ended December 31, 2011, includes accelerated amortization of deferred hedge losses in the amount of $8,508 related to three aircraft sold in 2011. (3) For the year ended December 31, 2010, includes the write-off of deferred financing fees of $2,471 related to the pay-off of a term financing loan and a secured credit facility. For the year ended December 31, 2011, includes the write-off of deferred financing fees of $2,456 related to an aircraft sold in June 2011. Interest, net increased by $25.9 million, or 14.5%, over the year ended December 31, 2010. The net increase is primarily a result of: • • • a $16.5 million increase in interest on our borrowings due to higher weighted average debt outstanding ($2.78 billion for the year ended December 31, 2011 as compared to $2.54 billion for the year ended December 31, 2010); a $3.2 million loan breakage fee in connection with the repayment of one of our ECA loans in the second quarter of 2011; a $13.4 million increase in the amortization of deferred losses, including $8.5 million of accelerated amortization resulting from the sale of three Airbus A330 aircraft. These increases were offset partially by: • • a $5.1 million decrease resulting from changes in measured hedge ineffectiveness due to changes in our debt forecast; and a $2.4 million increase in capitalized interest. 48 Selling, general and administrative expenses for the year ended December 31, 2011 remained flat over the same period in 2010. Non-cash share based expense was $7.5 million and $5.8 million for the years ended December 31, 2010 and 2011, respectively. Impairment of aircraft was $7.3 million during the year ended December 31, 2010, which related to one Boeing Model 737-300 aircraft and one Boeing Model 737-500 aircraft. Impairment of aircraft was $6.4 million during the year ended December 31, 2011, which related to a Boeing Model 737-400 aircraft which we repossessed following termination of the lease agreement in the second quarter of 2011. Maintenance and other costs were $13.3 million for the year ended December 31, 2011, an increase of $3.7 million over the same period in 2010. The net increase is primarily related to an increase in aircraft maintenance and other transitions costs relating to unscheduled lease terminations for four aircraft returned to us in the first quarter of 2011 and one aircraft returned during the second quarter of 2011. Other Income: Total other income for the year ended December 31, 2011 was $38.8 million as compared to $6.2 million for the same period in 2010. The increase is primarily a result of a $32.0 million increase in the gain on sale of aircraft (thirteen aircraft sold in 2011 as compared to three aircraft sold in 2010). Income Tax Provision: Our provision for income taxes for the years ended December 31, 2010 and 2011 was $6.6 million and $7.8 million, respectively. Income taxes have been provided based on the applicable tax laws and rates of those countries in which operations are conducted and income is earned, primarily Ireland and the United States. The increase in our income tax provision of approximately $1.2 million for the year ended December 31, 2011 as compared to the same period in 2010 was attributable to an increase in operating income subject to tax in the U.S., Ireland, and other jurisdictions. 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. In addition, those subsidiaries that are resident in Ireland are subject to Irish tax. 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 2035. This date was recently extended by the Government of Bermuda from 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. Other Comprehensive Income: Net income Net change in fair value of derivatives, net of tax expense of $268 and $857, respectively Derivative loss reclassified into earnings Total comprehensive income (loss) Year Ended December 31, 2010 2011 (Dollars in thousands) $ 65,816 $124,270 1,994 9,634 37,461 23,078 $ 77,444 $184,809 Other comprehensive income was $184.8 million for the year ended December 31, 2011, an increase of $107.4 million from the $77.4 million of other comprehensive income for the year ended December 31, 2010. Other comprehensive income for the year ended December 30, 2011 primarily consisted of: • $124.3 million of net income; 49 • • $37.4 million gain from a change in fair value of interest rate derivatives, net of taxes which is due primarily to net settlements for the year ended December 31, 2011 partially offset by a downward shift in the 1 Month LIBOR forward curve; and $23.1 million of amortization of deferred net losses reclassified into earnings related to terminated interest rate derivatives. Other comprehensive income for the year ended December 31, 2010 primarily consisted of: • • • $65.8 million of net income; $2.0 million gain from a change in fair value of interest rate derivatives, net of taxes due primarily to net settlements for the year ended December 31, 2010 partially offset by a downward shift in the 1 Month LIBOR forward curve; and $9.6 million of amortization of deferred net losses reclassified into earnings related to terminated interest rate derivatives. The amount of loss expected to be reclassified from accumulated other comprehensive income into interest expense over the next 12 months consists of net interest settlements on active interest rate derivatives in the amount of $57.9 million and the amortization of deferred net losses from terminated interest rate derivatives in the amount of $17.4 million. See “Liquidity and Capital Resources — Hedging” below for more information on deferred net losses as related to terminated interest rate derivatives. Summary of Recoverability Assessment Transactional Impairments: A320-200 "Classic" A320-200 767-300ER 757-200 Total transactional impairments Annual Portfolio Review: A310-300F 737-300 737-400 767-300ER Total annual portfolio review impairments Number of Aircraft Impairment Charge (Dollars in Millions) 2 1 1 1 5 1 2 6 4 13 $ 12.3 6.7 8.0 2.1 29.1 4.8 3.2 23.6 35.8 67.4 Total impairments 18 $ 96.5 Transactional Impairments We perform a recoverability assessment whenever events or changes in circumstances, or indicators, indicate that the carrying amount or net book value of an aircraft may not be recoverable. During 2012, we recorded impairments totaling $29.1 million related to one aircraft that we sold for less than its net book value, one aircraft that failed its recoverability test following its scheduled return and three aircraft for which we elected not to invest in engine performance restoration visits, and, in conjunction with these activities, we also recorded maintenance revenue and lease incentive reversals aggregating $21.2 million. 50 Annual Portfolio Review We perform a recoverability assessment of all aircraft in our fleet, on an aircraft-by-aircraft basis, at least annually. We performed this recoverability assessment during the third quarter of 2012. Management develops the assumptions used in the recoverability assessment based on its knowledge of active lease contracts, current and future expectations of the global demand for a particular aircraft type and historical experience in the aircraft leasing market and aviation industry, as well as information received from third party industry sources. The factors considered in estimating the undiscounted cash flows are impacted by changes in future periods due to changes in contracted lease rates, residual values, economic conditions, technology, airline demand for a particular aircraft type and other factors. In particular, many of our assumptions were driven primarily by weak market demand for older technology narrow- and wide-body model aircraft caused by slowing global economic growth rates, declining business confidence levels and higher fuel prices. In the case of Boeing 737 “Classic” aircraft, production rate increases by both Boeing and Airbus for newer generation narrowbody aircraft, coupled with slowing demand growth, is enabling more rapid replacement of earlier generation aircraft. Storage levels for these aircraft types have increased during the last twelve months. Following completion of the recoverability analysis, we took the following actions: • We impaired 13 aircraft and recorded aggregate impairment charges of $67.4 million to write these aircraft down to current market values. For these 13 aircraft, the aggregate net book value as of June 30, 2012 was $158.4 million. • For seven other aircraft that passed the recoverability assessment, we took the following steps: Shortened the expected lives of one Airbus A330-300 aircraft, five Boeing Model 767-300ER aircraft and one McDonnell Douglas MD-11SF aircraft, primarily to reflect the specific maintenance schedule that we expect for the airframe and related engines. In the case of our Boeing Model 767-300ER aircraft, reduced the residual values to reflect our current estimates. Reducing the expected lives or anticipated residual values for aircraft in our fleet will accelerate the future depreciation on these aircraft, which will be partly offset by reduced depreciation on aircraft that we impaired. As described above, these changes in depreciation going forward will affect 23 aircraft. We estimate that there will be no annual increase in depreciation expense for the year ended December 31, 2013, although future depreciation is expected to decrease as these aircraft reach the end of their holding periods. While we believe that the estimates and related assumptions used in the recoverability assessment are appropriate, actual results could differ from those estimates. Other than the aircraft discussed above, management believes that the net book value of each aircraft is currently supported by the estimated future undiscounted cash flows expected to be generated by that aircraft, and accordingly, no other aircraft were impaired as a consequence of this recoverability assessment. In addition, our lessees may face financial difficulties and return aircraft to us prior to the contractual lease expiry dates. As a result, our cash flow assumptions may change and future impairment charges may be required. At December 31, 2012, we had a total of 13 aircraft with a total net book value of $318.6 million (accounting for 6.7% of the total net book value of our flight equipment held for lease) that we consider more susceptible to failing our recoverability assessment. The recoverability in the value of these aircraft is more sensitive to changes in contractual cash flows, future cash flow estimates and aircraft residual or scrap values. These aircraft fall into the categories as shown in the table below: Aircraft Type Narrowbody Midbody Freighters Number of Aircraft 5 5 3 Percent of Net Book Value 2.0% 2.0% 2.7% 51 APPLICATION OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES Management’s discussion and analysis of financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with US GAAP, which requires us to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying footnotes. Our estimates and assumptions are based on historical experiences and currently available information. Actual results may differ from such estimates under different conditions, sometimes materially. A summary of our significant accounting policies is presented in the notes to our consolidated financial statements included elsewhere in this Annual Report. Critical accounting policies and estimates are defined as those that are both most important to the portrayal of our financial condition and results and require our most subjective judgments, estimates and assumptions. Our most critical accounting policies and estimates are described below. Lease Revenue Recognition Our operating lease rentals are recognized on a straight-line basis over the term of the lease. We will neither recognize revenue nor record a receivable from a customer when collectability is not reasonably assured. Estimating whether collectability is reasonably assured requires some level of subjectivity and judgment. When collectability is not reasonably assured, the customer is placed on non-accrual status and revenue is recognized when cash payments are received. Management determines whether customers should be placed on non-accrual status. When we are reasonably assured that payments will be received in a timely manner, the customer is placed on accrual status. The accrual/non-accrual status of a customer is maintained at a level deemed appropriate based on factors such as the customer’s credit rating, payment performance, financial condition and requests for modifications of lease terms and conditions. Events or circumstances outside of historical customer patterns can also result in changes to a customer’s accrual status. Maintenance Payments and Maintenance Revenue Under our leases, the lessee must pay operating expenses accrued or payable during the term of the lease, which would normally include maintenance, overhaul, fuel, crew, landing, airport and navigation charges; certain taxes, licenses, consents and approvals; aircraft registration; and insurance premiums. Typically, our aircraft are subject to net operating leases whereby the lessee pays lease rentals and is generally responsible for maintaining the aircraft and paying operational, maintenance and insurance costs, although in a majority of cases, we are obligated to pay a portion of specified maintenance or modification costs. Our aircraft lease agreements generally provide for the periodic payment of a fixed amount of rent over the life of the lease, and the amount of the contracted rent will depend upon the type, age, specification and condition of the aircraft and market conditions at the time the lease is committed. The amount of rent we receive will depend on a number of factors, including the credit-worthiness of our lessees and the occurrence of delinquencies, restructurings and defaults. Our lease rental revenues are also affected by the extent to which aircraft are off-lease and our ability to remarket aircraft that are nearing the end of their leases in order to minimize their off-lease time. Our success in re-leasing aircraft is affected by market conditions relating to our aircraft and by general industry conditions and trends. An increase in the percentage of off-lease aircraft or a reduction in lease rates upon remarketing would negatively impact our revenues. Under an operating lease, the lessee will be responsible for performing maintenance on the relevant aircraft and will typically be required to make payments to us for heavy maintenance, overhaul or replacement of certain high-value components of the aircraft. These maintenance payments are based on hours or cycles of utilization or on calendar time, depending upon the component, and would be made either monthly in arrears or at the end of the lease term. For maintenance payments made monthly in arrears during a lease term, we will typically be required to reimburse all or a portion of these payments to the lessee upon completion of the relevant heavy maintenance, overhaul or parts replacement. We record maintenance payments paid by the lessee during a lease as accrued maintenance liabilities in recognition of our obligation in the lease to refund such payments, and therefore we do not recognize maintenance revenue during the lease. Maintenance revenue recognition would occur at the end of a lease, when we are able to determine the amount, if any, by which reserve payments received exceed the amount we are required under the lease to reimburse to the lessee for heavy maintenance, overhaul or parts replacement. The amount of maintenance revenue we recognize in any reporting period is inherently volatile and is dependent upon a number of factors, including the timing of lease expiries, including scheduled and unscheduled expiries, the timing of maintenance events and the utilization of the aircraft by the lessee. Lease Incentives and Amortization Many of our leases contain provisions which may require us to pay a portion of the lessee’s costs for heavy maintenance, overhaul or replacement of certain high-value components. We account for these expected payments as lease incentives, 52 which are amortized as a reduction of revenue over the life of the lease. We estimate the amount of our portion for such costs, typically for the first major maintenance event for the airframe, engines, landing gear and auxiliary power units, expected to be paid to the lessee based on assumed utilization of the related aircraft by the lessee, the anticipated cost of the maintenance event and the estimated amounts the lessee is responsible to pay. This estimated lease incentive is not recognized as a lease incentive liability at the inception of the lease. We recognize the lease incentive as a reduction of lease revenue on a straight-line basis over the life of the lease, with the offset being recorded as a lease incentive liability, which is included in maintenance payments on the balance sheet. The payment to the lessee for the lease incentive liability is first recorded against the lease incentive liability, and any excess above the lease incentive liability is recorded as a prepaid lease incentive asset, which is included in other assets on the balance sheet and continues to amortize over the remaining life of the lease. Flight Equipment Held for Lease and Depreciation Flight equipment held for lease is stated at cost and depreciated using the straight-line method, typically over a 25 year life from the date of manufacture for passenger aircraft and over a 30- to 35- year life for freighter aircraft, depending on whether the aircraft is a converted or purpose-built freighter, to estimated residual values. Estimated residual values are generally determined to be approximately 15% of the manufacturer’s estimated realized price for passenger aircraft when new and 5% — 10% for freighter aircraft when new. Management may make exceptions to this policy on a case-by-case basis when, in its judgment, the residual value calculated pursuant to this policy does not appear to reflect current expectations of value. Examples of situations where exceptions may arise include but are not limited to: • • • flight equipment where estimates of the manufacturers' realized sales prices are not relevant (e.g., freighter conversions); flight equipment where estimates of the manufacturers’ realized sales prices are not readily available; and flight equipment which may have a shorter useful life due to obsolescence. In accounting for flight equipment held for lease, we make estimates about the expected useful lives, the fair value of attached leases, acquired maintenance liabilities and the estimated residual values. In making these estimates, we rely upon actual industry experience with the same or similar aircraft types and our anticipated utilization of the aircraft. As part of our due diligence review of each aircraft we purchase, we prepare an estimate of the expected maintenance payments and any excess costs which may become payable by us, taking into consideration the then-current maintenance status of the aircraft and the relevant provisions of any existing lease. For planned major maintenance activities for aircraft off-lease, the Company capitalizes the actual maintenance costs by applying the deferral method. Under the deferral method, we capitalize the actual cost of major maintenance events, which are depreciated on a straight-line basis over the period until the next maintenance event is required. When we acquire an aircraft with a lease, determining the fair value of the attached lease requires us to make assumptions regarding the current fair values of leases for specific aircraft. We estimate a range of current lease rates of like aircraft in order to determine if the attached lease is within a fair value range. If a lease is below or above the range of current lease rates, we present value the estimated amount below or above fair value range over the remaining term of the lease. The resulting lease discount or premium is amortized into lease rental income over the remaining term of the lease. Impairment of Flight Equipment We perform a recoverability assessment of all aircraft in our fleet, on an aircraft-by-aircraft basis, at least annually. In addition, a recoverability assessment is performed whenever events or changes in circumstances, or indicators, indicate that the carrying amount or net book value of an asset may not be recoverable. Indicators may include, but are not limited to, a significant lease restructuring or early lease termination, significant air traffic decline, the introduction of newer technology aircraft or engines, an aircraft type is no longer in production or a significant airworthiness directive is issued. When we perform a recoverability assessment, we measure whether the estimated future undiscounted net cash flows expected to be generated by the aircraft exceed its net book value. The undiscounted cash flows consist of cash flows from currently contracted leases, future projected lease rates, transition costs, estimated down time and estimated residual or scrap values for an aircraft. In the event that an aircraft does not meet the recoverability test, the aircraft will be adjusted to fair value, resulting in an impairment charge. See further discussion under “Fair Value Measurements” below. Management develops the assumptions used in the recoverability analysis based on current and future expectations of the global demand for a particular aircraft type and historical experience in the aircraft leasing market and aviation industry, 53 as well as information received from third party industry sources. The factors considered in estimating the undiscounted cash flows are impacted by changes in future periods due to changes in contracted lease rates, residual values, economic conditions, technology, airline demand for a particular aircraft type and many of the risk factors discussed in Item 1A. “Risk Factors.” Net Investment in Finance Leases If a lease meets specific criteria at the inception of a new lease or at any lease modification date, we recognize the lease as a Net investment in finance leases on our Consolidated Balance Sheets. The net investment in finance leases consists of lease receivables, less the unearned income, plus the estimated unguaranteed residual value of the leased flight equipment at the lease end date. The unearned income is recognized as Other revenue in our Consolidated Statements of Income over the lease term in a manner that produces a constant rate of return on the Net investment in finance lease. Collectability of finance leases is evaluated periodically on an individual customer level. The evaluation of the collectability of the finance leases considers the credit of the lessee and the value of the underlying aircraft. An allowance for credit losses is established if there is evidence that we will be unable to collect all amounts due according to the original contractual terms of the Net Investment in Finance Leases. At December 31, 2012, we had no allowance for credit losses for our Net investment in finance leases. Derivative Financial Instruments In the normal course of business we utilize derivative instruments to manage our exposure to interest rate risks. All interest rate derivatives are recognized on the balance sheet at their fair value. We determine fair value for our United States dollar-denominated interest rate derivatives by calculating reset rates and discounting cash flows based on cash rates, futures rates and swap rates in effect at the period close. We determine the fair value of our United States dollar-denominated guaranteed notional balance interest rate derivatives based on the upper notional band using cash flows discounted at relevant market interest rates in effect at the period close. The changes in fair values related to the effective portion of the interest rate derivatives are recorded in other comprehensive income on our consolidated balance sheet. The ineffective portion of the interest rate derivative is calculated and recorded in interest expense on our consolidated statement of income at each quarter end. For any interest rate derivatives not designated as a hedge, all mark-to-market adjustments are recognized in other income (expense) on our consolidated statement of income. At inception of the hedge, we choose a method to assess effectiveness and to calculate ineffectiveness, which we must use for the life of the hedge relationship. Historically, we have designated the “change in variable cash flows method” for calculation of hedge ineffectiveness. This methodology, which is only available for interest rate derivatives designated at execution with a fair value of zero, involves a comparison of the present value of the cumulative change in the expected future cash flows on the variable leg of the interest rate derivative against the present value of the cumulative change in the expected future interest cash flows on the floating-rate liability. When the change in the interest rate derivative’s variable leg exceeds the change in the liability, the calculated ineffectiveness is recorded in interest expense on our consolidated statement of income. Effectiveness is tested by dividing the change in the interest rate derivative’s variable leg by the change in the liability. We used the “hypothetical trade method” for hedge relationships designated after execution because those hedge relationships did not have an interest rate derivative fair value of zero, and therefore, did not qualify for the “change in variable cash flow method.” The hypothetical trade method involves a comparison of the change in the fair value of an actual interest rate derivative to the change in the fair value of a hypothetical interest rate derivative with critical terms that reflect the hedged debt. When the change in the value of the interest rate derivative exceeds the change in the hypothetical interest rate derivative, the calculated ineffectiveness is recorded in interest expense on our consolidated statement of income. The effectiveness of these relationships is tested by regressing historical changes in the interest rate derivative against historical changes in the hypothetical interest rate derivative. Fair Value Measurements We measure the fair value of interest rate derivative assets and liabilities on a recurring basis. Fair value is the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Our valuation model for interest rate derivatives classified in level 2 maximizes the use of observable inputs, including contractual terms, interest rate curves, cash rates and futures rates and minimizes the use of unobservable inputs, including an assessment of the risk of non-performance by the interest rate derivative counterparty in valuing derivative 54 assets, an evaluation of the Company’s credit risk in valuing derivative liabilities and an assessment of market risk in valuing the derivative asset or liability. We use our interest rate derivative counterparty’s valuation of our interest rate derivatives to validate our models. Our interest rate derivatives are sensitive to market changes in LIBOR as discussed in Item 7A. “Quantitative and Qualitative Disclosures about Market Risk.” Our valuation model for interest rate derivatives classified in Level 3 includes a significant unobservable market input to value the option component of the guaranteed notional balance. The guaranteed notional balance has an upper notional band that matches the hedged debt on Term Financing No. 1 and a lower notional band. The notional balance is guaranteed to match the hedged debt balance if the debt balances decrease within the upper and lower notional band. 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 balance. The fair value of the interest rate derivative is determined based on the upper notional band using cash flows discounted at the relevant market interest rates in effect at the period close and incorporates an assessment of the risk of non-performance by the interest rate derivative counterparty in valuing derivative assets, an evaluation of the Company’s credit risk in valuing derivative liabilities and an assessment of market risk in valuing the derivative asset or liability. 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 impaired are based on an income approach that uses Level 3 inputs, which include our assumptions and appraisal data as to future cash proceeds from leasing and selling aircraft. Income Taxes Aircastle uses an asset and liability based approach in accounting for income taxes. Deferred income tax assets and liabilities are recognized for the future tax consequences attributed to differences between the financial statement and tax basis of existing assets and liabilities using enacted rates applicable to the periods in which the differences are expected to affect taxable income. A valuation allowance is established, when necessary, to reduce deferred tax assets to the amount estimated by us to be realizable. The Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities. We did not have any unrecognized tax benefits. RECENT UNADOPTED ACCOUNTING PRONOUNCEMENTS In August 2010, the Financial Accounting Standards Board (the "FASB") issued an exposure draft, “Leases” (the “Lease ED”), which would replace the existing guidance in the Accounting Standards Codification (“ASC”) 840 (“ASC 840”), Leases. In June 2012, the FASB decided that leases would be classified as either leases of property or leases of assets other than property. Leases of property will continue to use operating lease accounting. Leases of other than property would use the receivable residual approach. Under the receivable residual approach, a lease receivable would be recognized for the lessor's right to receive lease payments, a portion of the carrying amount of the underlying asset would be allocated between the right of use granted to the lessee and the lessor's residual value and profit or loss would only be recognized at commencement if it is reasonably assured. The FASB completed all of its deliberations and decided to re-expose the Lease ED in the first half of 2013. We anticipate that the final standard may have an effective date no earlier than 2016. When and if the proposed guidance becomes effective, it may have a significant impact on the Company's consolidated financial statements. Although we believe the presentation of our financial statements, and those of our lessees could change, we do not believe the accounting pronouncement will change the fundamental economic reasons for which the airlines lease aircraft. Therefore, we do not believe it will have a material impact on our business. LIQUIDITY AND CAPITAL RESOURCES Our primary sources of liquidity currently are cash on hand, cash generated by our aircraft leasing operations, loans secured by new aircraft we acquire and unsecured borrowings. Our business is very capital intensive, requiring significant investments in order to expand our fleet during periods of growth and investments in maintenance and improvements on our existing portfolio. Our business also generates a significant amount of cash from operations, primarily from lease rentals and maintenance collections. These sources have historically provided liquidity for these investments and for other uses, 55 including the payment of dividends to our shareholders. In the past, we have also met our liquidity and capital resource needs by utilizing several sources, including: • • • • lines of credit, our securitizations, term financings, secured borrowings supported by export credit agencies for new aircraft acquisitions and bank financings secured by aircraft purchases; unsecured indebtedness, including an unsecured revolving credit facility and unsecured senior notes; public offerings of common shares; and asset sales. Going forward, we expect to continue to seek liquidity from these sources subject to pricing and conditions that we consider satisfactory. In December 2012, we closed a $150.0 million unsecured revolving credit facility with Citibank, N.A., Goldman Sachs Bank USA, J.P. Morgan Chase Bank N.A. and an affiliate of RBC Capital Markets, which has a three-year term scheduled to expire in December 2015; we have not yet drawn down on this facility. In April 2012, we closed an offering of $500.0 million aggregate principal amount of Senior Notes due 2017 and $300.0 million aggregate principal amount of Senior Notes due 2020. Both the Senior Notes due 2017 and the Senior Notes due 2020 were priced at par. We used the net proceeds of the private placement to repay outstanding indebtedness under our Term Financing No. 1, to terminate the associated interest rate derivatives and to fund general corporate purposes, including the purchase of aviation assets. In November 2012, we closed an offering of $500.0 million aggregate principal amount of Senior Notes due 2019 which were priced at par. We used the net proceeds of the private placement for general corporate purposes, including the purchase of aviation assets. While the financing structures for our securitizations include liquidity facilities, these liquidity facilities are primarily designed to provide short-term liquidity to enable the financing vehicles to remain current on interest payments during periods when the relevant entities incur substantial unanticipated expenditures. Because these facilities have priority in the payment waterfall and therefore must be repaid quickly, and because we do not anticipate being required to draw on these facilities to cover operating expenses, we do not view these liquidity facilities as an important source of liquidity for us. As of December 31, 2012, we are in compliance with all applicable covenants in our financings. We have also determined as of December 31, 2012 that our consolidated subsidiaries "restricted net assets" as defined by Rule 4-08(e)(3) of Regulation S-X are less than 25 percent of our consolidated net assets. In May 2012, the Company’s Board of Directors authorized the repurchase of up to $50.0 million of the Company’s common shares. In August 2012, we repurchased 2,500,002 shares from affiliates of Fortress Investment Group LLC at a total cost of $28.5 million under the repurchase program and we paid no commissions on this transaction. In November 2012, the Company's Board of Directors authorized an increase in the Company's share repurchase program by up to an additional $28.5 million of its common shares, bringing the total back up to $50.0 million of its common shares. Through December 31, 2012, we repurchased an additional 936,500 shares at a total cost of $11.4 million including commissions. In addition, as of February 14, 2013, we repurchased an additional 679,292 common shares at an aggregate cost of $8.6 million including commissions during 2013. Accordingly, as of February 14, 2013, we have repurchased under this program a total of 1,615,792 common shares at a total cost of $20.0 million including commissions, at an average price per share of $12.38, and the remaining dollar value of common shares that may be purchased under the program is $30.0 million. We believe that cash on hand, funds generated from operations, maintenance payments received from lessees, and proceeds from any future contracted aircraft sales will be sufficient to satisfy our liquidity and capital resource needs over the next twelve months. Our liquidity and capital resource needs include payments due under our other aircraft purchase commitments, required principal and interest payments under our long-term debt facilities, expected capital expenditures, lessee maintenance payment draws and lease incentive payments over the next twelve months. 56 Cash Flows Net cash flow provided by operating activities Net cash flow used in investing activities Net cash flow provided by financing activities Operating Activities: Year Ended December 31, 2010 Year Ended December 31, 2011 Year Ended December 31, 2012 (Dollars in thousands) $ 356,530 $ 359,377 $ 427,277 (541,115) (445,420) (741,909) 281,876 141,608 637,327 Cash flow from operations was $427.3 million and $359.4 million for the years ended December 31, 2012 and 2011, respectively. The increase in cash flow from operations of $67.9 million for the year ended December 31, 2012 versus the same period in 2011 was primarily a result of: • • • $48.1 million increase in cash from lease rentals; $21.0 million increase in cash from other working capital; and $7.2 million increase in cash interest from finance leases. This increase was offset by: • a $4.1 million increase in cash paid for interest, net of capitalized interest. Cash flow from operations was $359.4 million and $356.5 million for the years ended December 31, 2011 and 2010, respectively. The increase in cash flow from operations of approximately $2.8 million for the year ended December 31, 2011 versus the same period in 2010 was primarily a result of: • a $48.4 million increase in cash from lease rentals. This increase was offset by: • • a $26.3 million increase in cash paid for interest and a $18.3 million decrease in cash from other working capital. Investing Activities: Cash used in investing activities was $741.9 million and $445.4 million for the years ended December 31, 2012 and 2011, respectively. The increase in cash flow used in investing activities of $296.5 million for the year ended December 31, 2012 versus the same period in 2011 was primarily a result of: • $427.7 million decrease in the proceeds from the sale of flight equipment; • $91.5 increase in the net investment of finance leases in 2012; and • $37.0 million net increase for the purchase of a debt investment in 2012. These increases were offset partially by: • $101.5 million decrease in aircraft purchase deposits under our Airbus A330 Agreement; • $83.5 million decrease in the acquisition and improvement of flight equipment; and • $71.5 million increase in restricted cash and cash equivalents related to the sale of flight equipment. Cash used in investing activities was $445.4 million and $541.1 million for the years ended December 31, 2011 and 2010, respectively. The decrease in cash flow used in investing activities of $95.7 million for the year ended December 31, 2011 versus the same period in 2010 was primarily a result of: • a $420.6 million increase in proceeds from the sale of flight equipment. 57 This increase was offset by: • a $311.2 million increase in the acquisition and improvement of flight equipment. Financing Activities: Cash provided from financing activities was $637.3 million for the year ended December 31, 2012 as compared to $141.6 million for the year ended December 31, 2011. The net increase in cash flow used by financing activities of $495.7 million for the year ended December 31, 2012 versus the same period in 2011 was a result of: • $790.6 million of higher borrowings from the proceeds of the issuance of Senior Notes due 2017, Senior Notes due 2019, Senior Notes due 2020 and an additional borrowing under an ECA supported loan for the financing of an Airbus Model A330-200 aircraft in 2012 as compared to five ECA supported loan borrowings for the financing of five Airbus Model A330-200 aircraft in 2011; • $124.8 million higher restricted cash and cash equivalents related to security deposits and maintenance payments; • $51.6 million of higher maintenance deposits received net of maintenance deposits returned; • $47.4 million lower repurchases of our common shares as a result of the share buy-back program in 2012 versus the same period in 2011; and • $1.4 million in lower dividends paid. The inflows were offset partially by: • $456.5 million of higher financing repayments on our securitizations and term debt financings as the result of the pay-off of Term Financing No. 1 in 2012 as compared to the pay-off of one ECA supported loan in 2011; • $50.8 million of payments for terminated cash flows hedges in 2012; and • $11.5 million in higher deferred financing costs; and • $1.4 million in lower security deposits received net of security deposits returned. Cash provided by financing activities was $141.6 million and $281.9 million for the years ended December 31, 2011 and 2010, respectively. The net decrease in cash flow provided by financing activities of $140.3 million for the year ended December 31, 2011 versus the same period in 2010 was a result of: • • • • • • $89.9 million of increased repurchases of our common shares; $86.4 million of higher financing repayments on our securitizations and term debt financings; $43.4 million of lower restricted cash and cash equivalents related to security deposits and maintenance payments; $40.2 million of lower maintenance payments received net of maintenance payments returned; $13.3 million of higher dividend payments; and $4.8 million in additional deferred financing costs. The outflows were offset partially by: • • $121.3 million of higher proceeds from term debt financings and $12.7 million of higher security deposits received net of security deposits returned. 58 Debt Obligations The following table provides a summary of our secured and unsecured debt financings at December 31, 2012: Debt Obligation Secured Debt Financings: Securitization No. 1 Securitization No. 2 ECA Term Financings Bank Financings Total secured debt financings Unsecured Debt Financings: Senior Notes due 2017 Senior Notes due 2018 Senior Notes due 2019 Senior Notes due 2020 2012 Revolving Credit Facility Total unsecured debt financings Total secured and unsecured debt financings _______________ Collateral Outstanding Borrowing Number of Aircraft Interest (1) Rate Final Stated Maturity (2) (Dollars in thousands) Interests in aircraft leases, beneficial interests in aircraft owning/leasing entities and related interests Interests in aircraft leases, beneficial interests in aircraft owning/leasing entities and related interests Interests in aircraft, aircraft leases, beneficial interests in aircraft owning/leasing entities and related interests Interests in aircraft, aircraft leases, beneficial interests in aircraft owning/leasing entities and related interests None None None None None $ 309,505 30 0.49% 06/20/31 772,863 44 0.54% 06/14/37 652,916 112,750 1,848,034 500,000 450,642 500,000 300,000 — 1,750,642 $ 3,598,676 10 2.01% to 3.96% 12/03/21 to 11/30/24 3 4.22% to 4.57% 09/15/15 to 10/26/17 — 6.75% 04/15/17 — 9.75% 08/01/18 — 6.25% 12/01/19 — 7.63% 04/15/20 — N/A 12/19/15 (1) Reflects the floating rate in effect at the applicable reset date plus the margin for Securitization No. 1, Securitization No. 2 and one of our ECA Term Financings. All other financings have a fixed rate. (2) For Securitizations No. 1 and No. 2, all cash flow available after expenses and interest is applied to debt amortization. The following securitizations and term debt financing structures include liquidity facility commitments described in the table below: Facility Liquidity Facility Provider Securitization No. 1 Securitization No. 2 ______________ Crédit Agricole Corporate and Investment Bank(1) HSH Nordbank AG(1) Available Liquidity December 31, December 31, 2011 2012 (Dollars in thousands) Unused Fee Interest Rate on any Advances $ 42,000 $ 42,000 0.45% 1M LIBOR + 1.00 66,859 65,000 0.50% 1M LIBOR + 0.75 (1) Following a ratings downgrade by each of the facility providers, the liquidity facility was drawn, and the proceeds, or permitted investments thereof, remain available to provide liquidity if required. Amounts drawn following a ratings downgrade with respect to the liquidity facility provider do not bear interest; however, net investment earnings will be paid to the liquidity facility provider, and the unused fee continues to apply. 59 The purpose of these facilities is to provide liquidity for the relevant securitization or term financing in the event that cash flow from lease contracts and other revenue sources is not sufficient to pay operating expenses with respect to the relevant aircraft portfolio, interest payments and interest rate hedging payments for the relevant securitization. Secured Debt Financings: ECA Term Financings During 2012, we entered into two twelve-year term loans which are supported by guarantees from COFACE for the financing of two new Airbus Model A330-200 aircraft totaling $159.7 million. We refer to these COFACE-supported financings as “ECA Term Financings”. The borrowings under these financings at December 31, 2012 have a weighted average rate of interest equal to 3.221%. The obligations outstanding under the ECA Term Financings are secured by, among other things, a mortgage over the aircraft and a pledge of our ownership interest in our subsidiary company that leases the aircraft to the operator. The ECA Term Financings documents contain a $500.0 million minimum net worth covenant for Aircastle Limited, as well as a material adverse change default and cross default to any other recourse obligation of Aircastle Limited, and other terms and conditions customary for ECA-supported financings being completed at this time. In addition, Aircastle Limited has guaranteed the repayment of the ECA Term Financings. Bank Financings In October 2011, one of our subsidiaries entered into a $90.0 million loan facility to finance a portion of the purchase of a Boeing Model 777-300ER aircraft. The loan is to be repaid in 24 equal quarterly principal installments beginning January 26, 2012 and a balloon payment of $50.0 million on the final repayment date of October 26, 2017. In December 2011, two of our subsidiaries each entered into $18.0 million loan facilities to finance the purchase of two McDonnell Douglas MD11-F aircraft. The loans are to be repaid over 45 and 47 months, respectively, in principal installments beginning January 15, 2012 and ending on September 15, 2015 and November 15, 2015, respectively. We refer to these loan facilities as “Bank Financings”. Our Bank Financings contain, among other customary provisions, a $500.0 million minimum net worth covenant and, in some cases, a cross-default to other financings with the same lender. In addition, Aircastle Limited has guaranteed the repayment of the Bank Financings. The borrowings under these financings at December 31, 2012 have a weighted average fixed rate of interest equal to 4.306%. Unsecured Debt Financings: Senior Notes due 2017 and Senior Notes due 2020 During 2012, Aircastle Limited issued $500.0 million aggregate principal amount of 6.75% Senior Notes due 2017 (the “Senior Notes due 2017”) and $300.0 million aggregate principal amount of 7.625% Senior Notes due 2020 (the “Senior Notes due 2020”). The Senior Notes due 2017 mature on April 15, 2017 and bear interest at the rate of 6.75% and the Senior Notes due 2020 mature on April 15, 2020 and bear interest at the rate of 7.625%. Interest on both series of notes is payable on April 15 and October 15 of each year, commencing on October 15, 2012 to holders of record on the immediately preceding April 1 and October 1. The offerings of the Senior Notes due 2017 and the Senior Notes due 2020 were not conditioned on one another. The Company may redeem the Senior Notes due 2017 and the Senior Notes due 2020 at any time, up to 35% of the aggregate principal amount of each series of notes issued under the indenture at a redemption price equal to 106.75% for the Senior Notes due 2017 and 107.625% for the Senior Notes due 2020, plus accrued and unpaid interest thereon. If the Company undergoes a change of control, it must offer to repurchase the Senior Notes due 2017 and the Senior Notes due 2020 at 101% of the principal amount, plus accrued and unpaid interest. The Senior Notes due 2017 and the Senior Notes due 2020 are not guaranteed by any of the Company’s subsidiaries. Senior Notes due 2018 During 2010, Aircastle Limited issued $300.0 million aggregate principal amount of 9.75% Senior Notes due 2018 (the "2010-1 Notes”). The 2010-1 Notes will mature on August 1, 2018 and bear interest at the rate of 9.75% per annum, payable semi-annually in arrears on February 1 and August 1, commencing on February 1, 2011 to holders of record on the immediately preceding January 15 and July 15. 60 During 2011, we issued an additional $150.0 million aggregate principal amount of 9.75% Senior Notes due 2018 (the “2011-1 Notes” and together with the 2010-1 Notes, the “Senior Notes due 2018”). The 2011-1 Notes will mature on August 1, 2018 and bear interest at the rate of 9.75% per annum, payable semi-annually in arrears on February 1 and August 1, commencing on February 1, 2012 to holders of record on the immediately preceding January 15 and July 15. The 2010-1 Notes and the 2011-1 Notes are treated as a single class under the indenture. The Company may redeem all or a portion of the Senior Notes due 2018 at any time on or after August 1, 2014 at a premium decreasing ratably to zero, plus accrued and unpaid interest. In addition, prior to August 1, 2013 the Company may redeem up to 35% of the aggregate principal amount of the Senior Notes due 2018 with the net cash proceeds of certain equity offerings at a redemption price equal to 109.75%, plus accrued and unpaid interest. If the Company undergoes a change of control, it must offer to repurchase the Senior Notes due 2018 at 101% of the principal amount, plus accrued and unpaid interest. The Senior Notes due 2018 are not guaranteed by any of the Company’s subsidiaries. Senior Notes due 2019 During 2012, Aircastle Limited issued $500.0 million aggregate principal amount of 6.25% Senior Notes due 2019 (the “Senior Notes due 2019”). The Senior Notes due 2019 mature on December 1, 2019 and bear interest at the rate of 6.25%. Interest on both series of notes is payable on June 1 and December 1 of each year, commencing on June 1, 2013 to holders of record on the immediately preceding May 15 and November 15. The Company may redeem the Senior Notes due 2019 at any time, up to 35% of the aggregate principal amount of the notes issued under the indenture at a redemption price equal to 106.25%, plus accrued and unpaid interest thereon. If the Company undergoes a change of control, it must offer to repurchase the Senior Notes due 2019 at 101% of the principal amount, plus accrued and unpaid interest. The Senior Notes due 2019 are not guaranteed by any of the Company’s subsidiaries. 2012 Revolving Credit Facility On December 19, 2012, the Company entered into a three-year $150.0 million senior unsecured revolving credit facility with a group of banks (the “2012 Revolving Credit Facility”) which replaced the 2010 Revolving Credit Facility. The 2012 Revolving Credit Facility provides loans in amounts up to $150.0 million for working capital and other general corporate purposes. We have not drawn on the 2012 Revolving Credit Facility as of December 31, 2012. During the fourth quarter of 2012, we wrote-off $0.1 million of deferred financing fees related to the 2010 Revolving Credit Facility, which is reflected in interest expense on the consolidated statement of income. Contractual Obligations Our contractual obligations consist of principal and interest payments on variable and fixed rate liabilities, interest payments on interest rate derivatives, other aircraft acquisition and conversion agreements and rent payments pursuant to our office leases. Total contractual obligations increased from $3.75 billion at December 31, 2011 to approximately $4.64 billion at December 31, 2012 due primarily to: • • an increase in borrowings and interest payments as the result of the closing of our Senior Notes due 2017, 2019 and 2020 and ECA loans for the purchase of two New A330 aircraft, one in April 2012 and one in November 2012; and an increase in the commitment for office leases as a result of a ten-year lease extension for the office space in Stamford, Connecticut signed in January 2012. These increases were partially offset by: • • principal and interest payments made under our securitizations, ECA term financings and our Bank financings; and the payoff of Term Financing No. 1 in April, 2012 from the proceeds of the closing of our Senior Notes due 2017 and 2020. 61 The following table presents our actual contractual obligations and their payment due dates as of December 31, 2012. Contractual Obligations Principal payments: Senior Notes due 2017 Senior Notes due 2018 Senior Notes due 2019 Senior Notes due 2020 Securitization No. 1(1) Securitization No. 2(1) ECA Term Financings(2) Bank Financings(3) Total principal payments Interest payments: Interest payments on debt obligations(4) Interest payments on interest rate derivatives(5) Total interest payments Office leases(6) Purchase obligations(7) Total _____________ Payments Due By Period as of December 31, 2012 Total Less than 1 year 1-3 years 3-5 years More than 5 years (Dollars in thousands) $ 500,000 $ — $ — $ 500,000 $ — 450,000 500,000 300,000 309,505 772,863 652,916 112,750 — — — 76,585 138,652 52,797 13,578 — — — 105,156 274,121 111,055 35,839 — — — 76,161 235,729 118,757 63,333 450,000 500,000 300,000 51,603 124,361 370,307 — 3,598,034 281,612 526,171 993,980 1,796,271 962,663 163,140 315,930 283,507 200,086 71,179 22,795 38,440 9,944 — 1,033,842 185,935 354,370 293,451 200,086 8,954 — 1,095 — 2,275 — 1,687 — 3,897 — $ 4,640,830 $ 468,642 $ 882,816 $ 1,289,118 $ 2,000,254 (1) Estimated principal payments for this non-recourse financing are based on excess cash flows available from forecasted lease rentals, net maintenance funding and proceeds from asset dispositions after the payment of forecasted operating expenses and interest payments, including interest payments on existing interest rate derivative agreements and policy provider fees. Includes scheduled principal payments based upon fixed rate, 12-year, fully amortizing loans. Includes principal payments based upon individual loan amortization schedules. (2) (3) (4) Future interest payments on variable rate, LIBOR-based debt obligations are estimated using the interest rate in effect at December 31, 2012. (5) Future interest payments on derivative financial instruments are estimated using the spread between the floating interest rates and the fixed interest rates in effect at December 31, 2012. (6) Represents contractual payment obligations for our office leases in Stamford, Connecticut; Dublin, Ireland and Singapore. (7) At December 31, 2012, we had no commitments to acquire aircraft. . Capital Expenditures We make capital expenditures from time to time in connection with improvements made to our aircraft. These expenditures include the cost of major overhauls necessary to place an aircraft in service and modifications made at the request of lessees. For the years ended December 31, 2010, 2011 and 2012, we incurred a total of $46.5 million, $44.0 million and $41.1 million, respectively, of capital expenditures (including lease incentives) related to the acquisition and improvement of aircraft. As of December 31, 2012, the weighted average age (by net book value) of our aircraft was approximately 10.7 years. In general, the costs of operating an aircraft, including maintenance expenditures, increase with the age of the aircraft. Under our leases, the lessee is primarily responsible for maintaining the aircraft. We may incur additional maintenance and modification costs in the future in the event we are required to remarket an aircraft, or a lessee fails to meet its maintenance obligations under the lease agreement. At December 31, 2012, we had a $379.4 million maintenance payment liability on our balance sheet, which is a $32.3 million increase from December 31, 2011. The increase primarily consisted of net maintenance cash inflows of $45.1 million and a decrease in lease incentive liabilities of $12.8 million. These maintenance reserves are paid by the lessee to provide for future maintenance events. Provided a lessee performs scheduled maintenance of the aircraft, we are required to reimburse the lessee for scheduled maintenance payments. In certain cases, we are also 62 required to make lessor contributions, in excess of amounts a lessee may have paid, towards the costs of maintenance events performed by or on behalf of the lessee. Actual maintenance payments to us by lessees in the future may be less than projected as a result of a number of factors, including defaults by the lessees. Maintenance reserves may not cover the entire amount of actual maintenance expenses incurred and, where these expenses are not otherwise covered by the lessees, there can be no assurance that our operational cash flow and maintenance reserves will be sufficient to fund maintenance requirements, particularly as our aircraft age. See Item 1A. “Risk Factors — Risks Related to Our Business — Risks related to our leases — If lessees are unable to fund their maintenance obligations on our aircraft, our cash flow and our ability to meet our debt obligations or to pay dividends on our common shares could be adversely affected.” Off-Balance Sheet Arrangements We did not have any off-balance sheet arrangements as of December 31, 2012. Foreign Currency Risk and Foreign Operations At December 31, 2012, all of our leases are payable to us in U.S. dollars. However, we incur Euro- and Singapore dollar-denominated expenses in connection with our subsidiary in Ireland and branch office in Singapore. For the year ended December 31, 2012, expenses, such as payroll and office costs, denominated in currencies other than the U.S. dollar aggregated approximately $10.8 million in U.S. dollar equivalents and represented approximately 22.3% of total selling, general and administrative expenses. Our international operations are a significant component of our business strategy and permit us to more effectively source new aircraft, service the aircraft we own and maintain contact with our lessees. Therefore, it is likely that our international operations and our exposure to foreign currency risk will increase over time. Although we have not yet entered into foreign currency hedges because our exposure to date has not been significant, if our foreign currency exposure increases we may enter into hedging transactions in the future to mitigate this risk. For the years ended December 31, 2010, 2011 and 2012, we incurred insignificant net gains and losses on foreign currency transactions. Hedging 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. 63 We held the following interest rate derivatives as of December 31, 2012: Derivative Liabilities Current Notional Amount Effective Date Maturity Date Future Maximum Notional Amount Floating Rate Fixed Rate Balance Sheet Location Fair Value (Dollars in thousands) Hedged Item Interest rate derivatives designated as cash flow hedges: Securitization No. 1(1) $ 240,004 Jun-06 Jun-16 $ 240,004 1M LIBOR + 0.27% 5.78% Securitization No. 2 585,828 Jun-12 Jun-17 585,828 1M LIBOR 1.26% to 1.28% Total interest rate derivatives designated as cash flow hedges 825,832 825,832 Fair value of derivative liabilities Fair value of derivative liabilities Interest rate derivatives not designated as cash flow hedges: Securitization No. 1(1) 94,471 Jun-06 Jun-16 94,471 1M LIBOR + 0.27% 5.78% Fair value of derivative liabilities Total interest rate derivatives not designated as cash flow hedges 94,471 94,471 $ 36,074 11,702 47,776 14,202 14,202 Total interest rate derivative liabilities ___________ $ 920,303 $ 920,303 $ 61,978 (1) One of the interest rate derivatives hedging Securitization No. 1 was de-designated on December 28, 2012. The effective portion of the loss of $32.2 million remained in other comprehensive loss on our consolidated balance sheet and will amortize into interest expense using the interest rate method. We re-designated 65% of the hedge notional or $ 175.4 million with a fair value of $26.4 million on December 28, 2012. The change in the undesignated 35% of the hedge notional, or $94.5 million with a fair value of $14.2 million as of December 28, 2012, will be recorded in other income (loss) on our consolidated statement of income. The weighted average interest pay rates of these derivatives at December 31, 2010, 2011 and 2012 were 5.01%, 5.03% and 2.91%, respectively. In connection with the repayment of Term Financing No. 1, two interest rate derivatives hedging the facility were terminated on April 4, 2012 resulting in a net deferred loss of $50.4 million which is being amortized into interest expense using the interest rate method. For the year ended December 31, 2012, the amount of loss reclassified from accumulated other comprehensive income (“OCI”) into interest expense related to net interest settlements on active interest rate derivatives was $46.5 million. The amount of loss expected to be reclassified from OCI into interest expense over the next 12 months related to net interest settlements on active interest rate derivatives is $17.5 million. Our interest rate derivatives involve counterparty credit risk. As of December 31, 2012, our interest rate derivatives are held with the following counterparties: JP Morgan Chase Bank NA, Citibank Canada NA, and Wells Fargo Bank NA. All of our counterparties or guarantors of these counterparties are considered investment grade (senior unsecured ratings of Baa2 or above) by Moody’s Investors Service. All are also considered investment grade (long-term foreign issuer ratings of A- or above) by Standard and Poor’s. 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 December 31, 2012, accrued interest payable included in accounts payable, accrued expenses, and other liabilities on our consolidated balance sheet was $1.1 million related to interest rate derivatives designated as cash flow hedges and $0.1 million related to interest rate derivatives not designated as cash flow hedges. 64 On an ongoing basis, terminated interest rate derivative notionals are evaluated against debt forecasts. To the extent that interest payments are deemed remote to occur, deferred gains or losses are accelerated into interest expense as applicable. The following table summarizes the deferred (gains) and losses and related amortization into interest expense for our terminated interest rate derivative contracts for the years ended December 31, 2010, 2011, and 2012: Hedged Item Original Maximum Notional Amount Effective Date Maturity Date Fixed Rate % Termination Date Deferred (Gain) or Loss Upon Termination Unamortized Deferred (Gain) or Loss at December 31, 2012 (Dollars in thousands) Amount of Deferred (Gain) or Loss Amortized (including Accelerated Amortization) into Interest Expense For the Year Ended December 31, 2010 2011 2012 Amount of Deferred (Gain) or Loss Expected to be Amortized over the Next Twelve Months Jun-06 $ (12,968) $ — $ (1,418) $ — $ — $ Securitization No. 1 $ 400,000 Dec-05 Aug-10 Securitization No. 1 200,000 Dec-05 Dec-10 Securitization No. 2 500,000 Mar-06 Mar-11 Securitization No. 2 200,000 Jan-07 Aug-12 Securitization No. 2 410,000 Feb-07 Apr-17 Term Financing No. 1 150,000 Jul-07 Dec-17 Term Financing No. 1 440,000 Jun-07 Feb-13 Term Financing No. 1 248,000 Aug-07 May-13 4.61 5.03 5.07 5.06 5.14 5.14 4.88 5.33 Term Financing No. 1(1) 710,068 Jun-08 May-13 4.04 Term Financing No. 1(1) 491,718 May-13 May-15 5.31 360,000 231,000 Jan-08 Apr-10 Feb-19 Oct-15 5.16 5.17 238,000 Jan-11 Apr-16 5.23 Jun-06 Jun-07 Jun-07 Jun-07 Mar-08 Full – Jun-08 Jun-08 Terminated - Apr-12 Terminated - Apr-12 Full – Oct-08 Full – Dec-08 Dec-08 Senior Notes due 2018 ECA Term Financing for New A330 Aircraft ECA Term Financing for New A330 Aircraft ECA Term Financing for New A330 Aircraft Total _____________ (2,541) (2,687) (1,850) (3,119) 15,281 26,281 9,888 19,026 — — (190) (341) 1,740 4,771 1,349 — — — (297) (675) (350) (968) (348) 5,966 1,916 384 721 5,695 5,588 2,677 — — — (122) (333) (353) 1,779 5,185 1,620 — — 13,331 5,695 — 12,148 31,403 31,403 23,077 15,310 8,197 5,592 1,823 705 1,328 2,538 645 3,602 19,430 10,169 13 — 4,508 3,755 6,928 2,014 — — — — (298) 1,446 384 721 1,173 2,280 3,468 2,170 $ 153,785 $ 74,186 $ 9,634 $ 23,078 $ 30,676 $ 29,187 238,000 Jul-11 Sep-16 5.27 Dec-08 17,254 7,027 (1) On April 4, 2012, upon the repayment of Term Financing No. 1, both interest rate derivatives were terminated resulting in a net deferred loss of $50,429 which is being amortized into interest expense using the interest rate method. For the year ended December 31, 2012, the amount of deferred net loss reclassified from OCI into interest expense related to our terminated interest rate derivatives was $30.7 million. The amount of deferred net loss expected to be reclassified from OCI into interest expense over the next 12 months related to our terminated interest rate derivatives is $29.2 million of which $17.8 million relates to Term Financing No. 1 interest rate derivatives terminated in April 2012, $2.6 million relates to Term Financing No. 1 interest rate derivatives terminated in 2008, $7.9 million relates to ECA Term Financings for New A330 Aircraft and $0.9 million relates to other financings. For the year ended December 31, 2012, the amount of deferred loss reclassified from OCI into interest expense related to our designated interest rate derivative was $0.1 million. The amount of deferred loss expected to be reclassified from OCI into interest expense over the next 12 months related to our designated interest rate derivative under our Securitization No. 1 is $9.6 million. The following table summarizes amounts charged directly to the consolidated statement of income for the years ended December 31, 2010, 2011, and 2012 related to our interest rate derivative contracts: 65 Interest Expense: Hedge ineffectiveness losses (gains) Amortization: Accelerated amortization of deferred losses(1) Amortization of loss of designated interest rate derivative Amortization of deferred (gains) losses Total Amortization Total charged to interest expense Other Income (Expense): Mark to market gains (losses) on undesignated hedges Total charged to other income (expense) _____________ Year Ended December 31, 2010 2011 2012 (Dollars in thousands) $ 5,039 $ (101) $ 2,893 766 — 8,868 9,634 8,508 — 14,570 23,078 14,673 $ 22,977 $ — 101 30,676 30,777 33,670 (860) $ (860) $ (848) $ (848) $ (597) (597) $ $ $ (1) For the year ended December 31, 2011, includes accelerated amortization of deferred hedge losses in the amount of $8,501 related to three aircraft sold in 2011. Inflation Inflation affects our lease rentals, asset values and costs, including selling, general and administrative expenses and other expenses. We do not believe that our financial results have been, or will be, adversely affected by inflation in a material way. Management’s Use of EBITDA and Adjusted EBITDA We define EBITDA as income (loss) from continuing operations before income taxes, interest expense, and depreciation and amortization. We use EBITDA to assess our consolidated financial and operating performance, and we believe this non- US GAAP measure is helpful in identifying trends in our performance. This measure provides an assessment of controllable expenses and affords management the ability to make decisions which are expected to facilitate meeting current financial goals as well as achieving optimal financial performance. It provides an indicator for management to determine if adjustments to current spending decisions are needed. EBITDA provides us with a measure of operating performance because it assists us in comparing our operating performance on a consistent basis as it removes the impact of our capital structure (primarily interest charges on our outstanding debt) and asset base (primarily depreciation and amortization) from our operating results. Accordingly, this metric measures our financial performance based on operational factors that management can impact in the short-term, namely the cost structure, or expenses, of the organization. EBITDA is one of the metrics used by senior management and the board of directors to review the consolidated financial performance of our business. We define Adjusted EBITDA as EBITDA (as defined above) further adjusted to give effect to adjustments required in calculating covenant ratios and compliance as that term is defined in the indenture governing our senior unsecured notes. Adjusted EBITDA is a material component of these covenants. The table below shows the reconciliation of net income to EBITDA for the years ended December 31, 2010, 2011 and 2012, and the three months ended December 31, 2012, respectively. 66 Net income Depreciation Amortization of net lease discounts and lease incentives Interest, net Income tax provision EBITDA Adjustments: Impairment of Aircraft Non-cash share based payment expense Loss (gain) on mark to market of interest rate derivative contracts Contract termination expense Adjusted EBITDA Management’s Use of Adjusted Net Income (“ANI”) Year Ended December 31, 2010 2011 2012 (Dollars in thousands) $ 65,816 $ 124,270 $ 32,868 220,476 242,103 269,920 20,081 16,445 12,844 178,262 204,150 222,808 6,596 7,832 7,845 $ 491,231 $ 594,800 $ 546,285 7,342 7,509 860 — 6,436 5,786 848 — 96,454 4,232 (597) 1,248 $ 506,942 $ 607,870 $ 647,622 Beginning with our quarterly report for the quarter ended March 31, 2012, management, to be more consistent with reporting practices of peer aircraft leasing companies, has revised the calculation of ANI to no longer exclude gains (losses) on sales of assets, and to exclude non-cash share based payment expense in the calculation of ANI. Beginning with our quarterly report for the quarter ended June 30, 2012, we also excluded Term Financing No. 1 hedge loss amortization charges which will be reported in Interest, net on our consolidated statement of income from the calculation of ANI. The calculation of ANI for the years ended December 31, 2010 and 2011 have been revised to be comparable with the current period presentation. Management believes that ANI when viewed in conjunction with the Company’s results under US GAAP and the below reconciliation, provide useful information about operating and period-over-period performance, and provide additional information that is useful for evaluating the underlying operating performance of our business without regard to periodic reporting elements related to interest rate derivative accounting and gains or losses related to flight equipment and debt investments. The table below shows the reconciliation of net income to ANI for the years ended December 31, 2010, 2011 and 2012, and the three months ended December 31, 2012 respectively. Net income Ineffective portion and termination of cash flow hedges(1) Mark to market of interest rate derivative contracts(2) Loan termination payment(1) Write-off of deferred financing fees(1) Stock compensation expense(3) Term Financing No. 1 hedge loss amortization charges(1) Contract termination expense Adjusted net income 67 Year Ended December 31, 2010 2011 2012 (Dollars in thousands) $ 65,816 $ 124,270 $ 32,868 5,805 860 — 2,471 7,509 — — 8,407 848 3,196 2,456 5,786 — — 2,893 (597) — 3,034 4,232 13,331 1,248 $ 82,461 $ 144,963 $ 57,009  ______________ (1) (2) (3) Included in Interest, net. Included in Other income (expense). Included in Selling, general and administrative expenses. Weighted-average shares: Common shares outstanding Restricted common shares Total weighted-average shares Percentage of weighted-average shares: Common shares outstanding Restricted common shares(a) Total Weighted-average common shares outstanding — Basic and Diluted(b) Adjusted net income allocation: Adjusted net income Less: Distributed and undistributed earnings allocated to restricted common shares(a) Adjusted net income allocable to common shares — Basic and Diluted Adjusted net income per common share — Basic Adjusted net income per common share — Diluted ____________ Year Ended December 31, 2010 2011 2012 78,488,031 74,686,150 70,716,963 1,118,542 956,433 587,813 79,606,573 75,642,583 71,304,776 Year Ended December 31, 2010 2011 2012 98.59% 1.41% 98.74% 1.26% 99.18% 0.82% 100.00% 100.00% 100.00% Year Ended December 31, 2010 2011 2012 78,488,031 74,686,150 70,716,963 Year Ended December 31, 2010 2011 2012 (Dollars in thousands, except per share amounts) $ $ $ $ 82,461 $ 144,963 $ 57,009 (1,159) 81,302 1.04 1.04 $ $ $ (1,833) 143,130 1.92 1.92 $ $ $ (470) 56,539 0.80 0.80 (a) For the years ended December 31, 2010, 2011 and 2012, distributed and undistributed earnings to restricted shares is 1.41%, 1.26% and 0.82%, respectively, of net income. The amount of restricted share forfeitures for all periods presented is immaterial to the allocation of distributed and undistributed earnings. (b) For the years ended December 31, 2010, 2011 and 2012, we have no dilutive shares. Limitations of EBITDA, Adjusted EBITDA and ANI An investor or potential investor may find EBITDA, Adjusted EBITDA and ANI important measures in evaluating our performance, results of operations and financial position. We use these non-US GAAP measures to supplement our US GAAP results in order to provide a more complete understanding of the factors and trends affecting our business. EBITDA, Adjusted EBITDA and ANI have limitations as analytical tools and should not be viewed in isolation or as substitutes for US GAAP measures of earnings. Material limitations in making the adjustments to our earnings to calculate EBITDA, Adjusted EBITDA and ANI, and using these non-US GAAP measures as compared to US GAAP net income, income from continuing operations and cash flows provided by or used in operations, include: • • depreciation and amortization, though not directly affecting our current cash position, represent the wear and tear and/or reduction in value of our aircraft, which affects the aircraft’s availability for use and may be indicative of future needs for capital expenditures; the cash portion of income tax (benefit) provision generally represents charges (gains), which may significantly affect our financial results; 68 • • • elements of our interest rate derivative accounting may be used to evaluate the effectiveness of our hedging policy; hedge loss amortization charges related to Term Financing No. 1; and adjustments required in calculating covenant ratios and compliance as that term is defined in the indenture governing our senior unsecured notes. EBITDA, Adjusted EBITDA and ANI are not alternatives to net income, income from operations or cash flows provided by or used in operations as calculated and presented in accordance with US GAAP. You should not rely on these non- US GAAP measures as a substitute for any such US GAAP financial measure. We strongly urge you to review the reconciliations to US GAAP net income, along with our consolidated financial statements included elsewhere in this Annual Report. We also strongly urge you to not rely on any single financial measure to evaluate our business. In addition, because EBITDA, Adjusted EBITDA and ANI are not measures of financial performance under US GAAP and are susceptible to varying calculations, EBITDA, Adjusted EBITDA and ANI as presented in this Annual Report, may differ from and may not be comparable to, similarly titled measures used by other companies. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Interest rate risk is the exposure to loss resulting from changes in the level of interest rates and the spread between different interest rates. These risks are highly sensitive to many factors, including U.S. monetary and tax policies, U.S. and international economic factors and other factors beyond our control. We are exposed to changes in the level of interest rates and to changes in the relationship or spread between interest rates. Our primary interest rate exposures relate to our lease agreements, floating rate debt obligations and interest rate derivatives. Rent payments under our aircraft lease agreements typically do not vary during the term of the lease according to changes in interest rates. However, our borrowing agreements generally require payments based on a variable interest rate index, such as LIBOR. Therefore, to the extent our borrowing costs are not fixed, increases in interest rates may reduce our net income by increasing the cost of our debt without any corresponding increase in rents or cash flow from our securities. Changes in interest rates may also impact our net book value as our interest rate derivatives are periodically marked- to-market through shareholders’ equity. Generally, we are exposed to loss on our fixed pay interest rate derivatives to the extent interest rates decrease below their contractual fixed rate. The relationship between spreads on derivative instruments may vary from time to time, resulting in a net aggregate book value increase or decrease. Changes in the general level of interest rates can also affect our ability to acquire new investments and our ability to realize gains from the settlement of such assets. Sensitivity Analysis The following discussion about the potential effects of changes in interest rates is based on a sensitivity analysis, which models the effects of hypothetical interest rate shifts on our financial condition and results of operations. Although we believe a sensitivity analysis provides the most meaningful analysis permitted by the rules and regulations of the SEC, it is constrained by several factors, including the necessity to conduct the analysis based on a single point in time and by the inability to include the extraordinarily complex market reactions that normally would arise from the market shifts modeled. Although the following results of a sensitivity analysis for changes in interest rates may have some limited use as a benchmark, they should not be viewed as a forecast. This forward-looking disclosure also is selective in nature and addresses only the potential interest expense impacts on our financial instruments and, in particular, does not address the mark-to-market impact on our interest rate derivatives. It also does not include a variety of other potential factors that could affect our business as a result of changes in interest rates. As of December 31, 2012, a hypothetical 100-basis point increase/decrease in our variable interest rate on our borrowings would result in an interest expense increase/(decrease) of $1.9 million and $(0.5) million, respectively, net of amounts received from our interest rate derivatives, over the next twelve months. 69 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Our consolidated financial statements and notes thereto, referred to in Item 15(A)(1) of this Form 10-K, are filed as part of this report and appear in this Form 10-K beginning on page F-1. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. ITEM 9A. CONTROLS AND PROCEDURES. Management’s Evaluation of Disclosure Controls and Procedures The term “disclosure controls and procedures” is defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”). This term refers to the controls and procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the SEC and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) as appropriate, to allow timely decisions regarding required disclosure. An evaluation was performed under the supervision and with the participation of the Company’s management, including the CEO and CFO, of the effectiveness of the Company’s disclosure controls and procedures as of December 31, 2012. Based on that evaluation, the Company’s management, including the CEO and CFO, concluded that the Company’s disclosure controls and procedures were effective as of December 31, 2012. Management’s Annual Report on Internal Control over Financial Reporting The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or because the degree of compliance with policies or procedures may deteriorate. Under the supervision and with the participation of our management, including our CEO and CFO, we conducted an assessment of the effectiveness of our internal control over financial reporting as of December 31, 2012. The assessment was based on criteria established in the framework Internal Control — Integrated Framework, issued by the Committee of Sponsoring Organizations (COSO) of the Treadway Commission. Based on this assessment, management concluded that our internal control over financial reporting was effective as of December 31, 2012. Ernst & Young LLP, the independent registered public accounting firm that audited our Consolidated Financial Statements included in this Annual Report on Form 10-K, audited the effectiveness of our controls over financial reporting as of December 31, 2012. Ernst & Young LLP has issued its report which is included below. Changes in Internal Control over Financial Reporting There were no changes in the Company’s internal control over financial reporting that occurred during the quarter ended December 31, 2012 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. 70 Report of Independent Registered Public Accounting Firm The Board of Directors and Shareholders of Aircastle Limited We have audited Aircastle Limited and subsidiaries’ internal control over financial reporting as of December 31, 2012, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Aircastle Limited and subsidiaries’ management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, Aircastle Limited and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2012, based on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Aircastle Limited and subsidiaries as of December 31, 2011 and 2012, and the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2012 of Aircastle Limited and subsidiaries and our report dated February 22, 2013 expressed an unqualified opinion thereon. /s/ Ernst & Young LLP New York, New York February 22, 2013 71 ITEM 9B. OTHER INFORMATION None. 72 PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE The name, age and background of each of our directors nominated for election will be contained under the caption “Election of Directors” in our Proxy Statement for our 2013 Annual General Meeting of Shareholders. The identification of our Audit Committee and our Audit Committee financial experts will be contained in our Proxy Statement for our 2013 Annual General Meeting of Shareholders under the captions “CORPORATE GOVERNANCE — Committees of the Board of Directors — The Audit Committee.” Information regarding our Code of Business Ethics and Conduct, any material amendments thereto and any related waivers will be contained in our Proxy Statement for our 2013 Annual General Meeting of Shareholders under the captions “CORPORATE GOVERNANCE — Code of Business Conduct and Ethics.” All of the foregoing information is incorporated herein by reference. The Code of Business Conduct and Ethics is posted on Aircastle’s Website at www.aircastle.com under Investors — Corporate Governance. Pursuant to Item 401(b) of Regulation S-K, the requisite information pertaining to our executive officers is reported immediately following Item 4. of Part I of this report. Information on compliance with Section 16(a) of the Exchange Act will be contained in our Proxy Statement for our 2013 Annual General Meeting of Shareholders under the captions “OWNERSHIP OF AYR COMMON SHARES — Section 16(a) Beneficial Ownership Reporting Compliance” and is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION Information on compensation of our directors and certain named executive officers will be contained in our Proxy Statement for our 2013 Annual General Meeting of Shareholders under the captions “Directors’ Compensation” and “EXECUTIVE COMPENSATION,” respectively, and is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS Information on the number of shares of Aircastle’s common shares beneficially owned by each director, each named executive officer and by all directors and executive officers as a group will be contained under the captions “OWNERSHIP OF THE COMPANY’S COMMON SHARES — Security Ownership by Management” and information on each beneficial owner of more than 5% of Aircastle’s common shares is contained under the captions “OWNERSHIP OF THE COMPANY’S COMMON SHARES — Security Ownership of Certain Beneficial Owners” in our Proxy Statement for our 2013 Annual General Meeting of Shareholders and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE Information relating to certain transactions between Aircastle and its affiliates and certain other persons will be set forth under the caption “CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS” in our Proxy Statement for our 2013 Annual General Meeting of Shareholders and is incorporated herein by reference. Information relating to director independence will be set forth under the caption “PROPOSAL NUMBER ONE — ELECTION OF DIRECTORS — Director Independence” in our Proxy Statement for our 2013 Annual General Meeting of Shareholders and is incorporated herein by reference. ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES Information relating to audit fees, audit-related fees, tax fees and all other fees billed in fiscal 2012 and by Ernst & Young LLP, for services rendered to Aircastle is set forth under the caption “INDEPENDENT AUDITOR FEES” in the Proxy Statement for our 2013 Annual General Meeting of Shareholders and is incorporated herein by reference. In addition, information relating to the pre-approval policies and procedures of the Audit Committee is set forth under the caption “INDEPENDENT AUDITOR FEES — Pre-Approval Policies and Procedures” in our Proxy Statement for our 2013 Annual General Meeting of Shareholders and is incorporated herein by reference. 73 ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES PART IV (A) 1. Consolidated Financial Statements. The following is a list of the “Consolidated Financial Statements” of Aircastle Limited and its subsidiaries included in this Annual Report on Form 10-K, which are filed herewith pursuant to Item 8: Report of Independent Registered Public Accounting Firm. Consolidated Balance Sheets as of December 31, 2011 and December 31, 2012. Consolidated Statements of Income for the years ended December 31, 2010, December 31, 2011 and December 31, 2012. Consolidated Statements of Comprehensive Income for the years ended December 31, 2010, December 31, 2011 and December 31, 2012. Consolidated Statements of Cash Flows for the years ended December 31, 2010, December 31, 2011 and December 31, 2012. Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 2010, December 31, 2011 and December 31, 2012. Notes to Consolidated Financial Statements. 2. 3. Financial Statement Schedules. There are no Financial Statement Schedules filed as part of this Annual Report, since the required information is included in the Consolidated Financial Statements, including the notes thereto, or the circumstances requiring inclusion of such schedules are not present. Exhibits. The exhibits filed herewith are listed on the Exhibit Index filed as part of this report on Form 10-K. 74 (B) EXHIBIT INDEX Exhibit No. 3.1 3.2 4.1 4.2 4.3 4.4 4.5 10.1 10.2 10.3 10.4 10.5 10.6 10.7 10.8 10.9 Description of Exhibit Memorandum of Association (incorporated by reference to Exhibit 3.1 to the Company’s Registration Statement on Form S-1 (Amendment No. 2) (No. 333-134669) filed on July 25, 2006). Amended Bye-laws (incorporated by reference to Exhibit 3.2 to the Company’s Registration Statement on Form S-3 (No. 333-182242) filed on June 20, 2012). Specimen Share Certificate (incorporated by reference to Exhibit 4.1 to the Company’s Registration Statement on Form S-1 (Amendment No. 2) (No. 333-134669) filed on July 25, 2006). Indenture, dated as of July 30, 2010, by and among Aircastle Limited and Wells Fargo Bank, National Association, as trustee (incorporated by reference to Exhibit 4.1 to the Company's current report on Form 8-K filed with the SEC on August 4, 2010). First Supplemental Indenture, dated as of December 9, 2011, by and among Aircastle Limited and Wells Fargo Bank, National Association, as trustee (incorporated by reference to Exhibit 4.1 to the Company’s current report on Form 8-K filed with the SEC on December 12, 2011). Indenture, dated as of April 4, 2012, by and among Aircastle Limited and Wells Fargo Bank, National Association as trustee (incorporated by reference to Exhibit 4.1 to the Company’s current report on Form 8-K filed with the SEC on April 4, 2012). Indenture, dated as of November 30, 2012 by and among Aircastle Limited and Wells Fargo Bank, National Association, as trustee (incorporated by reference to Exhibit 4.1 to the Company's current report on Form 8-K filed with the SEC on November 30, 2012) Form of Restricted Share Purchase Agreement (incorporated by reference to Exhibit 10.2 to the Company’s Registration Statement on Form S-1 (No. 333-134669) filed on June 2, 2006). # Form of Amended Restricted Share Grant Letter (incorporated by reference to Exhibit 10.4 to the Company’s Annual Report on form 10-K filed March 5, 2010). # Form of Amended Restricted Share Agreement for Certain Executive Officers under the Amended and Restated Aircastle Limited 2005 Equity and Incentive Plan (incorporated by reference to Exhibit 10.5 to the Company’s Annual Report on Form 10-K filed on March 10, 2011). # Form of Amended International Restricted Share Grant Letter (incorporated by reference to Exhibit 10.6 to the Company’s Annual Report on form 10-K filed March 5, 2010). # Letter Agreement, dated February 3, 2005, between Aircastle Limited and David Walton (incorporated by reference to Exhibit 10.8 to the Company’s Registration Statement on Form S-1 (No. 333-134669) filed on June 2, 2006). # Letter Agreement, dated February 24, 2006, between Aircastle Advisor LLC and Joseph Schreiner (incorporated by reference to Exhibit 10.11 to the Company’s Registration Statement on Form S-1 (No. 333-134669) filed on June 2, 2006). # Letter Agreement, dated April 29, 2005, between Aircastle Advisor LLC and Jonathan Lang (incorporated by reference to Exhibit 10.12 to the Company’s Registration Statement on Form S-1 (No. 333-134669) filed on June 2, 2006). # Letter Agreement, dated March 8, 2006 between Aircastle Advisor LLC and Jonathan M. Lang (incorporated by reference to Exhibit 10.13 to the Company’s Registration Statement on Form S-1 (No. 333-134669) filed on June 2, 2006). # Trust Indenture, dated as of June 15, 2006, among ACS Aircraft Finance Bermuda Limited, as Issuer, ACS Aircraft Finance Ireland PLC, as Guarantor, Deutsche Bank Trust Company Americas, in its capacity as the Cash Manager, Deutsche Bank Trust Company Americas, in its capacity as the person accepting appointment as the Trustee under the Indenture, CALYON, Financial Guaranty Insurance Company and Deutsche Bank Trust Company Americas, in its capacity as the Drawing Agent (incorporated by reference to Exhibit 10.26 to the Company’s Registration Statement on Form S-1 (Amendment No. 2) (No. 333-134669) filed on July 25, 2006). E - 1 Exhibit No. 10.10 10.11 10.12 10.13 10.14 10.15 10.16 10.17 10.18 10.19 10.20 10.21 Description of Exhibit Trust Indenture, dated as of June 15, 2006, among ACS Aircraft Finance Ireland PLC, as Issuer, ACS Aircraft Finance Bermuda Limited, as Guarantor, Deutsche Bank Trust Company Americas, in its capacity as the Cash Manager, Deutsche Bank Trust Company Americas, in its capacity as the person accepting appointment as the Trustee under the Indenture, CALYON, Financial Guaranty Insurance Company and Deutsche Bank Trust Company Americas, in its capacity as the Drawing Agent (incorporated by reference to Exhibit 10.27 to the Company’s Registration Statement on Form S-1 (Amendment No. 2) (No. 333-134669) filed on July 25, 2006). Amended and Restated Aircastle Limited 2005 Equity and Incentive Plan (incorporated by reference to Exhibit 10.28 to the Company’s Registration Statement on Form S-1 (Amendment No. 2) (No. 333-134669) filed on July 25, 2006). # Trust Indenture, dated as of June 8, 2007, among ACS 2007-1 Limited, as Issuer, ACS Aircraft Finance Ireland 2 Limited, as Guarantor, Deutsche Bank Trust Company Americas, in its capacity as the Cash Manager, Deutsche Bank Trust Company Americas, in its capacity as the person accepting appointment as the Trustee under the Indenture, HSH Nordbank AG, New York Branch, Financial Guaranty Insurance Company and Deutsche Bank Trust Company Americas, in its capacity as the Drawing Agent (incorporated by reference to Exhibit 10.1 to the Company’s current report on Form 8-K filed with the SEC on June 12, 2007). Trust Indenture, dated as of June 8, 2007, among ACS Aircraft Finance Ireland 2 Limited, as Issuer, ACS 2007-1 Limited, as Guarantor, Deutsche Bank Trust Company Americas, in its capacity as the Cash Manager, Deutsche Bank Trust Company Americas, in its capacity as the person accepting appointment as the Trustee under the Indenture, HSH Nordbank AG, New York Branch, Financial Guaranty Insurance Company and Deutsche Bank Trust Company Americas, in its capacity as the Drawing Agent (incorporated by reference to Exhibit 10.2 to the Company’s current report on Form 8-K filed with the SEC on June 12, 2007). Acquisition Agreement, dated as of June 20, 2007, by and between AYR Freighter LLC and Airbus SAS (incorporated by reference to Exhibit 10.43 to the Company’s quarterly report on Form 10-Q filed with the SEC on August 14, 2007). Amendment No. 1 to the Acquisition Agreement, dated as of June 20, 2007, by and between AYR Freighter LLC and Airbus SAS (incorporated by reference to Exhibit 10.24 to the Company’s Annual Report on Form 10-K filed on March 5, 2010). Amendment No. 2 to the Acquisition Agreement, dated as of June 20, 2007, by and between AYR Freighter LLC and Airbus SAS (incorporated by reference to Exhibit 10.25 to the Company’s Annual Report on Form 10-K filed on March 5, 2010). Amendment No. 3 to the Acquisition Agreement, dated as of June 20, 2007, by and between AYR Freighter LLC and Airbus SAS (incorporated by reference to Exhibit 10.26 to the Company’s Annual Report on Form 10-K filed on March 5, 2010). Amendment No. 4 to the Acquisition Agreement, dated as of June 20, 2007, by and between AYR Freighter LLC and Airbus SAS (incorporated by reference to Exhibit 10.27 to the Company’s Annual Report on Form 10-K filed on March 5, 2010). Amendment No. 5 to the Acquisition Agreement, dated as of June 20, 2007, by and between AYR Freighter LLC and Airbus SAS (incorporated by reference to Exhibit 10.28 to the Company’s Annual Report on Form 10-K filed on March 5, 2010). Amendment No. 6 to the Acquisition Agreement, dated as of June 20, 2007, by and between AYR Freighter LLC and Airbus SAS (incorporated by reference to Exhibit 10.29 to the Company’s Annual Report on Form 10-K filed on March 5, 2010). Amendment No. 7 to the Acquisition Agreement, dated as of June 20, 2007, by and between AYR Freighter LLC and Airbus SAS (incorporated by reference to Exhibit 10.30 to the Company’s Annual Report on Form 10-K filed on March 5, 2010). 10.22 Amendment No. 8 to the Acquisition Agreement, dated as of June 20, 2007, by and between AYR Freighter LLC and Airbus SAS (incorporated by reference to Exhibit 10.31 to the Company’s Annual Report on Form 10-K filed on March 5, 2010). E - 2 Exhibit No. Description of Exhibit 10.23 Amendment No. 9 to the Acquisition Agreement, dated as of June 20, 2007, by and between AYR Freighter LLC and Airbus SAS (incorporated by reference to Exhibit 10.1 to the Company’s quarterly report on Form 10-Q filed with the SEC on August 10, 2010). 10.24 10.25 10.26 10.27 10.28 10.29 10.30 10.31 10.32 10.33 10.34 10.35 12.1 21.1 23.1 Form of Lease Agreement, dated as of December 16, 2009, between Wells Fargo Bank Northwest, National Association, a national banking association, not in its individual capacity but solely as Owner Trustee, as Lessor and South African Airways (Pty) Ltd., as Lessee (incorporated by reference to Exhibit 10.35 to the Company’s Annual Report on Form 10-K filed on March 5, 2010). Amendment No. 1 to Form of Lease Agreement, dated as of December 16, 2009, between Wells Fargo Bank Northwest, National Association, a national banking association, not in its individual capacity but solely as Owner Trustee, as Lessor and South African Airways (Pty) Ltd., as Lessee (incorporated by reference to Exhibit 10.2 to the Company’s quarterly report on Form 10-Q filed with the SEC on August 10, 2010). Form of Lease Novation Agreement, dated as of December 15, 2010, by and among Wells Fargo Bank Northwest, National Association, a US national banking association, not in its individual capacity but solely as Owner Trustee, as Existing Lessor, South African Airways (Pty) Ltd., as Lessee, and the New Lessor (as defined therein) (incorporated by reference to Exhibit 10.40 to the Company’s Annual Report on Form 10-K filed with the SEC on March 10, 2011). Letter Agreement, dated July 13, 2010, between Aircastle Advisor LLC and Ron Wainshal (incorporated by reference to Exhibit 10.1 to the Company’s current report on Form 8-K filed with the SEC on July 15, 2010). # Form of Senior Executive Employment Agreement (incorporated by reference to Exhibit 10.2 to the Company’s current report on Form 8-K filed with the SEC on December 8, 2010). # Form of Amended and Restated Indemnification Agreement with directors and officers (incorporated by reference to Exhibit 10.1 to the Company’s quarterly report on Form 10-Q filed with the SEC on November 8, 2011). Registration Rights Agreement, dated as of December 14, 2011, by and among Aircastle Limited and Citigroup Global Markets Inc. as Initial Purchaser named therein (incorporated by reference to Exhibit 10.1 to the Company’s current report on Form 8-K filed with the SEC on December 15, 2011). Separation Agreement, dated January 22, 2012, among Aircastle Advisor LLC and J. Robert Peart (incorporated by reference to Exhibit 10.1 to the Company’s current report on Form 8-K filed with the SEC on January 23, 2012). Registration Rights Agreement, dated as of April 4, 2012, by and among Aircastle Limited and Goldman, Sachs & Co., Citigroup Global Markets Inc. and J.P. Morgan Securities LLC as representatives of the several Initial Purchasers named therein (incorporated by reference to Exhibit 10.1 to the Company's current report on Form 8-K filed with the SEC on April 4, 2012). Share Purchase agreement, dated August 7, 2012, between Aircastle Limited and the sellers therein (incorporated by reference to Exhibit 1.2 to the Company's current report on Form 8-K filed with the SEC on August 13, 2012). Registration Rights Letter Agreement dated August 10, 2012, between Aircastle Limited and Ontario Teachers' Pension Plan Board (incorporated by reference to Exhibit 1.3 of the Company's current report on Form 8-K filed with the SEC on August 13, 2012). Registration Rights Agreement, dated as of November 30, 2012, by and among Aircastle Limited and J.P. Morgan Securities LLC, Citigroup Global Markets Inc., Goldman, Sachs & Co and RBC Capital Markets, LLC (incorporated by reference to Exhibit 4.1 to the Company's current report on Form 8-K). Computation of Ratio of Earnings to Fixed Charges Subsidiaries of the Registrant Consent of Ernst & Young LLP E - 3 Exhibit No . 31.1 31.2 32.1 32.2 99.1 101 Description of Exhibit Certification by the Chief Executive Officer pursuant to Section 302 of the Sarbanes Oxley Act of 2002 Certification by the Chief Financial Officer pursuant to Section 302 of the Sarbanes Oxley Act of 2002 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Owned Aircraft Portfolio at December 31, 2012 The following materials from the Company’s annual Report on Form 10-K for the year ended December 31, 2012, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets as of December 31, 2011 and December 31, 2012, (ii) Consolidated Statements of Income for the years ended December 31, 2010, December 31, 2011 and December 31, 2012, (iii) Consolidated Statements of Comprehensive Income for the years ended December 31, 2010, December 31, 2011 and December 31, 2012, (iv) Consolidated Statements of Cash Flows for the years ended December 31, 2010, December 31, 2011 and December 31, 2012, (v) Consolidated Statements of Changes in Shareholders’ Equity and Comprehensive Income (Loss) for the years ended December 31, 2010, December 31, 2011 and December 31, 2012 and (vi) Notes to Consolidated Financial Statements * _____________ # * Management contract or compensatory plan or arrangement. Filed herewith. Portions of this exhibit have been omitted pursuant to a request for confidential treatment. Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Exchange Act and otherwise are not subject to liability under those sections. E - 4 Index to Financial Statements Consolidated Financial Statements Report of Independent Registered Public Accounting Firm Consolidated Balance Sheets at December 31, 2011 and 2012 Consolidated Statements of Income for the years ended December 31, 2010, 2011 and 2012 Consolidated Statements of Comprehensive Income for the years ended December 31, 2010, 2011 and 2012 Consolidated Statements of Cash Flows for the years ended December 31, 2010, 2011 and 2012 Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 2010, 2011 and 2012 Notes to Consolidated Financial Statements Page No. F - 2 F - 3 F - 4 F - 5 F - 6 F - 7 F - 8 F - 1 Report of Independent Registered Public Accounting Firm The Board of Directors and Shareholders of Aircastle Limited We have audited the accompanying consolidated balance sheets of Aircastle Limited and subsidiaries as of December 31, 2011 and 2012, and the related consolidated statements of income, comprehensive income, changes in shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2012. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Aircastle Limited and subsidiaries at December 31, 2011 and 2012 and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2012, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Aircastle Limited and subsidiaries’ internal control over financial reporting as of December 31, 2012, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 22, 2013 expressed an unqualified opinion thereon. /s/ Ernst & Young LLP New York, New York February 22, 2013 F - 2 Aircastle Limited and Subsidiaries Consolidated Balance Sheets (Dollars in thousands, except share data) ASSETS Cash and cash equivalents Accounts receivable Restricted cash and cash equivalents Restricted liquidity facility collateral Flight equipment held for lease, net of accumulated depreciation of $981,932 and $1,305,064 Net investment in finance leases Aircraft purchase deposits and progress payments Other assets Total assets LIABILITIES AND SHAREHOLDERS’ EQUITY LIABILITIES Borrowings from secured financings (including borrowings of ACS Ireland VIEs of $295,952 and $207,926, respectively) Borrowings from unsecured financings Accounts payable, accrued expenses and other liabilities Lease rentals received in advance Liquidity facility Security deposits Maintenance payments Fair value of derivative liabilities Total liabilities Commitments and Contingencies December 31, 2011 2012 $ $ 295,522 3,646 247,452 110,000 618,217 5,625 111,942 107,000 4,387,986 — 89,806 90,047 4,662,661 119,951 131 186,633 $ 5,224,459 $ 5,812,160 $ 2,535,759 $ 1,848,034 1,750,642 108,593 53,189 107,000 87,707 379,391 61,978 4,396,534 450,757 105,432 46,105 110,000 83,037 347,122 141,639 3,819,851 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, 72,258,472 shares issued and outstanding at December 31, 2011; and 68,639,729 shares issued and outstanding at December 31, 2012 Additional paid-in capital Retained earnings Accumulated other comprehensive loss Total shareholders’ equity Total liabilities and shareholders’ equity — — 723 1,400,090 191,476 (187,681) 1,404,608 686 1,360,555 180,675 (126,290) 1,415,626 $ 5,224,459 $ 5,812,160 The accompanying notes are an integral part of these consolidated financial statements. F - 3 Aircastle Limited and Subsidiaries Consolidated Statements of Income (Dollars in thousands, except per share amounts) Revenues: Lease rental revenue Amortization of net lease discounts and lease incentives Maintenance revenue Total lease rentals Other revenue Total revenues Expenses: Depreciation Interest, net Selling, general and administrative (including non-cash share based payment expense of $7,509, $5,786 and $4,232, respectively) Impairment of aircraft Maintenance and other costs Total expenses Other income (expense): Gain on sale of flight equipment Other Total other income (expense) Income from continuing operations before income taxes Income tax provision Net income Earnings per common share — Basic: Net income per share Earnings per common share — Diluted: Net income per share Dividends declared per share Year Ended December 31, 2010 2011 2012 $ 531,076 (20,081) 15,703 526,698 1,012 527,710 $ 580,209 (16,445) 36,954 600,718 4,479 605,197 $ 623,503 (12,844) 53,320 663,979 22,593 686,572 220,476 178,262 242,103 204,150 269,920 222,808 45,774 7,342 9,612 461,466 45,953 6,436 13,277 511,919 48,370 96,454 14,656 652,208 7,084 (916) 6,168 39,092 (268) 38,824 5,747 602 6,349 72,412 6,596 $ 65,816 132,102 7,832 $ 124,270 40,713 7,845 $ 32,868 $ $ $ 0.83 $ 1.64 $ 0.46 0.83 0.40 $ $ 1.64 0.50 $ $ 0.46 0.615 The accompanying notes are an integral part of these consolidated financial statements. F - 4 Aircastle Limited and subsidiaries Consolidated Statements of Comprehensive Income (Dollars in thousands) Net income Other comprehensive income, net of tax: Net change in fair value of derivatives, net of tax expense of $268, $857 and $586, respectively Net derivative loss reclassified into earnings Other comprehensive income Total comprehensive income Year Ended December 31, 2010 $ 65,816 2011 $ 124,270 2012 $ 32,868 1,994 9,634 11,628 $ 77,444 37,461 23,078 60,539 $ 184,809 30,614 30,777 61,391 $ 94,259 The accompanying notes are an integral part of these consolidated financial statements. F - 5 Aircastle Limited and Subsidiaries Consolidated Statements of Cash Flows (Dollars in thousands) Cash flows from operating activities: Net income Adjustments to reconcile net income to net cash provided by operating activities: Depreciation Amortization of deferred financing costs Amortization of net lease discounts and lease incentives Deferred income taxes Non-cash share based payment expense Cash flow hedges reclassified into earnings Ineffective portion of cash flow hedges Security deposits and maintenance payments included in earnings Gain on the sale of flight equipment Impairment of aircraft Other Changes on certain assets and liabilities: Accounts receivable Restricted cash and cash equivalents related to operating activities Other assets Accounts payable, accrued expenses, other liabilities and payable to affiliates Lease rentals received in advance Net cash provided by operating activities Cash flows from investing activities: Acquisition and improvement of flight equipment Proceeds from sale of flight equipment Restricted cash and cash equivalents related to sale of flight equipment Aircraft purchase deposits and progress payments, net of returned deposits Net investment in finance leases Collections on finance leases Purchase of debt investment Principal repayments on debt investment Other Net cash used in investing activities Cash flows from financing activities: Repurchase of shares Proceeds from notes and term debt financings Securitization and term debt financing repayments Deferred financing costs Restricted secured liquidity facility collateral Secured liquidity facility collateral Restricted cash and cash equivalents related to security deposits and maintenance payments Security deposits received Security deposits returned Maintenance payments received Maintenance payments returned Payments for terminated cash flow hedges and payment for option Dividends paid Net cash provided by financing activities Net increase in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year Supplemental disclosures of cash flow information: Cash paid during the year for interest, net of capitalized interest Cash paid during the year for income taxes Supplemental disclosures of non-cash investing activities: Security deposits, maintenance liabilities and other liabilities settled in sale of flight equipment Advance lease rentals, security deposits and maintenance reserves assumed in asset acquisitions Supplemental disclosures of non-cash financing activities: Advance lease rentals converted to maintenance reserves Security deposits converted to advance lease rentals Security deposits converted to maintenance payment liabilities Year Ended December 31, 2011 2010 2012 $ 65,816 $ 124,270 $ 32,868 220,476 15,065 20,081 3,727 7,509 9,634 5,039 (14,004) (7,084) 7,342 848 (412) (1,560) (3,097) 18,478 8,672 356,530 (465,529) 68,622 — (144,143) — — — — (65) (541,115) (1,663) 547,719 (304,533) (15,365) 6,000 (6,000) 18,342 14,218 (14,281) 119,118 (46,174) (3,705) (31,800) 281,876 97,291 142,666 $ 239,957 242,103 15,271 16,445 5,615 5,786 23,078 (101) (35,500) (39,092) 6,436 742 (4,818) 4,418 (2,675) (1,848) (753) 359,377 (776,750) 489,196 (35,762) (122,069) — — — — (35) (445,420) (91,610) 669,047 (390,945) (20,179) (35,000) 35,000 (25,056) 20,574 (7,914) 122,050 (89,300) — (45,059) 141,608 55,565 239,957 $ 295,522 269,920 12,449 12,844 6,828 4,232 30,777 2,893 (54,180) (5,747) 96,454 (2,218) (2,530) — 919 17,732 4,036 427,277 (693,227) 61,489 35,762 (20,553) (91,500) 3,852 (43,626) 6,585 (691) (741,909) (44,180) 1,459,690 (847,415) (31,691) 3,000 (3,000) 99,748 17,453 (6,152) 142,122 (57,822) (50,757) (43,669) 637,327 322,695 295,522 $ 618,217 $ 136,596 3,528 $ $ 162,938 2,054 $ $ 167,069 2,468 $ $ $ $ $ $ 100 20,204 $ 21,585 5,666 $ $ 4,135 $ 24,261 $ 1,750 730 $ — $ — $ $ 627 $ 138 — 669 — The accompanying notes are an integral part of these consolidated financial statements. F - 6 Aircastle Limited and Subsidiaries Consolidated Statements of Changes in Shareholders’ Equity (Dollars in thousands, except share amounts) Balance, December 31, 2009 Issuance of common shares to directors and employees Repurchase of common shares from directors and employees Amortization of share based payments Dividends declared Net income Net change in fair value of derivatives, net of $268 tax expense Net derivative loss reclassified into earnings Balance, December 31, 2010 Issuance of common shares to directors and employees Repurchase of common shares from directors and employees Amortization of share based payments Dividends declared Net income Net change in fair value of derivatives, net of $857 tax expense Net derivative loss reclassified into earnings Balance, December 31, 2011 Issuance of common shares to directors and employees Repurchase of common shares from stockholders, directors and employees Amortization of share based payments Excess tax benefit from stock based compensation Dividends declared Net income Net change in fair value of derivatives, net of $586 tax expense Net derivative loss reclassified into earnings Balance, December 31, 2012 Common Shares Shares Amount Additional Paid-In Capital Retained Earnings (Deficit) 79,550,421 $ 796 $ 1,479,995 $ 70,294 Accumulated Other Comprehensive Income (Loss) $ (259,848) $ Total Shareholders’ Equity 258,105 (168,241) — — — — — 79,640,285 330,382 2 (2) — — — — — 796 3 — — — — — 72,258,472 270,412 — — — — — 723 2 (7,712,195) (76) (91,534) (3,889,155) (39) (44,141) — — — — — — — — — — — — 4,232 376 — — — — (2) (1,661) 7,509 — — — — — — — (31,809) 65,816 — — — — — — — 1,994 9,634 1,291,237 — (1,663) 7,509 (31,809) 65,816 1,994 9,634 1,485,841 104,301 (248,220) 1,342,718 1,400,090 191,476 (187,681) 1,404,608 (3) 5,786 — — — — (2) — — — (37,095) 124,270 — — — — — — — 37,461 23,078 — (91,610) 5,786 (37,095) 124,270 37,461 23,078 — — — — (43,669) 32,868 — — — — — — — — 30,614 30,777 — (44,180) 4,232 376 (43,669) 32,868 30,614 30,777 68,639,729 $ 686 $ 1,360,555 $ 180,675 $ (126,290) $ 1,415,626 The accompanying notes are an integral part of these consolidated financial statements. F - 7 Aircastle Limited and Subsidiaries Notes to Consolidated Financial Statements (Dollars in thousands, except per share amounts) Note 1. Summary of Significant Accounting Policies Organization and Basis of Presentation Aircastle Limited (“Aircastle,” the “Company,” “we,” “us” or “our”) is a Bermuda exempted company that was incorporated on October 29, 2004 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. 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 one segment. The Company’s management has reviewed and evaluated all events or transactions for potential recognition and/or disclosure since the balance sheet date of December 31, 2012 through the date on which the consolidated financial statements included in this Form 10-K were issued. Effective January 1, 2012, the Company adopted Financial Accounting Standards Board (the “FASB”) Accounting Standards Update (“ASU”) ASU 2011-04 (“ASU 2011-04”), Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurements and Disclosure Requirements in U.S. GAAP and IFRSs, to improve the comparability of fair value measurements presented and disclosed in financial statements prepared in accordance with US GAAP and IFRS. The amendments in this update change the wording used to describe the requirements in US GAAP for measuring fair value and for disclosing information about fair value measurements which include (1) those that clarify the FASB's intent about the application of existing fair value measurement and disclosure requirements, and (2) those that change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurement. ASU 2011-04 is effective for interim and annual reporting periods beginning after December 15, 2011. The adoption of ASU 2011-04 did not have a material impact on the Company's consolidated financial statements. Also effective January 1, 2012, the Company adopted ASU 2011-12 (“ASU 2011-12”) Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05. This ASU defers the ASU 2011-05 requirement that companies present reclassification adjustments for each component of accumulated other comprehensive income (“AOCI”) in both net income and other comprehensive income (“OCI”) on the face of the financial statements. During the deferral period, there is no requirement to separately present or disclose the reclassification adjustments into net income. The FASB expects to issue a final standard in January 2013, with an effective date after December 15, 2012. ASU 2011-12 is effective for interim and annual reporting periods beginning after December 15, 2011 and should be applied retrospectively. The adoption of ASU 2011-12 did not have a material impact on the Company's consolidated financial statements. Principles of Consolidation The consolidated financial statements include the accounts of Aircastle and all of its subsidiaries. Aircastle consolidates nine 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. F - 8 Aircastle Limited and Subsidiaries Notes to Consolidated Financial Statements (Dollars in thousands, except per share amounts) Risk and Uncertainties In the normal course of business, Aircastle encounters several significant types of economic risk including credit, market, aviation industry and capital market risks. Credit risk is the risk of a lessee’s inability or unwillingness to make contractually required payments and to fulfill its other contractual obligations. Market risk reflects the change in the value of derivatives and financings due to changes in interest rate spreads or other market factors, including the value of collateral underlying derivatives and financings. Aviation industry risk is the risk of a downturn in the commercial aviation industry which could adversely impact a lessee’s ability to make payments, increase the risk of unscheduled lease terminations and depress lease rates and the value of the Company’s aircraft. Capital market risk is the risk that the Company is unable to obtain capital at reasonable rates to fund the growth of our business or to refinance existing debt facilities. Use of Estimates The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. While Aircastle believes that the estimates and related assumptions used in the preparation of the consolidated financial statements are appropriate, actual results could differ from those estimates. Cash and Cash Equivalents and Restricted Cash and Cash Equivalents Aircastle considers all highly liquid investments with maturities of three months or less when purchased to be cash equivalents. Restricted cash and cash equivalents consists primarily of rent collections, maintenance payments and security deposits received from lessees pursuant to the terms of various lease agreements held in lockbox accounts in accordance with our financings. Changes in restricted cash and cash equivalents related to rent collections are reflected within operating activities of our consolidated statements of cash flows for non-cash trapped financings. Changes in restricted cash and cash equivalents related to rent collections are reflected within financing activities of our consolidated statements of cash flows for cash trapped financings. Changes in restricted cash related to the sale of flight equipment are reflected within investing activities of our consolidated statements of cash flows. Changes in restricted cash and cash equivalents related to maintenance payments and security deposits are reflected within financing activities of our consolidated statements of cash flows. Virtually all of our cash and cash equivalents and restricted cash and cash equivalents are held by four major financial institutions. Flight Equipment Held for Lease and Depreciation Flight equipment held for lease is stated at cost and depreciated using the straight-line method, typically over a 25- year life from the date of manufacture for passenger aircraft and over a 30- to 35-year life for freighter aircraft, depending on whether the aircraft is a converted or purpose-built freighter, to estimated residual values. Estimated residual values are generally determined to be approximately 15% of the manufacturer’s estimated realized price for passenger aircraft when new and 5% - 10% for freighter aircraft when new. Management may make exceptions to this policy on a case-by-case basis when, in its judgment, the residual value calculated pursuant to this policy does not appear to reflect current expectations of value. Examples of situations where exceptions may arise include but are not limited to: • • • flight equipment where estimates of the manufacturer’s realized sales prices are not relevant (e.g., freighter conversions); flight equipment where estimates of the manufacturers’ realized sales prices are not readily available; and flight equipment which may have a shorter useful life due to obsolescence. Major improvements and modifications incurred in connection with the acquisition of aircraft that are required to get the aircraft ready for initial service are capitalized and depreciated over the remaining life of the flight equipment. For planned major maintenance activities for aircraft off-lease, the Company capitalizes the actual maintenance costs by applying the deferral method. Under the deferral method, we capitalize the actual cost of major maintenance events, which are depreciated on a straight-line basis over the period until the next maintenance event is required. F - 9 Aircastle Limited and Subsidiaries Notes to Consolidated Financial Statements (Dollars in thousands, except per share amounts) In accounting for flight equipment held for lease, we make estimates about the expected useful lives, the fair value of attached leases, acquired maintenance liabilities and the estimated residual values. In making these estimates, we rely upon actual industry experience with the same or similar aircraft types and our anticipated lessee’s utilization of the aircraft. When we acquire an aircraft with a lease, determining the fair value of attached leases requires us to make assumptions regarding the current fair values of leases for specific aircraft. We estimate a range of current lease rates of like aircraft in order to determine if the attached lease is within a fair value range. If a lease is below or above the range of current lease rates, we present value the estimated amount below or above the fair value range over the remaining term of the lease. The resulting lease discount or premium is amortized into lease rental income over the remaining term of the lease. Impairment of Flight Equipment We perform a recoverability assessment of all aircraft in our fleet, on an aircraft-by-aircraft basis, at least annually. In addition, a recoverability assessment is performed whenever events or changes in circumstances, or indicators, indicate that the carrying amount or net book value of an asset may not be recoverable. Indicators may include, but are not limited to, a significant lease restructuring or early lease termination, significant air traffic decline, the introduction of newer technology aircraft or engines, an aircraft type is no longer in production or a significant airworthiness directive is issued. When we perform a recoverability assessment, we measure whether the estimated future undiscounted net cash flows expected to be generated by the aircraft exceed its net book value. The undiscounted cash flows consist of cash flows from currently contracted leases, future projected lease rates, transition costs, estimated down time and estimated residual or scrap values for an aircraft. In the event that an aircraft does not meet the recoverability test, the aircraft will be adjusted to fair value, resulting in an impairment charge. See Note 2. — Fair Value Measurements. Management develops the assumptions used in the recoverability analysis based on current and future expectations of the global demand for a particular aircraft type and historical experience in the aircraft leasing market and aviation industry, as well as information received from third party industry sources. The factors considered in estimating the undiscounted cash flows are impacted by changes in future periods due to changes in contracted lease rates, residual values, economic conditions, technology, airline demand for a particular aircraft type and other factors. In monitoring the aircraft in our fleet for impairment charges, we identify those aircraft that are most susceptible to failing the recoverability assessment and monitor those aircraft more closely, which may result in more frequent recoverability assessments. The recoverability in the value of these aircraft is more sensitive to changes in contractual cash flows, future cash flow estimates and residual values or scrap values for each aircraft. These are typically older aircraft for which lessee demand is declining. Net Investment in Finance Leases If a lease meets specific criteria at the inception of a new lease or at any lease modification date, we recognize the lease as a Net investment in finance leases on our Consolidated Balance Sheets. The Net investment in finance leases consists of lease receivables, less the unearned income, plus the estimated unguaranteed residual value of the leased flight equipment at the lease end date. The unearned income is recognized as Other revenue in our Consolidated Statements of Income over the lease term in a manner that produces a constant rate of return on the Net investment in finance lease. Collectability of finance leases is evaluated periodically on an individual customer level. The evaluation of the collectability of the finance leases considers the credit of the lessee and the value of the underlying aircraft. An allowance for credit losses is established if there is evidence that we will be unable to collect all amounts due according to the original contractual terms of the Net investment in finance leases. At December 31, 2012, we had no allowance for credit losses for our Net investment in finance leases. Capitalization of Interest We capitalize interest related to progress payments made in respect of flight equipment on forward order and on prepayments made in respect of the conversion of passenger-configured aircraft to freighter-configured aircraft, and add such amount to prepayments on flight equipment. The amount of interest capitalized is the actual interest costs incurred on funding specific assets or the amount of interest costs which could have been avoided in the absence of such payments for the related assets. F - 10 Aircastle Limited and Subsidiaries Notes to Consolidated Financial Statements (Dollars in thousands, except per share amounts) Security Deposits Most of our operating leases require the lessee to pay Aircastle a security deposit or provide a letter of credit. Security deposits represent cash received from the lessee that is held on deposit until lease expiration. Aircastle’s operating leases also obligate the lessees to maintain flight equipment and comply with all governmental requirements applicable to the flight equipment, including without limitation, operational, maintenance, registration requirements and airworthiness directives. Maintenance Payments Typically, under an operating lease, the lessee is responsible for performing all maintenance but might be required to make deposit payments to us for heavy maintenance, overhaul or replacement of certain high-value components of the aircraft. These maintenance payments are based on hours or cycles of utilization or on calendar time, depending upon the component, and are required to be made monthly in arrears or at the end of the lease term. Whether to permit a lessee to make maintenance payments at the end of the lease term, rather than requiring such payments to be made monthly, depends on a variety of factors, including the creditworthiness of the lessee, the level of security deposit which may be provided by the lessee and market conditions at the time we enter into the lease. If a lessee is making monthly maintenance payments, we would typically be obligated to reimburse the lessee for costs they incur for heavy maintenance, overhaul or replacement of certain high-value components to the extent of maintenance payments received in respect of the specific maintenance event, usually shortly following completion of the relevant work. We record maintenance payments paid by the lessee as accrued maintenance payments liabilities in recognition of our contractual commitment to refund such receipts. In these contracts, we do not recognize such maintenance payments as maintenance revenue during the lease. Reimbursements to the lessee upon the receipt of evidence of qualifying maintenance work are charged against the existing accrued maintenance payments liability. We currently defer maintenance revenue recognition of all maintenance reserve payments collected until the end of the lease, when we are able to determine the amount, if any, by which reserve payments received exceed costs to be incurred by the current lessee in performing scheduled maintenance. Lease Incentives and Amortization Many of our leases contain provisions which may require us to pay a portion of the lessee’s costs for heavy maintenance, overhaul or replacement of certain high-value components. We account for these expected payments as lease incentives, which are amortized as a reduction of revenue over the life of the lease. We estimate the amount of our portion for such costs, typically for the first major maintenance event for the airframe, engines, landing gear and auxiliary power units, expected to be paid to the lessee based on assumed utilization of the related aircraft by the lessee, the anticipated amount of the maintenance event cost and the estimated amounts the lessee is responsible to pay. This estimated lease incentive is not recognized as a lease incentive liability at the inception of the lease. We recognize the lease incentive as a reduction of lease revenue on a straight-line basis over the life of the lease, with the offset being recorded as a lease incentive liability which is included in maintenance payments on the balance sheet. The payment to the lessee for the lease incentive liability is first recorded against the lease incentive liability, and any excess above the lease incentive liability is recorded as a prepaid lease incentive asset, which is included in other assets on the balance sheet and continues to amortize over the remaining life of the lease. Lease acquisition costs related to reconfiguration of the aircraft cabin, other lessee specific modifications and other direct costs are capitalized and amortized into revenue over the initial life of the lease, assuming no lease renewals, and are included in other assets. Income Taxes Aircastle uses an asset and liability based approach in accounting for income taxes. Deferred income tax assets and liabilities are recognized for the future tax consequences attributed to differences between the financial statement and tax basis of existing assets and liabilities using enacted rates applicable to the periods in which the differences are expected to affect taxable income. A valuation allowance is established, when necessary, to reduce deferred tax assets to the amount estimated by us to be realizable. The Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities. We did not have any unrecognized tax benefits. F - 11 Aircastle Limited and Subsidiaries Notes to Consolidated Financial Statements (Dollars in thousands, except per share amounts) Derivative Financial Instruments In the normal course of business we utilize interest rate derivatives to manage our exposure to interest rate risks. Specifically, our interest rate derivatives are hedging variable rate interest payments on our various debt facilities. If certain conditions are met, an interest rate derivative may be specifically designated as a cash flow hedge. All of our designated interest rate derivatives are cash flow hedges. We have one interest rate derivative that is not designated for accounting purposes. On the date that we enter into an interest rate derivative, we formally document the intended use of the interest rate derivative and its designation as a cash flow hedge, if applicable. We also assess (both at inception and on an ongoing basis) whether the interest rate derivative has been highly effective in offsetting changes in the cash flows of the variable rate interest payments on our debt and whether the interest rate derivative is expected to remain highly effective in future periods. If it were to be determined that the interest rate derivative is not (or has ceased to be) highly effective as a cash flow hedge, we would discontinue cash flow hedge accounting prospectively. At inception of an interest rate derivative designated as a cash flow hedge, we establish the method we will use to assess effectiveness and the method we will use to measure any ineffectiveness. Historically, we have elected to use the “change in variable cash flows method” for both. This method involves a comparison of the present value of the cumulative change in the expected future cash flows on the variable leg of the interest rate derivative against the present value of the cumulative change in the expected future interest cash flows on the variable-rate debt. When the change in the interest rate derivative’s variable leg exceeds the change in the debt’s variable-rate interest cash flows, the calculated ineffectiveness is recorded in interest expense on our consolidated statement of income. Effectiveness is assessed by dividing the change in the interest rate derivative variable leg by the change in the debt’s variable-rate interest cash flows. We use the “hypothetical trade method” for interest rate derivatives designated as cash flow hedges subsequent to inception that did not qualify for the “change in variable cash flow method.” The calculation involves a comparison of the change in the fair value of the interest rate derivative to the change in the fair value of a hypothetical interest rate derivative with critical terms that reflect the hedged variable-rate debt. The effectiveness of these relationships is assessed by regressing historical changes in the interest rate derivative against historical changes in the hypothetical interest rate derivative. When the change in the interest rate derivative exceeds the change in the hypothetical interest rate derivative, the calculated ineffectiveness is recorded in interest expense on our consolidated statement of income. All interest rate derivatives are recognized on the balance sheet at their fair value. We determine fair value for our United States dollar-denominated interest rate derivatives by calculating reset rates and discounting cash flows based on cash rates, futures rates and swap rates in effect at the period close. We determine the fair value of our United States dollar- denominated guaranteed notional balance interest rate derivatives based on the upper notional band using cash flows discounted at relevant market interest rates in effect at the period close. See Note 2 — Fair Value Measurements for more information. For our interest rate derivatives designated as cash flow hedges, the effective portion of the interest rate derivative’s gain or loss is initially reported as a component of other comprehensive income and subsequently reclassified into earnings when the interest payments on the debt are recorded in earnings. The ineffective portion of the interest rate derivative is calculated and recorded in interest expense on our consolidated statement of income at each quarter end. For any interest rate derivative not designated as a cash flow hedge, the gain or loss is recognized in other income (expense) on our consolidated statement of income. We may choose to terminate certain interest rate derivatives prior to their contracted maturities. Any related net gains or losses in accumulated other comprehensive income at the date of termination are not reclassified into earnings if it remains probable that the interest payments on the debt will occur. The amounts in accumulated other comprehensive income are reclassified into earnings as the interest payments on the debt affect earnings. Terminated interest rate derivatives are reviewed periodically to determine if the forecasted transactions remain probable of occurring. To the extent that the occurrence of the interest payments on the debt are deemed remote, the related portion of the accumulated other comprehensive income balance is reclassified into earnings immediately. F - 12 Aircastle Limited and Subsidiaries Notes to Consolidated Financial Statements (Dollars in thousands, except per share amounts) Lease Revenue Recognition We lease flight equipment under net operating leases with lease terms typically ranging from 3 to 7 years. We generally do not offer renewal terms or purchase options in our leases, although certain of our operating leases allow the lessee the option to extend the lease for an additional term. Operating leases with fixed rentals and step rentals are recognized on a straight-line basis over the term of the initial lease, assuming no renewals. Operating lease rentals that adjust based on a London Interbank Offered Rate (“LIBOR”) index are recognized on a straight-line basis over the period the rentals are fixed and accruable. Revenue is not recognized when collection is not reasonably assured. When collectability is not reasonably assured, the customer is placed on non-accrual status, and revenue is recognized when cash payments are received. Comprehensive Income Comprehensive income consists of net income and other gains and losses, net of income taxes, if any, affecting shareholders’ equity that, under US GAAP, are excluded from net income. At December 31, 2012, such amount consists of the effective portion of fluctuations in the fair value of derivatives designated as cash flow hedges. Share Based Compensation Aircastle recognizes compensation cost relating to share-based payment transactions in the financial statements based on the fair value of the equity instruments issued. Aircastle uses the straight line method of accounting for compensation cost on share-based payment awards that contain pro-rata vesting provisions. Deferred Financing Costs Deferred financing costs, which are included in other assets in the Consolidated Balance Sheet, are amortized using the interest method for amortizing loans over the lives of the relevant related debt. Leasehold Improvements, Furnishings and Equipment Improvements made in connection with the leasing of office facilities are capitalized as leasehold improvements and are amortized on a straight line basis over the minimum lease period. Furnishings and equipment are capitalized at cost and are amortized over the estimated life of the related assets or remaining lease terms, which range between 3 and 5 years. Recent Unadopted Accounting Pronouncements In August 2010, the FASB issued an exposure draft, “Leases” (the “Lease ED”), which would replace the existing guidance in the Accounting Standards Codification (“ASC”) 840 (“ASC 840”), Leases. In June 2012, the FASB decided that leases would be classified as either leases of property or leases of assets other than property. Leases of property will continue to use operating lease accounting. Leases of other than property would use the receivable residual approach. Under the receivable residual approach, a lease receivable would be recognized for the lessor's right to receive lease payments, a portion of the carrying amount of the underlying asset would be allocated between the right of use granted to the lessee and the lessor's residual value and profit or loss would only be recognized at commencement if it is reasonably assured. The FASB completed all of its deliberations and decided to re-expose the Lease ED in the first half of 2013. We anticipate that the final standard may have an effective date no earlier than 2016. When and if the proposed guidance becomes effective, it may have a significant impact on the Company's consolidated financial statements. Although we believe the presentation of our financial statements, and those of our lessees could change, we do not believe the accounting pronouncement will change the fundamental economic reasons for which the airlines lease aircraft. Therefore, we do not believe it will have a material impact on our business. 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. F - 13 Aircastle Limited and Subsidiaries Notes to Consolidated Financial Statements (Dollars in thousands, except per share amounts) • 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: • The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. • The income approach uses valuation techniques to convert future amounts to a single present amount based on current market expectation about those future amounts. • The cost approach is 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, 2011 and 2012 that we measured at fair value on a recurring basis by level within the fair value hierarchy. Assets and liabilities measured at fair value are classified in their entirety based on the lowest level of input that is significant to their fair value measurement. Assets: Cash and cash equivalents Restricted cash and cash equivalents Total Liabilities: Derivative liabilities Assets: Cash and cash equivalents Restricted cash and cash equivalents Debt investments Total Liabilities: Derivative liabilities Fair Value as of December 31, 2011 Fair Value Measurements at December 31, 2011 Using Fair Value Hierarchy Level 1 Level 2 Level 3 Valuation Technique $ $ 295,522 $ 295,522 $ — $ — Market 247,452 247,452 — — Market 542,974 $ 542,974 $ — $ — $ 141,639 $ — $ 85,410 $ 56,229 Income Fair Value as of December 31, 2012 Fair Value Measurements at December 31, 2012 Using Fair Value Hierarchy Level 1 Level 2 Level 3 Valuation Technique $ 618,217 $ 618,217 $ — $ 111,942 111,942 40,388 — — — — — Market Market 40,388 Income $ 770,547 $ 730,159 $ — $ 40,388 $ 61,978 $ — $ 61,978 $ — 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. F - 14 Aircastle Limited and Subsidiaries Notes to Consolidated Financial Statements (Dollars in thousands, except per share amounts) On April 4, 2012, the interest rate derivatives included in Level 3 were terminated when the related hedged debt was repaid with the proceeds from the Senior Notes due 2017 and Senior Notes due 2020 (See Note 6. Borrowings from Secured and Unsecured Debt Financings — Unsecured Debt Financings below). The following table reflects the activity for the classes of our liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the years ended December 31, 2011 and 2012: Balance as of December 31, 2010 Total gains/(losses), net: Included in other income (expense) Included in interest expense Included in other comprehensive income Balance as of December 31, 2011 Purchases Total gains/(losses), net: Included in other revenue Included in other income (expense) Included in interest expense Included in other comprehensive income Settlements Balance as of December 31, 2012 Assets Debt Investments $ — — — — — — 43,626 3,347 — — — (6,585) Liabilities Derivative Liabilities $ (55,181) (474) (71) (503) (56,229) — — 599 73 4,800 50,757 $ 40,388 $ — For the year ended December 31, 2011, we had no transfers into or out of Level 3, and we had no purchases, issuances, sales or settlements of Level 3 items. For the year ended December 31, 2012, we purchased a loan that is secured by a commercial jet aircraft that matures in May, 2013. The loan is classified as available for sale and the fair value was determined using the income approach with unobservable inputs. We had no transfers into or out of Level 3; however in 2012, we did terminate all Level 3 interest rate derivatives. 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 which uses Level 3 inputs, which include the Company’s assumptions and appraisal data as to future cash proceeds from leasing and selling aircraft. In the year ended December 31, 2011, we recognized an impairment of $6,436 related to a Boeing Model 737-400 aircraft triggered by the early termination of the lease and the change to estimated future cash flows as well as by our decision to sell the aircraft, whereupon we adjusted the net book value of the aircraft to its estimated disposition value. We perform a recoverability assessment whenever events or changes in circumstances, or indicators, indicate that the carrying amount or net book value of an aircraft may not be recoverable. During 2012, we impaired two aircraft, one Boeing Model 757-200 aircraft that we sold for less than its net book value and one Boeing Model 767-300ER aircraft which was returned to us following its scheduled lease expiration and which failed its recoverability assessment. For these two aircraft, we recorded impairment charges of $10,111, and we recorded $2,447 of maintenance revenue. We elected not to invest in engine performance restoration maintenance visits for two Airbus Model A320-200 “Classic” aircraft with older technology engines and instead agreed with the lessee to terminate the leases prior to scheduled expiry and pursue part-out sales. Following agreement with our customer to terminate the leases, these aircraft failed the recoverability assessment and we recorded impairment charges of $12,306 and we recorded $11,104 of maintenance revenue and reversed $1,157 of lease incentives, for these two aircraft. F - 15 Aircastle Limited and Subsidiaries Notes to Consolidated Financial Statements (Dollars in thousands, except per share amounts) We also elected not to invest in engine performance restoration maintenance visits for one Airbus Model A320-200 aircraft and instead agreed to pursue part-out sales. Following the scheduled return of the aircraft from the lessee, this aircraft failed the recoverability assessment and we recorded an impairment charge of $6,668 and we recorded $6,509 of maintenance revenue for the three months ended December 31, 2012. We perform a recoverability assessment of all aircraft in our fleet, on an aircraft-by-aircraft basis, at least annually. We performed this recoverability assessment during the third quarter of 2012. Management develops the assumptions used in the recoverability assessment based on its knowledge of active lease contracts, current and future expectations of the global demand for a particular aircraft type and historical experience in the aircraft leasing market and aviation industry, as well as information received from third party industry sources. The factors considered in estimating the undiscounted cash flows are impacted by changes in future periods due to changes in contracted lease rates, residual values, economic conditions, technology, airline demand for a particular aircraft type and other factors. In particular, many of our assumptions were driven primarily by weak market demand for older technology narrow- and wide-body model aircraft caused by slowing global economic growth rates, declining business confidence levels and higher fuel prices. In the case of Boeing 737 “Classic” aircraft, production rate increases by both Boeing and Airbus for newer generation narrowbody aircraft, coupled with slowing demand growth, is enabling more rapid replacement of earlier generation aircraft. Storage levels for these aircraft types have increased during the last twelve months. Following completion of the recoverability analysis, we took the following actions: • We impaired 13 aircraft and recorded aggregate impairment charges of $67,370 to write these aircraft down to current market values. For some of these aircraft we also shortened the expected lives and/or reduced the residual values. • For seven other aircraft that passed the recoverability assessment, we took the following steps: Shortened the expected lives of one Airbus A330-300 aircraft, five Boeing Model 767-300ER aircraft and one McDonnell Douglas MD-11SF aircraft, primarily to reflect the specific maintenance schedule that we expect for the airframe and related engines. In the case of our Boeing Model 767-300ER aircraft, reduced the residual values to reflect our current estimates. Reducing the expected lives or anticipated residual values for aircraft in our fleet will accelerate the future depreciation on these aircraft, which will be partly offset by reduced depreciation on aircraft that we impaired. As described above, these changes in depreciation going forward will affect 23 aircraft. We estimate that there will be no annual increase in depreciation for these 23 aircraft for the year ended December 31, 2013, although future depreciation is expected to decrease as these aircraft reach the end of their holding periods. While we believe that the estimates and related assumptions used in the recoverability assessment are appropriate, actual results could differ from those estimates. Other than the aircraft discussed above, management believes that the net book value of each aircraft is currently supported by the estimated future undiscounted cash flows expected to be generated by that aircraft, and accordingly, no other aircraft were impaired as a consequence of this recoverability assessment. In addition, our lessees may face financial difficulties and return aircraft to us prior to the contractual lease expiry dates. As a result, our cash flow assumptions may change and future impairment charges may be required. 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 ECA term financings and bank financings are estimated using a discounted cash flow analysis, based on our current incremental borrowing rates for similar types of borrowing arrangements. The fair value of our Senior Notes is estimated using quoted market prices. F - 16 Aircastle Limited and Subsidiaries Notes to Consolidated Financial Statements (Dollars in thousands, except per share amounts) The carrying amounts and fair values of our financial instruments at December 31, 2011 and 2012 are as follows: December 31, 2011 December 31, 2012 Carrying Amount of Asset (Liability) Fair Value of Asset (Liability) Carrying Amount of Asset (Liability) Fair Value of Asset (Liability) Securitizations and term debt financings $ (1,873,652) $ (1,681,023) $ (1,082,368) $ (962,960) ECA term financings Bank financings Senior Notes (536,107) (126,000) (450,757) (524,373) (126,000) (652,916) (112,750) (671,966) (116,272) (482,625) (1,750,642) (1,905,565) All of our financial instruments are classified as Level 2 with the exception of our senior Notes, which are classified as Level 1. 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 December 31, 2012 were as follows: Year Ending December 31, 2013 2014 2015 2016 2017 Thereafter Total Amount $ 608,330 514,321 444,745 383,324 273,609 654,895 $ 2,879,224 Geographic concentration of lease rental revenue earned from flight equipment held for lease was as follows: Region Europe Asia and Pacific North America Middle East and Africa Latin America Total Year Ended December 31, 2010 2011 2012 45% 21% 15% 10% 9% 45% 24% 13% 11% 7% 39% 32% 11% 11% 7% 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 year ended December 31, 2010, one customer accounted for 11% of lease rental revenues, and two additional customers accounted for a combined 14% of lease rental revenues. No other customer accounted for more than 5% of lease rental revenues. For the year ended December 31, 2011, one customer accounted for 11% of lease rental revenues, and three additional customers accounted for a combined 19% of lease rental revenues. No other customer accounted for more than 5% of lease rental revenues. F - 17 Aircastle Limited and Subsidiaries Notes to Consolidated Financial Statements (Dollars in thousands, except per share amounts) For the year ended December 31, 2012, one customer accounted for 9% of lease rental revenues, and four additional customers accounted for a combined 25% of lease rental revenues. No other customer accounted for more than 5% of lease rental revenues. The following table sets forth revenue attributable to individual countries representing at least 10% of total revenue (including maintenance revenue) in any year based on each lessee’s principal place of business for the years indicated: Country United States China Netherlands 2010 2011 2012 Revenue $ 66,847 60,181 56,057 % of Total Revenue Revenue % of Total Revenue % of Total Revenue Revenue 13% $ 64,195 11% 11% 69,534 — 11% $ 78,493 11% 75,502 — — 11% 11% — Geographic concentration of net book value of flight equipment held for lease was as follows: Region Europe Asia and Pacific North America Latin America Middle East and Africa Off-lease Total ______________ December 31, 2011 December 31, 2012 Number of Aircraft Net Book Value % Number of Aircraft Net Book Value % 66 39 16 10 9 4 (1) 41% 28% 9% 6% 15% 1% 68 50 17 14 8 2 (2) 35% 34% 10% 8% 12% 1% 144 100% 159 100% (1) Includes two Boeing Model 747-400 aircraft being converted from passenger to freighter configuration, one of these aircraft was delivered to a customer in North America in January 2012 and one was delivered to a customer in North America in April 2012; one Airbus Model A320-200 aircraft which was delivered to a customer in Europe in March, 2012, and one Boeing Model 737-400 aircraft which was sold in January 2012. (2) Includes one Boeing Model 767-300ER aircraft and one Boeing Model 747-400BDSF aircraft that we are marketing for lease or sale. The following table sets forth net book value of flight equipment attributable to individual countries representing at least 10% of net book value of flight equipment based on each lessee’s principal place of business as of: Country China Russia(1) ______________ December 31, 2011 December 31, 2012 Net Book Value Net Book Value % Number of Lessees Net Book Value Net Book Value % Number of Lessees $ 526,008 453,695 12% 10% 4 8 $ 515,194 — 11% — 4 — (1) The net book value of flight equipment attributable to Russia was less than 10% as of December 31, 2012. At December 31, 2011 and 2012, the amounts of lease incentive liabilities recorded in maintenance payments on the consolidated balance sheets were $28,412 and $15,587, respectively. F - 18 Aircastle Limited and Subsidiaries Notes to Consolidated Financial Statements (Dollars in thousands, except per share amounts) Note 4. Net Investment in Finance Leases At December 31, 2012, our net investment in finance leases represents six aircraft leased to a customer in Germany and three aircraft leased to a customer in the United States. The following table lists the components of our net investment in finance leases at December 31, 2012: Total lease payments to be received Less: Unearned income Estimated residual values of leased flight equipment (unguaranteed) Net investment in finance leases At December 31, 2012, minimum future lease payments on finance leases are as follows: Year Ending December 31, 2013 2014 2015 2016 2017 Thereafter Total lease payments to be received Note 5. Variable Interest Entities Amount $ 128,789 (74,087) 65,249 $ 119,951 Amount $ 22,070 21,390 21,390 21,390 20,948 21,601 $ 128,789 Aircastle consolidates nine VIEs of which it is the primary beneficiary. The operating activities of these VIEs are limited to acquiring, owning, leasing, maintaining, operating and, under certain circumstances, selling the 22 aircraft discussed below. Securitizations In connection with Securitization No. 1, two of our subsidiaries, ACS Aircraft Finance Ireland plc (“ACS Ireland”) and ACS Aircraft Finance Bermuda Limited (“ACS Bermuda”) issued Class A-1 notes, and each has fully and unconditionally guaranteed the other's obligations under the notes. In connection with Securitization No. 2, two of our subsidiaries, ACS Aircraft Finance Ireland 2 Limited (“ACS Ireland 2”) and ACS 2007-1 Limited (“ACS Bermuda 2”) issued Class A-1 notes and each has fully and unconditionally guaranteed the other's obligations under the notes. ACS Bermuda and ACS Bermuda 2 are collectively referred to as the “ACS Bermuda Group.” Aircastle is the primary beneficiary of ACS Ireland and ACS Ireland 2 (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 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. At December 31, 2012, the assets of the two VIEs include 12 aircraft transferred into the VIEs at historical cost basis in connection with Securitization No. 1 and Securitization No. 2. The combined assets of the ACS Ireland VIEs as of December 31, 2012 are $351,360. The combined liabilities of the ACS Ireland VIEs, net of $72,068 Class E-1 Securities held by the Company, which is eliminated in consolidation, as of December 31, 2012 are $320,030. F - 19 Aircastle Limited and Subsidiaries Notes to Consolidated Financial Statements (Dollars in thousands, except per share amounts) ECA Term Financings Aircastle, through various subsidiaries, each of which is owned by a charitable trust (such entities, collectively the “Air Knight VIEs”), entered into 11 different twelve-year term loans, which are supported by guarantees from Compagnie Francaise d' Assurance pour le Commerce Exterieur, (“COFACE”), the French government sponsored export credit agency (“ECA”). These loans provided for the financing for 11 new Airbus Model A330-200 aircraft. In June 2011, we repaid one of these loans from the proceeds of the sale of the related aircraft. At December 31, 2012, Aircastle had 10 outstanding term loans with guarantees from COFACE. 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 our wholly owned subsidiary is the servicer and is responsible for managing the relevant 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 and deferred financing costs. The related aircraft, with a net book value as of December 31, 2012 were $827,762, are included in our flight equipment held for lease. The consolidated debt outstanding of the Air Knight VIEs as of December 31, 2012 is $652,916. Note 6. Borrowings from Secured and Unsecured Debt Financings The outstanding amounts of our secured and unsecured term debt financings were as follows: Debt Obligation Secured Debt Financings: Securitization No. 1 Securitization No. 2 Term Financing No. 1 ECA Term Financings Bank Financings Total secured debt financings Unsecured Debt Financings: Senior Notes due 2017 Senior Notes due 2018 Senior Notes due 2019 Senior Notes due 2020 2012 Revolving Credit Facility Total unsecured debt financings At December 31, 2011 At December 31, 2012 Outstanding Borrowings Outstanding Borrowings Interest Rate (1) Final Stated (2) Maturity $ 387,124 $ 309,505 891,452 595,076 536,107 126,000 0.49% 0.54% 06/20/31 06/14/37 N/A 2.01% to 3.96% N/A 12/03/21 to 11/30/24 772,863 — 652,916 112,750 4.22% to 4.57% 09/15/15 to 10/26/17 2,535,759 1,848,034 — 450,757 — — — 500,000 450,642 500,000 300,000 — 450,757 1,750,642 6.75% 9.75% 6.25% 7.625% N/A 04/15/17 08/01/18 12/01/19 04/15/20 12/19/15 Total secured and unsecured debt financings $ 2,986,516 $ 3,598,676 _______________ (1) Reflects the floating rate in effect at the applicable reset date plus the margin for Securitization No. 1, Securitization No. 2 and one of our ECA Term Financings. All other financings have a fixed rate. (2) For Securitizations No. 1 and No. 2, all cash flows available after expenses and interest is applied to debt amortization. F - 20 Aircastle Limited and Subsidiaries Notes to Consolidated Financial Statements (Dollars in thousands, except per share amounts) The following securitizations structures include liquidity facility commitments described in the table below: Facility Securitization No. 1 Securitization No. 2 _____________ Liquidity Facility Provider Crédit Agricole Corporate and Investment Bank(1) HSH Nordbank AG(1) Available Liquidity December 31, 2011 December 31, 2012 $ 42,000 $ 42,000 Unused Fee 0.45% 66,859 65,000 0.50% Interest Rate on any Advances 1M LIBOR + 1.0 0 1M LIBOR + 0.7 5 (1) Following a ratings downgrade by each of the facility providers, the liquidity facility was drawn, and the proceeds, or permitted investments thereof, remain available to provide liquidity if required. Amounts drawn following a ratings downgrade with respect to the liquidity facility provider do not bear interest; however, net investment earnings will be paid to the liquidity facility provider, and the unused fee continues to apply. The purpose of these facilities is to provide liquidity for the relevant securitization or term financing in the event that cash flow from lease contracts and other revenue sources is not sufficient to pay operating expenses with respect to the relevant aircraft portfolio, interest payments and interest rate hedging payments for the relevant securitization. Secured Debt Financings: ECA Term Financings In 2010, we entered into two twelve-year term loans which are supported by guarantees from Compagnie Francaise d’ Assurance pour le Commerce Exterieur (“COFACE”) for the financing of two new Airbus Model A330-200 aircraft totaling $138,295. During 2011, we entered into five twelve-year term loans which are supported by guarantees from COFACE for the financing of five new Airbus Model A330-200 aircraft totaling $359,393. In 2011, we repaid in full the outstanding principal balance on one of our ECA term financings in the amount of $61,571. During 2012, we entered into two twelve-year term loans which are supported by guarantees from COFACE for the financing of two new Airbus Model A330-200 aircraft totaling $159,690. We refer to these COFACE-supported financings as “ECA Term Financings”. The borrowings under these financings at December 31, 2012 have a weighted average rate of interest equal to 3.221%. The obligations outstanding under the ECA Term Financings are secured by, among other things, a mortgage over the aircraft and a pledge of our ownership interest in our subsidiary company that leases the aircraft to the operator. The ECA Term Financings documents contain a $500,000 minimum net worth covenant for Aircastle Limited, as well as a material adverse change default and cross default to any other recourse obligation of Aircastle Limited, and other terms and conditions customary for ECA-supported financings being completed at this time. In addition, Aircastle Limited has guaranteed the repayment of the ECA Term Financings. Bank Financings In October 2011, one of our subsidiaries entered into a $90,000 loan facility to finance a portion of the purchase of a Boeing Model 777-300ER aircraft. The loan is to be repaid in 24 equal quarterly principal installments beginning January 26, 2012 and a balloon payment of $50,000 on the final repayment date of October 26, 2017. In December 2011, two of our subsidiaries each entered into $18,000 loan facilities to finance the purchase of two McDonnell Douglas MD11-F aircraft. The loans are to be repaid over 45 and 47 months, respectively, in principal installments beginning January 15, 2012 and ending on September 15, 2015 and November 15, 2015, respectively. We refer to these loan facilities as “Bank Financings”. Our Bank Financings contain, among other customary provisions, a $500,000 minimum net worth covenant and, in some cases, a cross-default to other financings with the same lender. In addition, Aircastle Limited has guaranteed the repayment of the Bank Financings. The borrowings under these financings at December 31, 2012 have a weighted average fixed rate of interest equal to 4.306%. F - 21 Aircastle Limited and Subsidiaries Notes to Consolidated Financial Statements (Dollars in thousands, except per share amounts) Unsecured Debt Financings: Senior Notes due 2017 and Senior Notes due 2020 During 2012, Aircastle Limited issued $500,000 aggregate principal amount of 6.75% Senior Notes due 2017 (the “Senior Notes due 2017”) and $300,000 aggregate principal amount of 7.625% Senior Notes due 2020 (the “Senior Notes due 2020”). The Senior Notes due 2017 mature on April 15, 2017 and bear interest at the rate of 6.75% and the Senior Notes due 2020 mature on April 15, 2020 and bear interest at the rate of 7.625%. Interest on both series of notes is payable on April 15 and October 15 of each year, commencing on October 15, 2012 to holders of record on the immediately preceding April 1 and October 1. The offerings of the Senior Notes due 2017 and the Senior Notes due 2020 were not conditioned on one another. The Company may redeem the Senior Notes due 2017 and the Senior Notes due 2020 at any time, up to 35% of the aggregate principal amount of each series of notes issued under the indenture at a redemption price equal to 106.75% for the Senior Notes due 2017 and 107.625% for the Senior Notes due 2020, plus accrued and unpaid interest thereon. If the Company undergoes a change of control, it must offer to repurchase the Senior Notes due 2017 and the Senior Notes due 2020 at 101% of the principal amount, plus accrued and unpaid interest. The Senior Notes due 2017 and the Senior Notes due 2020 are not guaranteed by any of the Company’s subsidiaries. Senior Notes due 2018 During 2010, Aircastle Limited issued $300,000 aggregate principal amount of 9.75% Senior Notes due 2018 (the "2010-1 Notes”). The 2010-1 Notes will mature on August 1, 2018 and bear interest at the rate of 9.75% per annum, payable semi-annually in arrears on February 1 and August 1, commencing on February 1, 2011 to holders of record on the immediately preceding January 15 and July 15. During 2011, we issued an additional $150,000 aggregate principal amount of 9.75% Senior Notes due 2018 (the “2011-1 Notes” and together with the 2010-1 Notes, the “Senior Notes due 2018”). The 2011-1 Notes will mature on August 1, 2018 and bear interest at the rate of 9.75% per annum, payable semi-annually in arrears on February 1 and August 1, commencing on February 1, 2012 to holders of record on the immediately preceding January 15 and July 15. The 2010-1 Notes and the 2011-1 Notes are treated as a single class under the indenture. The Company may redeem all or a portion of the Senior Notes due 2018 at any time on or after August 1, 2014 at a premium decreasing ratably to zero, plus accrued and unpaid interest. In addition, prior to August 1, 2013 the Company may redeem up to 35% of the aggregate principal amount of the Senior Notes due 2018 with the net cash proceeds of certain equity offerings at a redemption price equal to 109.75%, plus accrued and unpaid interest. If the Company undergoes a change of control, it must offer to repurchase the Senior Notes due 2018 at 101% of the principal amount, plus accrued and unpaid interest. The Senior Notes due 2018 are not guaranteed by any of the Company’s subsidiaries. Senior Notes due 2019 During 2012, Aircastle Limited issued $500,000 aggregate principal amount of 6.25% Senior Notes due 2019 (the “Senior Notes due 2019”). The Senior Notes due 2019 mature on December 1, 2019 and bear interest at the rate of 6.25%. Interest on both series of notes is payable on June 1 and December 1 of each year, commencing on June 1, 2013 to holders of record on the immediately preceding May 15 and November 15. The Company may redeem the Senior Notes due 2019 at any time, up to 35% of the aggregate principal amount of the notes issued under the indenture at a redemption price equal to 106.25%, plus accrued and unpaid interest thereon. If the Company undergoes a change of control, it must offer to repurchase the Senior Notes due 2019 at 101% of the principal amount, plus accrued and unpaid interest. The Senior Notes due 2019 are not guaranteed by any of the Company’s subsidiaries. We used the net proceeds of the private placement for general corporate purposes, including the purchase of aviation assets. 2012 Revolving Credit Facility On December 19, 2012, the Company entered into a three-year $150,000 senior unsecured revolving credit facility with a group of banks (the “2012 Revolving Credit Facility”) which replaced the 2010 Revolving Credit Facility. The 2012 F - 22 Aircastle Limited and Subsidiaries Notes to Consolidated Financial Statements (Dollars in thousands, except per share amounts) Revolving Credit Facility provides loans in amounts up to $150,000 for working capital and other general corporate purposes. We have not drawn on the 2012 Revolving Credit Facility as of December 31, 2012. During the fourth quarter of 2012, we wrote-off $120 of deferred financing fees related to the 2010 Revolving Credit Facility, which is reflected in interest expense on the consolidated statement of income. Maturities of the secured and unsecured debt financings over the next five years and thereafter are as follows: 2013 2014 2015 2016 2017 Thereafter Total ______________ $ $ 281,611 265,401 260,770 224,398 769,582 1,796,272 3,598,034 (1) (1) Included in the above table are forecasted principal payments for Securitizations No. 1 and No. 2. These forecasted payments are based on excess cash flows available from forecasted lease rentals, net maintenance funding (which is forecasted to be neutral after the first 12 months) and proceeds from asset dispositions after the payment of forecasted operating expenses and interest payments. As of December 31, 2012, we are in compliance with all applicable covenants in our financings. Note 7. Shareholders’ Equity and Share Based Payment In January 2006, the board of directors (the “Board”) and shareholders managed by affiliates of Fortress Investment Group LLC (the "Fortress Shareholders") adopted the Aircastle Investment Limited 2005 Equity and Incentive Plan, and the Board and the Fortress Shareholders approved an amendment to and restatement thereof on July 20, 2006 (as so amended and restated, the “2005 Plan”). The purpose of the 2005 Plan is to provide additional incentive to selected management employees. The 2005 Plan provides that the Company may grant (a) share options, (b) share appreciation rights, (c) awards of restricted common shares, deferred shares, performance shares, unrestricted shares or other share-based awards, or (d) any combination of the foregoing. Four million shares were reserved under the 2005 Plan, increasing by 100,000 each year beginning in 2007 through and including 2016. The 2005 Plan provides that grantees of restricted common shares will have all of the rights of shareholders, including the right to receive dividends, other than the right to sell, transfer, assign or otherwise dispose of the shares until the lapse of the restricted period. Generally, the restricted common shares vest over 3 or 5 year periods based on continued service and are being expensed on a straight line basis over the requisite service period of the awards. The terms of the grants provide for accelerated vesting under certain circumstances, including termination without cause following a change of control. F - 23 Aircastle Limited and Subsidiaries Notes to Consolidated Financial Statements (Dollars in thousands, except per share amounts) A summary of the fair value of non-vested shares for the years ended December 31, 2010, 2011 and 2012 is as follows: Non vested Shares Non-vested at January 1, 2010 Granted Cancelled Vested Non-vested at December 31, 2010 Granted Cancelled Vested Non-vested at December 31, 2011 Granted Cancelled Vested Non-vested at December 31, 2012 Shares (in 000’s) 1,678.2 $ 205.1 (7.1) (712.5) 1,163.7 311.9 (6.5) (526.3) 942.8 241.0 (110.8) (511.8) 561.2 $ Weighted Average Grant Date Fair Value 12.73 10.14 9.62 14.15 11.42 12.95 9.81 14.10 10.44 13.26 10.56 10.28 12.21 The fair value of the restricted common shares granted in 2010, 2011 and 2012 were determined based upon the market price of the shares at the grant date. The total unrecognized compensation cost, adjusted for estimated forfeitures, related to all non-vested shares as of December 31, 2012, in the amount of $3,151, is expected to be recognized over a weighted average period of 1.59 years. On May 24, 2012, the Company's Board of Directors authorized the repurchase of up to $50,000 of the Company's common shares. Under the program, the Company may purchase its common shares from time to time in the open market or in privately negotiated transactions. In August 2012, we repurchased 2,500,002 common shares from affiliates of the Fortress Investment Group LLC at a total cost of $28,500 under the repurchase program and we paid no commissions on this transaction. On November 5, 2012, the Company's Board of Directors authorized an increase in the Company's share repurchase program by up to an additional $28,500 of its common shares, bringing the total back up to $50,000 of its common shares in the aggregate. During the fourth quarter of 2012, we repurchased an additional 936,500 common shares at a total cost of $11,421 including commissions. In addition, as of February 14, 2013, we repurchased an additional 679,292 common shares at an aggregate cost of $8,579, including commissions during 2013. Accordingly, as of February 14, 2013, under this program we have repurchased a total of 1,615,792 common shares at a total cost of $20,000 including commissions, at an average price per share of $12.38, and the remaining dollar value of common shares that may be purchased under the program is $30,000. F - 24 Aircastle Limited and Subsidiaries Notes to Consolidated Financial Statements (Dollars in thousands, except per share amounts) Note 8. Dividends The following table sets forth the quarterly dividends declared by our Board of Directors for the three years ended December 31, 2012: Declaration Date December 14, 2009 March 12, 2010 May 25, 2010 September 21, 2010 December 6, 2010 March 8, 2011 June 27, 2011 September 14, 2011 November 7, 2011 February 17, 2012 May 2, 2012 August 1, 2012 November 5, 2012 Dividend per Common Share Aggregate Dividend Amount $ 0.100 $ 0.100 $ 0.100 $ 0.100 $ 0.100 $ 0.100 $ 0.125 $ 0.125 $ $ $ $ $ $ $ $ 7,955 7,951 7,947 7,947 7,964 7,857 9,364 9,035 Record Date Payment Date December 31, 2009 January 15, 2010 March 31, 2010 June 30, 2010 April 15, 2010 July 15, 2010 September 30, 2010 October 15, 2010 December 31, 2010 January 14, 2011 March 31, 2011 July 7, 2011 April 15, 2011 July 15, 2011 September 30, 2011 October 14, 2011 $ 0.150 $ 10,839 November 30, 2011 December 15, 2011 $ 0.150 $ 10,865 February 29, 2012 March 15, 2012 $ 0.150 $ 10,847 May 31, 2012 June 15, 2012 $ 0.150 $ 10,464 August 31, 2012 September 14, 2012 $ 0.165 $ 11,493 November 30, 2012 December 14, 2012 Note 9. 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 EPS 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: Weighted-average shares: Common shares outstanding Restricted common shares Total weighted-average shares Percentage of weighted-average shares: Common shares outstanding Restricted common shares Total F - 25 Year Ended December 31, 2010 2011 2012 78,488,031 74,686,150 70,716,963 1,118,542 956,433 587,813 79,606,573 75,642,583 71,304,776 Year Ended December 31, 2010 2011 2012 98.59% 1.41% 98.74% 1.26% 99.18% 0.82% 100.00% 100.00% 100.00% Aircastle Limited and Subsidiaries Notes to Consolidated Financial Statements (Dollars in thousands, except per share amounts) The calculations of both basic and diluted earnings per share for the years ended December 31, 2010, 2011 and 2012 are as follows: Earnings per common share — Basic: Income from continuing operations Less: Distributed and undistributed earnings allocated to restricted common shares(a) Income from continuing operations available to common shareholders — Basic Weighted-average common shares outstanding — Basic Net income per common share — Basic Earnings per common share — Diluted: Income from continuing operations Less: Distributed and undistributed earnings allocated to restricted common shares(a) Income from continuing operations available to common shareholders — Basic Weighted-average common shares outstanding — Basic Effect of diluted shares Weighted-average common shares outstanding — Diluted Net income per common share — Diluted _____________ Year Ended December 31, 2010 2011 2012 $ $ $ $ $ 65,816 (925) $ 124,270 (1,571) 64,891 $ 122,699 $ $ 32,868 (271) 32,597 78,488,031 74,686,150 70,716,963 0.83 $ 1.64 65,816 $ 124,270 (925) (1,571) 64,891 $ 122,699 $ $ $ 0.46 32,868 (271) 32,597 78,488,031 — (b) 74,686,150 — (b) 70,716,963 — (b) 78,488,031 74,686,150 70,716,963 $ 0.83 $ 1.64 $ 0.46 (a) For the years ended December 31, 2010, 2011 and 2012, distributed and undistributed earnings to restricted shares is 1.41%, 1.26% and 0.82%, respectively, of net income. The amount of restricted share forfeitures for all periods present is immaterial to the allocation of distributed and undistributed earnings. (b) For the years ended December 31, 2010, 2011 and 2012, we have no dilutive shares. Note 10. 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 2035. 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. The sources of income from continuing operations before income taxes for the years ended December 31, 2010, 2011 and 2012 were as follows: U.S. operations Non-U.S. operations Income from continuing operations before income taxes Year Ended December 31, 2010 2011 2012 $ 1,661 $ 1,551 $ 2,016 70,751 130,551 38,697 $ 72,412 $132,102 $ 40,713 F - 26 Aircastle Limited and Subsidiaries Notes to Consolidated Financial Statements (Dollars in thousands, except per share amounts) The components of the income tax provision from continuing operations for the year ended December 31, 2010, 2011 and 2012 consisted of the following: Current: United States: Federal State Non-U.S Current income tax provision Deferred: United States: Federal State Non-U.S Deferred income tax provision (benefit) Total Year Ended December 31, 2010 2011 2012 $ 1,874 $ 643 $ 48 947 2,869 712 161 2,854 3,727 75 1,499 2,217 982 355 4,278 5,615 148 131 738 1,017 2,201 409 4,218 6,828 $ 6,596 $ 7,832 $ 7,845 Significant components of the Company’s deferred tax assets and liabilities at December 31, 2010, 2011 and 2012 consisted of the following: Deferred tax assets: Non-cash share based payments Net operating loss carry forwards Interest rate derivatives Other Total deferred tax assets Deferred tax liabilities: Accelerated depreciation Other Total deferred tax liabilities Net deferred tax liabilities Year Ended December 31, 2010 2011 2012 $ 2,148 $ 1,420 $ 1,180 6,708 2,789 260 18,213 19,427 1,931 472 1,345 255 11,905 22,036 22,207 (23,468) (39,462) (46,551) (646) (948) (1,666) (24,114) (40,410) (48,217) $ (12,209) $ (18,374) $ (26,010) The Company had approximately $5,754 of net operating loss (“NOL”) carry forwards available at December 31, 2012 to offset future taxable income subject to U.S. graduated tax rates. If not utilized, these carry forwards begin to expire in 2029. The Company also had NOL carry forwards of $367,842 with no expiration date to offset future Irish and Mauritius taxable income. Deferred tax assets and liabilities are included in other assets and accounts payable and accrued liabilities, respectively, in the accompanying consolidated balance sheets. The increase in the NOL carry forwards from 2010 to 2011 is primarily attributable to tax depreciation claimed in Mauritius, where 100% of the asset is allowed to be depreciated in the year placed in service. We do not expect to incur income taxes on future distributions of undistributed earnings of non-U.S. subsidiaries and, accordingly, no deferred income taxes have been provided for the distributions of such earnings. As of December 31, 2012 we have elected to permanently reinvest our accumulated undistributed U.S. earnings of $11,260. Accordingly, no U.S. withholding taxes have been provided. Withholding tax of $3,378 would be due if such earnings were remitted. 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 F - 27 Aircastle Limited and Subsidiaries Notes to Consolidated Financial Statements (Dollars in thousands, except per share amounts) 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 from continuing operations at December 31, 2010, 2011 and 2012 consisted of the following: Notional U.S. federal income tax expense at the statutory rate: U.S. state and local income tax, net Non-U.S. operations: Bermuda Ireland Other low tax jurisdictions Non-deductible expenses in the U.S. Other Provision for income taxes Year Ended December 31, 2010 2011 2012 $ 25,344 $ 46,236 $ 14,250 121 92 140 (12,971) (29,105) 2,764 (6,891) (47) 1,187 (147) (7,907) (2,090) 847 (241) (5,368) (4,189) 281 (33) $ 6,596 $ 7,832 $ 7,845 The Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities. We did not have any unrecognized tax benefits. We conduct business globally and, as a result, the Company and its subsidiaries or branches are subject to foreign, U.S. federal and various state and local income taxes, as well as withholding taxes. In the normal course of business the Company is subject to examination by taxing authorities throughout the world, including such major jurisdictions as Ireland and the United States. With few exceptions, the Company and its subsidiaries or branches remain subject to examination for all periods since inception. Our policy is that we will recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. We did not accrue interest or penalties associated with any unrecognized tax benefits, nor was any interest expense or penalty recognized during the year. Note 11. Interest, Net The following table shows the components of interest, net for the years ended December 31, 2010, 2011 and 2012: Interest on borrowings, net settlements on interest rate derivatives, and other liabilities Hedge ineffectiveness losses (gains) Amortization related to deferred losses Amortization of deferred financing fees Interest Expense Less interest income Less capitalized interest Interest, net Year Ended December 31, 2010 2011 2012 $ 153,064 $ 172,798 $ 178,601 5,039 9,634 15,065 (101) 23,078 15,271 2,893 30,777 12,449 182,802 211,046 224,720 (413) (390) (597) (4,127) (6,506) (1,315) $ 178,262 $ 204,150 $ 222,808 F - 28 Aircastle Limited and Subsidiaries Notes to Consolidated Financial Statements (Dollars in thousands, except per share amounts) Note 12. Commitments and Contingencies Rent expense, primarily for the corporate office and sales and marketing facilities, was approximately $1,135, $1,163 and $955 for the years ended December 31, 2010, 2011 and 2012, respectively. As of December 31, 2012, Aircastle is obligated under non-cancelable operating leases relating principally to office facilities in Stamford, Connecticut; Dublin, Ireland; and Singapore for future minimum lease payments as follows: December 31, 2013 2014 2015 2016 2017 Thereafter Total Amount $ 1,095 1,133 1,142 951 736 3,897 $ 8,954 At December 31, 2012, we had no commitments to acquire, convert and/or modify aircraft. Note 13. 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. We held the following interest rate derivatives as of December 31, 2012: Derivative Liabilities Current Notional Amount Effective Date Maturity Date Future Maximum Notional Amount Floating Rate Fixed Rate Balance Sheet Location Fair Value Hedged Item Interest rate derivatives designated as cash flow hedges: Securitization No. 1(1) $ 240,004 Jun-06 Jun-16 $ 240,004 1M LIBOR + 0.27% 5.78% Securitization No. 2 585,828 Jun-12 Jun-17 585,828 1M LIBOR 1.26% to 1.28% Total interest rate derivatives designated as cash flow hedges 825,832 825,832 Fair value of derivative liabilities Fair value of derivative liabilities Interest rate derivatives not designated as cash flow hedges: Securitization No. 1(1) 94,471 Jun-06 Jun-16 94,471 1M LIBOR + 0.27% 5.78% Fair value of derivative liabilities Total interest rate derivatives not designated as cash flow hedges 94,471 Total interest rate derivative liabilities $ 920,303 94,471 $ 920,303 F - 29 $ 36,074 11,702 47,776 14,202 14,202 $ 61,978 Aircastle Limited and Subsidiaries Notes to Consolidated Financial Statements (Dollars in thousands, except per share amounts) ___________ (1) One of the interest rate derivatives hedging Securitization No. 1 was de-designated on December 28, 2012. The effective portion of the loss of $32,246 remained in other comprehensive loss on our consolidated balance sheet and will amortize into interest expense using the interest rate method. We re- designated 65% of the hedge notional or $175,445 with a fair value of $26,371 on December 28, 2012. The change in the undesignated 35% of the hedge notional or $94,471 with a fair value of $14,200 as of December 28, 2012 will be recorded in other income (loss) on our consolidated statement of income. In connection with the repayment of Term Financing No. 1, two interest rate derivatives hedging the facility were terminated on April 4, 2012 resulting in a net deferred loss of $50,429 which is being amortized into interest expense using the interest rate method. The weighted average interest pay rates of these derivatives at December 31, 2010, 2011 and 2012 were 5.01%, 5.03% and 2.91%, respectively. For the year ended December 31, 2012, the amount of loss reclassified from accumulated other comprehensive income (“OCI”) into interest expense related to net interest settlements on active interest rate derivatives was $46,469. The amount of loss expected to be reclassified from OCI into interest expense over the next 12 months related to net interest settlements on active interest rate derivatives is $17,491. Our interest rate derivatives involve counterparty credit risk. As of December 31, 2012, our interest rate derivatives are held with the following counterparties: JP Morgan Chase Bank NA, Citibank Canada NA and Wells Fargo Bank NA. All of our counterparties or guarantors of these counterparties are considered investment grade (senior unsecured ratings of Baa2 or above) by Moody’s Investors Service. All are also considered investment grade (long-term foreign issuer ratings of A- 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 December 31, 2012, accrued interest payable included in accounts payable, accrued expenses, and other liabilities on our consolidated balance sheet was $1,062 related to interest rate derivatives designated as cash flow hedges and $56 related to interest rate derivatives not designated as cash flow hedges. Following is the effect of interest rate derivatives on the statement of financial performance for the year ended December 31, 2012: Effective Portion Amount of Gain or (Loss) Recognized in OCI on Derivative (a) Location of Gain or (Loss) Reclassified from Accumulated OCI into Income Amount of Gain or (Loss) Reclassified from Accumulated OCI (b) into Income Ineffective Portion Location of Gain or (Loss) Recognized in Income on Derivative Amount of Gain or (Loss) Recognized in Income on (c) Derivative $ (14,921) Interest expense $ (76,312) Interest expense $ (5,123) Derivatives in ASC 815 Cash Flow Hedging Relationships Interest rate derivatives ______________ (a) This represents the change in fair market value of our interest rate derivatives since year end, net of taxes, offset by the amount of actual cash paid related to the net settlements of the interest rate derivatives for each of the twelve months ended December 31, 2012. (b) This represents the amount of actual cash paid, net of taxes, related to the net settlements of the interest rate derivatives for each of the twelve months ended December 31, 2012 plus any effective amortization of net deferred interest rate derivative losses. (c) This represents both realized and unrealized ineffectiveness incurred during the twelve months ended December 31, 2012. Derivatives Not Designated as Hedging Instruments under ASC 815 Interest rate derivatives F - 30 Location of Gain or (Loss) Recognized in Income On Derivative Amount of Gain or (Loss) Recognized in Income on Derivative Other income (expense) $ 597 Aircastle Limited and Subsidiaries Notes to Consolidated Financial Statements (Dollars in thousands, except per share amounts) On an ongoing basis, terminated swap notionals are evaluated against debt forecasts. To the extent that interest payments are deemed remote to occur, deferred gains or losses are accelerated into interest expense as applicable. For the year ended December 31, 2012, the amount of deferred net loss reclassified from OCI into interest expense related to our terminated interest rate derivatives was $30,676. The amount of deferred net loss expected to be reclassified from OCI into interest expense over the next 12 months related to our terminated interest rate derivatives is $29,187, of which $17,843 relates to Term Financing No. 1 interest rate derivatives terminated in 2012, $2,551 relates to Term Financing No. 1 derivatives terminated in 2008, $7,918 relates to ECA Term Financings for New A330 Aircraft and $875 relates to other financings. For the year ended December 31, 2012, the amount of deferred loss reclassified from OCI into interest expense related to our designated interest rate derivative was $101. The amount of deferred loss expected to be reclassified from OCI into interest expense over the next 12 months related to our designated interest rate derivative under our Securitization No. 1 is $9,592. The following table summarizes amounts charged directly to the consolidated statement of income for the years ended December 31, 2010, 2011, and 2012 related to our interest rate derivative contracts: Interest Expense: Hedge ineffectiveness losses (gains) Amortization: Accelerated amortization of deferred losses(1) Amortization of loss of designated interest rate derivative Amortization of deferred (gains) losses Total Amortization Total charged to interest expense Other Income (Expense): Mark to market gains (losses) on undesignated hedges Total charged to other income (expense) _____________ Year Ended December 31, 2010 2011 2012 $ 5,039 $ (101) $ 2,893 766 — 8,508 — — 101 8,868 14,570 30,676 9,634 $ 14,673 23,078 $ 22,977 30,777 $ 33,670 $ $ (860) $ (848) $ (860) $ (848) $ (597) (597) (1) For the year ended December, 2011, includes accelerated amortization of deferred hedge losses in the amount of $8,501 related to three aircraft sold in 2011. Note 14. Other Assets The following table describes the principal components of other assets on our consolidated balance sheet as of: Debt investments Deferred debt issuance costs, net of amortization of $55,173 and $54,146, respectively Deferred federal income tax asset Lease incentives and lease premiums, net of amortization of $19,294 and $26,902, respectively Other assets Total other assets December 31, 2011 2012 $ — $ 40,388 35,960 22,036 20,490 11,561 55,087 22,207 62,822 6,129 $ 90,047 $ 186,633 F - 31 Aircastle Limited and Subsidiaries Notes to Consolidated Financial Statements (Dollars in thousands, except per share amounts) Note 15. Accounts Payable, Accrued Expenses and Other Liabilities The following table describes the principal components of accounts payable, accrued expenses and other liabilities recorded on our consolidated balance sheet as of: Accounts payable and accrued expenses Deferred federal income tax liability Accrued interest payable Lease discounts, net of amortization of $30,830 and $7,328 respectively Total accounts payable, accrued expenses and other liabilities December 31, 2011 2012 $ 34,931 $ 21,507 40,410 27,849 2,242 48,217 38,273 596 $ 105,432 $ 108,593 Note 16. Quarterly Financial Data (Unaudited) Quarterly results of our operations for the years ended December 31, 2011 and 2012 are summarized below: 2011 Revenues Net income Basic earnings per share: Net income Diluted earnings per share: Net income 2012 Revenues Net income (loss) Basic earnings per share: Net income (loss) Diluted earnings per share: Net income (loss) First Quarter Second Quarter Third Quarter Fourth Quarter $ 157,914 $ 148,838 $ 141,507 $ 156,938 $ 42,677 $ 23,309 $ 22,665 $ 35,619 $ $ 0.54 $ 0.30 $ 0.31 $ 0.49 0.54 $ 0.30 $ 0.31 $ 0.49 $ 164,915 $ 172,181 $ 172,866 $ 176,610 $ 32,602 $ 16,324 $ (45,847) $ 29,789 $ $ 0.45 $ 0.23 $ (0.65) $ 0.43 0.45 $ 0.23 $ (0.65) $ 0.43 The sum of the quarterly earnings per share amounts may not equal the annual amount reported since per share amounts are computed independently for each period presented. F - 32 SIGNATURES Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, Aircastle Limited has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: February 22, 2013 Aircastle Limited By: /s/ Ron Wainshal Ron Wainshal Chief Executive Officer and Director Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of Aircastle Limited and in the capacities and on the date indicated. SIGNATURE TITLE DATE /s/ Ron Wainshal Ron Wainshal /s/ Michael Inglese Michael Inglese /s/ Aaron Dahlke Aaron Dahlke /s/ Peter V. Ueberroth Peter V. Ueberroth /s/ Ronald W. Allen Ronald W. Allen Chief Executive Officer and Director February 22, 2013 Chief Financial Officer February 22, 2013 Chief Accounting Officer February 22, 2013 Chairman of the Board February 22, 2013 Director February 22, 2013 /s/ Giovanni Bisignani Director February 22, 2013 Giovanni Bisignani /s/ Douglas A. Hacker Douglas A. Hacker /s/ Ronald L. Merriman Ronald L. Merriman /s/ Charles W. Pollard Charles W. Pollard Director Director Director S - 1 February 22, 2013 February 22, 2013 February 22, 2013 AIRCASTLE LIMITED COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (Dollars in thousands) Exhibit 12.1 Fixed Charges: Interest expense Capitalized interest Portion of rent expense representative of interest Total fixed charges Earnings: Income from continuing operations before income taxes Fixed charges from above Less capitalized interest from above Amortization of capitalized interest Earnings (as defined) Ratio of earnings to fixed charges Year Ended December 31, 2010 2011 2012 $ 182,802 $ 211,046 $ 224,123 4,127 367 6,506 381 1,315 307 $ 187,296 $ 217,933 $ 225,745 $ 72,412 $ 132,102 $ 40,713 187,296 217,933 225,746 (4,127) (6,506) 397 597 (1,315) 800 $ 255,978 $ 344,126 $ 265,944 1.37 x 1.58 x 1.18 x Subsidiaries of Aircastle Limited As of December 31, 2012 Exhibit 21.1 Name of Subsidiary 1 ABH 12 Limited 2 ACS 2007-1 Limited 3 ASC 2007-1 Luxembourg S.à.r.l. 4 ACS 2008-1 Limited 5 ACS 2008-2 Limited 6 ACS Aircraft Finance Bermuda Limited 7 ACS Aircraft Finance Ireland 2 Limited 8 ACS Aircraft Finance Ireland 3 Limited 9 ACS Aircraft Finance Ireland Public Limited Company Aircastle Advisor Asia Pacific Limited AHCL Two Limited AHCL Luxembourg Finance Company 10 ACS Aircraft Leasing (Ireland) Limited 11 AHCL Securities Limited 12 13 14 AYR Bermuda Limited 15 AYR Delaware LLC 16 AYR E Note Limited 17 AYR Freighter LLC 18 19 Aircastle Advisor (International) Limited 20 Aircastle Advisor (Ireland) Limited 21 Aircastle Advisor LLC 22 Aircastle Bermuda Holding Limited 23 Aircastle Bermuda Securities Limited 24 Aircastle Delaware Holdings LLC 25 Aircastle Delaware Holdings 2 LLC 26 Aircastle Holding Corporation Limited 27 Aircastle Investment Holdings 2 Limited 28 Aircastle Investment Holdings 3 Limited 29 Aircastle Investment Holdings Limited 30 Aircastle Ireland Holding Limited 31 32 Aircraft MSN 138 LLC 33 Aircraft MSN 148 LLC 34 Aircraft MSN 303 LLC 35 Aircraft MSN 306 LLC 36 Aircraft MSN 311 LLC 37 Aircraft MSN 313 LLC 38 Aircraft MSN 324 LLC 39 Aircraft MSN 368 LLC 40 Aircraft MSN 1006 LLC 41 Aircraft MSN 1012 LLC 42 Aircraft MSN 1047 LLC 43 Aircraft MSN 1054 LLC Aircastle Singapore Pte. Limited Jurisdiction Bermuda Bermuda Grand Duchy of Luxembourg Bermuda Bermuda Bermuda Ireland Ireland Ireland Ireland Bermuda Bermuda Grand Duchy of Luxembourg Bermuda Delaware Bermuda Delaware Bermuda Bermuda Ireland Delaware Bermuda Bermuda Delaware Delaware Bermuda Bermuda Bermuda Bermuda Ireland Singapore Delaware Delaware Delaware Delaware Delaware Delaware Delaware Delaware Delaware Delaware Delaware Delaware  Name of Subsidiary 44 Aircraft MSN 1055 LLC 45 Aircraft MSN 1059 LLC 46 Aircraft MSN 1067 LLC 47 Aircraft MSN 1099 LLC 48 Aircraft MSN 1101 LLC 49 Aircraft MSN 1119 LLC 50 Aircraft MSN 1364 LLC 51 Aircraft MSN 24061 LLC 52 Aircraft MSN 24066 LLC 53 Aircraft MSN 24226 LLC 54 Aircraft MSN 24541 LLC 55 Aircraft MSN 24838 LLC 56 Aircraft MSN 24952 LLC 57 Aircraft MSN 24975 LLC 58 Aircraft MSN 25000 LLC 59 Aircraft MSN 25076 LLC 60 Aircraft MSN 25117 LLC 61 Aircraft MSN 25587 LLC 62 Aircraft MSN 25702 LLC Aircraft MSN 26983 LLC 63 Aircraft MSN 26985 LLC 64 Aircraft MSN 26986 LLC 65 Aircraft MSN 26987 LLC 66 Aircraft MSN 26988 LLC 67 68 Aircraft MSN 26992 LLC 69 Aircraft MSN 27137 LLC 70 Aircraft MSN 27152 LLC 71 Aircraft MSN 27183 LLC 72 Aircraft MSN 27342 LLC 73 Aircraft MSN 27681 LLC 74 Aircraft MSN 28038 LLC 75 Aircraft MSN 28213 LLC 76 Aircraft MSN 28231 LLC 77 Aircraft MSN 28386 LLC 78 Aircraft MSN 28414 LLC 79 Aircraft MSN 28578 LLC 80 Aircraft MSN 28620 LLC Aircraft MSN 28626 LLC 81 82 Aircraft MSN 28867 LLC 83 Aircraft MSN 29045 LLC 84 Aircraft MSN 29046 LLC 85 Aircraft MSN 29246 LLC 86 Aircraft MSN 29247 LLC 87 Aircraft MSN 29250 LLC 88 Aircraft MSN 29329 LLC 89 Aircraft MSN 29345 LLC 90 Aircraft MSN 29375 LLC 91 Aircraft MSN 29916 LLC 92 Aircraft MSN 29917 LLC Jurisdiction Delaware Delaware Delaware Delaware Delaware Delaware Delaware Delaware Delaware Delaware Delaware Delaware Delaware Delaware Delaware Delaware Delaware Delaware Delaware Delaware Delaware Delaware Delaware Delaware Delaware Delaware Delaware Delaware Delaware Delaware Delaware Delaware Delaware Delaware Delaware Delaware Delaware Delaware Delaware Delaware Delaware Delaware Delaware Delaware Delaware Delaware Delaware Delaware Delaware  Name of Subsidiary Aircraft MSN 19000449 LLC Aircraft MSN 19000458 LLC Aircraft MSN 19000575 LLC Aircraft MSN 19000588 LLC 93 Aircraft MSN 29918 LLC 94 Aircraft MSN 29919 LLC 95 Aircraft MSN 29920 LLC Aircraft MSN 29927 LLC 96 97 Aircraft MSN 29930 LLC 98 Aircraft MSN 32907 LLC 99 Aircraft MSN 35233 LLC 100 Aircraft MSN 35235 LLC 101 Aircraft MSN 35236 LLC 102 Aircraft MSN 35237 LLC 103 Aircraft MSN 35299 LLC 104 Aircraft MSN 48445 LLC 105 Aircraft MSN 48778 LLC 106 Aircraft MSN 48779 LLC 107 108 109 110 111 Constellation Aircraft Leasing (France) SARL 112 Constitution Aircraft Leasing (Ireland) 3 Limited 113 Constitution Aircraft Leasing (Ireland) 4 Limited 114 Constitution Aircraft Leasing (Ireland) 5 Limited 115 Constitution Aircraft Leasing (Ireland) 6 Limited 116 Constitution Aircraft Leasing (Ireland) 7 Limited 117 Constitution Aircraft Leasing (Ireland) 8 Limited 118 Constitution Aircraft Leasing (Ireland) 9 Limited 119 Constitution Aircraft Leasing (Ireland) 1086 Limited 120 Constitution Aircraft Leasing (Ireland) 28386 Limited 121 Delphie Aircraft Leasing Limited 122 Dunvegan Aircraft Leasing (Ireland) Limited 123 Emer Aircraft Leasing (Ireland) Limited 124 Endeavor Aircraft Leasing (Sweden) AB 125 Endeavor Aircraft Leasing (Sweden) 2 AB 126 Endeavor Aircraft Leasing (Sweden) 3 AB 127 Enterprise Aircraft Leasing (France) SARL 128 Grayston Aircraft Leasing Limited 129 130 131 132 133 134 Macleod Aircraft Leasing (Labuan) Limited 135 Macstay Aircraft Leasing Limited 136 Mohawk Aircraft Leasing Limited 137 Momo Aircraft Leasing Limited 138 Perdana Aircraft Leasing (Labuan) Limited 139 Really Useful Aircraft Leasing (Ireland) 1 Limited 140 Really Useful Aircraft Leasing (Ireland) 2 Limited 141 Really Useful Aircraft Leasing (Ireland) 3 Limited Intrepid Aircraft Leasing (France) SARL Java Aircraft Leasing (France) SARL Jimin Aircraft Leasing Limited Kelsterbach Aircraft Leasing (Ireland) Limited Klaatu Aircraft Leasing (Ireland) Limited Jurisdiction Delaware Delaware Delaware Delaware Delaware Delaware Delaware Delaware Delaware Delaware Delaware Delaware Delaware Delaware Delaware Delaware Delaware Delaware France Ireland Ireland Ireland Ireland Ireland Ireland Ireland Ireland Ireland Bermuda Ireland Ireland Sweden Sweden Sweden France Cayman Islands France France Bermuda Ireland Ireland Labuan Bermuda Bermuda Bermuda Labuan Ireland Ireland Ireland  Name of Subsidiary 142 Sulaco Aircraft Leasing (Ireland) Limited 143 Thunderbird 1 Leasing Limited 144 Thunderbird 2 Leasing Limited 145 Thunderbird 3 Leasing Limited 146 Thunderbird 4 Leasing Limited 147 Thunderbird 5 Leasing Limited 148 Thunderbird 6 Leasing Limited 149 150 Zebra Aircraft Leasing Limited 151 Zephyr Aircraft Leasing B.V. Trojan Aircraft Leasing (France) SARL Jurisdiction Ireland Mauritius Mauritius Mauritius Mauritius Mauritius Mauritius France Cayman Islands The Netherlands Consent of Independent Registered Public Accounting Firm We consent to the incorporation by reference in the Registration Statement (Form S-3 No. 333-182242) of Aircastle Limited and in the related Prospectus and the Registration Statement (Form S-8 No. 333-136385) pertaining to the Amended and Restated Aircastle Limited 2005 Equity and Incentive Plan of Aircastle Limited of our reports dated February 22, 2013, with respect to the consolidated financial statements of Aircastle Limited and the effectiveness of internal control over financial reporting of Aircastle Limited, included in this Annual Report (Form 10-K) for the year ended December 31, 2012. EXHIBIT 23.1 /s/ Ernst & Young LLP New York, New York February 22, 2013 Exhibit 31.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Ron Wainshal, certify that: 1. 2. 3. 4. I have reviewed this annual report on Form 10-K of Aircastle Limited; Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a. b. c. d. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and 5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): a. b. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. Date: February 22, 2013 /s/ Ron Wainshal Ron Wainshal Chief Executive Officer Exhibit 31.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Michael Inglese, certify that: 1. 2. 3. 4. I have reviewed this annual report on Form 10-K of Aircastle Limited; Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a. b. c. d. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and 5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): a. b. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. Date: February 22, 2013 /s/ Michael Inglese Michael Inglese Chief Financial Officer Exhibit 32.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report on Form 10-K of Aircastle Limited (the “Company”) for the fiscal year ended December 31, 2012, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Ron Wainshal, as Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. A signed original of this written statement required by section 906 has been provided to Aircastle Limited and will be retained by Aircastle Limited and furnished to the Securities and Exchange Commission or its staff upon request. /s/ Ron Wainshal Ron Wainshal Chief Executive Officer Date: February 22, 2013 CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 Exhibit 32.2 In connection with the Annual Report on Form 10-K of Aircastle Limited (the “Company”) for the fiscal year ended December 31, 2012, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Michael Inglese, as Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. A signed original of this written statement required by section 906 has been provided to Aircastle Limited and will be retained by Aircastle Limited and furnished to the Securities and Exchange Commission or its staff upon request. /s/ Michael Inglese Michael Inglese Chief Financial Officer Date: February 22, 2013 Owned Aircraft Portfolio at December 31, 2012 is as follows: Exhibit 99.1 Aircraft Group Narrowbody Aircraft Aircraft Type Engine Type Manufacturer Serial Number Date of Manufacture Financing A319-100 CFM56-5B6/2P A319-100 CFM56-5B6/2P A319-100 CFM56-5B6/2P A319-100 CFM56-5B6/2P A319-100 CFM56-5B6/2P A319-100 CFM56-5B6/2P A320-200 V2527-A5 A320-200 V2527-A5 A320-200 V2527-A5 A320-200 CFM56-5B4/P A320-200 CFM56-5B4/P A320-200 CFM56-5B4/P A320-200 V2527-A5 A320-200 CFM56-5B4/P A320-200 CFM56-5B4/P A320-200 CFM56-5B4/3 A320-200 CFM56-5B4/P A320-200 CFM56-5B4/P A320-200 CFM56-5B4/2P A320-200 CFM56-5B4/P A320-200 CFM56-5B4/P A320-200 CFM56-5B4/P A320-200 CFM56-5B4/P A320-200 CFM56-5B4/P A320-200 CFM56-5B4/2P A320-200 V2527-A5 A320-200 V2527-A5 A321-200 CFM56-5B3/P A321-200 CFM56-5B3/2P 737-700 CFM56-7B22 737-700 CFM56-7B22 737-700 CFM56-7B22 737-700 CFM56-7B22 737-700 CFM56-7B22 737-700 CFM56-7B22 737-700 CFM56-7B22 737-700 CFM56-7B24 737-800 CFM56-7B26 737-800 CFM56-7B26 737-800 CFM56-7B26 737-800 CFM56-7B27 737-800 CFM56-7B27 737-800 CFM56-7B26 737-800 CFM56-7B26 737-800 CFM56-7B26 1048 1086 1124 1160 1336 1388 667 739 743 828 925 967 990 1041 1047 1054 1059 1067 1081 1099 1101 1119 1316 1345 1370 2524 2564 1006 1012 28008 28009 28010 28013 28015 29045 29046 29078 28056 28213 28220 28227 28231 28381 28384 28386 Jul-99 Sep-99 Securitization No. 2 Securitization No. 2 Nov-99 Securitization No. 2 Jan-00 Oct-00 Dec-00 Apr-97 Nov-97 Nov-97 Jun-98 Jan-99 Apr-99 Securitization No. 1 Securitization No. 1 Securitization No. 1 Securitization No. 1 Securitization No. 1 Securitization No. 1 Unencumbered Unencumbered Securitization No. 1 May-99 Securitization No. 2 Jul-99 Aug-99 Sep-99 Aug-99 Sep-99 Oct-99 Oct-99 Nov-99 Dec-99 Oct-00 Nov-00 Jan-01 Sep-05 Oct-05 Apr-99 Apr-99 Feb-99 Mar-99 Oct-99 Oct-00 Feb-01 Dec-98 Jan-99 Apr-99 Jun-99 Jun-98 Mar-99 Jan-00 May-00 May-99 Nov-99 Nov-99 Securitization No. 2 Unencumbered Securitization No. 2 Unencumbered Unencumbered Securitization No. 2 Unencumbered Unencumbered Unencumbered Securitization No. 2 Securitization No. 2 Securitization No. 2 Securitization No. 2 Securitization No. 2 Securitization No. 2 Securitization No. 2 Securitization No. 2 Securitization No. 2 Securitization No. 2 Unencumbered Securitization No. 2 Securitization No. 2 Securitization No. 2 Securitization No. 1 Securitization No. 1 Securitization No. 2 Securitization No. 1 Securitization No. 1 Unencumbered Securitization No. 1 Securitization No. 1 Unencumbered 737-800 CFM56-7B26 737-800 CFM56-7B26 737-800 CFM56-7B26 737-800 CFM56-7B26 737-800 CFM56-7B26 737-800 CFM56-7B26 737-800 CFM56-7B26 737-800 CFM56-7B26 737-800 CFM56-7B26 737-800 CFM56-7B27 737-800 CFM56-7B26 737-800 CFM56-7B26 737-800 CFM56-7B24 737-800 CFM56-7B24 737-800 CFM56-7B24 737-800 CFM56-7B24 737-800 CFM56-7B24 737-800 CFM56-7B24 737-800 CFM56-7B24 737-800 CFM56-7B27 737-800 CFM56-7B26 737-800 CFM56-7B26 737-800 CFM56-7B24 737-800 CFM56-7B24 E-195 CF34-10E6 E-195 CF34-10E6 E-195 CF34-10E7 E-195 CF34-10E7 737-300 CFM56-3C1 737-300 CFM56-3C1 737-400 CFM56-3C1 737-400 CFM56-3C1 737-400 CFM56-3C1 737-400 CFM56-3C1 737-400 CFM56-3C1 737-400 CFM56-3C1 737-400 CFM56-3C1 737-400 CFM56-3C1 757-200 PW2037 757-200 PW2037 757-200 RB211-535E4 757-200 PW2040 757-200 RB211-535E4 757-200 RB211-535E4 757-200 PW2037 757-200 PW2037 757-200 RB211-535E4 757-200 RB211-535E4 28578 28620 28626 29036 29037 29246 29247 29250 29329 29345 29444 29445 29916 29917 29918 29919 29920 29927 29930 30296 34801 34802 34803 34804 449 458 575 588 24669 24672 24644 25147 27001 27003 27094 27826 28038 28867 27152 27183 27201 27203 27244 27245 27342 27681 27805 27806 Aug-98 May-00 Jul-00 Dec-98 Jan-99 Apr-00 Apr-00 Mar-01 Mar-99 Unencumbered Unencumbered Unencumbered Securitization No. 2 Securitization No. 2 Unencumbered Unencumbered Unencumbered Securitization No. 2 May-02 Unencumbered Jan-99 Jan-99 Unencumbered Unencumbered Mar-99 Unencumbered Jun-99 Jun-99 Unencumbered Unencumbered Aug-99 Unencumbered Sep-99 Dec-00 Jan-01 Feb-05 Dec-06 Feb-07 Unencumbered Unencumbered Unencumbered Unencumbered Unencumbered Unencumbered Mar-07 Unencumbered Jun-07 Unencumbered Jul-11 Jul-11 Sep-12 Dec-12 Unencumbered Unencumbered Unencumbered Unencumbered Aug-90 Securitization No. 1 Sep-90 Oct-90 Securitization No. 1 Securitization No. 2 May-91 Securitization No. 1 Jul-92 Jul-92 Feb-93 Feb-95 Securitization No. 1 Securitization No. 1 Securitization No. 1 Securitization No. 2 May-96 Securitization No. 2 Apr-97 Jun-93 Sep-93 Mar-94 Nov-94 Mar-94 Jul-94 Securitization No. 2 Unencumbered Unencumbered Securitization No. 2 Unencumbered Securitization No. 2 Securitization No. 2 Aug-94 Unencumbered Jul-95 Jan-95 Jan-95 Unencumbered Unencumbered Unencumbered Classic Narrowbody Aircraft Midbody Aircraft Widebody Aircraft Freighter Aircraft 757-200 RB211-535E4 27807 Feb-95 Unencumbered A330-200 Trent 772B-60 A330-200 Trent 772B-60 A330-200 Trent 772B-60 A330-200 Trent 772B-60 A330-200 PW4168A A330-200 PW4168A A330-200 Trent 772B-60 A330-200 Trent 772B-60 A330-200 Trent 772B-60 A330-200 Trent 772B-60 A330-200 Trent 772B-60 A330-200 Trent 772B-60 A330-200 Trent 772B-60 A330-300 CF6-80E1A2 A330-300 PW4168A A330-300 PW4168A A330-300 PW4168A A330-300 PW4168A A330-300 PW4168A A330-300 PW4168A A330-300 PW4168A 767-200ER CF6-80C2B2 767-300ER PW4060-1C 767-300ER CF6-80C2B6F 767-300ER PW4062-3 767-300ER PW4060-1 767-300ER PW4060-1 767-300ER CF6-80C2B6F 767-300ER CF6-80C2B6F 767-300ER PW4060-1/-3 767-300ER PW4060-3 767-300ER PW4062-3 767-300ER PW4062-3 767-300ER PW4062-3 767-300ER PW4062-3 767-300ER PW4062-3 767-300ER PW4062-3 777-200ER Trent 892B-17 777-300ER GE90-115B A310-300F CF6-80C2A2 A330-200F Trent 772B-60 A330-200F Trent 772B-60 A330-200F Trent 772B-60 737-300QC CFM56-3B2 737-300QC CFM56-3B1 303 306 311 313 324 343 1073 1191 1210 1223 1236 1293 1364 86 171 337 342 368 370 375 1055 24894 24541 24844 24849 24952 25000 25076 25117 25365 25587 26983 26985 26986 26987 26988 26992 28414 35299 502 1051 1062 1115 23835 23836 Oct-99 Nov-99 Dec-99 Jan-00 Feb-00 Jun-00 Dec-09 Feb-11 Mar-11 Unencumbered Unencumbered Unencumbered Securitization No. 2 Unencumbered Securitization No. 1 ECA Term Financing ECA Term Financing ECA Term Financing May-11 ECA Term Financing Jul-11 Apr-12 Dec-12 Jul-95 Apr-97 ECA Term Financing ECA Term Financing ECA Term Financing Unencumbered Securitization No. 2 May-00 Securitization No. 2 Jun-00 Nov-00 Dec-00 Jan-01 Oct-09 Nov-90 Aug-89 Aug-90 Sep-90 Mar-91 Aug-91 May-91 May-91 Oct-91 Feb-96 Jan-93 Apr-94 Sep-94 Dec-92 Jan-95 Jan-93 Securitization No. 2 Unencumbered Securitization No. 1 Securitization No. 1 Unencumbered Securitization No. 1 Securitization No. 2 Securitization No. 1 Securitization No. 2 Unencumbered Unencumbered Unencumbered Unencumbered Securitization No. 1 Securitization No. 2 Unencumbered Unencumbered Unencumbered Unencumbered Unencumbered Unencumbered May-98 Securitization No. 2 Oct-07 Bank Financing Aug-89 Sep-10 Nov-10 Jun-11 Nov-87 Feb-88 Securitization No. 1 ECA Term Financing ECA Term Financing ECA Term Financing Securitization No. 1 Securitization No. 1 737-300QC CFM56-3B1 737-300QC CFM56-3B1 747-400BCF PW4056-3 747-400BCF PW4056-3 747-400BCF PW4056-3 747-400BCF PW4056-3 747-400BCF PW4056-3 747-400BDSF PW4056-1C 747-400BDSF PW4056-1C 747-400BDSF PW4056 747-400BDSF PW4056-3 747-400BDSF CF6-80C2B1F 747-400F CF6-80C2B1F 747-400ERF CF6-80C2B5F 747-400ERF CF6-80C2B5F 747-400ERF CF6-80C2B5F 747-400ERF CF6-80C2B5F MD-11SF PW4462-3 MD-11F CF6-80C2D1F MD-11F CF6-80C2D1F 23837 24283 24061 24066 24226 24975 27137 25700 25702 27044 27068 29375 33749 35233 35235 35236 35237 48445 48778 48779 Mar-88 Feb-89 Mar-89 Jun-90 Sep-90 Feb-91 Aug-93 May-93 Nov-93 Sep-94 Oct-93 Sep-99 Oct-04 Jan-07 Jul-07 Feb-08 Apr-08 Apr-91 Oct-97 Securitization No. 1 Securitization No. 1 Securitization No. 2 Unencumbered Unencumbered Securitization No. 2 Unencumbered Unencumbered Unencumbered Unencumbered Unencumbered Unencumbered Unencumbered Securitization No. 2 Securitization No. 2 Unencumbered Unencumbered Securitization No. 2 Bank Financing Nov-97 Bank Financing corporate inFormation Board oF directors executiVe oFFicers corporate oFFices leGal counsel ron Wainshal chief executive officer michael inglese chief Financial officer david Walton chief operating officer, General counsel and secretary Joseph schreiner executive vice President, technical aaron dahlke chief Accounting officer 1 Audit committee 2 compensation committee 3 Nominating and corporate Governance committee c/o Aircastle Advisor llc 300 First stamford Place, 5th Floor stamford, ct 06902 203 504 1020 www.aircastle.com transFer aGent American stock transfer & trust company 59 maiden lane New York, NY 10038 800 937 5449 stock listinG NYse: AYr independent auditors ernst & Young llP Five times square New York, NY 10036 peter V. ueberroth 3 chairman of the Board; chairman contrarian Group, inc. ronald W. allen 1 director; President and chief executive officer Aaron’s inc. Giovanni Bisignani 3 director douglas a. hacker 1,2 director ronald l. merriman 1,2 director agnes mura director; President Agnes mura, inc. charles W. pollard 2,3 director ron Wainshal director; chief executive officer Aircastle limited skadden, Arps, slate, meagher & Flom llP Four times square New York, NY 10036 212 735 3000 inVestor relations contacts Frank constantinople senior vice President Aircastle Advisor llc 300 First stamford Place, 5th Floor stamford, ct 06902 203 504 1063 ir@aircastle.com the iGB Group 45 Broadway, suite 1150 New York, NY 10006 212 477 8438 notice oF annual meetinG may 23, 2013, 10:00 a.m. edt delamar Greenwich Harbor 500 steamboat road Greenwich, ct 06830 saFe harBor statement under the priVate securities litiGation reForm act oF 1995 certain items in this Annual report on Form 10-K (this “report”), and other information we provide from time to time, may constitute forward-looking statements within the meaning of the Private securities litigation reform Act of 1995 including, but not necessarily limited to, statements relating to our ability to acquire, sell, lease or finance aircraft, raise capital, pay dividends, and increase revenues, earnings, eBitdA, Adjusted eBitdA and Adjusted Net income and the global aviation industry and aircraft leasing sector. Words such as “anticipates,” “expects,” “intends,” “plans,” “projects,” “believes,” “may,” “will,” “would,” “could,” “should,” “seeks,” “estimates” and variations on these words and similar expressions are intended to identify such forward-looking statements. these statements are based on management’s current expectations and beliefs and are subject to a number of factors that could lead to actual results materially different from those described in the forward-looking statements; Aircastle can give no assurance that its expectations will be attained. Accordingly, you should not place undue reliance on any forward-looking statements contained in this report. Factors that could have a material adverse effect on our operations and future prospects or that could cause actual results to differ materially from Aircastle expectations include, but are not limited to, capital markets disruption or volatility which could adversely affect our continued ability to obtain additional capital to finance new investments or our working capital needs; government fiscal or tax policies, general economic and business conditions or other factors affecting demand for aircraft or aircraft values and lease rates; our continued ability to obtain favorable tax treatment in Bermuda, ireland and other jurisdictions; our ability to pay dividends; high or volatile fuel prices, lack of access to capital, reduced load factors and/or reduced yields, operational disruptions caused by political unrest in North Africa, the middle east or elsewhere, and other factors affecting the creditworthiness of our airline customers and their ability to continue to perform their obligations under our leases; termination payments on our interest rate hedges; and other risks detailed from time to time in Aircastle’s filings with the securities and exchange commission (“sec”), including as described in item 1A. “risk Factors” and elsewhere in this report. in addition, new risks and uncertainties emerge from time to time, and it is not possible for Aircastle to predict or assess the impact of every factor that may cause its actual results to differ from those contained in any forward-looking statements. such forward-looking statements speak only as of the date of this report. Aircastle expressly disclaims any obligation to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in its expectations with regard thereto or change in events, conditions or circumstances on which any statement is based. r e p a p d e l c y c e r n o d e t n i r p a i r c a s t l e l i m i t e d 2 0 1 2 a n n u a l r e p o r t AircAstle limited : c/o AircAstle Advisor llc 300 First stamford Place, 5th Floor, stamford, ct 06902 203-504-1020 : www.aircastle.com 

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