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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.
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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.
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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;
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• manufacturer production levels and technological innovation;
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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;
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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.
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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;
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• whether the aircraft is subject to a lease and, if so, whether the lease terms are favorable to us;
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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.
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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.
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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
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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
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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:
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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.
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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.
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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
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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.
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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.
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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
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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.
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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
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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:
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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
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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:
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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.
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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
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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.
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AircAstle limited : c/o AircAstle Advisor llc
300 First stamford Place, 5th Floor, stamford, ct 06902
203-504-1020 : www.aircastle.com