-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PnHcDSVBwxcl+8Hgxc6g1Dlw7na0AOBhQNrFnB7ZablsHHUhZxq0tsyq9oG7X586 kN99KLP8CPiJp9M/d1cOMQ== 0000921929-99-000004.txt : 19990215 0000921929-99-000004.hdr.sgml : 19990215 ACCESSION NUMBER: 0000921929-99-000004 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990212 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FRONTIER AIRLINES INC /CO/ CENTRAL INDEX KEY: 0000921929 STANDARD INDUSTRIAL CLASSIFICATION: AIR TRANSPORTATION, SCHEDULED [4512] IRS NUMBER: 841256945 STATE OF INCORPORATION: CO FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-24126 FILM NUMBER: 99538278 BUSINESS ADDRESS: STREET 1: 12015 EAST 46TH AVE CITY: DENVER STATE: CO ZIP: 80239 BUSINESS PHONE: 3033717400 MAIL ADDRESS: STREET 1: 12015 EAST 46TH AVENUE STREET 2: 12015 EAST 46TH AVENUE CITY: DENVER STATE: CO ZIP: 80239 10-Q 1 FORM 10-Q - 15 - FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended December 31, 1998 [ ] TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number: 0-24126 FRONTIER AIRLINES, INC. (Exact name of registrant as specified in its charter) Colorado 84-1256945 (State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.) 12015 E. 46th Avenue, Denver, CO 80239 (Address of principal executive offices) (Zip Code) Issuer's telephone number including area code: (303) 371-7400 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 X No The number of shares of the Company's Common Stock outstanding as of February 10, 1999 was 15,792,814. TABLE OF CONTENTS PART I. FINANCIAL INFORMATION Page Item 1. Financial Information Financial Statements 1 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 6 Item 3: Quantitative and Qualitative Disclosures About Market Risk 17 PART II. OTHER INFORMATION Item 5. Other Information 17 Item 6. Exhibits and Reports on Form 8-K 17 PART I. FINANCIAL INFORMATION Item 1. Financial Statements FRONTIER AIRLINES, INC. Condensed Balance Sheets
December 31, March 31, 1998 1998 --------------- --------------- (unaudited) Assets Current assets: Cash and cash equivalents $25,322,423 $ 3,641,395 Restricted investments 4,000,000 4,000,000 Trade receivables, net of allowance for doubtful accounts of $191,834 and $139,096 at December 31, 1998 and March 31, 1998 10,164,432 11,661,323 Maintenance deposits 12,025,502 9,307,723 Prepaid expenses and other assets 6,796,423 3,843,694 Inventories 1,192,077 1,164,310 Deferred lease expenses 380,975 380,975 --------------- --------------- Total current assets 59,881,832 33,999,420 Security, maintenance and other deposits 10,289,233 7,633,143 Property and equipment, net 6,900,406 5,579,019 Deferred lease and other expenses 494,697 780,429 Restricted investments 4,555,332 2,606,459 =============== =============== $82,121,500 $ 50,598,470 =============== =============== Liabilities and Stockholders' Equity Current liabilities: Accounts payable $ 9,842,383 $ 13,664,750 Air traffic liability 20,301,758 18,910,441 Other accrued expenses 5,357,643 5,157,640 Accrued maintenance expense 15,987,605 12,537,228 Note payable 61,006 - Current portion of obligations under capital leases 49,837 54,346 --------------- --------------- Total current liabilities 51,600,232 50,324,405 Senior secured notes payable 814,019 3,468,138 Accrued maintenance expense 4,955,805 2,381,354 Obligations under capital leases, excluding current portion 102,605 97,757 --------------- --------------- Total liabilities 57,472,661 56,271,654 --------------- --------------- Stockholders' equity Preferred stock, no par value, authorized 1,000,000 shares; none issued and outstanding - - Common stock, no par value, stated value of $.001 per share, authorized 40,000,000 shares; 15,316,444 and 9,253,563 shares issued and outstanding at December 31, 1998 and March 31, 1998 15,316 9,253 Additional paid-in capital 55,507,746 37,954,584 Accumulated deficit (30,874,223) (43,637,021) --------------- --------------- Total stockholders' equity 24,648,839 (5,673,184) --------------- --------------- $82,121,500 $ 50,598,470 =============== ===============
See accompanying notes to financial statements. FRONTIER AIRLINES, INC. Condensed Statements of Operations (Unaudited)
Three Months Ended Nine Months Ended December 31, December 31, December 31, December 31, 1998 1997 1998 1997 -------------- ---------------- --------------- --------------- Revenues: Passenger $ 49,112,767 $ 31,921,525 $146,175,655 $ 101,564,403 Cargo 1,279,175 596,736 3,250,994 2,008,154 Other 301,646 569,822 1,007,405 1,685,318 -------------- ---------------- --------------- --------------- Total revenues 50,693,588 33,088,083 150,434,054 105,257,875 -------------- ---------------- --------------- --------------- Operating expenses: Flight operations 19,894,445 17,866,945 56,526,799 47,998,124 Aircraft and traffic servicing 8,584,155 8,376,494 24,175,968 22,824,452 Maintenance 9,178,653 9,052,299 27,317,001 23,606,405 Promotion and sales 8,365,827 7,481,557 23,788,720 21,037,834 General and administrative 1,989,114 1,503,212 5,025,693 4,753,969 Depreciation and amortization 438,380 433,350 1,154,354 1,154,469 -------------- ---------------- --------------- --------------- Total operating expenses 48,450,574 44,713,857 137,988,535 121,375,253 -------------- ---------------- --------------- --------------- Operating income (loss) 2,243,014 (11,625,774) 12,445,519 (16,117,378) -------------- ---------------- --------------- --------------- Nonoperating income (expense): Interest income 422,217 200,604 1,042,189 580,935 Interest expense (203,789) (62,345) (661,870) (72,561) Other, net (1,911) (31,753) (63,040) (45,180) -------------- ---------------- --------------- --------------- Total nonoperating income, net 216,517 106,506 317,279 463,194 -------------- ---------------- --------------- --------------- Net income (loss) $ 2,459,531 $(11,519,268) $12,762,798 $(15,654,184) ============== ================ =============== =============== Earnings (loss) per share: Basic $ 0.17 $ (1.25) $ 0.93 $ (1.73) ============== ================ =============== =============== Diluted $ 0.15 $ (1.25) $ 0.86 $ (1.73) ============== ================ =============== =============== Weighted average shares of common stock outstanding 14,697,983 9,228,313 13,726,675 9,048,926 ============== ================ =============== =============== Weighted average shares of common stock and common stock equivalents outstanding 16,117,426 9,228,313 14,875,968 9,048,926 ============== ================ =============== ===============
See accompanying notes to financial statements. FRONTIER AIRLINES, INC. Condensed Statements of Cash Flows For the Nine Months Ended December 31, 1998 and 1997 (Unaudited)
1998 1997 --------------- --------------- Cash flows from operating activities: Net income (loss) $12,762,798 $(15,654,184) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Employee stock option plan compensation expense 645,750 - Depreciation and amortization 1,640,062 1,386,633 Loss on sale of equipment 6,793 - Changes in operating assets and liabilities: Restricted investments (828,873) (2,250,266) Trade receivables 1,496,891 (836,136) Security, maintenance and other deposits (5,089,869) (3,383,149) Prepaid expenses and other assets (2,952,729) (1,890,180) Inventories (27,767) (207,753) Note receivable - 11,741 Accounts payable (3,822,367) 2,337,583 Air traffic liability 1,391,317 3,980,925 Other accrued expenses 200,003 807,672 Accrued maintenance expense 6,024,828 5,777,719 --------------- --------------- Net cash provided (used) by operating activities 11,446,837 (9,919,395) --------------- --------------- Cash flows used by investing activities: Aircraft lease deposits (284,000) 207,500 Increase in restricted investments (1,120,000) (1,500,000) Capital expenditures (2,447,096) (1,584,240) --------------- --------------- Net cash used by investing activities (3,851,096) (2,876,740) --------------- --------------- Cash flows from financing activities: Net proceeds from issuance of common stock 14,064,381 415,357 Proceeds from sales of senior secured notes including warrants 5,000,000 Proceeds from short-term borrowings 179,664 170,318 Principal payments on short-term borrowings (118,658) (122,176) Principal payments on obligations under capital leases (40,100) (26,787) --------------- --------------- Net cash provided by financing activities 14,085,287 5,436,712 --------------- --------------- Net increase (decrease) in cash and cash equivalents 21,681,028 (7,359,423) Cash and cash equivalents, beginning of period 3,641,395 10,286,453 --------------- --------------- Cash and cash equivalents, end of period $25,322,423 $ 2,927,030 =============== ===============
See accompanying notes to financial statements. FRONTIER AIRLINES, INC. Notes to Condensed Financial Statements December 31, 1998 (1) Basis of Presentation The accompanying unaudited condensed financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and the instructions to Form 10-Q and Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements and should be read in conjunction with the 1998 Annual Report on Form 10-K. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation have been included. The results of operations for the three and nine months ended December 31, 1998 and 1997 are not necessarily indicative of the results that will be realized for the full year. (2) Senior Secured Notes Payable In December 1997, the Company sold $5,000,000 of 10% senior secured notes to Wexford Management LLC ("Wexford"). The notes were due and payable in full on December 15, 2001 with interest payable quarterly in arrears. The notes were secured by substantially all of the assets of the Company. The Wexford agreement contained restrictions primarily related to liens on assets and required prior written consent for expenditures outside the ordinary course of business. In connection with this transaction, the Company issued Wexford warrants to purchase 1,750,000 shares of Common Stock at $3.00 per share. The Company determined the value of the warrants to be $1,645,434 and recorded the value as equity in additional paid-in capital. The balance of the notes were to be accreted to its face value over the term of the notes and included as interest expense. The effective interest rate on the notes was approximately 18.2% including the value of the warrants. (See Note 5.) During the nine months ended December 31, 1998, Wexford exercised warrants to purchase 1,369,880 shares of Common Stock with proceeds to the Company totaling $4,109,640. Under the terms of the agreement, Wexford elected to tender debt for the warrant exercise price first by application of accrued unpaid interest and the remainder by reducing the principal balance of the notes. As a result, $3,912,951 of the principal balance of the notes was tendered during the nine months ended December 31, 1998. (3) Common Stock In April 1998, the Company sold 4,363,001 shares of its Common Stock, through a private placement to an institutional investor. Gross proceeds to the Company from the transaction were $14,179,753, of which the Company received net proceeds of approximately $13,650,000. The Company issued a warrant to this investor to purchase 716,929 shares of Common Stock of the Company at a purchase price of $3.75 per share, which warrant expires in April 2002. (4) Income Tax Expense The Company's income tax expense was zero for the three and nine months ended December 31, 1998. The current income tax expense for these periods was offset by a reduction in the Company's valuation allowance for deferred tax assets, a result of the Company's ability to utilize previously reserved for net operating loss carryforwards. (5) Subsequent Event In January 1999, Wexford, the holder of the senior secured notes (see Note 2), exercised an additional 49,000 warrants with proceeds to the Company totaling $147,000. Under the terms of the agreement, Wexford elected to tender debt for the warrant exercise price first by application of accrued unpaid interest and the remainder by reducing the principal balance of the notes. As a result, an additional $145,208 of the principal balance of the notes was tendered. In January 1999, the Company paid the remaining balance of the note in full which totaled $941,841, thereby terminating all of Wexford's security interests in the Company's assets. Wexford had warrants to purchase 331,120 shares of Common Stock outstanding as of the date the notes were paid. As of February 10, 1999, subsequent to the pay-off of the notes, Wexford exercised warrants to purchase 261,120 additional shares of Common Stock with total proceeds to the Company of $783,360. Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations This report contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934 that describe the business and prospects of Frontier Airlines, Inc. (the "Company") and the expectations of the Company and management. When used in this document, the words "estimate," "anticipate," "intend," "project," "management believes" and similar words and phrases are intended to identify forward-looking statements. These statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those set forth. These risks and uncertainties include, but are not limited to: the timing of, and expense associated with, expansion and modification of the Company's operations in accordance with its business strategy or in response to competitive pressures or other factors such as the Company's commencement of passenger service and ground handling operations at several airports and assumption of maintenance and ground handling operations at DIA with its own employees; general economic factors and behavior of the fare-paying public and the federal government, such as the crash in May 1996 of another low-fare carrier's aircraft that resulted in a federal investigation of the carrier, suspension of the carrier's operations and increased federal scrutiny of low-fare carriers generally that may increase the Company's operating costs or otherwise adversely affect the Company; actions of competing airlines, such as increasing capacity and pricing actions of United Airlines and other competitors; the availability of Boeing 737 aircraft, which may inhibit the Company's ability to achieve operating economies and implement its business strategy; and uncertainties regarding aviation fuel prices. Because the Company's business, like that of the airline industry generally, is characterized by high fixed costs relative to revenues, small fluctuations in the Company's yield per RPM or expense per ASM can significantly affect operating results. General The Company is a low-fare, full-service commercial airline based in Denver, Colorado. The Company currently operates routes linking its Denver hub to 18 cities in 14 states spanning the nation from coast to coast. The Company's current route system extends from Denver to Los Angeles, San Francisco and San Diego, California; Chicago and Bloomington/Normal, Illinois; Boston, Massachusetts; Baltimore, Maryland; Seattle/Tacoma, Washington; Phoenix, Arizona; Minneapolis/St. Paul, Minnesota; Salt Lake City, Utah; Omaha, Nebraska; Albuquerque, New Mexico, New York (LaGuardia), New York; El Paso and Dallas/Ft. Worth, Texas; Atlanta, Georgia; and Las Vegas, Nevada. At present, the Company utilizes approximately six gates at Denver International Airport ("DIA") for approximately 83 daily flight departures and arrivals. Organized in February 1994, the Company commenced flight operations in July 1994 with two leased Boeing 737-200 jet aircraft. It has since expanded its fleet to 17 leased jets as of December 1998, including eight Boeing 737-200s and nine larger Boeing 737-300s. On June 30, 1997, the Company signed an Agreement and Plan of Merger ("the Merger Agreement") providing for the merger (the "Merger") of the Company with Western Pacific Airlines. Pursuant to the Merger Agreement, a "code share" marketing alliance between the Company and Western Pacific went into effect on August 1, 1997, in effect integrating the route networks of the two airlines. On September 29, 1997, both companies mutually agreed to terminate the Merger Agreement and the code-share arrangement. The separation of the two carriers required the Company to implement a costly restructuring of its flight schedule and route system to support a stand-alone operation competing against both Western Pacific and United Airlines, the dominant air carrier at DIA. On October 5, 1997, Western Pacific filed for protection under Chapter 11 of the U.S. Bankruptcy Code. Western Pacific ceased operations on February 4, 1998. This transaction and the Company's competition with Western Pacific adversely affected the Company's results of operations for the nine months ended December 31, 1997. Results of Operations The Company had net income of $12,763,000 or .86(cent) per diluted share for the nine months ended December 31, 1998 as compared to a net loss of $15,654,000 or 1.73(cent) per share for the nine months ended December 31, 1997. The Company had net income of $2,460,000 or .15(cent) per diluted share for the three months ended December 31, 1998 as compared to a net loss of $11,519,000 or 1.25(cent) per share for the three months ended December 31, 1997. During the three and nine months ended December 31, 1998 as compared to the prior comparable period, the Company experienced higher fares as a result of increases in business travelers, decreased competition as a result of the demise of Western Pacific, and an increase in the average length of haul and stage length. During the nine months ended December 31, 1998, the Company also experienced higher average fares in certain of its markets as a result of accommodating Northwest Airlines passengers during that carrier's pilot strike in August and September 1998. The Company's cost per ASM declined to 7.72(cent) during the nine months ended December 31, 1998 from 8.54(cent) for the prior comparable period, principally as a result of lower fuel prices and improved operating efficiencies and economies of scale as the Company's fixed costs were spread across a larger base of operations. Small fluctuations in the Company's yield per RPM or expense per ASM can significantly affect operating results because the Company, like other airlines, has high fixed costs and low operating margins in relation to revenues. Airline operations are highly sensitive to various factors, including the actions of competing airlines and general economic factors, which can adversely affect the Company's liquidity, cash flows and results of operations. An airline's break-even load factor is the passenger load factor that will result in operating revenues being equal to operating expenses, assuming constant revenue per passenger mile and expenses. For the nine months ended December 31, 1998, the Company's break-even load factor was 54.4% compared to the passenger load factor achieved of 59.6%. For the nine months ended December 31, 1997, the Company's break-even load factor was 64.3% compared to the achieved passenger load factor of 55.7%. The Company's break-even load factor decreased from the prior comparable period largely as a result of an increase in its average fare to $119 during the nine months ended December 31, 1998 from $98 during the nine months ended December 31, 1997, an increase in its total yield per RPM from 13.31(cent) for the nine months ended December 31, 1997 to 14.14(cent) for the nine months ended December 31, 1998, and a decrease in its expense per ASM to 7.72(cent) for the nine months ended December 31, 1998 from 8.54(cent) for the nine months ended December 31, 1997. The following table sets forth certain quarterly financial and operating data regarding the Company for the fifteen months of operations ended December 31, 1998.
Selected Financial and Operating Data Quarter Ended ---------------------------------------------------------------------------------- December 31, March 31, June 30, September 30, December 31, 1997 1998 1998 1998 1998 Passenger revenue $31,922,000 $40,454,000 $41,561,000 $55,502,000 $49,113,000 Revenue passengers carried 301,000 370,000 368,000 420,000 373,000 Revenue passenger miles (RPMs)(1) 259,443,000 328,309,000 337,555,000 387,810,000 338,691,000 Available seat miles (ASMs)(2) 524,686,000 575,294,000 544,557,000 609,111,000 632,754,000 Passenger load factor(3) 49.4% 57.1% 62.0% 63.7% 53.5% Break-even load factor(4) 67.3% 60.0% 61.3% 52.3% 50.8% Block hours(5) 11,059 12,114 11,255 12,543 13,325 Average daily block hour utilization(6) 10.52 10.30 10.27 10.27 9.57 Yield per RPM (cents)(7) 12.30 12.32 12.31 14.31 14.50 Total yield per RPM (cents)(8) Total yield per ASM (cents)(9) 6.31 7.28 7.88 9.33 8.01 Expense per ASM (cents) 8.52 7.70 7.80 7.73 7.66 Passenger revenue per block hour $2,886.52 $3,339.44 $3,692.67 $4,424.94 $3,685.78 Average fare(10) $101 $105 $108 $125 $124 Average aircraft in fleet 13.0 13.6 14.0 14.0 14.4 Operating income (loss) ($11,626,000) ($2,437,000) $425,000 $9,778,000 $2,243,000 Net income (loss) ($11,519,000) ($2,092,000) $434,000 $9,870,000 $2,460,000 EBITDAR(11) ($4,372,000) $5,318,000 $8,384,000 $17,859,000 $11,126,000 EBITDAR as a % of revenue (13.2%) 12.7% 19.5% 31.4% 21.9%
(1) "Revenue passenger miles," or RPMs, are determined by multiplying the number of fare-paying passengers carried by the distance flown. (2) "Available seat miles," or ASMs, are determined by multiplying the number of seats available for passengers by the number of miles flown. (3) "Passenger load factor" is determined by dividing revenue passenger miles by available seat miles. (4) "Break-even load factor" is the passenger load factor that will result in operating revenues being equal to operating expenses, assuming constant revenue per passenger mile and expenses. (5) "Block hours" represent the time between aircraft gate departure and aircraft gate arrival. (6) "Average daily block hour utilization" represents the total block hours divided by the weighted average number of aircraft days in service. (7) "Yield per RPM" is determined by dividing passenger revenues by revenue passenger miles. (8) "Total yield per RPM" is determined by dividing total revenues by revenue passenger miles. (9) "Total yield per ASM" is determined by dividing total revenues by available seat miles. (10) "Average fare" excludes revenue included in passenger revenue for non-revenue passengers, administrative fees, and revenue recognized for unused tickets that are greater than one year from issuance date. (11) "EBITDAR", or " earnings before interest, income taxes, depreciation, amortization and aircraft rentals," is a supplemental financial measurement used by the Company in the evaluation of its business and by many airline industry analysts. However, EBITDAR should only be read in conjunction with all of the Company's financial data summarized above and its financial statements appearing elsewhere herein, and should not be construed as an alternative either to operating income (as determined in accordance with generally accepted accounting principles) as an indicator of the Company's operating performance or to cash flows from operating activities (as determined in accordance with generally accepted accounting principles) as a measure of liquidity. The following table provides operating revenues and expenses for the Company expressed as cents per total available seat miles ("ASM") and as a percentage of total operating revenues, as rounded, for the three and nine months ended December 31, 1998 and 1997.
Three Months ended December 31, Nine Months Ended December 31, ----------------------------------------- ----------------------------------------- 1998 1997 1998 1997 -------------------- -------------------- ------------------- -------------------- Per % Per % Per % Per % total of total of total of total of ASM Revenue ASM Revenue ASM Revenue ASM Revenue Revenues: Passenger 9.36 96.9% 6.09 96.5% 8.18 97.2% 7.15 96.5% Cargo .24 2.5% .11 1.8% .18 2.1% .14 1.9% Other .06 0.6% .11 1.7% .06 0.7% .12 1.6% --------- --------- --------- --------- --------- --------- ---------- -------- Total revenues 9.66 100.0% 6.31 100.0% 8.42 100.0% 7.41 100.0% Operating expenses: Flight operations 3.15 39.3% 3.40 54.0% 3.17 37.5% 3.38 45.6% Aircraft and traffic 1.36 16.9% 1.60 25.3% 1.35 16.1% 1.61 21.7% servicing Maintenance 1.45 18.1% 1.72 27.4% 1.53 18.2% 1.66 22.4% Promotion and sales 1.32 16.5% 1.43 22.6% 1.33 15.8% 1.48 20.0% General and .31 3.9% .29 4.5% .28 3.3% .33 4.5% administrative Depreciation and .07 0.9% .08 1.3% .06 0.8% .08 1.1% amortization ========= ========= ========= ========= ========= ========= ========== ======== Total operating expenses 7.66 95.6% 8.52 135.1% 7.72 91.7% 8.54 115.3% ========= ========= ========= ========= ========= ========= ========== ======== Total ASMs (000s) 632,754 524,686 1,786,422 1,420,891
Revenues The Company's revenues are highly sensitive to changes in fare levels. Fare pricing policies have a significant impact on the Company's revenues. Because of the elasticity of passenger demand, the Company believes that increases in fares will result in a decrease in passenger demand in many markets. The Company cannot predict future fare levels, which depend to a substantial degree on actions of competitors. When sale prices or other price changes are initiated by competitors in the Company's markets, the Company believes that it must, in most cases, match those competitive fares in order to maintain its market share. Passenger revenues are seasonal in leisure travel markets depending on the markets' locations and when they are most frequently patronized. The Company's average fare for the nine months ended December 31, 1998 and 1997 was $119 and $98, respectively. Management believes that the increase in the average fare during the nine months ended December 31, 1998 over the prior comparable period was largely a result of the Company's focus on increasing the number of business travelers, decreased competition as a result of the demise of Western Pacific, and an increase in the average length of haul and stage length. The average length of haul increased from 802 miles for the nine months ended December 31, 1997 to 916 miles for the nine months ended December 31, 1998. The Company also experienced higher average fares in certain of its markets as a result of accommodating Northwest Airlines passengers during that carrier's pilot strike in August and September 1998. Passenger Revenues. Passenger revenues totaled $146,176,000 for the nine months ended December 31, 1998 compared to $101,564,000 for the nine months ended December 31, 1997, or an increase of 43.9%. The number of revenue passengers carried was 1,161,000 for the nine months ended December 31, 1998 compared to 986,000 for the nine months ended December 31, 1997 or an increase of 17.8%. The Company had an average of 14.4 aircraft in its fleet during the nine months ended December 31, 1998 compared to an average of 11.8 aircraft during the nine months ended December 31, 1997, an increase of 22%, and an increase in ASMs of 365,531,000 or 25.7%. Cargo revenues, consisting of revenues from freight and mail service, totaled $3,251,000 and $2,008,000 for the nine months ended December 31, 1998 and 1997, respectively, representing 2.1% and 1.9% of total operating revenues, respectively, or an increase of 61.9%. This adjunct to the passenger business is highly competitive and depends heavily on aircraft scheduling, alternate competitive means of same day delivery service and schedule reliability. Other revenues, comprised principally of interline handling fees, liquor sales and excess baggage fees, totaled $1,007,000 and $1,685,000 or .7% and 1.6% of total operating revenues for each of the nine months ended December 31, 1998 and 1997, respectively. Other revenues were higher during the nine months ended December 31, 1997 as a result of ticket handling fees associated with the code share agreement with Western Pacific. Ticket handling fees are earned by the ticketing airline to offset ticketing costs incurred on segments ticketed on the flight operated by the Company's code share partner. The Company recognized approximately $857,000 in ticket handling fees associated with its code share agreement with Western Pacific during the nine months ended December 31, 1997. The costs that offset this revenue are included in sales and promotion expenses. Operating Expenses Operating expenses include those related to flight operations, aircraft and traffic servicing, maintenance, promotion and sales, general and administrative and depreciation and amortization. Total operating expenses were $137,989,000 and $121,375,000 for the nine months ended December 31, 1998 and 1997 and represented 91.7% and 115.3% of total revenue, respectively. Operating expenses decreased as a percentage of revenue during the nine months ended December 31, 1998 as the Company experienced significantly lower fuel prices and improved operating efficiencies and economies of scale as the Company's fixed costs were spread across a larger base of operations. Flight Operations. Flight operations expenses of $56,527,000 and $47,998,000 were 37.5% and 45.6% of total revenue for the nine months ended December 31, 1998 and 1997, respectively. Flight operations expenses include all expenses related directly to the operation of the aircraft including fuel, lease and insurance expenses, pilot and flight attendant compensation, in flight catering, crew overnight expenses, flight dispatch and flight operations administrative expenses. Aircraft fuel expenses include both the direct cost of fuel including taxes as well as the cost of delivering fuel into the aircraft. Aircraft fuel costs of $16,691,000 for 28,964,000 gallons used and $17,478,000 for 23,918,000 gallons used resulted in an average fuel cost of 57.6(cent) and 73.1(cent) per gallon and represented 29.5% and 36.4% of total flight operations expenses for the nine months ended December 31, 1998 and 1997, respectively. The average fuel cost per gallon decreased for the nine months ended December 31, 1998 from the comparable prior period due to an overall decrease in the cost of fuel. Fuel prices are subject to change weekly as the Company does not purchase supplies in advance for inventory. Fuel consumption for each of the nine months ended December 31, 1998 and 1997 averaged 780 gallons per block hour. Aircraft lease expenses totaled $23,387,000 (15.6% of total revenue) and $17,041,000 (16.2% of total revenue) for the nine months ended December 31, 1998 and 1997, respectively, or an increase of 37.2%. The increase is largely due to higher lease expenses for larger and newer Boeing 737-300 aircraft added to the fleet and partially attributable to the increase in the average number of aircraft to 14.4 from 11.8, or 22%, for the nine months ended December 31, 1998 and 1997, respectively. Aircraft insurance expenses totaled $1,774,000 (1.2% of total revenue) for the nine months ended December 31, 1998 offset by a profit commission of $153,000 for the policy period ended June 6, 1998. The profit commission was earned because the Company had no aircraft hull insurance claims during the 1997-1998 policy year. Aircraft insurance expenses for the nine months ended December 31, 1997 were $2,075,000 (2% of total revenue). Aircraft insurance expenses decreased as a percentage of revenue as a result of competitive pricing in the aircraft insurance industry, the Company's favorable experience rating since it began flight operations in July 1994 and economies of scale due to the increase in fleet size. For the policy period June 7, 1998 to June 6, 1999, the Company reduced its aircraft insurance rates by approximately 44.8% or an estimated annual savings of $1,787,000 at its present fleet levels. Pilot and flight attendant salaries before payroll taxes and benefits totaled $8,235,000 and $6,948,000 or 5.6% and 6.8% of passenger revenue for each of the nine months ended December 31, 1998 and 1997, or an increase of 8.5%. Pilot and flight attendant compensation increased principally as a result of a 22% increase in the average number of aircraft in service and an increase of 21.1% in block hours. The Company pays pilot and flight attendant salaries for training consisting of approximately six and three weeks, respectively, prior to scheduled increases in service which can cause the compensation expense during that period to appear high in relationship to the average number of aircraft in service. When the Company is not in the process of adding aircraft to its system, pilot and flight attendant expense per aircraft normalizes. With a scheduled passenger operation, and with salaried rather than hourly crew compensation, the Company's expenses for flight operations are largely fixed, with flight catering and fuel expenses the principal exception. Aircraft and Traffic Servicing. Aircraft and traffic servicing expenses were $24,176,000 and $22,825,000 (an increase of 5.9%) for the nine months ended December 31, 1998 and 1997, respectively, and represented 16.1% and 21.7% of total revenue. These include all expenses incurred at airports served by the Company, as well as station operations administration and flight operations ground equipment maintenance. Station expenses include landing fees, facilities rental, station labor and ground handling expenses. Station expenses as a percentage of revenue decreased during the nine months ended December 31, 1998 over the nine months ended December 31, 1997 as a result of the Company's rental costs (in particular, the gate rentals at DIA and other cities where the Company added additional frequencies), which are largely fixed costs, remaining relatively constant as compared to the increase in revenue. Additionally, the Company began its own ground handling operations at DIA effective September 1, 1998 which is more cost effective than using a third party contractor. Aircraft and traffic servicing expenses will increase with the addition of new cities to the Company's route system; however, the increased existing gate utilization at DIA is expected to reduce per unit expenses. Maintenance. Maintenance expenses of $27,317,000 and $23,606,000 were 18.2% and 22.4% of total revenue for the nine months ended December 31, 1998 and 1997, respectively. These include all labor, parts and supplies expenses related to the maintenance of the aircraft. Routine maintenance is charged to maintenance expense as incurred while major engine overhauls and heavy maintenance check expense is accrued monthly. Maintenance cost per block hour was $736 and $770 per block hour for the nine months ended December 31, 1998 and 1997, respectively. Maintenance costs per block hour decreased as a result of six new aircraft added to the Company's fleet during the past year and the fixed rental cost of the hangar facility being spread over a larger aircraft fleet offset by FAA mandated corrosion inspections on the Company's 737-200s. The newer aircraft require fewer routine repairs and are generally covered by a warranty period of approximately up to three years on standard Boeing components. Management believes that these costs will continue to normalize as additional aircraft are added to the fleet. Promotion and Sales. Promotion and sales expenses totaled $23,789,000 and $21,038,000 and were 15.8% and 20% of total revenue for the nine months ended December 31, 1998 and 1997, respectively. These include advertising expenses, telecommunications expenses, wages and benefits for reservationists and reservations supervision as well as marketing management and sales personnel, credit card fees, travel agency commissions and computer reservations costs. The Company's promotion and sales expenses for the nine months ended December 31, 1997 included expenses as a result of the code share agreement with Western Pacific, under which the Company incurred additional communications, computer reservation, and interline service charges and handling fees for the code share agreement. These expenses were offset, in part, by interline handling fees earned which are included in other revenues. The Company did not have any code share agreements during the nine months ended December 31, 1998 that had as large of an impact on its expenses as the code share agreement with Western Pacific. Promotion and sales expenses decreased as a percentage of revenue for the nine months ended December 31, 1998 over the prior comparable period largely as a result of the increase in revenue. Promotion and sales expenses per passenger decreased to $20.49 from $21.32 for the nine months ended December 31, 1997, as a result of the elimination of expenses related to the code share agreement with Western Pacific offset by increased reservation costs and an increase in credit card fees. The costs of reservation expenses increased as a result of outsourcing part of the Company's reservations requirements. These increased costs were offset by a decrease in travel agency commissions. During April 1998, the Company reduced travel agency commissions to 8% from 10%, matching an 8% commission instituted by the Company's competitors in the fall of 1997. Additionally, the Company's direct sales, which are not subject to commissions, increased as a percentage of passenger revenue. Travel agency commissions and interline service charges and handling fees, as a percentage of passenger revenue, before non-revenue passengers, administrative fees and breakage (revenue from expired tickets), decreased to 5.4% for the nine months ended December 31, 1998 from 7.5% for the nine months ended December 31, 1997. Advertising expenses of $2,654,000 were 1.8% of passenger revenue for the nine months ended December 31, 1998, compared to $2,336,000 or 2.3% of passenger revenue for the nine months ended December 31, 1997. As new cities are added to the Company's flight schedule, advertising and marketing promotions are designed and implemented to increase awareness of the Company's new service, name and brand awareness. Advertising expenses decreased as a percentage of revenue largely as a result of the increase in the average fare. Additionally, during the nine months ended December 31, 1997 the Company was competing with Western Pacific for the "low fare" market which required a higher volume of advertising. General and Administrative. General and administrative expenses for the nine months ended December 31, 1998 and 1997 totaled $5,026,000 and $4,754,000, respectively, and were 3.3% and 4.5% of total revenue, respectively. These expenses include the wages and benefits for the Company's executive officers and various other administrative personnel. Legal and accounting expenses, supplies and other miscellaneous expenses are also included in this category. Included in general and administrative expenses during the nine months ended December 31, 1997 were unusual expenses of approximately $500,000 associated with the terminated Merger Agreement with Western Pacific. Depreciation and Amortization. Depreciation and amortization expenses of $1,154,000 were approximately .8% and 1.1% of total revenue for each of the nine months ended December 31, 1998 and 1997. These expenses include depreciation of office equipment, ground station equipment, and other fixed assets of the Company. Amortization of start-up and route development costs are not included as these expenses have been expensed as incurred. Nonoperating Income (Expense). Net nonoperating income totaled $317,000 for the nine months ended December 31, 1998 compared to $463,000 for the nine months ended December 31, 1997. Interest income increased from $581,000 to $1,042,000 during the nine months ended December 31, 1998 from the prior comparable period due to an increase in cash balances as a result of the sale of Common Stock in April 1998 and an increase in cash from operating activities. Interest income was offset by interest expense of $662,000 during the nine months ended December 31, 1998. In December 1997, the Company sold $5,000,000 of 10% senior notes. In connection with this transaction, the Company issued the lender warrants to purchase 1,750,000 shares of Common Stock. Interest expense paid in cash and the accretion of the warrants and deferred loan expenses totaled $562,000 during the nine months ended December 31, 1998. See Notes 2 and 5 to Financial Statements. Income Tax Expense: The Company has substantial net operating loss carryforwards (NOL's) available to offset future taxable income. However, a portion of these NOL's could be subject to Internal Revenue Code Section 382 annual limitations. Additionally, alternative minimum tax rules could limit the Company's ability to utilize a portion of the NOL's each year and could result in alternative minimum tax expense. Expenses per ASM. The Company's expenses per ASM for the nine months ended December 31, 1998 and 1997 were 7.72(cent) and 8.54(cent), respectively, or a decrease of 9.6%. Expenses per ASM decreased from the prior comparable period as a result of economies of scale as fixed costs were spread across a larger base of operations, a decrease in fuel prices, and the average ASMs per aircraft having increased as the Company added aircraft with greater seating capacity as compared to earlier fleet additions. Expenses per ASM excluding fuel for the nine months ended December 31, 1998 and 1997 were 6.79(cent) and 7.31(cent), respectively, or a decrease of 7.1%. Expenses per ASM are influenced to a degree by the amount of aircraft utilization and by aircraft seating configuration. For example, with the 108 seat all coach seating configuration selected by the Company on five of its Boeing 737-200 aircraft, the expenses per ASM of the Company are higher by 11% when compared with the 120 seat alternative used by many carriers. The Company's average seats per aircraft for the nine months ended December 31, 1998 were 124 as compared to 122 seats per aircraft for the nine months ended December 31, 1997. Liquidity and Capital Resources The Company's balance sheet reflected cash and cash equivalents of $25,322,000 at December 31, 1998 and $3,641,000 at March 31, 1998. At December 31, 1998, total current assets were $59,882,000 as compared to $51,600,000 of total current liabilities, resulting in working capital of $8,282,000. At March 31, 1998, total current assets were $33,999,000 as compared to $50,324,000 of total current liabilities, resulting in a working capital deficit of $16,325,000. The Company had a working capital deficit of $13,580,000 at December 31, 1997. The Company's present working capital is largely a result of the sale in April 1998 of 4,363,001 shares of the Company's Common Stock with net proceeds to the Company totaling approximately $13,650,000, combined with cash flows from operating activities during the nine months ended December 31, 1998. Cash provided by operating activities for the nine months ended December 31, 1998 was $11,447,000. This is attributable to the Company's net income for the period, a decrease in receivables and increases in air traffic liability, other accrued expenses and accrued maintenance expenses, offset by increases in restricted investments, security, maintenance and other deposits and prepaid expenses and other assets, and decreases in accounts payable. Cash used by operating activities for the nine months ended December 31, 1997 was $9,919,000. This was attributable primarily to the Company's net loss for the period, an increase in restricted investments, trade receivables, security, maintenance and other deposits, and prepaid expenses and other assets, offset by increases in accounts payable, air traffic liability, other accrued expenses and accrued maintenance expenses. Cash used by investing activities for the nine months ended December 31, 1998 was $3,851,000. The Company used $2,447,000 for capital expenditures for ground handling equipment, rotable aircraft components and aircraft leasehold costs and improvements. The Company used cash of $284,000 for initial lease acquisition security deposits for one Boeing 737-200 aircraft delivered in October 1998. Additionally, the Company secured two aircraft delivered in December 1998 with letters of credit totaling $1,120,000. The Company's restricted investments increased $1,120,000 to collateralize the letters of credit. Cash used by investing activities for the nine months ended December 31, 1997 was $2,877,000, largely a result of capital expenditures for rotable aircraft components and aircraft leasehold costs and improvements for three aircraft delivered in May, August and September 1997. Additionally, the Company secured aircraft delivered in August 1997 and February 1998 with letters of credit totaling $1,500,000. In turn the Company received $650,000 during the nine months ended December 31, 1997 from the aircraft lessor that was previously on deposit to secure these aircraft. The Company's restricted investments increased $1,500,000 to collateralize the letter of credit. Cash provided by financing activities for the nine months ended December 31, 1998 and 1997 was $14,085,000 and $5,437,000, respectively. During the nine months ended December 31, 1998, the Company sold 4,363,001 shares of its Common Stock through a private placement to an institutional investor. Gross proceeds to the Company from the transaction were approximately $14,180,000, of which the Company received net proceeds of approximately $13,650,000. The Company issued a warrant to this investor to purchase 716,929 shares of Common Stock of the Company at a purchase price of $3.75 per share. This warrant expires in April 2002. Additionally, during the nine months ended December 31, 1998, the Company received $208,000 from the exercise of Common Stock options. During the nine months ended December 31, 1997, the Company received $415,000 from the exercise of Common Stock options. In December 1997, the Company sold $5,000,000 of 10% senior secured notes. In connection with this transaction, the Company issued warrants to purchase 1,750,000 shares of Common Stock at $3.00 per share. Five of the Company's Boeing 737-200 aircraft are leased under operating leases that originally expired in 1997. The leases provide for up to two renewal terms of two years each with no increase in basic rent. The Company renewed the leases for the first two-year renewal period and these leases now expire in 1999. Under these leases, the Company was required to make security deposits and makes deposits for maintenance of these leased aircraft. These deposits totaled $625,000 and $4,431,000, respectively, at December 31, 1998. These aircraft are not compliant with FAA Stage 3 noise regulations. As their leases expire in 1999 the Company plans to replace these aircraft with Stage 3 compliant aircraft. Although there can be no assurances that the Company will be successful in replacing any or all of these aircraft, the Company has entered into a letter of intent to lease two Boeing 737-200 advanced aircraft to replace two of the non Stage 3 compliant aircraft. Management believes that the replacement aircraft, if any, will be newer, larger aircraft with higher monthly rental costs. The Company in November 1995 leased two Boeing 737-300 aircraft under operating leases that expire in the year 2000. The Company was required to make security deposits and makes deposits for maintenance of these leased aircraft. Security and maintenance deposits for these aircraft totaled $1,505,000 and $2,918,000, respectively, at December 31, 1998. The Company has issued to each of the two Boeing 737-300 aircraft lessors a warrant to purchase 100,000 shares of the Company's common stock at an aggregate purchase price of $500,000. These warrants, to the extent not earlier exercised, expire upon the expiration dates of the aircraft leases. In June 1996, the Company leased two additional Boeing 737-200 aircraft under operating leases that expire in the year 2001. In November 1997, the Company renegotiated one of these leases extending the lease term by one year to 2002 in return for a slight reduction in the monthly rental payment. The Company was required to make security deposits for these aircraft totaling $858,000. Commencing July 1996, the Company was required to make monthly deposits for maintenance of these leased aircraft. At December 31, 1998, these deposits totaled $2,921,000. These aircraft were "hush-kitted" by the lessor at its expense during 1996 making them compliant with FAA Stage 3 noise regulations. The Company has issued to the aircraft lessor two warrants, each of which entitles the lessor to purchase 70,000 shares of the Company's common stock at an aggregate purchase price of $503,300 per warrant. These warrants, to the extent not earlier exercised, expire upon the expiration dates of the aircraft leases. In November 1996, the Company took delivery of a leased Boeing 737-300 aircraft which it placed in scheduled service in December 1996. The lease term for this aircraft is eight years from date of delivery. The Company was required to secure the aircraft lease with a letter of credit totaling $600,000. The Company is also required to make monthly cash deposits for maintenance of this aircraft. As of December 31, 1998, the Company had maintenance deposits associated with this leased aircraft totaling $1,459,000. During the year ended March 31, 1997, the Company entered into four operating lease agreements for four additional new Boeing 737-300 aircraft. The Company took delivery of these aircraft in May, August and September 1997 and in February 1998. In connection with the Boeing 737-300 aircraft delivered in September 1997, the Company has issued to the lessor a warrant to purchase 55,000 shares of common stock at an aggregate purchase price of $385,000. This warrant, to the extent not earlier exercised, expires upon the expiration date of the aircraft lease. As of December 31, 1998, the Company had made cash security deposits totaling $1,616,000 with respect to these aircraft. During the year ended March 31, 1998, the Company secured lease obligations for two of these aircraft with letters of credit totaling $1,500,000 and, in turn, $650,000 of cash security deposits was returned to the Company. The Company's restricted cash increased by $1,500,000 to collateralize the letters of credit. Two of the four leases have seven year terms, and two have eight year terms, in each case from date of delivery. Two of the four leases have up to two one year renewal terms and a third may be renewed for up to three one year terms. The Company is required to pay monthly cash deposits to each aircraft lessor based on flight hours and cycles operated to provide funding of future scheduled maintenance costs. As of December 31, 1998, the Company had maintenance deposits associated with these aircraft totaling $5,358,000. In October 1998, the Company took delivery of a leased Boeing 737-200 advanced aircraft. The lease term for this aircraft is seven years from date of delivery. The Company has made cash security deposits totaling $284,000 to secure the aircraft lease. The Company is also required to make monthly cash deposits for maintenance. As of December 31, 1998, the Company had maintenance deposits associated with this aircraft totaling $22,000. During December 1998, the Company leased from two different lessors two additional new Boeing 737-300 aircraft. The first aircraft has a 40 month lease term from date of delivery with an option to extend the lease term for an additional 12 months. The second aircraft lease term expires on May 1, 2000, and may be extended to October 31, 2000 at the lessor's option. The Company secured these aircraft with letters of credit totaling $1,120,000. The Company is also required to make monthly cash deposits for maintenance of these aircraft commencing in January 1999. The addition of these two aircraft permitted the Company's then 17 aircraft fleet to be in compliance with Stage 3 noise level requirements until January 1, 2000. Management is continuing to take steps designed to improve the Company's operating performance. Effective in January 1997, the Company introduced electronic ticketing. Passengers who call the Company directly are provided the option of receiving a paper ticket or a confirmation number in lieu of a paper ticket. Electronic ticketing decreases certain costs including postage and handling costs, ticket stock, and reduced revenue accounting fees. The Company is exploring various means to increase revenues and reduce expenses. The Company has performed ad hoc charters and will consider them in the future depending on the availability of its fleet. The Company is considering revenue enhancement initiatives with new marketing alliances. Effective March 1, 1999, the Company will begin to conduct certain aircraft heavy maintenance checks in-house which is expected to reduce maintenance expenses. Other potential expense reduction programs include the installation of an upgraded flight operations, maintenance, and parts inventory management information system which will be installed by the end of the fiscal year ending March 31, 1999. The Company began its own ground handling operations at DIA effective September 1, 1998, a function which had been provided by an independent contractor. Ground handling equipment required by the Company to perform these operations internally necessitated capital expenditures of approximately $800,000 The Company's sublease with Continental Airlines for terminal gates and other related space at DIA expires in March 2000. If DIA is unsuccessful in reallocating the cost of the inoperative automated baggage system on Concourse A, which is presently subsidized by Continental Airlines, the Company's operating costs to cover the additional cost associated with this system would increase materially. The Company's present fixed monthly rate under the terms of the sublease with Continental would change to a per passenger fee charged directly to the Company. The Company has a contract with a credit card processor that requires the Company to provide a letter of credit to match the total amount of air traffic liability associated with credit card customers. The credit card processor does not always require the Company to match the total amount depending on certain events or circumstances such as seasonality, ticket price sales, and the Company's financial condition. In November 1997, the credit card processor required an increase in the collateral amount from its present level of $2,000,000 to $4,000,000, which increased the Company's current restricted investment balance accordingly. The credit card processor has not requested any increases since November 1997. As of February 4, 1999, the Company could be required to increase the collateral amount to $7,314,000. The Company's goal is to continue to lease additional aircraft to serve additional cities and to add flights on existing routes from Denver. The Company added routes to Atlanta, Georgia, Dallas/Ft. Worth, Texas and Las Vegas, Nevada effective December 17, 1998. The Company believes that expanding its route system would facilitate a greater volume of connecting traffic as well as a stable base of local traffic and offset the impact of higher DIA-related operating costs through more efficient gate utilization. Expansion of the Company's operations will entail the hiring of additional employees to staff flight and ground operations in new markets, and significant initial costs such as deposits for airport and aircraft leases. Because of the expansion of the Company's business, and competition within the airline industry which often requires quick reaction by management to changes in market conditions, the Company may require additional capital to further expand its business. In February 1997, United Airlines commenced service using its low fare United "Shuttle" between Denver and Phoenix, Arizona, and in October 1997 such service to Salt Lake City was added by United. These are both markets in which the Company provides service, in addition to other markets where United Airlines provides flights. The Company commenced service between Denver and Las Vegas in December 1998, another market in which United provides service with United "Shuttle". This competition, as well as other competitive activities by United and other carriers, have had and could continue to have an adverse effect on the Company's revenues and results of operations. Except for the nine months ended December 31, 1998, the Company has incurred substantial operating losses since its inception. In addition, the Company has substantial contractual commitments for leasing and maintaining aircraft. The Company believes that its existing cash balances coupled with improved operating results are and will be adequate to fund the Company's operations at least through December 31, 1999. Year 2000 Compliance Background. Older computers were programmed to use a two-digit code for the date entry rather than a four-digit code. For example, the date November 17, 1970 would be entered as "11/17/70" rather than "11/17/1970." The decision to use two digits instead of four was based largely on cost-reduction considerations and the belief that the code would no longer be used at the millennium. Nevertheless, coding conventions have not changed, and on January 1, 2000, computers may read the digits "00" as denoting the year 1900 rather than 2000. At the least, this could result in massive quantities of incorrect data. At worst, it could result in the total or partial failure of time sensitive computer systems and software. The Company's Year 2000 Issues. The Company began operations in July 1994, and its operations depend predominantly on third party computer systems. Because of the Company's limited resources during its start-up, the most cost effective way to establish its computer systems was to outsource or to use manual systems. Internal systems developed and any software acquired are limited and were designed or purchased with the Year 2000 taken into consideration. The Company has designated an employee committee that is responsible for (1) identifying and assessing Year 2000 issues, (2) modifying, upgrading or replacing computer systems, (3) testing internal and third party systems and, (4) developing contingency plans in the event that a system or systems fail. This committee periodically reports to management regarding progress being made in addressing the Year 2000 issue. Management, in turn, periodically reports to the Board of Directors on the issue. The Company relies on third parties which provide goods and services which are imperative to the Company's operations including, but not limited to, the U.S. Federal Aviation Administration, the U.S. Department of Transportation, local airport authorities including DIA, utilities, communication providers, and fuel suppliers. The Company is reviewing, and has initiated formal communications with, these third party service providers to determine their Year 2000 readiness, the extent to which the Company is vulnerable to any failure by such third parties to remediate their Year 2000 problems and to resolve such issues to the extent practicable. Although the Company is primarily in the identification and assessment phase of its Year 2000 project, some systems are in the modification and testing phases. These include the customer reservations and ticketing system and the credit card processing system that is interfaced with the reservations and ticketing system. These systems are outsourced and the costs of modifying and testing these systems are being absorbed by the third party provider. The Company's general accounting and payroll systems are being upgraded to new versions that are Year 2000 compliant at an insignificant cost to the Company. The Company's crew and dispatch training records, aircraft maintenance records and inventory control are in the process of automating from manual systems to computer systems that are Year 2000 compliant. The Boeing Company has verified that the computer systems on the aircraft type operated by the Company are or will be Year 2000 compliant before the year 2000. The Company plans to complete its identification and assessment phase by February 28, 1999, its modification and testing phases by June 30, 1999, and its contingency plans by October 31, 1999. The Company has utilized existing resources and has not incurred any significant costs to implement its Year 2000 project to date. The total remaining cost of the Year 2000 project are expected to be immaterial and will be funded through cash from operations. The costs and the dates on which the Company anticipates it will complete the Year 2000 project are based on management's best estimates. There can be no guarantee that these estimates will be achieved and actual results could differ materially from those anticipated. Despite its efforts to address Year 2000 issues, the Company could potentially experience disruptions to some of its operations, including those resulting from non-compliant systems used by third party business and governmental entities. The Company's business, financial condition or results of operations could be materially adversely affected by the failure of its systems or those operated by third parties upon which the Company's business relies. Item 3: Quantitative and Qualitative Disclosures About Market Risk Not applicable. PART II. OTHER INFORMATION Item 5: Other Information Effective January 11, 1999, Arthur H. Amron resigned his position as a member of the Company's board of directors. Item 6: Exhibits and Reports on Form 8-K (a) Exhibits 10.35 Aircraft Lease Agreement (MSN 28738) dated as of November 23, 1998 among First Security Bank, National Association, Lessor, Heller Financial Leasing, Inc., Owner Participant, and the Company, Lessee. 10.36 Aircraft Sublease Agreement (MSN 28734) dated as of December 14, 1998 between Indigo Pacific AB, Sublessor, and the Company, Sublessee. 27.1 Financial Data Schedule (b) Reports on Form 8-K None. SIGNATURES Pursuant to the requirements of the Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. FRONTIER AIRLINES, INC. Date: February 12, 1999 By: /s/ Samuel D. Addoms Samuel D. Addoms, Principal Executive Officer and Principal Financial Officer Date: February 12, 1999 By: /s/ Elissa A. Potucek Elissa A. Potucek, Vice President, Controller, Treasurer and Principal Accounting Officer EX-10 2 AIRCRAFT LEASE AGREEMENT Exhibit 10.35 LEASE AGREEMENT between FIRST SECURITY BANK, NATIONAL ASSOCIATION, not in its individual capacity but solely as Owner Trustee, as Lessor HELLER FINANCIAL LEASING, INC., as Owner Participant and FRONTIER AIRLINES, INC., as Lessee Relating to one (1) Boeing 737-3U3 Aircraft Manufacturer's Serial No.: 28738 U.S. Registration No. N308FL Dated as of November 23, 1998 This Lease Agreement has been executed in several counterparts. To the extent, if any, that this Lease Agreement constitutes chattel paper (as such term is defined in the Uniform Commercial Code as in effect in any applicable jurisdiction), no security interest in this Lease Agreement may be created through the transfer or possession of any counterpart other than the original executed counterpart containing the receipt executed by Lessor or, if Lessor has assigned its rights to a third party in accordance with this Lease Agreement, such third party on the signature page of this Lease Agreement. Vedder, Price, Kaufman & Kammholz Chicago, Illinois TABLE OF CONTENTS Page SECTION 1. Definitions; Construction of Terms 1 (a) General Definitions 1 (b) Construction 15 SECTION 2. Lease of Aircraft 16 (a) Agreement to Lease 16 (b) Delivery Conditions; Inspections 16 (c) Changes in Delivery Date; Limitation of Lessor's Obligation to Deliver Aircraft 17 (d) Bridging Maintenance 18 SECTION 3. Lease Term; Rent; Payments 18 (a) Lease Term 18 (b) Basic Rent and Renewal Rent 19 (c) Supplemental Rent 19 (d) Security Deposit 19 (e) Payments in General 21 (f) No Deductions or Withholdings 22 SECTION 4. Conditions Precedent 22 (a) Delivery of Aircraft 22 (b) Delivery Conditions 22 (c) Approved Maintenance Program 22 (d) [Intentionally reserved] 23 (e) Agreements and Documents 23 (f) Delivery Date Conditions 24 (g) Registration 25 (h) Necessary Government Actions 25 (i) No Government Actions 25 (j) No Change in Law 26 SECTION 5. Representations and Warranties 26 (a) Disclaimer; Representations, Warranties and Covenants of Lessor and Owner Participant 26 (b) Lessee's Representations and Warranties 28 SECTION 6. Certain Covenants of Lessee 31 (a) Maintenance of Corporate Existence; Duly Qualified; Certificated Air Carrier 31 (b) Merger or Consolidation 32 (c) Reporting Requirements 32 (d) Government Approvals 33 (e) Taxes 33 (f) Place of Business 34 (g) Filings 34 (h) Approved Maintenance Program 34 SECTION 7. Return of the Aircraft 34 (a) Date and Location of Return 34 (b) Condition of Aircraft 34 (c) Final Inspection 34 (d) Operational Ground Check 35 (e) Demonstration Flight 36 (f) Technical Acceptance 36 (g) Failure to Return Aircraft 36 (h) Transition 37 SECTION 8. Liens 37 (a) No Liens 37 (b) Removal of Liens 38 (c) No Adverse Action 38 SECTION 9. Indemnities 39 (a) General Indemnity 39 (b) Exceptions to General Indemnity 39 (c) Taxes 40 (d) [Intentionally reserved] 44 (e) Scope, Survival, Etc 44 (f) Gross-Up for Taxes on Indemnity Payments 45 (g) Tax Contests 45 SECTION 10. Title; Registration; Maintenance and Operation; Insignia 47 (a) Title to the Aircraft 47 (b) Registration 47 (c) Maintenance 48 (d) Operation 51 (e) Insignia 52 (f) Costs of Operation 53 (g) Payment of Flight Charges 53 (h) Loss or Damage 53 (i) Cost Sharing 54 SECTION 11. Possession 54 (a) Maintenance, Etc 54 (b) Installation of Engines on Other Airframes 55 (c) Pooling; Sublease. 55 (d) Transfers of Possession in General 56 SECTION 12. Replacement of Parts, Alterations, Modifications and Additions 57 (a) Replacement of Parts 57 (b) Modifications 58 SECTION 13. Risk of Loss, Destruction, Requisition, Etc 60 (a) Risk of Loss 60 (b) Event of Loss With Respect to the Aircraft 60 (c) Event of Loss With Respect to an Engine 61 (d) Application of Payments From any Government Entity for Requisition of Title, Etc 62 (e) Application of Payments During Existence of Default 63 SECTION 14. Maintenance Reserves. 63 (a) Amount 63 (b) Payments 64 (c) Release of Maintenance Reserves 64 SECTION 15. Insurance 65 (a) Requirements 65 (b) Application of Proceeds of Hull Insurance 65 (c) Insurance for Indemnities; Continuation of Liability Insurance 66 (d) Reports, Etc 66 (e) Self-Insurance 66 (f) Additional Insurance 66 (g) Application of Payments During Existence of a Default 67 (h) Change of Practice or Insurers 67 (i) Change of Circumstance 67 (j) Negative Undertakings 68 (k) Failure to Insure 68 SECTION 16. Inspection 68 (a) Maintenance Schedule 68 (b) Reasonable Inspections 69 (c) No Duty to Inspect 69 (d) Follow-On Lease 69 (e) Absolute Right 69 SECTION 17. Assignment 69 (a) Assignment by Lessee 70 (e) Collateral Assignment 71 (g) Successors and Assigns 73 SECTION 18. Early Termination 73 SECTION 19. Events of Default 73 (a) Failure to Pay Basic Rent, Renewal Rent or Stipulated Loss Value 74 (b) Failure to Pay Supplemental Rent 74 (c) Insurance 74 (d) Return 74 (e) Unauthorized Transfer 74 (f) Certain Covenants 74 (g) Other Covenants 74 (h) Representations and Warranties 75 (i) Authorizations 75 (j) Voluntary Bankruptcy, Etc 75 (k) Involuntary Bankruptcy, Etc 75 (l) Indebtedness 75 (m) Government Action 76 (n) Judgments 76 (o) Cross Default 76 (p) Adverse Change 76 (q) Letter of Credit. 76 SECTION 20. Remedies 76 (a) Retake Possession 77 (b) Termination or Enforcement 77 (c) Application of Funds 77 (d) Damages 78 SECTION 21. Transaction Expenses 78 SECTION 22. No Setoff, Counterclaim, Etc 78 SECTION 23. Further Assurances, Etc 81 (a) Further Assurances 81 (b) Lessor's Performance of Lessee's Obligations 81 (c) No Implied Waivers; Rights Cumulative 81 (d) Warranties 82 SECTION 24. Confidentiality 82 SECTION 25. Governing Law and Jurisdiction 83 (a) Governing Law 83 (b) Nonexclusive Jurisdiction in Illinois 83 SECTION 26. Miscellaneous 84 (a) Amendments 84 (b) Severability 84 (c) Counterparts 84 (d) Chattel Paper 84 (e) Time of the Essence 84 (f) Notices 84 (g) Entire Agreement 85 EXHIBITS AND SCHEDULES Exhibit A Technical Acceptance Certificate Exhibit B Basic Rent Exhibit C Form of Lease Supplement Exhibit D Intentionally Omitted Exhibit E Insurance Requirements Exhibit F Intentionally Omitted Exhibit G Intentionally Omitted Exhibit H Intentionally Omitted Exhibit I Form of Aircraft Status Report Schedule 1 Permitted Jurisdictions Schedule 2 Delivery Conditions Annex A Delivery Receipt Attachment 1 Aircraft Status Attachment 2 Aircraft Documentation Schedule 3 Addresses and Accounts Schedule 4 Filings and Recordings Schedule 5 Return Conditions Annex A Redelivery Receipt Attachment 1 Return Documentation Attachment 2 Aircraft Status [Lease Agreement] LEASE AGREEMENT THIS LEASE AGREEMENT, dated as of November 23, 1998 (this "Agreement" or this "Lease"), is between FRONTIER AIRLINES, INC., a Colorado corporation having its principal place of business at 12015 E. 46th Avenue, Denver, Colorado 80239 ("Lessee") and FIRST SECURITY BANK, NATIONAL ASSOCIATION not individually, but solely as trustee under that certain Trust Agreement dated as of November 23, 1998 between itself and Heller Financial Leasing, Inc. ("Lessor"), and HELLER FINANCIAL LEASING, INC., a corporation organized under the laws of the State of Delaware ("Owner Participant"). WITNESSETH: WHEREAS, Lessee desires, upon the terms and conditions hereof, to lease the Aircraft (as defined below) from Lessor, and Lessor is willing, upon the terms and conditions hereof, to lease the Aircraft to Lessee. AGREEMENT: NOW, THEREFORE, in consideration of the foregoing premises, and for other good and valuable consideration the adequacy and receipt of which are hereby acknowledged, the parties hereto agree as follows: SECTION 1. Definitions; Construction of Terms. (a) General Definitions. The following terms shall have the following meanings for all purposes of this Agreement: "AD" shall mean any airworthiness directive issued by the Aviation Authority or mandatory SB. "Additional Parts" has the meaning specified in Section 12(b) (ii)(z). "Affiliate" shall mean, in relation to a Person, any other Person directly or indirectly controlling, controlled by or under common control with that Person. "Aircraft" shall mean, collectively, the Airframe (including the APU) and the Engines and, unless the context does not permit, the Aircraft Documentation. "Aircraft Documentation" shall mean, collectively, any and all log books, records, manuals and other data or documents relating to the Aircraft which are delivered to Lessee in connection with the delivery of the Aircraft and/or set forth on Attachment 1 to Annex A to Schedule 5 hereto and such additional log books, records, manuals and other data or documents relating to the Aircraft which are maintained by Lessee as required by the Aviation Authority. "Aircraft Status Report" shall mean a report substantially in the form of Exhibit I hereto. "Airframe" shall mean, collectively, (i) the Airframe Manufacturer model 737-3U3 airframe (except only Engines or engines from time to time installed thereon), bearing the Airframe Manufacturer's serial number and the registration mark specified in Lease Supplement No. 1, leased hereunder by Lessor to Lessee and (ii) any and all Parts so long as the same shall be incorporated or installed in or attached to such airframe, and any and all Parts removed therefrom so long as title to such removed Parts shall remain vested in Lessor in accordance with the terms of Section 12. "Airframe Manufacturer" shall mean The Boeing Company, a Delaware corporation. "Airworthiness Certificate" shall mean a valid, current transport category airworthiness certificate issued in respect of the Aircraft by the Aviation Authority. "Airframe Cycle" shall mean, with respect to the Airframe, one takeoff and landing thereof. "Airframe Flight Hour" shall mean each hour or part thereof elapsing from the moment the wheels of the Airframe leave the ground on takeoff until the wheels of the Airframe touch the ground on landing following such flight. For purposes of all calculations under this Agreement measured in Airframe Flight Hours, such Airframe Flight Hours (and parts thereof) shall be rounded to the nearest minute. "Approved Maintenance Performer" shall mean Lessee or such other maintenance performer, if any, which shall have a repair station license and approval by the Aviation Authority and, with respect to maintenance performers who are to accomplish Heavy Checks, Basic Shop Visits and/or Landing Gear Overhauls, the Lessor. "Approved Maintenance Program" shall mean Lessee's Aviation Authority-approved written maintenance, inspection and repair program and schedule for Boeing Model 737-3U3 aircraft, including Lessee's current approved maintenance schedule, and the CPCP approved by the Aviation Authority, as such maintenance, inspection and repair program is approved by Lessor pursuant to Section 4(c), or such other written maintenance, inspection and repair program, if any, as Lessor and Lessee shall agree in writing. "APU" shall mean (i) the auxiliary power unit identified by manufacturer's serial number in Lease Supplement No. 1 and (ii) any auxiliary power unit substituted for such auxiliary power unit in accordance with this Agreement. "Authorizations" shall mean each and every approval, waiver, authorization, consent, license, certificate or order of, or registration with, or requirement for the giving of prior notice to, or the taking of any action in respect of, the Aviation Authority, or any other Government Entity having jurisdiction over Lessee, the operation of the Aircraft or any transactions contemplated hereby or by any Operative Document. "Aviation Authority" shall mean the United States Federal Aviation Administration, and any person, governmental department, bureau, commission or agency succeeding to all or any of such authority's functions. "Base Rate" shall mean the rate of interest announced from time to time by The First National Bank of Chicago as its prime commercial lending rate (or its equivalent successor rate if the prime commercial lending rate is no longer used). "Basic Lease Term" shall be the period from and including the Delivery Date to but excluding the 40th monthly anniversary of the Rent Commencement Date. "Basic Rent" shall mean the rent payable during the Basic Lease Term with respect to the Aircraft pursuant to Section 3(b)(i). "Basic Rent Date" shall mean (i) the Rent Commencement Date and (ii) each monthly anniversary of the Rent Commencement Date (provided that if there is no corresponding date in a particular month, the Basic Rent Date for such month shall be the last day of such month) occurring during the Basic Lease Term. "Basic Term Expiry Date" shall mean the date forty (40) months following the Rent Commencement Date. "Basic Shop Visit" shall mean, with respect to any Engine or the APU, any shop visit, as defined by the Engine Manufacturer or the APU manufacturer, as the case may be, that is based on an approved program of condition monitoring and trend monitoring of performance deterioration that results in an Engine or APU, as the case may be, being restored to full performance standard. "Basis point" shall mean 1/100 of 1%. "Break Amount"shall mean, with respect to any termination of the Lease prior to the Expiry Date pursuant to Section 20 hereof, an amount equal to the sum of the present values calculated pursuant to the following formula: (A - B)/12 x C where: A = The yield, as published by the Federal Reserve System in its "Statistical Release H.15 (519), Selected Interest Rates" under the caption "U.S. Government Securities/Treasury Constant Maturities," for a U.S. Government Security having a maturity on the Basic Term Expiry Date (which may be obtained by interpolating between the yields published for whole years), on the Delivery Date; B = The yield, as published by the Federal Reserve System in its "Statistical Release H.15 (519), Selected Interest Rates" under the caption "U.S. Government Securities/Treasury Constant Maturities," for a U.S. Government Security having a maturity on the Basic Term Expiry Date (which may be obtained by interpolating between the yields published for whole years), on the date of determination of such Break Amount; and C = The amount of Stipulated Loss Value which would have been outstanding on the date of determination of such Break Amount and on the first day of each month thereafter throughout the Basic Lease Term had no termination of this Agreement occurred. The present value of each of the amounts calculated above will be obtained by discounting each amount at the monthly equivalent of the rate obtained in clause B above for the number of whole months from the date of termination of this Agreement to the Basic Term Expiry Date (all percentages shall be rounded to the nearest one hundred thousandth percent and Dollar amounts to the nearest whole Dollar). In no event shall Break Amount be a negative number. Break Amount shall be zero during any Renewal Term. "Business Day" shall mean a day (other than a Saturday or Sunday) on which banks are not required or authorized to close in Salt Lake City, Utah or Chicago, Illinois. "Cabin" shall mean the passenger compartment and all doors, windows, interior panels, storage bins, lights, seats, seat covers, carpets, lavatories, galleys, galley equipment, closets, flight attendant seats, passenger communications and entertainment systems, emergency and miscellaneous equipment, seat tracks and floor areas. "Certificate of Registration" shall mean the certificate of registration issued by the Aviation Authority in respect of the Aircraft. "Certificated Air Carrier" means a Citizen of the United States holding an air carrier operating certificate issued by the Secretary of Transportation pursuant to Chapter 447 of Title 49 of the United States Code, for aircraft capable of carrying ten or more individuals or 6,000 pounds or more of cargo or that otherwise is certified or registered to the extent required to fall within the purview of 11 U.S.C. Section 1110 or any analogous successor provision of the United States Bankruptcy Code. "Commitment Termination Date" shall mean December 31, 1998. "CPCP" shall mean a Corrosion Prevention and Control Program and/or Aging Aircraft Program that establishes minimum requirements for the Aircraft, incorporating, among other things, the recommendations of the Airframe Manufacturer and the mandatory requirements established by the Approved Maintenance Program. "Cycle" shall mean an Airframe Cycle or an Engine Cycle, as indicated by the context. ""D" Check" means a "D" Check, as such term is defined in the Approved Maintenance Program relating to the Aircraft or an equivalent check that meets the requirements of a "7C" Check as defined in the Boeing 737 Maintenance Planning Document (MPD); or such other structural check which shall then be the most significant maintenance check under the MPD. "Default" shall mean any Event of Default or any condition, circumstance, act or event which, upon the giving of notice, the passage of time and/or the fulfillment of any other condition would constitute or give rise to an Event of Default. "Delivery" shall have the meaning set forth in Section 2(b). "Delivery Conditions" shall mean the requirement for the condition of the Aircraft on delivery, as set forth in Schedule 2. "Delivery Date" shall mean the date, local time at the Delivery Location, on which the Aircraft is delivered by Lessor and accepted by Lessee pursuant to this Agreement as such date is set forth in Lease Supplement No. 1. "Delivery Location" shall mean the Airframe Manufacturer's delivery facility in Seattle, Washington, or such other location, if any, as Lessor, Owner Participant and Lessee shall agree, in writing. "Delivery Receipt" shall have the meaning specified in Section 4(e)(iii). "Dollars" and "US$" mean the lawful currency of the United States of America. "Engine" shall mean (i)(y) either of the Engine Manufacturer Model CFM56-3C-1 engines listed by Engine Manufacturer's serial numbers in Lease Supplement No. 1 and originally installed on the Airframe at the time of delivery to Lessee hereunder whether or not from time to time thereafter installed on the Airframe or installed on any other airframe and (z) any Replacement Engine which may from time to time be substituted, pursuant to the terms hereof, for either of such engines, and (ii) in each case, any and all Parts incorporated or installed in or attached thereto or any and all Parts removed therefrom so long as title thereto shall remain vested in Lessor in accordance with the terms of Section 12 after removal from such Engine, provided that at such time as an engine shall be deemed part of the property leased hereunder in substitution for an Engine, pursuant to the applicable provisions hereof, the replaced Engine shall cease to be an Engine hereunder. The term "Engines" shall mean, as of any date of determination, all Engines then leased hereunder. "Engine Cycle" shall mean, with respect to any Engine, one takeoff and landing of the airframe (including, without limitation, the Airframe) on which such Engine is from time to time installed. "Engine Flight Hour" shall mean each hour or part thereof elapsing from the moment the wheels of the airframe (including, without limitation, the Airframe) on which such Engine is from time to time installed leave the ground on takeoff until the wheels of such airframe touch the ground on landing following such flight. For purposes of all calculations under this Agreement measured in Engine Flight Hours, such Engine Flight Hours (and parts thereof) shall be rounded to the nearest minute. "Engine Manufacturer" shall mean CFM International, Inc. "Event of Default" has the meaning specified in Section 19. "Event of Loss" shall mean, with respect to the Aircraft, the Airframe or any Engine, any of the following events, conditions or circumstances with respect to such property: (i) the actual or constructive loss of such property or the use thereof due to the destruction of or damage to such property which renders repair uneconomical or which renders such property permanently unfit for normal use by Lessee or Lessor; (ii) any damage to such property or other occurrence which results in an insurance settlement with respect to such property on the basis of a total loss or a constructive, compromised, arranged or agreed total loss; (iii) the confiscation, condemnation, seizure, forfeiture or requisition of the title to such property (for any reason whatsoever and whether de jure or de facto), other than as set forth in clause (v) below); (iv) the disappearance, hijacking or theft (including a seizure of title or use not otherwise included in this definition) of such property for a continuous period in excess of ten (10) days (or, if less, the remaining Lease Term); and (v) the confiscation, condemnation or seizure of, or requisition by any Government Entity or purported Government Entity of use or hire of such property which shall have resulted in the loss of possession or use of such property by Lessee for a continuous period in excess of thirty (30) days (or, if less, the remaining Lease Term). An Event of Loss with respect to the Aircraft shall be deemed to have occurred if an Event of Loss occurs with respect to the Airframe. An Event of Loss with respect to one or more Engines without loss of the Airframe shall not be deemed an Event of Loss with respect to the Aircraft. "Event of Loss Date" shall mean (i) with respect to any Event of Loss set forth in clause (i) or (ii) of the definition of "Event of Loss," the earliest of (x) the date of actual loss, (y) the date on which the loss is agreed, arranged or compromised by the insurers and (z) thirty (30) days after the date of notice to Lessee's brokers or insurers claiming the loss, (ii) with respect to any Event of Loss set forth in clause (iii) of the definition of Event of Loss, the date such event, condition or circumstance occurs, or (iii) with respect to any Event of Loss set forth in clause (iv) or (v) of the definition of Event of Loss, the earlier of (y) the date on which insurers make payment on the basis of a total loss and (z) the expiration of the period, or the continuation of the condition or circumstance beyond the date, described therein. "Expense" shall mean any liabilities, obligations, losses, damages (including, without limitation, damages for loss of life, injury to persons or damage to any property), penalties, fines, sanctions, claims (whether fraudulent, groundless, false or not), actions, suits, judgments, legal proceedings (whether civil or criminal), costs, disbursements and expenses (including reasonable legal fees and expenses, costs of investigation and related expenses), in each case, of every kind and nature whatsoever (including, without limitation any liability, obligation or claim arising in contract or tort, whether or not arising from the negligence, actual, implied or imputed, active or passive, or absolute or strict liability of an Indemnified Party or any other Person or under any other theory). "Expiry Date" shall mean the Basic Term Expiry Date or, if the Renewal Lease Term shall be entered into, the date of expiry of the Renewal Lease Term. "Final Inspection" shall mean the inspection of the Aircraft by Lessor and any other Inspecting Parties during any part of the inspections, checks, and test flights required pursuant to Sections 7(c), 7(d) and 7(e) or otherwise performed in connection with the Return. "Final Maintenance" shall mean prior to the return of the Aircraft on the last day of the Lease Term, the completion of the next scheduled heavy maintenance check ("C" Check or above and, if applicable, multiples of such checks falling due within a "C" Check maintenance interval) in respect of the Aircraft under the Approved Maintenance Program (which check shall incorporate all lower-level checks and any special repair items or special inspections (including, without limitation, all applicable AD's that are required to be accomplished in accordance with the terms of this Lease, mandatory SB's and CPCP items) as well as inspections that have a frequency less than a "C" Check and all cleaning and refurbishment that would be a normal part of the Approved Maintenance Program were the Aircraft to continue in commercial passenger service by Lessee. "Flight Charges" shall mean all flight charges, route navigation charges, navigation service charges and all other fees, charges or Taxes payable for the use of or for services provided at any airport or otherwise payable to any airport, airport authority, navigation or flight authority or other similar entity or for any services provided in connection with the operation, landing or navigation of aircraft. "Follow-On Operator" shall mean any Person acquiring title to or the right to use the Aircraft after the end of the Lease Term (whether or not such Person is an airline or other operator). "Force Majeure" shall mean delay or nonperformance due to or arising out of acts of God or public enemy, civil war, insurrection or riot, fire, flood, explosion, earthquake, accident, epidemic, quarantine restriction, any act of government, governmental priority, allocation, regulation or order affecting, directly or indirectly, the Aircraft, Lessor or Lessee or any materials or facilities, strike or labor dispute causing cessation, slowdown or interruption of work, inability after due and timely diligence to procure equipment, data or materials from suppliers in a timely manner, or any other cause (including unforeseen maintenance) to the extent that such cause is beyond the control of Lessor or Lessee whether above mentioned or not and whether or not similar to the foregoing. "GAAP" shall mean generally accepted accounting principles as shall from time to time be in effect in the Lessee Jurisdiction, as such principles may at any time or from time to time be varied by any applicable financial accounting rules and, with respect to any Person, shall mean such principles applied on a basis consistent with prior periods. "Government Entity" shall mean (i) any national, state or local government of any country, any territory or possession of any country, or any international authority (including, without limitation, in each case, any central bank or fiscal, tax or monetary authority), (ii) any board, commission, department, division, instrumentality, court, agency, territory, possession or political subdivision of any entity described in clause (i) above, however constituted, (iii) any association, organization or institution of which any entity described in clause (i) or (ii) above is a member or to whose jurisdiction any thereof is subject or in whose activities any thereof is a participant and (iv) any taxing authority of any entity described in clause (i), (ii) or (iii) above. "Hour" shall mean an Airframe Flight Hour or an Engine Flight Hour, as indicated by the context. "Indebtedness" means all obligations of Lessee that would, in accordance with GAAP, be shown as a liability on Lessee's balance sheet, and in any footnotes or notations thereto, including, without limitation, (i) obligations for the repayment of monies borrowed or raised, (ii) obligations under finance leases, hire-purchase arrangements, conditional sale agreements and other obligations for the deferred purchase price of property, (iii) guarantees, direct or indirect, of the obligations of any other Person, including any such obligations secured by a Lien on any property of Lessee, (iv) indemnity and reimbursement obligations, including any such obligations arising to any issuer of a letter of credit or similar instrument, and (v) obligations to purchase or otherwise acquire any indebtedness of, or to advance monies to or on behalf of, or make any investment in any other Person. "Indemnified Party" shall mean Lessor, in its individual and trust capacities, Owner Participant and each Inspecting Party (but, as to an Inspecting Party, only in connection with an inspection pursuant to Section 7(c)) and each of their respective Affiliates, and the successors and permitted assigns of each of the foregoing and the directors, officers, corporate stockholders, partners, employees, servants and agents of each of the foregoing. "Inspecting Party" shall have the meaning specified in Section 7(c)(i). "Insurance Brokers" shall mean any independent firm of internationally recognized insurance brokers reasonably acceptable to Lessor. "Insured Party" shall mean each Indemnified Party. "Landing Gear" shall mean (i) each landing gear assembly of the Aircraft identified by serial number in Lease Supplement No. 1 and (ii) any landing gear assembly substituted for any such identified landing gear assembly in accordance with this Agreement. "Landing Gear Overhaul" means any full overhaul of any Landing Gear to full manufacturer specification and operating condition, and, for the avoidance of doubt, "full overhaul" does not mean only the replacement, repair or overhaul of any rotable components, but includes any cleaning or replacement of seals, any repair of brakes, wheels or tires, brake rods, struts or braces, in each case, that occurs any more frequently than a full overhaul. "Lease Supplement" shall mean any lease supplement entered into in accordance with the terms hereof to this Agreement substantially in the form of Exhibit C; "Lease Supplement No. 1" to be entered into between Lessor, Owner Participant and Lessee on the Delivery Date for the purpose of leasing the Aircraft under and pursuant to the terms of this Agreement. "Lease Term" shall mean the Basic Lease Term and the Renewal Lease Term. "Lender" means each of (a) any person or persons as the Lessor may from time to time advise Lessee in writing to be the person or persons providing finance to the Lessor to assist it in purchasing, funding or refinancing the purchase by the Lessor of the Aircraft and including, where the context so admits or requires, any agent or trustee for any one or more of such persons; and (b) any of the respective successors, permitted assigns or permitted transferees of any one or more of any such persons. "Lessee Jurisdiction" shall mean the United States. "Lessor Lien" shall mean any Lien of any Person claiming by, through or under Lessor or Owner Participant which arises from any act or omission of Lessor or Owner Participant, other than any Lien created or permitted hereby or by any other Operative Document. "Letter of Credit" shall have the meaning specified in Section 3(d). "Letter of Credit Bank" shall have the meaning specified in Section 3(d)(ii). "Letter of Credit Deposit" shall have the meaning specified in Section 3(d)(iii). "Lien" means any mortgage, pledge, lien, charge, encumbrance, hypothecation, lease, sublease, seizure, exercise of rights, security interest, judgment, writ, order or other claim or right of possession of any kind or nature whatsoever, however and wherever created or arising and whether or not consensual (including, without limitation, any agreement or arrangement to give or effect any of the foregoing and any conditional sale or other title retention agreement). "Life Limited Component" shall mean any part or component on the Aircraft for which the manufacturer has specified a certain life in either calendar time, Cycles or Hours accumulated after which such part or component must be replaced. "Maintenance Planning Document" shall mean the Boeing 737 maintenance planning document. "Maintenance Reserves" shall have the meaning assigned thereto in Section 14(a). "Major Checks" shall mean any "D" check, "C" check, multiple "C" check (including all lower checks and all other items that are due before the next "C" check), heavy structural inspection (or equivalent), structural inspection or annual heavy maintenance visit or segment thereof suggested for commercial aircraft of the same model as the Aircraft by the Airframe Manufacturer as set out in the Approved Maintenance Program. "Major Modifications" includes, but shall not be limited to: (i) changes that alter the fundamental nature of the Aircraft as a passenger and cargo carrying aircraft or Cabin modifications that materially change the interior layout of the Aircraft, (ii) changes to the Aircraft structure or performance of the Aircraft, (iii) changes that adversely affect interchangeability or replaceability of Parts, (iv) substitution of different types of equipment or accessories which are not equivalent in cost, value, remaining useful life and/or operational capability to the equipment or accessories being replaced, (v) changes that invalidate or impair any warranty with respect to the Aircraft or any Engine or Part, (vi) changes that adversely affect the eligibility of the Aircraft to obtain an Airworthiness Certificate from the Aviation Authority or (vii) any changes that result in a variation from the original type certificate for the Aircraft, but shall exclude changes pursuant to ADs and SBs provided by the Airframe Manufacturer which have Aviation Authority approval and all Required Modifications. "Modification" shall mean any modification, addition, alteration, removal or other change, including, without limitation, ADs and SBs, to the Airframe, any Engine or any Part. "Operative Documents" shall mean this Agreement, each Lease Supplement, the Trust Agreement and any other document, agreement or instrument to which Lessee is a party, or to which it consents in writing, or which is delivered by or on behalf of Lessee and which is entered into or delivered in connection with any of the foregoing or with any of the transactions contemplated by the foregoing. "Parts" shall mean any and all appliances, parts, components, modules, communications equipment, computers, instruments, appurtenances, accessories, furnishings and other equipment of whatever nature (including the APU, the Landing Gear but excluding complete Engines or engines) which may from time to time be incorporated or installed in or attached to the Airframe or any Engine, so long as title thereto shall remain vested in Lessor, in accordance with the terms hereof. "Past Due Rate" shall mean a rate per annum equal to 5% over the Base Rate. "Permitted Jurisdiction" shall mean any country listed in Schedule 1. "Permitted Lien" shall mean any Lien referred to in clauses (i) through (vi) of Section 8(a). "Person" shall mean any individual, corporation, trust, partnership, unincorporated association, joint venture, association, joint-stock company, government or Government Entity. "Proposal Letter" shall mean the Letter Agreement between Lessee and Owner Participant dated October 23, 1998. "Purchase Agreement" shall mean the Purchase Agreement Number 2198 between Heller Financial, Inc and the Airframe Manufacturer dated September 16, 1998. "Reconfiguration" shall mean configure to 136 coach passenger seats with flotation type seat bottom cushions and provide LOPA and certification for interior reconfiguration; rearrange cabin emergency equipment; paint aircraft exterior to conform to Frontier provided drawings; replace existing Allied Signal wheels and brakes with Goodrich; convert fuel related systems to U.S. standards; reprogram the Electronic Flight Instrument System (EFIS), Electronic Horizontal Situation Indicator (EHSI), Flight Management System (FMS), and the Ground Proximity Warning System (GPWS); perform Boeing Service Bulletin ###-##-#### to operate CFM56-3C1 engines at 20,000 pounds thrust; deactivate ACARS; deactivate the HF communications system; reprogram the SelCal decoder; deactivate the passenger video and audio entertainment systems; deactivate the prerecorded passenger announcement system; replace control wheel switches with switches that are spring loaded to the OFF position; load the Frontier provided FMS Navigational Data Base; and such other reconfiguration items as may be agreed upon in advance by Lessor. "Renewal Rent" shall mean the rent payable for the Aircraft during the Renewal Lease Term, if any, determined pursuant to Section 3(b)(ii). "Renewal Rent Date" shall mean with respect to the Renewal Lease Term, if any, (i) the Basic Term Expiry Date, and (ii) each monthly anniversary of the Rent Commencement Date (provided that if there is no corresponding date in a particular month, the Renewal Rent Date for such month shall be the last day of such month) occurring during the Renewal Lease Term. "Renewal Lease Term" shall mean the period, if any, for which the leasing of the Aircraft hereunder has been renewed pursuant to Section 3(a)(ii). "Rent" shall mean, collectively, Basic Rent, Renewal Rent and Supplemental Rent. "Rent Commencement Date" shall mean the later of (i) December 15, 1998 and (ii) the date of completion of the Reconfiguration, provided that this clause (ii) shall not extend beyond the fifteenth (15th) day following the Delivery Date. "Replacement Engine" shall mean an Engine Manufacturer model CFM56-3C-1 engine (or an improved model having a modification status, value and utility at least equal to such an Engine Manufacturer model CFM56-3C-1 engine) (including, without limitation, all warranty rights with respect to such engine) suitable for installation and use on the Airframe without impairing the value or utility of the Aircraft, and with neither Engine Flight Hours nor Engine Cycles since the last Basic Shop Visit greater than the Engine Flight Hours or Engine Cycles of the Engine it is replacing (and with an equal or greater life remaining on each Life Limited Component), and which has a value and utility at least equal to the Engine it is replacing (assuming such Engine was in the modification status, condition and repair required by the terms hereof immediately prior to being replaced) and which has been maintained, serviced, repaired and overhauled in substantially the same manner as is required under this Agreement as to "Engines" and without discrimination in any way, title to which shall have been conveyed to Lessor pursuant to the terms hereof, together with all Parts relating to such Engine so long as the same shall be incorporated or installed in or attached to such Engine leased hereunder, and any and all Parts removed therefrom so long as title to such removed Parts shall remain vested in Lessor in accordance with the terms hereof. "Required Modifications" has the meaning specified in Section 10(c)(ii)(B). "Return" shall mean the return of the Aircraft by Lessee to Lessor at the Return Location in the condition and manner required by Section 7 and the other provisions of this Agreement and the other Operative Documents, as evidenced by the execution by Lessor, and the delivery to Lessee, of the Return Receipt referred to in Section 7(f). "Return Date" shall mean the date upon which the Aircraft is returned to Lessor pursuant to and in accordance with Section 7 hereof. "Return Location" shall mean such location in the United States as may be designated by Lessor, or such other location as shall be mutually agreed between Lessor and Lessee. "Return Receipt" shall have the meaning specified in Section 7 (f). "SB" shall mean any service bulletin or service letter as issued by the Airframe Manufacturer, Engine Manufacturer or the manufacturer of any appliances or Parts. "Scheduled Delivery Date" shall mean November 23, 1998 (local time at the Delivery Location), or if such date is not a Business Day, the next succeeding Business Day (such date to be extended in the event of a delay in the delivery of the Aircraft as a result of additional work being performed on the Aircraft at the request of Lessee), provided that if the conditions precedent of Lessor contained in Section 4 hereof are not met, or waived by Lessor, on such date, (i) Lessor and Lessee shall cooperate and, as applicable, use reasonable efforts to satisfy such conditions precedent as soon as practicable after such date and (ii) the next Business Day on which such conditions precedent are met, or waived by Lessor, shall be the Scheduled Delivery Date. "Security Deposit" shall have the meaning specified in Section 3(d). "State of Registration" shall mean the United States. "Stated Amount" shall have the meaning specified in Section 3 (d)(ii). "Stipulated Deductible Amount" shall mean US$250,000. "Stipulated Loss Value" shall mean US$36,000,000. "Supplemental Rent" shall mean all amounts, liabilities and obligations (other than Basic Rent and Renewal Rent) which Lessee assumes, agrees or otherwise becomes liable to pay to Lessor, Owner Participant, any Indemnified Party or any other Person hereunder or under any of the other Operative Documents, including, without limitation, payments of or in respect of the Stipulated Loss Value, Expenses, Maintenance Reserves, Taxes, Break Amount or other amounts payable under any indemnities. "Taxes" shall mean any and all present or future fees (including, without limitation, license, documentation and registration fees), taxes (including, without limitation, income, receipts, sales, rental, use, turnover, value-added, property (tangible or intangible), excise, franchise, capital, user, transfer, doing business and stamp taxes or duties), licenses, levies, imposts, duties, recording charges or fees, or other charges, assessments, deductions or withholdings of any nature whatsoever, together with any assessments, penalties, late payment charges, notary charges, fines, additions to tax or other similar liabilities with respect to any of the foregoing and interest on any of the foregoing. "Tax Indemnitee" shall mean Lessor, Owner Participant, any Affiliate of Owner Participant, any successor or permitted assign of any of the foregoing or any Affiliate that is a member of a group that files a consolidated or combined tax return that includes Owner Participant, and the directors, officers, employees, servants and agents of each of the foregoing. "Technical Acceptance Certificate" shall have the meaning specified in Section 2(b)(ii). "Time Controlled Component" shall mean any component that Lessee monitors with an interval pursuant to which action is taken to inspect, replace and/or overhaul such component and that is limited by Airframe Cycles, Airframe Flight Hours and/or calendar time. "Trust Agreement" means that certain Trust Agreement dated as of November 23, 1998 between Owner Participant and Owner Trustee. "U.S. Money Center Bank" shall mean U.S. Bank Corporation or such other bank as shall be acceptable to Owner Participant in its sole discretion. "Wet Lease" shall mean any arrangement whereby the Lessee agrees to furnish the Aircraft to a third party and pursuant to which the Aircraft shall be (i) operated solely by regular employees of the Lessee possessing all current certificates and licenses required by the Aviation Authority and applicable laws and (ii) maintained by the Lessee in accordance with its normal maintenance practices and the terms of this Lease. (b) Construction. (i) In this Agreement, unless the contrary intention is stated, a reference to: (u) Each of "Lessor," "Lessee," "Owner Participant" or any other Person includes, without prejudice to the provisions of this Agreement, any successor in interest to it and any permitted assignee and, in the case of any Government Entity, any Government Entity succeeding to all or any of its functions; (v) Words importing the plural include the singular and vice versa; (w) Any document or any law includes that document or that law, as the case may be, as amended, modified or supplemented from time to time in accordance with its terms, and any document entered into or any law enacted or promulgated, as the case may be, in substitution or replacement therefor; (x) A "Law" (1) includes any statute, decree, constitution, regulation, decision, finding, order, rule, judgment or directive of any Government Entity, (2) includes any treaty, pact, compact or other agreement to which any Government Entity is a signatory or party, (3) includes any judicial or administrative interpretation or application thereof, and (4) is a reference to any of the foregoing as amended, substituted, reissued or reenacted; (y) The words "this Lease," "this Agreement," "hereby," "herein," "hereto," "hereof" and "hereunder" and words of similar import when used in this Agreement refer to this Agreement as a whole including, without limitation, the Schedules and Exhibits, and all Annexes thereto, and not to any particular provisions of this Agreement; and (z) A Section or an Exhibit or a Schedule is a reference to a section of, or an exhibit or schedule to, this Agreement. (ii) Headings used in this Agreement are for convenience only and shall not in any way affect the construction of, or be taken into consideration in the interpretation of, this Agreement. SECTION 2. Lease of Aircraft. (a) Agreement to Lease. Subject to satisfaction of the conditions set forth in Section 4 and to the provisions of this Section 2, Lessor hereby agrees to deliver the Aircraft to Lessee at the Delivery Location and to lease the Aircraft to Lessee, and Lessee hereby agrees to accept the Aircraft at the Delivery Location and to lease the Aircraft from Lessor, on the Scheduled Delivery Date, in each case in the condition specified in Schedule 2, but otherwise in an "as is, where is" condition, pursuant to the terms and conditions of this Agreement and the other Operative Documents, the commencement of such leasing to be evidenced by the execution by Lessor, Owner Participant and Lessee of Lease Supplement No. 1. Lessee hereby agrees that its execution of Lease Supplement No. 1 shall, without further act, constitute unconditional and irrevocable acceptance by Lessee of the Aircraft for all purposes of this Agreement. (b) Delivery Conditions; Inspections. (i) Owner Participant shall use reasonable best efforts to procure that the Airframe Manufacturer complies with its obligations with regard to delivery of the Aircraft (the "Delivery") pursuant to the Purchase Agreement. Lessee shall be entitled to participate in the inspection and test flight relating to the redelivery of the Aircraft from the Airframe Manufacturer which inspection shall take place at the Delivery Location. Lessee shall be entitled to have one representative on board as observer of any test flight. Lessee's participation in the inspection and test flight under the Purchase Agreement shall satisfy Lessor's obligations to provide Lessee with reasonable opportunity to verify that the Aircraft meets the Delivery Conditions. (ii) Upon completion of the inspection and test flight referred to above, Lessee agrees to execute and deliver to Lessor a technical acceptance certificate (the "Technical Acceptance Certificate") substantially in the form attached hereto as Exhibit A. Upon execution of the Technical Acceptance Certificate, Lessee shall be deemed to have found the Aircraft to be in acceptable condition for delivery hereunder (and shall not be permitted to refuse to accept delivery of the Aircraft on the Delivery Date on that basis) except to the extent damage or loss to the Aircraft or any Part thereof occurs during the period following execution of the Technical Acceptance Certificate and prior to the Delivery Date (unless Lessor has repaired any such damage or loss prior to the Delivery Date). (iii) Lessor, Owner Participant and Lessee shall cooperate such that the inspection and delivery procedures shall minimize the tax impact to such parties under Section 9(c) hereof. (c) Changes in Delivery Date; Limitation of Lessor's Obligation to Deliver Aircraft. (i) Lessee acknowledges and agrees that Lessor's ability to perform its obligations to deliver the Aircraft in the condition, at the time, at the location and otherwise as specified in this Agreement is dependent upon, among other things, delivery of the Aircraft under, and at the time, at the location and otherwise in accordance with, the Purchase Agreement. Lessee also acknowledges and agrees that Lessor may delay in the delivery of, or fail to deliver, the Aircraft for reasons of Force Majeure (including, without limitation, a failure by the Airframe Manufacturer to perform its obligations regarding delivery pursuant to the Purchase Agreement). (ii) Lessor shall use reasonable efforts to give advance written notice to Lessee of any change in the Scheduled Delivery Date. (iii) Accordingly, if, owing to (y) any delay in the delivery of, or failure to deliver, the Aircraft to Lessee due to a delay in the delivery of the Aircraft to Lessor pursuant to the terms of the Purchase Agreement and/or (z) reasons of Force Majeure, Lessor shall delay in the delivery of the Aircraft under this Agreement beyond the calendar date specified in the definition of "Scheduled Delivery Date," then Lessee shall accept delivery of the Aircraft on the first Business Day after such date on which Lessor has possession of the Aircraft at the Delivery Location; provided, however, that if delivery of the Aircraft under this Agreement is delayed beyond the Commitment Termination Date, then either party hereto may, by written notice to the other, terminate this Agreement and each other Operative Document, whereupon neither Lessor nor Lessee shall have any further obligation to the other hereunder or thereunder, except that Lessor shall be obligated to return the Security Deposit paid (or delivered) by Lessee prior to such termination. In the event of any such delay or any eventual termination of this Agreement, Lessor shall not be responsible for any losses, including loss of profit, costs or Expenses arising therefrom suffered or incurred by Lessee. (d) Bridging Maintenance. Following delivery of the Aircraft to Lessee, Lessee, except as explicitly set forth in Schedule 2 hereto, shall be solely responsible for: (i) causing the Aircraft to be listed on Lessee's Operating Specifications; and (ii) subject to the following sentence, performing, or causing to be performed, all bridging maintenance work necessary to allow Lessee to operate the Aircraft in regularly scheduled revenue passenger service. Lessee may, following delivery of the Aircraft, arrange for the Reconfiguration. Upon completion of the Reconfiguration and submission to Owner Participant of an invoice therefor setting out in reasonable detail the applicable costs related thereto, Owner Participant shall remit to the Lessee an amount equal to the lesser of the actual cost of the Reconfiguration and US$300,000. The actual cost of the Reconfiguration, to the extent in excess of US$300,000, shall be the sole responsibility of the Lessee. SECTION 3. Lease Term; Rent; Payments. (a) Lease Term. (i) The Basic Lease Term shall commence on the Delivery Date and, unless this Agreement is terminated earlier pursuant to the provisions hereof, shall end on the Basic Term Expiry Date. (ii) Renewal Lease Term. Lessee shall have the option to extend the Lease Term beyond the Basic Term Expiry Date for one (1) additional term consisting of twelve (12) months (the "Renewal Lease Term"). The Renewal Lease Term shall commence on the Basic Term Expiry Date and end on the date twelve (12) months following the commencement of the Renewal Lease Term; provided that if the last day of the Renewal Lease Term shall not be a Business Day, then the Renewal Lease Term shall expire on the next preceding Business Day. Such option may be exercised only by delivery of irrevocable written notice to Lessor at least one hundred eighty (180) days prior to the expiration of the Basic Lease Term. The Renewal Lease Term shall be governed by the terms of this Agreement. As a condition precedent to Lessee's right to elect to extend the Lease Term, no Event of Default may be occurring at the time of such notice or such extension. Exercise of Lessee's option to extend the Lease Term pursuant to this Section 3(a)(ii) shall not prejudice the rights of Lessor arising upon the occurrence of a Default or an Event of Default, including, without limitation, the right of Lessor, upon the occurrence of an Event of Default, to terminate this Lease at any time after such occurrence. (b) Basic Rent and Renewal Rent. (i) Basic Rent. During the Basic Lease Term, from and including the Rent Commencement Date, Lessee shall pay rent for the Aircraft in advance on each Basic Rent Date during the Basic Lease Term in advance in immediately available Dollars, in forty (40) consecutive monthly payments, in the amount set forth in Exhibit B hereto. (ii) Renewal Rent. Lessee shall pay rent for the Aircraft on each Renewal Rent Date during the Renewal Lease Term in advance in immediately available Dollars and in the amount set forth in Exhibit B hereto. (c) Supplemental Rent. Lessee shall pay, or cause to be paid, promptly to Lessor, or to whomsoever shall be entitled thereto, any and all Supplemental Rent constituting or in respect of the Stipulated Loss Value, Break Amount and all other amounts of Supplemental Rent when and as the same shall become due and owing. In the event of any failure on the part of Lessee to pay any Supplemental Rent when due, Lessor and each other Indemnified Party shall have all rights, powers and remedies provided for herein or in any other Operative Document, or at law or in equity or otherwise, in the case of nonpayment of Basic Rent or Renewal Rent. Lessee also shall pay to Lessor, or to whomsoever shall be entitled thereto, on demand, as Supplemental Rent, to the extent permitted by applicable law, interest at the Past Due Rate on any part of any installment of Basic Rent or Renewal Rent not paid when due for any period for which the same shall be overdue and on any payment of Supplemental Rent (to the extent permitted by applicable law) not paid when due for the period until the same shall be paid. (d) Security Deposit. (i) Initial Deposit. In connection with the execution of the Proposal Letter, Lessee delivered to the Owner Participant an initial security deposit in the amount of US$260,000 (the "Initial Security Deposit"). The Initial Security Deposit shall be and remain the property of the Owner Participant unless the Delivery Date fails to occur due for reasons other than a default by Lessee, in which case the Initial Security Deposit shall be returned to Lessee. (ii) In connection with the Delivery, and as a condition thereto, Lessee shall deliver to the Owner Participant an additional security deposit in the amount of US$260,000 (the "Additional Security Deposit", and together with the Initial Security Deposit, the "Security Deposit"). So long as no Default shall have occurred and is continuing, Lessee may, in exchange for the Security Deposit, cause an irrevocable letter of credit in form and substance satisfactory to the Lessor (the "Letter of Credit") issued by a U.S. Money Center Bank (the "Letter of Credit Bank") to be issued in favor of Owner Participant (or its designee) in an amount equal to Five Hundred Twenty Thousand Dollars (US$520,000) (the "Stated Amount") on the following terms and conditions: (A) Drawings under any Letter of Credit may be made by Owner Participant (or its designee) in part or in full upon the occurrence of any of the following (each, a "Drawing Event"): (1) if Lessor or Owner Participant receives a notice from the Letter of Credit Bank that it will not renew such Letter of Credit, and Lessee fails to provide Owner Participant (or its designee) with a substitute Letter of Credit in the Stated Amount by the 10th Business Day preceding the day on which the existing Letter of Credit is to expire; or (2) if an Event of Default shall have occurred and be continuing. (B) Thirty (30) days after the Expiry Date, and provided Lessee shall have satisfied all of its obligations hereunder (other than potential contingent obligations (of which Lessor and Owner Participant has no knowledge) under the indemnity provisions of this Agreement), Owner Participant shall take any and all actions which Lessee may reasonably request to terminate and return to Lessee any outstanding Letter of Credit. (iii) If at any time Owner Participant (or its designee) makes a drawing on the Letter of Credit in excess of the amount then owing to Lessor and Owner Participant hereunder, such excess amount shall be treated as a deposit held by Lessor and Owner Participant as security for Lessee's obligations hereunder (such excess amount being referred to herein as the "Letter of Credit Deposit"). In the event of the occurrence of the foregoing, Lessee may obtain a replacement Letter of Credit in an amount equal to the Letter of Credit Deposit. If Lessee obtains such a replacement Letter of Credit and provided that no Default has occurred and is continuing, Owner Participant (or its designee) shall return the Letter of Credit Deposit (net of any amount of the Letter of Credit Deposit applied by Owner Participant as provided pursuant to Section 3(d)(vi)) to Lessee. (iv) At any time during the term while a Letter of Credit shall remain outstanding and provided that no Default has occurred and is continuing Lessee shall have the option of providing Owner Participant with a Security Deposit in the Stated Amount and Owner Participant (or its designee) will promptly thereafter terminate and return to Lessee the outstanding Letter of Credit. (v) Each of the Security Deposit and the Letter of Credit Deposit (collectively, the "Deposit") shall be held by the Owner Participant (or its designee) during the Lease Term as security for the full and punctual performance of all of Lessee's obligations under this Agreement including, without limitation, satisfaction of the requirements of the condition of the Aircraft at the end of the Lease Term as set forth in Section 7. Lessee acknowledges that the Owner Participant (or its designee) may commingle the Deposit with its general funds. Lessee hereby grants to the Owner Participant or its designee, as applicable, a security interest by way of first priority perfected security interest in its interest, if any, in the Deposit and the proceeds thereof and hereby grants to the Owner Participant or its designee, as applicable, any and all of Lessee's right, title and interest therein, if any, as security for Lessee's obligations hereunder. No interest shall accrue in favor of Lessee in respect of the Deposit held by the Owner Participant or its designee, as applicable. At the end of the Lease Term, upon performance by Lessee, satisfactory to the Owner Participant of all of Lessee's obligations hereunder (other than potential contingent obligations (of which Lessor has no knowledge) under the indemnity provisions of this Agreement), the Owner Participant or its designee, as applicable, shall refund any remaining Security Deposit to Lessee. The Owner Participant's obligations in respect of the return of the Security Deposit shall be that of a debtor of Lessee, not as a trustee or other fiduciary. (vi) If a Default shall have occurred and be continuing, the Owner Participant or its designee, as applicable, may, but shall not be obliged to, apply the Deposit and any amount drawn under the Letter of Credit in whole or in part for the payment of any Rent, indemnities, legal fees and other expenses, insurance and other casualty payments and any other amount owing from time to time by Lessee under this Agreement, for the payment of any loss or damage suffered by Lessor or Owner Participant as a result of any Default or utilize the Security Deposit and any amount drawn under the Letter of Credit in whole or in part to perform any of Lessee's obligations under this Agreement or to otherwise remedy any circumstance giving rise to a Default, including the redelivery condition of the Aircraft, without prejudice to any other remedy of Lessor or Owner Participant (it being understood that an application of the Security Deposit and any amount drawn under the Letter of Credit shall not constitute a cure of any Default unless and until Lessee shall have complied with the following sentence). In any such event Lessee shall, on demand, restore the full amount of the Security Deposit by payment to the Owner Participant of an amount in immediately available Dollars equal to the amount by which the balance of the Security Deposit has been reduced under this clause (iv) or, if applicable, increase the amount available to be drawn under the Letter of Credit to the Stated Amount. (e) Payments in General. (i) All payments of Rent shall be made directly by Lessee in Dollars by wire transfer of immediately available funds on the date for payment to the account for Lessor specified in column (2) of Schedule 3, or to such account as Lessor shall otherwise direct by notice to Lessee. (ii) If the due date for any payment of Basic Rent, Renewal Rent, Break Amount or Stipulated Loss Value is not a Business Day, then, unless otherwise provided herein, such payment shall be made on the Business Day next preceding such due date with the same force and effect as if made on such due date and without adjustment in the amount due. (iii) All amounts of interest or amounts calculated by reference to interest payable under any of the provisions of this Agreement shall be calculated on the basis of the actual number of days elapsed and a 360-day year. (f) No Deductions or Withholdings. All payments by Lessee under this Agreement or any other Operative Document to Lessor or any other Indemnified Party, including payments in respect of Basic Rent, Renewal Rent, Supplemental Rent, interest, fees, indemnities or any other item, shall be made in full without any counterclaim, delay, deduction or withholding of any kind or nature whatsoever (including, without limitation, in respect of any setoff, counterclaim, Taxes, insurance charges, monetary transfer fees or any costs and expenses arising in connection with the use and operation of the Aircraft). SECTION 4. Conditions Precedent. The obligations of Owner Participant to enter into the transactions contemplated hereby and of Lessor to lease the Aircraft to Lessee are subject to the fulfillment to the satisfaction of Lessor and Owner Participant, and Lessee shall (with respect to such conditions precedent as are within Lessee's reasonable control) procure such fulfillment, on or prior to the Delivery Date (or, if another date is specified below, on or prior to such date) of the following conditions precedent: (a) Delivery of Aircraft. The Airframe Manufacturer shall have performed all of its obligations under the Purchase Agreement with respect to the delivery of the Aircraft. (b) Delivery Conditions. Prior to the Scheduled Delivery Date, the Aircraft shall have met all of the Delivery Conditions set forth on Schedule 2 hereto. (c) Approved Maintenance Program. Prior to the Scheduled Delivery Date, Lessee shall have provided to Lessor and Owner Participant a summary of the Approved Maintenance Program and such information reasonably requested by Lessor or Owner Participant regarding the proposed Approved Maintenance Program, in each case, for the Aircraft (including, without limitation, evidence that the Aviation Authority has approved the Approved Maintenance Program and such minimum equipment list), and Owner Participant shall have reviewed and approved such Approved Maintenance Program. (d) [Intentionally reserved]. (e) Agreements and Documents. The following documents, agreements, instruments or certificates shall have been duly authorized, executed and delivered by the respective party or parties thereto, shall each be satisfactory in form and substance to Lessor and Owner Participant and shall be in full force and effect and in the English language and executed counterparts shall have been delivered to Lessor and Owner Participant and/or to their respective counsel: (i) this Agreement; (ii) Lease Supplement No. 1 covering the delivery and acceptance of the Aircraft and dated the Delivery Date; (iii) (y) a Technical Acceptance Certificate and an Aircraft Status Report (as of the Delivery Date) and (z) a delivery receipt (the "Delivery Receipt") in the form of Annex A to Schedule 2; (iv) (y) a Certificate of Insurance in form and substance satisfactory to Lessor and Owner Participant and which otherwise complies with the requirements of Section 15 and (z) a Broker's Letter in form and substance reasonably satisfactory to Owner Participant from the Insurance Brokers and which otherwise complies with the requirements of Section 15, together with such other evidence as Lessor shall request as to the due compliance by Lessee with Section 15; (v) (w) an opinion of Ray, Quinney & Nebeker, special counsel to the Owner Trustee, (x) an opinion of Arthur T. Voss, in-house counsel to Lessee in form and substance reasonably satisfactory to Owner Participant, (y) an opinion of Daugherty, Fowler, Perigrin & Haught, special FAA counsel, in form and substance reasonably satisfactory to Lessor and Owner Participant, and in each case covering such other matters as Lessor or Owner Participant may reasonably request; (vi) copies of documents where available evidencing the issuance of each Authorization that may be required in connection with the remittance to Lessor and any other intended recipient of any amount payable under this Agreement, or any other Operative Document and the performance by Lessee of any of its respective obligations hereunder or thereunder; (vii) certified copies of Lessee's Certificate of Incorporation, bylaws and any other organizational documents plus any subsequent amendments thereto; (viii) copies of resolutions of the Board of Directors of Lessee or other written evidence of appropriate corporate action, duly authorizing or ratifying the lease of the Aircraft hereunder, and the execution, delivery and performance of this Agreement and the other Operative Documents, certified by a duly authorized officer of Lessee, in the case of any such resolutions, to have been passed at a duly convened and constituted meeting, and in each case to be true, accurate, complete, unamended and in full force and effect as of the Delivery Date; (ix) certificate signed by a duly authorized officer of Lessee: (u) certifying the incumbency, and the accuracy of the signatures, of the Person or Persons authorized to execute and deliver the Operative Documents on behalf of Lessee; (v) stating that Lessee's representations and warranties contained in this Agreement and each other Operative Document are and shall be true and correct on and as of the Delivery Date as though made on and as of such date (unless made as of a specified date, in which case such representations and warranties shall be true and correct as of such specified date); (w) stating that no Default or Event of Default has occurred and is continuing or will result from the lease of the Aircraft under this Agreement; and (x) such other documents, agreements, certificates and evidence with respect to the Aircraft, Lessee, any Persons acting for Lessee or otherwise as Lessor or Owner Participant may reasonably request in connection with the consummation of the transactions contemplated by this Agreement or the other Operative Documents, the taking of all proceedings (corporate or otherwise) in connection therewith or compliance with all the conditions set forth in this Section 4. (f) Delivery Date Conditions. Each of the following shall be true on the Delivery Date: (i) Lessee shall have paid in full (x) the first installment of Basic Rent and (y) the Security Deposit; (ii) all representations and warranties of Lessee hereunder and under the other Operative Documents shall be true and correct on and as of the Delivery Date as though made on and as of such date (unless made as of a specified date, in which case such representations and warranties shall be true and correct as of such specified date); (iii) Lessee shall have performed, complied with and observed all its obligations, covenants and agreements set forth herein and in each other Operative Document which it is required to perform, comply with or observe prior to or on the Delivery Date; (iv) no Default, Event of Default or Event of Loss, or event, condition or circumstance that would with the giving of notice or passage of time or both become or give rise to an Event of Loss, shall have occurred; (v) (y) no material adverse change has occurred in the financial condition or prospects of Lessee from that set forth in its unaudited consolidated financial statements dated September 30, 1998 and (z) nothing has occurred between September 30, 1998 and the Delivery Date which could materially and adversely affect the ability of Lessee to carry on its business or to perform its obligations under any Operative Document to which it is or will be a party; and (vi) Owner Participant shall have received a copy of Lessee's consolidated financial statements referenced in Section 5(b)(x) hereof. (g) Registration. The Aircraft shall be registered with the Aviation Authority in the name of Lessor. (h) Necessary Government Actions. All appropriate action required to have been taken prior to the Delivery Date by the Aviation Authority or any governmental or political agency, subdivision or instrumentality of the United States in connection with the transactions contemplated hereby shall have been taken, and all orders, permits, licenses, waivers, authorizations, exemptions and approvals of such entities required to be in effect on the Delivery Date in connection with the transactions contemplated hereby shall have been issued, and all such orders, permits, licenses, waivers, authorizations, exemptions and approvals shall be in full force and effect on the date hereof and on the Delivery Date (no such orders, permits, licenses, waivers, authorizations, exemptions and approvals shall be issued on a temporary basis pending further review by the entity requiring such to be in effect). (i) No Government Actions. No action or proceeding shall have been instituted nor shall governmental action be threatened before any United States or foreign court or governmental agency, nor shall any order, judgment or decree have been issued or proposed to be issued by any United States or foreign court or governmental agency at the time of the Delivery Date to set aside, restrain, enjoin or prevent the completion and consummation of this Lease or the transactions contemplated hereby and thereby. (j) No Change in Law. No change shall have occurred after the date of execution and delivery of this Lease in applicable law or regulations thereunder or interpretations thereof by appropriate regulatory authorities which, in the reasonable opinion of Lessor or Owner Participant, would make it a violation of a law or regulations for Lessor or Owner Participant to execute, deliver and perform its obligations hereunder or under any other Operative Document to which it is a party. The conditions precedent specified in this Section 4 are for the sole benefit of Lessor and Owner Participant and may be waived or deferred in whole or in part and with or without condition by Lessor and Owner Participant. If any of such conditions is not satisfied or waived in writing by Lessor on and as of the Delivery Date and Lessor, nonetheless delivers the Aircraft to Lessee hereunder, Lessee hereby covenants and agrees to satisfy, or cause the satisfaction of, such outstanding conditions within thirty days after the Delivery Date. SECTION 5. Representations and Warranties. (a) Disclaimer; Representations, Warranties and Covenants of Lessor and Owner Participant. (i) EXCEPT AS SPECIFICALLY SET FORTH IN ANY OF THE OPERATIVE DOCUMENTS, THE AIRCRAFT SHALL BE DELIVERED UNDER THIS LEASE "AS IS, WHERE IS" AND LESSEE AGREES, ACKNOWLEDGES AND ACCEPTS THAT, NEITHER LESSOR NOR ANY OTHER INDEMNIFIED PARTY MAKES ANY WARRANTY OR REPRESENTATION WHATSOEVER CONCERNING THE AIRCRAFT OR OTHERWISE. LESSEE, FOR THE BENEFIT OF LESSOR AND EACH INDEMNIFIED PARTY, HEREBY WAIVES, RELEASES AND RENOUNCES ALL WARRANTIES, REPRESENTATIONS AND OTHER INDEMNITIES, OBLIGATIONS AND LIABILITIES OF LESSOR AND ANY OTHER INDEMNIFIED PARTY AND ANY RIGHTS, CLAIMS AND REMEDIES OF LESSEE, EXPRESS OR IMPLIED, ARISING BY LAW OR OTHERWISE, IN EACH CASE, WITH RESPECT TO ANY NONCONFORMANCE OR DEFECT IN THE AIRCRAFT, ANY PART THEREOF OR ANY OTHER THING DELIVERED, LEASED, CHARTERED OR TRANSFERRED UNDER THIS LEASE, OR OTHERWISE INCLUDING, WITHOUT LIMITATION: (A) ANY WARRANTY AS TO THE AIRWORTHINESS, VALUE, CONDITION, DESIGN, OPERATION OF, OR THE QUALITY OF THE MATERIAL OR WORKMANSHIP IN, OR ANY DEFECT IN, THE AIRCRAFT, THE AIRFRAME, ANY ENGINE, ANY PART, ANY DATA, ANY AIRCRAFT DOCUMENTATION OR ANY OTHER THING DELIVERED, SOLD OR TRANSFERRED HEREUNDER; (B) ANY IMPLIED WARRANTY OF MERCHANTABILITY OR FITNESS FOR USE FOR A PARTICULAR PURPOSE; (C) ANY EXPRESS OR IMPLIED WARRANTY AS TO TITLE; (D) ANY IMPLIED WARRANTY ARISING FROM COURSE OF PERFORMANCE, COURSE OF DEALING OR USAGE OF TRADE; (E) ANY OBLIGATION OR LIABILITY WITH RESPECT TO ANY ACTUAL OR ALLEGED PATENT OR OTHER INTELLECTUAL PROPERTY INFRINGEMENT; (F) ANY OBLIGATION, LIABILITY, RIGHT, CLAIM OR REMEDY IN TORT, WHETHER OR NOT IN STRICT OR ABSOLUTE LIABILITY OR ARISING FROM THE NEGLIGENCE OF LESSOR OR ANY INDEMNIFIED PARTY, ACTUAL OR IMPUTED, ACTIVE OR PASSIVE; AND (G) ANY OBLIGATION, LIABILITY, RIGHT, CLAIM OR REMEDY FOR LOSS OR DAMAGE TO THE AIRCRAFT, THE AIRFRAME, ANY ENGINE, ANY PART, ANY DATA OR ANY OTHER THING, FOR ANY LOSS OF USE, REVENUE OR PROFIT OR FOR ANY OTHER DIRECT, INCIDENTAL OR CONSEQUENTIAL DAMAGES. (ii) DELIVERY BY LESSEE TO LESSOR OF LEASE SUPPLEMENT NO. 1 WILL BE CONCLUSIVE PROOF AS BETWEEN LESSOR AND LESSEE (BUT WITHOUT PREJUDICE TO ANY CLAIMS LESSOR OR LESSEE MAY HAVE AGAINST THE AIRFRAME MANUFACTURER, ENGINE MANUFACTURER OR ANY VENDOR WITH RESPECT TO THE AIRCRAFT) THAT LESSEE HAS EXAMINED AND INSPECTED THE AIRCRAFT, THAT THE AIRCRAFT AND THE AIRCRAFT DOCUMENTATION ARE SATISFACTORY TO LESSEE AND THAT LESSEE HAS IRREVOCABLY AND UNCONDITIONALLY ACCEPTED THE AIRCRAFT FOR LEASE HEREUNDER WITHOUT ANY RESERVATIONS WHATSOEVER. (iii) Each of Lessor and the Owner Participant represents and warrants that on the Delivery Date and throughout the Lease Term, so long as no Event of Default shall have occurred and be continuing, except as may be expressly provided in this Agreement or in any other Operative Document to which Lessee is a party or consents, it shall not take or cause to be taken any action inconsistent with Lessee's right of quiet enjoyment of, or otherwise in any way interfere with or interrupt, the continuing use, operation and possession of the Aircraft, the Airframe or any Engine by Lessee. (iv) Each of Lessor and the Owner Participant hereby agrees for the benefit of each lessor of any airframe leased to Lessee and each seller of an airframe purchased by Lessee subject to a conditional sale or other security agreement that it will not acquire or claim, as against such lessor or seller, any right, title or interest in any engine covered by any such lease or conditional sale and owned by such lessor or seller, which engine is attached to the Airframe, provided that such agreement of Lessor and the Owner Participant shall not be for the benefit of any lessor or seller of any airframe leased to Lessee or purchased by Lessee subject to a conditional sale, unless such lessor or seller has expressly agreed (which agreement may be contained in such lease or conditional sale agreement) that neither it nor its successors or assigns will acquire, as against Lessor or Owner Participant, any right, title or interest in an Engine as a result of such Engine's being installed on such airframe. (b) Lessee's Representations and Warranties. In order to induce Lessor and Owner Participant to enter into this Lease and to lease the Aircraft, Lessee hereby represents and warrants to Lessor and Owner Participant as of the date hereof and as of the Delivery Date (unless, in each case, such representation and warranty is expressly applicable on and as of another date or dates) that: (i) Organization, Qualification, Etc. Lessee (w) is a corporation duly incorporated under the laws of the State of Colorado, (w) holds all Authorizations necessary to authorize Lessee to engage in air transport and to carry on scheduled passenger and cargo service in each case as presently conducted, (x) has the corporate power and authority to own or hold under lease its properties wherever located or used and to enter into and perform its obligations under each Operative Document to which it is a party, (y) is duly qualified and authorized to do business, and is in good standing, in each jurisdiction in which the nature of its business makes such qualification necessary, except where the absence of such qualification would not materially adversely affect its ability to perform its obligations under the Operative Documents and (z) is a Certificated Air Carrier. (ii) Corporate Authority. The execution, delivery and performance by Lessee of this Agreement, Lease Supplement No. 1 and each other Operative Document to which Lessee is a party have been duly authorized by all necessary corporate action on the part of Lessee, do not require any stockholder or shareholder approval, or approval or consent of any trustee or holders of any indebtedness or obligations of Lessee, except such as have been duly obtained or, by the Delivery Date, will have been duly obtained, and copies of which shall have been delivered to Lessor and Owner Participant on or before the Delivery Date. (iii) Government Approvals. Neither the execution and delivery by Lessee of this Agreement, Lease Supplement No. 1 or any other Operative Document to which Lessee is a party nor the performance by Lessee of its obligations hereunder or thereunder requires any Authorization, except for (y) Authorizations that have been duly obtained and are in full force and effect, and copies of which shall have been delivered to Lessor and Owner Participant on or before the Delivery Date, and (z) any normal periodic and other reporting requirements under the applicable rules and regulations of the Aviation Authority (but only to the extent required to be observed or performed after the Delivery Date). (iv) No Breach. Neither the execution and delivery of this Agreement, Lease Supplement No. 1 or any other Operative Document by Lessee nor the consummation by Lessee of the transactions contemplated hereby or thereby nor compliance by Lessee with any of the terms or provisions hereof or thereof will (x) violate any of the provisions of the organizational or charter documents or bylaws of Lessee, (y) conflict with or contravene, or result in the creation, perfection or enforcement of any lien under, any law applicable to or binding upon the Aircraft, Lessee or any property of Lessee or (z) conflict with or result in any breach of any of the terms or provisions of, or constitute any default under, or result in or require the creation of any Lien upon any property of Lessee under, any indenture, mortgage, deed of trust, conditional sales contract, note, loan, credit agreement or other agreement or instrument to which Lessee is a party or by which Lessee or its properties or assets may be bound or affected. (v) Legal, Valid and Binding Agreements. This Lease, Lease Supplement No. 1 and each other Operative Document to which Lessee is a party, in each case, as and when entered into, have been, or will be, duly executed and delivered by Lessee and constitute, or will constitute, legal, valid, binding and enforceable obligations of Lessee. (vi) Litigation. There are no pending or threatened actions or proceedings before any court or administrative agency (y) in respect of this Agreement or any other Operative Document or the Aircraft or the performance by Lessee of its obligations hereunder or under any other Operative Document or (z) which would, if adversely determined, materially adversely affect the ability of Lessee to perform its obligations under the Operative Documents. (vii) Filing. Except for the registration of the Aircraft with the FAA and the filings or recordings described in Schedule 4, no further action, including the filing or recording of any instrument or document is necessary or advisable under the laws of the State of Registration or the Lessee Jurisdiction (x) in order for this Agreement to constitute a valid and perfected lease of record relating to the Aircraft, (y) to authorize or permit Lessee to perform its obligations under each Operative Document (including, without limitation, Lessee's obligation to pay Rent) or (z) fully to protect, establish, perfect and preserve Lessor's title to, and Lessor's rights and interests in, the Aircraft as against Lessee and any other Person. (viii) No Withholding. Lessee will not be required to deduct from any Rent payment made or to be made hereunder any withholding or other Tax under the laws of the State of Registration, the Lessee Jurisdiction or any other jurisdiction, either (y) on or by virtue of the execution or delivery by Lessee of this Agreement or any other Operative Document or (z) on or by virtue of the performance by Lessee of this Agreement or any other Operative Document, including, without limitation, payment of Rent or any other amount made, or to be made, by Lessee pursuant to this Agreement or any other Operative Document. (ix) No Default or Event of Default. There has not occurred any event which is presently continuing and which would constitute a Default or Event of Default under this Agreement or any of the other Operative Documents. (x) Financial Condition. The statements of financial position of Lessee as of March 31, 1998 and September 30, 1998 and the related statements of earnings and cash flows of Lessee for the fiscal year and six (6) months then ended, fairly present the financial condition of Lessee as at such dates and the results of operations and cash flow of Lessee for the periods ended on such dates, in accordance with generally accepted accounting principles consistently applied (except as may be stated in the notes thereto), and, subject in the case of the March 31, 1998 statements, to normal year-end audit adjustments, since March 31, 1998, there has been no material adverse change in such condition or operations, except as disclosed in press releases issued by Lessee. (xi) Taxes. Lessee has paid or caused to be paid all Taxes when due and payable or has made adequate provision by way of security for all Taxes payable by Lessee (except to the extent being contested in good faith and by appropriate proceedings, and for the payment of which adequate reserves have been provided, so long as such contest does not involve a material danger of the sale, forfeiture, confiscation, seizure or loss of the Aircraft, any Engine or Part thereof). No Taxes (including, without limitation, any stamp or value-added taxes), levies, imposts, duties or similar charges may be imposed by the government of the Lessee Jurisdiction, or any Government Entity or political or taxing subdivision therein, upon or with respect to the execution or delivery of this Agreement or any other Operative Document or the delivery of the Aircraft hereunder. (xii) No Material Adverse Change. Since September 30, 1998 no event has occurred or state of affairs exists that has or may have a material adverse effect on (i) the ability of Lessee to carry on its business or to perform its obligations under any Operative Document to which it is or will be a party or (ii) the rights or interests of Lessor under any Operative Document to which it is or will be a party. (xiii) Pari Passu. The obligations of Lessee under this Agreement and the other Operative Documents are direct, general and unconditional obligations of Lessee and rank at least pari passu with all other present and future unsecured and unsubordinated obligations (including contingent obligations) of Lessee with the exception of such obligations as are mandatorily preferred by law and not by virtue of any contract. (xiv) Section 1110. Lessor is entitled to the protection of Section 1110 of Chapter 11 of Title 11 of the United States Code in connection with its right to take possession of the Aircraft, Airframe and Engines in the event of a case under such Chapter 11 in which Lessee is a debtor. The rights and remedies of Lessor or Owner Participant in relation to any misrepresentation or breach of warranty on the part of Lessee shall not be prejudiced by any investigation by or on behalf of Lessor or Owner Participant into the affairs of Lessee, by the performance of this Agreement or by any other act or thing which may be done or omitted to be done by Lessor or Owner Participant and which would or might, but for this provision, prejudice such rights and remedies. SECTION 6. Certain Covenants of Lessee. Lessee covenants and agrees with Lessor and Owner Participant at Lessee's sole cost and expense, as follows: (a) Maintenance of Corporate Existence; Duly Qualified; Certificated Air Carrier. Subject to Section 6(b), at all times during the Lease Term, Lessee shall (i) exist as a company incorporated under the laws of the State of Colorado, (ii) hold all Authorizations necessary to authorize Lessee to engage in air transport and to carry on passenger and cargo service in each case as presently conducted by Lessee, (iii) have the corporate power and authority to own or hold under lease its properties wherever located or used and to enter into and perform its obligations under each Operative Document to which it is a party, (iv) be duly qualified and authorized to do business, and be in good standing, in each jurisdiction in which the nature of its business makes such qualification necessary, except where the absence of such qualification would not materially or adversely affect its ability to perform its obligations under the Operative Documents and (v) at all times be a Certificated Air Carrier. (b) Merger or Consolidation. Lessee shall preserve its corporate existence, and will not merge or consolidate with any person unless the successor person resulting from such merger or consolidation (the "Successor"): (i) is the Lessee or a corporation incorporated in the State of Colorado or another State of the United States; (ii) shall have a net worth immediately after such merger or consolidation of not less than the Lessee's net worth immediately prior thereto; (iii) shall be authorized under applicable law to perform the Lessee's obligations under this Lease to the same extent as the Lessee; (iv) shall deliver to the Lessor and Owner Participant an agreement in form and substance reasonably satisfactory to the Lessor Owner Participant containing an assumption by the Successor of the Lessee's representations and warranties under this Lease, together with the due and punctual performance of all the Lessee's obligations under this Lease; and (v) shall deliver to the Lessor and Owner Participant an opinion of counsel reasonably satisfactory in form and substance to the Lessor and Owner Participant to the effect that the agreement referred to in sub-clause (iii) above constitutes the Successor's legal, valid, binding and enforceable obligations. (c) Reporting Requirements. The Lessee shall furnish to the Lessor and Owner Participant: (i) within 45 days after the last day of the first three fiscal quarters of each fiscal year of Lessee, unaudited consolidated quarterly financial statements of the Lessee prepared for such quarter as of the last day of such quarter and statements of income and retained earnings for such fiscal quarter and on a comparative basis figures for the corresponding period of the immediately preceding fiscal year, all in reasonable detail, each such statement to be certified in a certificate of Lessee's chief financial officer or chief accounting officer as fairly presenting the financial position and the results of operations of the Lessee as at its date and for such quarter (subject to year-end audit adjustments) and as having been prepared in accordance with GAAP; (ii) as soon as available but not in any event later than 90 days after the last day of each fiscal year of Lessee, audited financial statements of the Lessee prepared for such year, including a balance sheet of Lessee of the last day of such year, statements of income and retained earnings of Lessee for such fiscal year, a balance sheet of the Lessee as of the last day of such year and statements of income and retained earnings of the Lessee for such fiscal year and in all cases on a comparative basis figures for the immediately preceding fiscal year, all in reasonable detail, each prepared in accordance with GAAP and certified without qualification by KPMG Peat Marwik or another firm of independent certified public accountants as fairly presenting the financial position and the results of operations of Lessee at the end of and for such fiscal year and as having been prepared in accordance with GAAP; (iii) in lieu of the financial statements referred to in sub-clauses (i) and (ii) above, any Quarterly Reports on Form 10-Q and Annual Report on Form 10-K for the respective periods filed by Lessee pursuant to and in accordance with the Securities Exchange Act of 1934, as amended; (iv) concurrently with the financial statements furnished pursuant to Clauses 6(c)(i) and (ii) above, an officer's certificate signed by the chief financial officer or chief accounting officer of Lessee certifying to the best knowledge after due inquiry of such officer that no Default occurred during the period covered by such financial statements and no Default exists on the date of such officer's certificate or, if a Default occurred or exists, stating that fact and specifying the nature and period of existence of such Default and the actions Lessee took or proposes to take with respect to such Default; and (v) on request from time to time such other information regarding the Lessee and its business and affairs as the Lessor or the Lender may reasonably request. (d) Government Approvals. Lessee shall maintain, or cause to be maintained, in full force and effect all Authorizations obtained or effected in connection with this Agreement and every document or instrument contemplated hereby as are required to be maintained and shall take all such additional action as may be necessary or advisable in connection therewith. Lessee further undertakes to obtain or effect any new or additional Authorizations as may become necessary for the performance of any of the terms and conditions hereof or any other document or instrument contemplated hereby. (e) Taxes. Lessee shall file or cause to be filed all tax returns which are required to be filed and shall pay or cause to be paid all Taxes when due and payable (except to the extent being contested in good faith and by appropriate proceedings, and for the payment of which adequate reserves have been provided but only as long as such proceedings do not involve any material danger of the sale, forfeiture, confiscation, seizure or loss of the Aircraft or any interest therein). (f) Place of Business. Lessee shall provide to Lessor written notice of any change in its principal place of business as set forth in Schedule 3 within 30 days thereafter. (g) Filings. Lessee shall promptly take all such action, including the filing or recording of any instrument or document as may, from time to time, be necessary or advisable under the laws of the State of Registration and the Lessee Jurisdiction (x) in order for this Agreement to constitute a valid and perfected lease of record relating to the Aircraft, (y) to authorize or permit Lessee to perform its obligations under each Operative Document (including, without limitation, its obligation to pay Rent) or (z) to fully protect, establish, perfect and preserve Lessor's title to, and Lessor's rights and interests in, the Aircraft as against Lessee, and any other Persons. For the avoidance of doubt, the cost of all filings and related notarizations, required by this Agreement or any other Operative Document shall be borne by Lessee. (h) Approved Maintenance Program. Lessee shall not make any substantive changes to the Approved Maintenance Program unless Owner Participant shall have reviewed and approved such substantive changes to the Approved Maintenance Program which Lessee proposes to make during the Lease Term, provided that (ii) Owner Participant's approval/disapproval of such substantive changes shall be reasonable and consistent with industry standards. SECTION 7. Return of the Aircraft. (a) Date and Location of Return. Upon any expiration or termination of the Lease Term, subject only to Section 13(b)(ii)(x), Lessee, at its own risk, cost and expense, shall return the Aircraft, including the Airframe, the Engines, all Parts thereof and the Aircraft Documentation to Lessor or its designee in accordance with the provisions of this Agreement and shall perform the elements of the Final Inspection as required hereby, all prior to the end of the Lease Term (the "Return"). Not later than the end of the Lease Term, the Aircraft shall be returned to Lessor or its designee at the Return Location. (b) Condition of Aircraft. At Return, Lessee shall, at its sole risk, cost and expense, procure that the Aircraft is free and clear of all Liens (other than Lessor Liens) and that the Aircraft complies in all respects with the conditions and requirements set forth in Schedule 5. (c) Final Inspection. (i) No less than 60 days prior to commencement of the Return, Lessee shall provide Lessor with written notice of the date (which shall be not less than fifteen (15) days prior to the Expiry Date) of, and a reasonably complete plan for the content of, the Final Maintenance and shall give Lessor further written notice of the date of, and any changes to the plan for, the Final Maintenance. During the entire period of such Final Maintenance, the Aircraft, including the Aircraft Documentation, shall be made available to Lessor and/or Lessor's agents, representatives and designees (each, an "Inspecting Party") for ground inspection by the Inspecting Parties at the Return Location. So long as no Event of Default has occurred and is continuing, no such inspection shall unreasonably interfere in the business operations of Lessee except to the extent such interference is reasonably necessary to enable an Inspecting Party to exercise its rights set forth in this Section 7(c)(i). Lessee shall make available to the Inspecting Parties such documentation regarding the condition, use, maintenance, operation and history of the Aircraft during the Lease Term as Lessor may reasonably request. During the Final Inspection, any Inspecting Party shall have the right to reasonably request that additional panels or areas be opened in order to allow further inspection by any Inspecting Party. Lessee shall remove the Aircraft from service and open the areas of the Aircraft as required to perform the Final Maintenance and the other inspections and checks as contemplated in this Section 7 and Schedule 5 that are reasonably requested by Lessor in accordance with the terms hereof and otherwise permit Lessor to determine, and assist Lessor in determining that the Aircraft, including the Aircraft Documentation, is in the condition required herein. (ii) Promptly after such inspections, except as otherwise agreed in writing by Lessor and Lessee, any discrepancies from the Aircraft return condition requirements set forth in this Section 7, and any discrepancies that must be corrected in order to comply with the Approved Maintenance Program, which shall include clearing of all deferred maintenance items, shall be corrected by Lessee at its cost prior to the operational ground check described in Section 7(d). (d) Operational Ground Check. (i) In connection with the Return (and following the inspection referred to in Section 7(c)), Lessee shall conduct an operational ground check of the Aircraft in accordance with the procedures set forth in the Airframe Manufacturer's maintenance manual, for the purpose of demonstrating to the reasonable satisfaction of Lessor the operation of all Aircraft systems that can be verified on the ground, including, if required by Lessor and at Lessee's cost, a full fuel tank leak check, audible ignition check (both systems), pitot and static systems check and hydraulic system internal leak check. (ii) Promptly after the operational ground check, except as otherwise agreed in writing by Lessor and Lessee, any discrepancies from the Aircraft return condition requirements set forth in this Section 7, and any discrepancies that must be corrected in order to comply with the Approved Maintenance Program and the Airframe Manufacturer's maintenance manual criteria, shall be corrected by Lessee at its cost prior to the demonstration flight described in Section 7(e). (e) Demonstration Flight. (i) Immediately following the operational ground check pursuant to Section 7(d), but prior to Lessor's technical acceptance of the Aircraft, Lessee shall, using its own pilots and at its own cost, carry out for the Inspecting Parties a demonstration flight in the Aircraft in accordance with Lessee's specifications and the Lessee's Aviation Authority-approved flight manual to demonstrate the proper functioning of Aircraft systems and components, as requested by Lessor within limits and/or guidelines established by the relevant manufacturers and the Aviation Authority. Such flight shall continue for the duration necessary to perform such check flight procedures, but for a period not exceeding two (2) hours. Lessor shall be allowed at least two representatives on-board as observers during such flight and Lessee shall comply with all reasonable requests made by such representatives during such flight. (ii) Except as otherwise agreed in writing by the Lessor and Lessee, promptly following such demonstration flight, any deficiencies from the Aircraft return condition requirements set forth in this Section 7 and Schedule 5, and any discrepancies that must be corrected in order to comply with the Approved Maintenance Program and the Airframe Manufacturer's maintenance manual and to achieve the proper functioning of the Aircraft systems and components, shall be corrected by Lessee at its cost prior to Return. (f) Technical Acceptance. Upon satisfactory completion of the Final Inspection and, unless otherwise agreed in writing by Lessor and Lessee, satisfactory correction of any discrepancies or deficiencies required to be corrected by Lessee prior to Return, Lessor shall execute and deliver to Lessee, a delivery receipt in the form of Annex A to Schedule 5 (the "Return Receipt") which shall, for all purposes hereof, constitute complete, irrevocable and absolute evidence of Lessor's technical acceptance of the Aircraft, except as validly noted in such Return Receipt. To the extent technical acceptance occurs prior to Return, Lessee shall remain liable for the performance of all of its payments and other obligations hereunder, and for any damage to or loss of the Aircraft occurring between the date thereof and Return (it being understood and agreed that Lessee shall maintain insurance as required by Section 15 to and including such date). (g) Failure to Return Aircraft. If Lessee shall, due to reasons of Force Majeure or for any other reason whatsoever, fail to return the Aircraft at the time or in the condition specified herein or return of the Aircraft is not accepted by Lessor because of Lessee's failure to meet the requirements of this Section 7 and Schedule 5, the obligations of Lessee provided in this Agreement and each other Operative Document to which Lessee is a party (including the obligation to pay Rent, on a per diem basis based upon a pro rata application of 125% of the monthly Rent in force during the last month of the Lease Term) shall continue in effect with respect to the Aircraft, and the Lease Term shall be deemed to be extended until Return of the Aircraft to Lessor; provided that, this Section 7(g) shall not be construed as permitting or authorizing Lessee to fail to meet, or consenting to or waiving any failure by Lessee to perform, Lessee's obligation to return the Aircraft in accordance with the requirements of this Agreement. (h) Transition. Lessee acknowledges that Lessor intends to lease or sell the Aircraft to another Person at the end of the Lease Term. In order to facilitate such lease or sale of the Aircraft, Lessee agrees to cooperate with Lessor and to otherwise assist Lessor in such matters by, for example: (i) allowing reasonable inspections of the Aircraft by the Follow-On Operator (without interrupting any commercial operation of the Aircraft); (ii) using reasonable endeavors to schedule the Return of the Aircraft and the Final Inspection in a manner that will allow for a simultaneous delivery of the Aircraft to the Follow-On Operator; (iii) assisting with exporting the Aircraft from the State of Registration and arranging for the notice of deregistration of the Aircraft to be sent to the aviation authority in the country where the Aircraft will be registered by the Follow-On Operator; (iv) assisting with the transition of the Aircraft from the Approved Maintenance Program to the maintenance program of the Follow-On Operator by providing access to the relevant technical data; and (v) performing or procuring the maintenance or modifications to the Aircraft as may be agreed by Lessor and Lessee, at Lessor's cost. SECTION 8. Liens. (a) No Liens. Lessee will not directly or indirectly create, incur, assume or suffer to exist, or agree to create or assume, any Lien on or with respect to the Aircraft, any Engine or any Part or in this Agreement, or in any right, title or interest in any of the foregoing, except: (i) the rights of Lessor and Owner Participant provided in the Operative Documents; (ii) the rights of others under agreements or arrangements to the extent permitted by the terms of Section 11; (iii) Lessor Liens; (iv) Liens for Taxes of Lessee arising in the ordinary course of business either not yet due or being contested in good faith by appropriate proceedings (and for the payment of which adequate reserves have been provided) so long as such contest does not involve any material danger of the sale, forfeiture, seizure or loss of the Airframe, any Engine or any Part or any interest therein; (v) materialmen's, mechanics', workmen's, repairmen's, employees' or other like Liens arising by operation of law in the ordinary course of Lessee's business (including those arising under maintenance agreements entered into in the ordinary course of business) securing obligations that are not yet due or are being contested in good faith by appropriate proceedings (and for the payment of which adequate reserves have been provided) so long as such contest does not involve any material danger of the sale, forfeiture, seizure or loss of the Airframe, any Engine or any Part or any interest therein; and (vi) Liens, other than Liens for Taxes, in respect only of Lessee's interest as Lessee under this Agreement and arising out of any judgment or award against Lessee (and for the payment of which adequate reserves have been provided), but only if the judgment secured shall have been discharged, vacated, reversed or execution thereof stayed pending a good faith appeal or shall have been discharged, vacated or reversed upon expiration of such stay. (b) Removal of Liens. Lessee will promptly, at its own expense, take, or cause to be taken, such actions as may be necessary duly to discharge any Lien not excepted under Section 8(a) that may at any time arise, exist or be levied upon the Aircraft, any Engine, any Part or in this Agreement, or in any right, title or interest in any of the foregoing, and Lessee shall indemnify and hold harmless Lessor, Owner Participant and each other Indemnified Party from any Expenses arising therefrom. (c) No Adverse Action. Without limiting the foregoing or any other provision of this Agreement or any other Operative Document, Lessee will not do or permit to be done anything which may expose the Aircraft or any part thereof to penalty, forfeiture, seizure, arrest, impoundment, detention, confiscation, taking in execution, attachment, appropriation or destruction, nor abandon the Aircraft or any Part. SECTION 9. Indemnities. (a) General Indemnity. Subject only to the exceptions set forth in Section 9(b), Lessee hereby assumes liability for and hereby agrees to indemnify Lessor, Owner Participant and each other Indemnified Party against, and agrees to protect, save and keep harmless each thereof from, any and all Expenses of whatsoever kind and nature from time to time imposed on, incurred by or asserted against any Indemnified Party in any way relating to or arising out of: (i) the Operative Documents, any of the transactions contemplated thereby or the enforcement of any of the terms thereof, including, without limitation, the enforcement of this Section 9; (ii) the Aircraft, the Airframe, any Engine or engine or Part or any other thing delivered under this Agreement; (iii) the acceptance, delivery, lease, sublease, charter, subcharter, registration, deregistration, reregistration, possession, repossession, use, presence, operation, condition, storage (unless otherwise expressly provided herein), installation, testing, modification, alteration, maintenance, repair, release, return, transportation, transfer, exportation, importation, abandonment or other disposition of the Aircraft, the Airframe, any Engine or engine or Part or any other thing delivered under this Agreement (including, without limitation, any claim for patent, trademark or copyright infringement in respect of any Part of the Aircraft which was not delivered to Lessee hereunder, any liability for any injury to or death of any Person or loss of or damage to any property, latent or other defects, whether or not discoverable and whether or not any of the foregoing shall arise as a result of the action or inaction of Lessee or any other Person); and (iv) any breach or noncompliance by Lessee with any covenant, term, agreement, condition, undertaking or obligation under this Agreement or under any other Operative Document or agreement entered into or furnished by Lessee in connection herewith or therewith, or the falsity or inaccuracy in any material respect of any representation or warranty of Lessee set forth herein or therein, or the occurrence of any other Default, including, without limitation, any Expenses incurred, assumed or suffered by Lessor or any other Indemnified Party as a consequence of Lessee's failure to Return the Aircraft in accordance with this Agreement on any date specified or required herein. (b) Exceptions to General Indemnity. The indemnity provided for in Section 9(a) will not extend to any of the following Expenses of any Indemnified Party: (i) Expenses caused solely by the gross negligence or willful misconduct of such Indemnified Party (other than negligence imputed to such Indemnified Party by reason of its interest in the Aircraft solely and by virtue of law); (ii) Expenses caused solely by a breach by such Indemnified Party of any covenant or inaccuracy or falsity of a representation or warranty made by such Indemnified Party in this Agreement or the documents and agreements delivered by such party to Lessee on or prior to the Delivery Date; (iii) Expenses that are Taxes (it being agreed that Lessee's sole responsibility for Taxes is as set out in Section 9(c) hereof); (iv) Expenses attributable solely to the period (x) prior to the Delivery Date and (y) after the return of possession of the Airframe, the Engines and the Parts to Lessor or its designee pursuant to and in accordance with the terms of this Lease (other than pursuant to Section 20 hereof, in which case (and other than with respect to Taxes) Lessee's liability under this Section 9(b) shall survive for so long as Lessor shall be entitled to exercise remedies under such Section 20); and (v) Expenses caused solely by any voluntary transfer or disposition (other than any transfer pursuant to any exercise of remedies in connection with an Event of Default, pooling arrangement or Event of Loss) by Lessor of its interest in the Aircraft, Airframe or Engines. (c) Taxes. (i) Lessee Liability. Except as provided in Section 9(c)(ii), Lessee shall pay or cause to be paid when due, and shall indemnify and hold harmless each Tax Indemnitee for, from and against, any and all Taxes howsoever imposed or levied on or asserted against, from time to time, any Tax Indemnitee, Lessee, the Aircraft, Airframe or any Engine or any Parts or any interest therein by any Government Entity on, with respect to, based on or measured by: (A) the acceptance, delivery, redelivery, transport, registration, reregistration, deregistration, possession, operation, location, use, presence, condition, alteration by or on behalf of Lessee, maintenance, repair, return, storage (unless otherwise expressly provided herein), repossession, disposition, abandonment, installation, storage, charter, leasing, subleasing, modification, transfer by or on behalf of Lessee, importation, exportation or other disposition of, or the imposition of any Lien on, the Aircraft, Airframe or any Engine or any Part or interest therein (or the incurrence of any liability to refund or pay over any amount as the result of any such Lien); (B) the rentals or receipts from the Aircraft, Airframe or any Engine or Parts thereof or interest therein; (C) the Aircraft, Airframe or any Engine or any Parts thereof or interest therein (including, without limitation, title or a security interest therein), this Lease, any other Operative Document or any data or any other thing delivered or to be delivered under the Operative Documents; or (D) otherwise with respect to or in connection with the execution, delivery, enforcement, amendment or supplement to the Operative Documents or the transactions contemplated by the Operative Documents. (ii) Exclusions From Lessee's Liability. The provisions of Section 9 (c)(i) shall not apply to: (A) Taxes imposed on the income, profits or gains of a Tax Indemnitee by any Government Entity; provided, however, that the exclusion contained in this clause (A) shall not apply to any Taxes imposed by any Government Entity if and to the extent that such Tax results from (i) the use, operation, presence or registration of the Aircraft, the Airframe, any Engine or any Part in the jurisdiction imposing the Tax; or (ii) the situs of organization, any place of business or any activity of Lessee or any other Person having use, possession or custody of the Aircraft, the Airframe, any Engine or any Part in the jurisdiction imposing the Tax; or (iii) any payment (actual or constructive) by or on behalf of Lessee; provided, further, however, notwithstanding anything to the contrary contained in this clause (A), a gross withholding tax shall not be excluded by this clause (A) unless due to the activities of the Tax Indemnitee or an Affiliate thereof unrelated to the transactions contemplated by this Lease Agreement or the negotiation thereof; (B) Sales, use or similar transfer Taxes imposed on a Tax Indemnitee upon any voluntary transfer (including a transfer by way of security but excluding a transfer pursuant to the exercise of remedies in connection with an Event of Default, a Modification, a pooling arrangement or an Event of Loss) or disposition (including a disposition by way of security but excluding a disposition pursuant to any exercise of remedies in connection with an Event of Default) by such Tax Indemnitee of any equitable or legal interest in the Aircraft, Airframe, any Engine or any Part or this Agreement to any Person; (C) Taxes attributable solely to any period (a) prior to the Delivery Date; or (b) after the return of possession of the Airframe, the Engines and the Parts to Lessor or its designee pursuant to the terms of this Lease (other than pursuant to Section 20 hereof, in which case Lessee's liability under this Section 9(c) shall survive for so long as Lessor shall be entitled to exercise remedies under such Section 20); provided, however, that the exclusions set forth in this subparagraph (C) shall not apply to Taxes to the extent such Taxes relate to events occurring or matters arising prior to or simultaneously with such return of possession; (D) Taxes caused solely by a breach by such Tax Indemnitee of any covenant or inaccuracy or falsity of any representation or warranty made by such Tax Indemnitee in this Agreement or the documents and agreements delivered by such Tax Indemnitee to Lessee pursuant to this Agreement; and (E) Taxes caused solely by the gross negligence or wilful misconduct of any Tax Indemnitee. (iii) No Reduction for Withholding, Etc. Notwithstanding anything that may be contained herein, all payments by Lessee under this Agreement or any other Operative Document, whether in respect of Rent, interest, fees or any other item, shall be made in full without any deduction or withholding (whether in respect of setoff, counterclaim, duties, Taxes, charges, wages or otherwise whatsoever), unless the withholding or deduction is required by law, in which event Lessee shall: (A) forthwith pay the recipient such additional amount so that the net amount received by such recipient after the deduction or withholding will equal the full amount which would have been received by it had no such deduction or withholding been made; (B) pay to the relevant taxing authorities within the period for payment permitted by applicable law the full amount of the deduction or withholding (including, but without prejudice to the generality of the foregoing, the full amount of any deduction or withholding from any additional amount paid pursuant to this clause (iii)); and (C) furnish to Lessor, within the period for payment permitted by applicable law, an official receipt of the relevant taxation or other authorities involved for all amounts deducted or withheld as aforesaid or, if no such receipt is issued, a certificate of deduction or equivalent evidence thereof. (iv) Reports. Lessee will provide, promptly upon request, such information as may be reasonably requested by a Tax Indemnitee or required to enable a Tax Indemnitee to timely and properly fulfill its tax filing requirements with respect to the transactions contemplated by the Operative Documents, including, without limitation, those requirements that relate to Taxes based on or measured by the total time the Aircraft is located in a particular place irrespective of whether the Aircraft is there for revenue, maintenance or storage purposes. If any report, return or statement is required to be filed with respect to any Tax which is subject to indemnification under this Section 9(c), Lessee shall timely file the same (except for any such report, return or statement which such Tax Indemnitee intends to file itself (and so notifies Lessee in writing)); provided, however, that Lessee shall have no obligation under this sentence to the extent such Tax Indemnitee, after receipt of Lessee's written request, shall have failed to furnish Lessee with such information (including instructions) as is peculiarly within such Tax Indemnitee's control and which is necessary to file such report, return or statement. Lessee shall either file such report, return or statement and send a copy of such report, return or statement to the Tax Indemnitee or, where Lessee is not permitted to file such report, return or statement, it shall notify such Tax Indemnitee of such requirement and prepare and deliver such report, return or statement to such Tax Indemnitee in a manner satisfactory to such Tax Indemnitee no later than 30 Business Days prior to the time such report, return or statement is to be filed. Lessee shall not have any right to examine the tax returns or books of any Tax Indemnitee. Lessee agrees to use reasonable endeavors to obtain official receipts indicating the payment by it of all foreign income and withholding Taxes that are subject to indemnification under this Section 9 and shall promptly deliver to the relevant Tax Indemnitee each such receipt obtained by Lessee. Notwithstanding the foregoing, nothing in this Section 9(c)(iv) shall (x) require Lessor or Lessee to divulge to the other any information which Lessor or Lessee, as the case may be, considers confidential, provided, however, that Lessor and Lessee, as the case may be, shall be so required if required by applicable law or reasonably related to a matter indemnified hereunder; or (y) prevent Lessor or Lessee from arranging its tax affairs in such manner as it sees fit, unless to do so would increase the obligations of the other under this Agreement. (v) Payment. Lessee shall pay any Tax for which it is liable pursuant to this Section 9(c) in immediately available funds directly to the appropriate Government Entity or, upon written demand of the Tax Indemnitee, to such Tax Indemnitee, but in no event shall such payment be required more than five (5) Business Days prior to the date such Tax is due. Any such demand for payment from a Tax Indemnitee shall specify, in reasonable detail, the calculation of the amount of the payment and the facts upon which the right to payment is based and shall be verified upon the request and at the expense of Lessee by a nationally recognized firm of independent accountants for such Tax Indemnitee. Each Tax Indemnitee shall promptly forward to Lessee any notice, bill or advice in the nature of a notice or bill received by it concerning any Tax; provided, however, failure to provide any such notice or bill shall not relieve Lessee of its obligations hereunder. As soon as practical after each payment of any Tax by Lessee directly to any Government Entity, Lessee shall furnish the appropriate Tax Indemnitee with the original or a certified copy of a receipt for Lessee's payment of such Tax or such other evidence of payment of such Tax as is reasonably acceptable to such Tax Indemnitee. Lessee shall also furnish promptly upon request such data as any Tax Indemnitee may reasonably require to enable such Tax Indemnitee to comply with the requirements of any Government Entity. (d) [Intentionally reserved]. (e) Scope, Survival, Etc. (i) Lessee shall be obligated under this Section 9 as a primary obligor irrespective of whether an Indemnified Party or Tax Indemnitee shall also be indemnified, guaranteed or insured with respect to the same matter under any of the Operative Documents or otherwise by any other Person, and such Indemnified Party may proceed directly against Lessee under this Section 9 without first resorting to any such other rights of indemnification, guarantee or insurance. (ii) All indemnities, obligations, adjustments and payments provided for in this Section 9 shall survive and remain in full force and effect, notwithstanding the expiration or termination of the Lease Term or of this Agreement or any other Operative Documents and the payment in full of all sums payable under the Operative Documents. The obligations of Lessee in respect of all such indemnities, obligations, adjustments and payments are expressly made for the benefit of, and shall be enforceable by, the Indemnified Party or Tax Indemnitee entitled thereto, without declaring this Agreement to be in default or taking other action under this Agreement. (iii) Lessee acknowledges that the Indemnified Parties or Tax Indemnitees, or any of them, may authorize Lessor, by notice in writing to Lessor and Lessee, to make claims and demands under any indemnity hereunder or under any other Operative Document on behalf of such Indemnified Parties or Tax Indemnitees, and Lessee shall be obligated to make all payments pursuant to any such indemnity to Lessor, to the extent claimed by Lessor on behalf of such Indemnified Parties or Tax Indemnitees (it being understood that Lessee is entitled to conclusively rely upon the instructions of Lessor with respect to the payment of amounts owing to any Indemnified Party or Tax Indemnitee under the indemnities). (iv) Each Indemnified Party and Lessee will give prompt written notice one to the other of any liability of which such party has knowledge for which Lessee is, or may be, liable under Section 9(a), provided that failure to give such notice will not prejudice or otherwise affect any of the rights of the Indemnified Parties under this Section 9. (f) Gross-Up for Taxes on Indemnity Payments. If and to the extent any sums payable to an Indemnified Party or Tax Indemnitee under this Section 9 are subject to any Taxes (including any payments made pursuant to this Section 9(f)), Lessee shall pay to such Indemnified Party or Tax Indemnitee such sum as will, after the obligation in respect of such Taxes has been fully satisfied with respect to all sums payable by Lessee under this Section 9, leave the Indemnified Party or Tax Indemnitee with the same amount as it would have been entitled to receive in the absence of the imposition of any such obligation in respect of such Taxes. (g) Tax Contests. If any taxing authority proposes to impose a Tax for which Lessee would be required to make an indemnity payment to a Tax Indemnitee under this Section 9, such Tax Indemnitee shall if requested by Lessee in writing in a timely fashion, contest (or permit Lessee, if requested by Lessee and if the Tax Indemnitee consents, which consent shall not be unreasonably withheld or delayed (such consent shall not be deemed to be unreasonably withheld or delayed in the case of any Tax contest involving claims for other Taxes asserted against such Tax Indemnitee for which Lessee has no responsibility hereunder and which cannot be severed for the purposes of such contest)) the validity, applicability or amount of such Tax at Lessee's sole cost and expense by: (i) resisting payment thereof, if practicable; (ii) not paying the same except under protest, if protest shall be necessary and proper; (iii) if payment shall be made using reasonable efforts to obtain a refund thereof in appropriate administrative proceedings; and (iv) considering in good faith such other action as is reasonably requested by the Lessee from time to time; provided, however, that (x) in the case of Taxes that are required by law to be contested in the Tax Indemnitee's name in proceedings that involve both Taxes for which such Tax Indemnitee is indemnified hereunder and other Taxes and which cannot, as a matter of law, be severed or otherwise contested separately such Tax Indemnitee may in its sole discretion select the forum for such contest and determine whether or not to pay such Tax in connection with the contest and shall control the conduct of such proceedings (although such Tax Indemnitee shall keep Lessee reasonably informed of the status of such proceedings and shall consult in good faith with Lessee and its counsel concerning the conduct of such proceedings); and (y) no contest shall be required or permitted unless: (A) such Tax Indemnitee shall have received from Lessee (I) an indemnity reasonably satisfactory to Lessor for any liability, expense or loss resulting from such contest; and (II) an opinion of independent tax counsel selected by Lessee and reasonably satisfactory to such Tax Indemnitee, furnished at Lessee's expense, to the effect that a reasonable basis exists for contesting such claim (or, in the case of an appeal of a judicial decision, that a meritorious basis exists for such appeal); (B) no Event of Default shall have occurred and be continuing; (C) such Tax Indemnitee shall have reasonably determined that the contest will not create a material risk of a sale, forfeiture or loss of, or creation of any Lien (other than a Permitted Lien but not including a Lien of the kind described in clause (iv) of Section 8(a)) on, the Aircraft, or any portion thereof or interest therein unless Lessee shall have provided a bond or other security for such risk reasonably adequate to Lessor; and (z) in the case of any Taxes not described in subclause (x) and subject to the requirement of subclause (y), Lessee may conduct such contest in the forum and in the manner Lessee deems appropriate (although Lessee shall keep such Tax Indemnitee informed of the status of such proceedings and shall consult in good faith with such Tax Indemnitee and its counsel concerning the conduct of such proceedings). If a Tax Indemnitee contests any claim for Taxes by making a payment and seeking a refund thereof, then Lessee shall advance to such Tax Indemnitee, on an interest-free basis, an amount equal to such Taxes (including any penalties, additions to tax, fines and interest paid by such Indemnitee in connection with the contest) and shall hold such Tax Indemnitee harmless, on a net after-tax basis, against any adverse tax consequences of the receipt or payment of such advance. In the event a Tax Indemnitee shall recover any Taxes or other amounts advanced to it by Lessee pursuant to the preceding sentence, such Tax Indemnitee shall promptly refund to Lessee the amount recovered plus any interest received thereon. Notwithstanding the foregoing, the Tax Indemnitee may waive in writing its rights to indemnification hereunder with respect to any claim for any Tax and refrain from contesting, or continuing the contesting of, such claim, in which event Lessee shall have no liability to Lessor hereunder with respect to such claim. In addition, if a Tax Indemnitee shall agree to a settlement of any contest under this Section 9 without the prior written consent of Lessee (which shall not be unreasonably withheld or delayed), then such Tax Indemnitee shall be deemed to have waived its rights to the indemnities provided for in this Section 9 with respect to the Tax liability accepted in such settlement. Lessee shall not be deemed to be in default under the indemnification provisions of this Section 9 so long as it or a Tax Indemnitee shall conduct a contest in accordance with the provisions of this Section 9(g). SECTION 10. Title; Registration; Maintenance and Operation; Insignia. (a) Title to the Aircraft. (i) Lessee acknowledges that title to the Aircraft shall at all times be and remain solely and exclusively vested in Lessor and that this Agreement and the other Operative Documents constitute an agreement to lease the Aircraft from Lessor to Lessee and, accordingly, Lessee shall have no right, title or interest in the Aircraft except the right to use the Aircraft as provided herein. (ii) Lessee will not at any time represent or hold out Lessor, Owner Participant or any other Indemnified Party as carrying goods or passengers on the Aircraft or as being in any way connected or associated with any operation of the Aircraft or attempt, or hold itself out as having any power, to sell, charge, lease or otherwise dispose of or encumber the Aircraft, the Engines or any Part, nor create, incur or suffer to exist any Lien over the Aircraft, the Engines or any Part. On all occasions when the ownership of the Aircraft or any part of it is relevant, Lessee will make clear to third parties that title to the same is held by Lessor. (b) Registration. (i) Upon Delivery of the Aircraft pursuant to Section 2, Lessee shall, at its own cost and expense, procure that the Aircraft will be duly registered with the Aviation Authority in the name of Lessor on the register (except that Lessor and Owner Participant shall be responsible for ensuring that the Trust Agreement and all other documents necessary for filing with the Aviation Authority to effect registration in the Lessor's name are in due form for filing with the Aviation Authority), and thereafter shall maintain, or procure the maintenance of, such registration throughout the Lease Term and shall promptly deliver to Lessor a certified copy of the Certificate of Registration when issued by the Aviation Authority and at all times during the Lease Term, Lessee shall neither cause nor permit the Aircraft to be registered under the laws of any other jurisdiction. (ii) Upon the Delivery Date of the Aircraft pursuant to Section 2, Lessee shall, at its own cost and expense, procure that, if required by applicable regulations, any Operative Document as is required (including, without limitation, this Lease and Lease Supplement No. 1) shall be filed for recording with the Aviation Authority, and shall promptly (and in any event within five (5) days) after such registration deliver evidence of such registration to Lessor. Lessee shall, at its own cost and expense, cause such recordation to be maintained in good standing at all times during the Lease Term. (iii) Lessee will take, or cause to be taken, such action with respect to the recording, filing, rerecording and refiling of this Agreement or other documents or instruments (including, without limitation, Uniform Commercial Code financing statements) as necessary or advisable in order to establish, protect, preserve and perfect, as against Lessee and any third party, Lessor's interest in the Aircraft and this Agreement and each other Operative Document and shall furnish to Lessor timely notice of the necessity of such action, together with such documents and instruments, in execution form, and such other information as may be necessary or advisable to take such action. Lessee shall cooperate fully with Lessor and Owner Participant, if, notwithstanding the foregoing, Lessor or Owner Participant notifies Lessee that Lessor or Owner Participant wishes to take any of the foregoing actions, in lieu of Lessee taking any of the foregoing actions. (iv) Without limiting the effect of the foregoing, Lessee shall also do or cause to be done at its own expense any and all acts and things which may be required under the terms of any agreement, treaty, convention, pact or by any practice, custom or understanding involving any jurisdiction in which Lessee may operate, and any and all acts and things which Lessor or Owner Participant may reasonably request, to establish, perfect, preserve and protect the respective rights of Lessor in the Aircraft and in this Agreement and each other Operative Document. (v) Lessee shall procure that, at all times during the Lease Term, the Aircraft possesses a current, legal and valid Airworthiness Certificate, and all such other certificates, licenses, permits and authorizations as are from time to time required for the use and operation of the Aircraft for the public transport of passengers or cargo by any Government Entity having jurisdiction in any country, state, province or other political subdivision in or over which the Aircraft is flown, including, without limitation, any aviation authority. (c) Maintenance. Lessee, at its own cost and expense, shall, at all times during the Lease Term and until the Aircraft is returned in the condition and manner required by this Agreement: (i) maintain, service, repair, test, inspect and overhaul, or cause to be maintained, serviced, repaired, tested, inspected and overhauled, the Aircraft in accordance with the Approved Maintenance Program (which shall not be amended in any material respect without Lessor's prior written consent, which consent shall not be unreasonably withheld), the structural repair manual and the rules and regulations of the Aviation Authority, including, without limitation, FAR Part 121, and the regulations promulgated by the Aviation Authority thereunder, and, except to the extent in conflict with the rules and regulations of the Aviation Authority, as well as standard commercial airline practice, (x) so as to keep the Aircraft in as good condition (operating and otherwise) as when delivered on the Delivery Date, ordinary wear and tear excepted, and in at least the same manner and with at least substantially the same care and diligence as other aircraft owned or operated by Lessee, (y) so as to keep the Aircraft free of, or so as to promptly correct, physical damage to the Airframe, any Engine or any Part which may have resulted from foreign object damage, from damage caused by ramp equipment, ramp personnel, operational mishandling, Lessee staff or passengers or from other means or sources and (z) so as to keep the Aircraft in such condition as may be necessary to enable the applicable airworthiness certification for the Aircraft to be maintained in good standing at all times under applicable law; (ii) without limiting Lessee's obligations under Section 10(c)(i), agree that such maintenance and repairs will include, but will not be limited to, each of the following specific items: (A) to perform in accordance with recognized standards of prudent air carriers and the Approved Maintenance Program, and all applicable rules and regulations of the Aviation Authority, and, except to the extent in conflict with the rules and regulations of the Aviation Authority, all routine and nonroutine maintenance work, including, without limitation, line maintenance to be done upon the Aircraft; (B) without prejudice to the provisions of Section 7, to comply with all applicable ADs that are issued during the Lease Term and are due for compliance on such basis at any time during the Lease Term and within 180 days after the end of the Lease Term ("Required Modifications"); (C) to incorporate and retain in the Approved Maintenance Program for the Aircraft an applicable CPCP, and to carry out such work as may be required to comply therewith, including periodic inspection, testing and corrosion inhibiting treatment to or of fuel tanks, periodic inspection, cleanup and resealing under galleys and lavatories, the cleaning and treating of all mild and moderate corrosion and the correcting of all severe and exfoliated corrosion, and the application of corrosion inhibition compounds to all areas of the Aircraft recommended by the Airframe Manufacturer that are manufactured from aluminum or other metals, in accordance with the recommendations of the Airframe Manufacturer, the CPCP, the Airframe Manufacturer structural repair manual and the Approved Maintenance Program; (D) to effect any required repair to the Airframe or any Engine, and any Parts installed therein or thereon, only (w) by an Aviation Authority-approved repair station, (x) by Aviation Authority-licensed mechanics and (y) in accordance with Lessee's Approved Maintenance Program, the Airframe Manufacturer's structural repair manual, the Airframe Manufacturer's component repair manual, Engine Manufacturer's repair manuals and the other repair and overhaul manuals related to the Aircraft or any Part thereof, in each case, as approved by the Aviation Authority, and (z) the relevant, if any, engineering change orders (which shall be initiated in accordance with procedures approved by the Aviation Authority); (E) to maintain, in the English language, the Aircraft Documentation and to keep the Aircraft Documentation current and up to date (with all documents and records unique to the Aircraft to be maintained unique to the Aircraft, which Aircraft Documentation shall (i) conform with the laws of any Government Entity having jurisdiction over the Aircraft and with normal practices of commercial air carriers, (ii) disclose the location of any Engine not installed on the Airframe, (iii) accurately record the amount of time consumed and/or the cycles of use (as appropriate) by each operation of the Airframe, each Engine and all Parts and all work performed thereon, (iv) accurately maintain complete back-to-birth records of all Life Limited Components, and (v) be made available for review by Lessor, Owner Participant or their respective designees on reasonable notice in order to facilitate Lessor's or Owner Participant's ability periodically to inspect the Aircraft and monitor the maintenance of the Aircraft); (F) to make available for review upon request by Lessor or Owner Participant or their respective designees copies of any written communications with the Aviation Authority, Airframe Manufacturer, Engine Manufacturer or other vendors with respect to incidents, defects or malfunctions of the Aircraft; (G) to diligently correct any and all deficiencies revealed by any inspection of Lessor or Owner Participant by proper cleaning, sealing, repair, replacement, overhaul and adjustment as required pursuant to the Approved Maintenance Program; (H) to ensure that only an Approved Maintenance Performer services, maintains, overhauls, repairs or performs any Modifications on or to the Aircraft or any installed engine or part; (I) all parts or materials installed or used on the Aircraft shall have a current valid Aviation Authority "serviceable tag" of the manufacturer or maintenance facility providing such item to Lessee; and (J) notwithstanding anything to the contrary contained herein, to maintain any engine which is not an Engine but which is installed on the Airframe as if it were an Engine; (iii) furnish or cause to be furnished to Lessor and Owner Participant as soon as reasonably practicable and at no cost to Lessee such information as may be required to enable Lessor and Owner Participant to file on a timely basis any reports required to be filed by Lessor or Owner Participant with any Government Entity because of Lessor's or Owner Participant's rights, title and interests in and to the Aircraft or under this Agreement or any other Operative Document. (d) Operation. (i) Lessee shall not maintain, use, service, repair, overhaul or operate the Aircraft (or permit maintenance, use, service, overhaul or operation of the Aircraft) in violation of any law of any Government Entity having jurisdiction, in violation of any manufacturer's operating manuals, recommendations or instructions or in violation of any airworthiness certificate, license or registration relating to the Aircraft issued by any such Government Entity. (ii) Lessee shall not operate the Aircraft or permit the Aircraft to be operated (y) outside of the Permitted Jurisdictions or (z) on routes other than those approved by the government of the State of Registration. (iii) Lessee shall not knowingly employ, suffer or cause the Aircraft to be used for the carriage of (w) livestock, (x) acids, toxic chemicals or other corrosive materials, unless the same are appropriately packaged in compliance with applicable law, (y) explosives, nuclear fuels or wastes, (z) illegal drugs, controlled substances or the like or any other goods, materials or items of cargo which are prohibited by law or which could reasonably be expected or anticipated to cause damage to the Aircraft. (iv) Lessee will not use, or permit the use of, the Aircraft for testing or for training, qualifying or reconfirming the status of flight crew members other than employees of Lessee, and then only if the use of the Aircraft for such purpose is not disproportionate to the use for such purpose of other Airframe Manufacturer model 737 aircraft owned or operated by Lessee. (v) Notwithstanding anything herein to the contrary, Lessee shall not install, and shall not permit the installation of, any Engine on any airframe that is not an Airframe Manufacturer model 737-3U3 airframe, except solely to the extent the Aviation Authority has approved the use of engines of the same model and manufacturer as such Engine on any Airframe Manufacturer model 737-3U3 airframe, such airframe. (vi) Lessee shall provide Lessor on the tenth day of each calendar month during the Lease Term with a completed and duly executed Aircraft Status Report substantially in the form of Exhibit I. (e) Insignia. Lessee shall affix and maintain in respect of the Airframe and each Engine a fireproof identification plate of a reasonable size, in the location specified below, that contains the following legends or any other legend requested from time to time by Lessor in writing: Location: (i) in the case of the Airframe, in the upper sill of the left-hand forward entry door, adjacent to the Airframe Manufacturer's plate and (ii) in the case of each Engine, in a clearly visible place in close proximity to the manufacturer's plate. Legend: (y) in the case of the Airframe, "THIS AIRCRAFT IS OWNED BY FIRST SECURITY BANK, NATIONAL ASSOCIATION, AS OWNER TRUSTEE, AND IS HELD UNDER LEASE BY FRONTIER AIRLINES, INC.,", and (z) in the case of each Engine, "THIS ENGINE IS OWNED BY FIRST SECURITY BANK,NATIONAL ASSOCIATION, AS OWNER TRUSTEE, AND IS HELD UNDER LEASE BY FRONTIER AIRLINES, INC.". Lessee shall promptly replace any such nameplate that becomes illegible, lost, damaged or destroyed for any reason. (f) Costs of Operation. Lessee shall pay all costs incurred in the operation of the Aircraft for profit or otherwise, including, without limitation, the costs and expenses of flight crews, cabin personnel, fuel, oil, lubricants, maintenance, insurance, landing fees, navigation fees, airport charges, passenger service and any and all other expenses or claims of any kind or nature (including, without limitation, any and all Taxes) directly or indirectly incurred or imposed in connection with or related to the use, movement, operation, maintenance, repair, storage or location of the Aircraft during the Lease Term. (g) Payment of Flight Charges. Without limiting the effect of Section 8, Lessee shall pay during the Lease Term promptly upon the same becoming due and payable all Flight Charges payable by Lessee during the Lease Term whether in respect of the Aircraft or any other aircraft of Lessee and which involve any risk of the imposition of a Lien on the Aircraft or the confiscation or detention thereof (unless such Flight Charges are being contested in good faith by appropriate proceedings) and shall indemnify and hold Lessor, Owner Participant and any other Indemnified Party harmless in respect of the same, which indemnity shall continue in full force and effect notwithstanding the termination or expiration of the Lease Term or Return of the Aircraft. (h) Loss or Damage. (i) Without limiting the other provisions of this Section 10, if the Aircraft or any part thereof suffers loss or damage not constituting an Event of Loss of the Aircraft or the Airframe or any Engine (in respect of which, for the avoidance of doubt, Section 13 shall apply), Lessee shall promptly correct and repair such loss or damage, including the repair or replacement of all damaged or lost Parts at its own expense in accordance with this Agreement in order that the Aircraft is placed in an airworthy condition and in substantially the same condition as it was prior to such loss or damage. Any insurance payments with respect to loss or damage not constituting an Event of Loss of the Aircraft or the Airframe shall be paid in accordance with the provisions of Section 15 and applied in payment for repairs to or for replacement of the property suffering the loss or damage. (ii) Lessee shall notify Lessor forthwith of any such loss or damage to the Aircraft for which the cost of correction or repairs may exceed the Damage Notice Threshold and shall provide an explanation or proposal for carrying out the correction or repair. If after its receipt of such proposal, Lessor does not agree with Lessee's proposal, Lessor shall promptly notify Lessee of such disagreement. Lessee and Lessor shall then consult with the Airframe Manufacturer, Engine Manufacturer or other relevant manufacturer, and Lessee and Lessor agree to accept as conclusive, and be bound by, such Person's directions or recommendations as to the manner in which to carry out such repairs. (i) Cost Sharing. The Lessor shall, if the cost to Lessee of performing an inspection resulting in modification or terminating action with regard to any AD or causing such inspection resulting in modification or terminating action being performed with regard to such AD, exceeds $100,000 in respect of any individual item of the same, provided no Default or Event of Default has occurred and is continuing, on receipt by Lessor of evidence of payment for and completion of the relevant work, reimburse Lessee with an amount equal to the solution to the following formula:- P=Cx(N-R)/N where "N" equals the Lease Term in months; "R" represents the remainder of the Lease Term in months after completion of the modification/terminating action; "C" equals the cost of the modification/terminating action in excess of $100,000; and "P" equals the Lessor's share of any cost. SECTION 11. Possession. Lessee will not, without the prior written consent of Lessor, sublease or otherwise in any manner deliver, transfer or relinquish possession of the Aircraft, Airframe or an Engine or any Part, or install an Engine, or permit any such Engine to be installed, on an airframe other than the Airframe, provided that so long as (1) no Event of Default shall have occurred and be continuing, (2) the action to be taken shall not adversely affect, or be of a nature that could reasonably be expected to adversely affect, Lessor's rights, title and interests in and to the Aircraft or Airframe, or any Engine or Part, or under this Agreement or any other Operative Document (including, without limitation, any impairment of title to or the registration with the then Aviation Authority of, the Aircraft), (3) all applicable approvals, if any, of the Aviation Authority and any other Government Entity having jurisdiction shall have been obtained, and (4) the insurance provisions of Section 15 hereof shall have been complied with, then, at the cost and expense of Lessee: (a) Maintenance, Etc. Without the prior consent of Lessor, Lessee may deliver possession of the Airframe or an Engine or any Part to the manufacturer thereof, to any Approved Maintenance Performer or to any other Aviation Authority-approved company acceptable to Lessor for testing, service, repair, maintenance or overhaul work on the Airframe or Engine or any Part or for alterations or modifications in or additions to such Airframe or Engine or Part to the extent required or permitted by the terms of Section 12(b). (b) Installation of Engines on Other Airframes. Without the prior consent of Lessor, Lessee may install an Engine on any Airframe Manufacturer model 737 airframe (other than the Airframe) operated by Lessee so long as no Person will acquire or claim any right, title or interest in any Engine by reason of such Engine's being installed on such airframe at any time while such Engine is owned by Lessor. (c) Pooling; Sublease. Lessee will not, without the prior written consent of Lessor, sublease or otherwise in any manner deliver, transfer or relinquish possession of the Aircraft, the Airframe or any Engine or install any Engine, or permit any Engine to be installed, on any airframe other than as permitted under Section 11(b); provided, however, subject to the provisions of this Section 11(c) that if and for so long as (y) no Default or Event of Default shall have occurred and be continuing, and (z) all approvals, consents or authorizations required in connection with any such delivery, transfer or relinquishment of possession by the Aviation Authority have been obtained and remain in full force and effect, then Lessee may, without such prior written consent: (i) Subject any Engine to normal interchange agreements or pooling agreements or arrangements, in each case customary in the commercial airline industry and entered into in writing by Lessee in the ordinary course of business and with any solvent United States air carrier; provided, however, that no such agreement or arrangements shall require, contemplate or result in any transfer of Lessor's title to such Engine. If, notwithstanding the foregoing, Lessor's title to any such Engine is divested under any such agreement or arrangement, then such Engine shall be deemed to have suffered an Event of Loss as of the date of such divestiture, with the effect that Lessee shall be required to replace such Engine with a Replacement Engine meeting the requirements of, and in accordance with, Section 13(c). (ii) With respect to the Aircraft, enter into a Wet Lease with any United States air carrier, but only if: (A) Lessee shall provide 30 days advance written notice to Lessor; (B) At the time that Lessee enters into such Wet Lease, no such air carrier shall be insolvent or subject to any bankruptcy, insolvency, liquidation, reorganization, dissolution or similar proceeding, or any similar non-ordinary course transaction, shall be seeking any reorganization or any readjustment of its debts, or shall have substantially all of its property in the possession of any liquidator, trustee, receiver or similar person; and (C) Any such Wet Lease shall be for a period not in excess of 6 months and not extending beyond the date which is one year prior to the end of the Lease Term, and shall be expressly subject to and subordinate to all the terms of this Agreement and to the rights, powers and remedies of Lessor hereunder, including, without limitation, Lessor's rights under Section 20 to repossess the Aircraft, Airframe and Engines and to terminate such Wet Lease, upon the occurrence of an Event of Default. (iii) Notwithstanding anything to the contrary in this Section 11(c): (A) Lessee shall remain primarily liable hereunder for the performance of all the terms of this Lease to the same extent as if such transfer had not occurred and no transfer of possession of the Aircraft, the Airframe, any Engine, any Part, or any Aircraft Documentation shall in any way discharge or diminish any of Lessee's obligations to Lessor hereunder or under any Operative Document; and (B) Lessee shall ensure that no delivery, transfer or relinquishment permitted under this Section 11(c) shall affect the United States registration of the Aircraft. (d) Transfers of Possession in General. The rights of any Person who receives possession by reason of a transfer or sublease permitted by this Section 11 shall be effectively and expressly subject and subordinate to all the terms of this Lease, including, without limitation, the covenants contained in Section 10, this Section 11 and Section 15 and the rights of Lessor to repossession pursuant to Section 20 and to avoid transfer upon such possession. No sublease, relinquishment or transfer of possession of the Aircraft or Airframe, or any Engine or Part, shall in any way release, discharge or otherwise limit or diminish any of Lessee's obligations to Lessor (it being agreed that notwithstanding any such transfer or relinquishment of possession, Lessee shall continue to be primarily liable and responsible for performance of all of its obligations under this Agreement and each other Operative Document), or constitute a waiver of Lessor's rights or remedies hereunder or affect the registration of the Aircraft with the Aviation Authority. Notwithstanding any other provision of this Agreement or any other Operative Document, any sublease, relinquishment or transfer of possession must (x) be consistent with the terms of this Agreement and the other Operative Documents, and (y) not adversely affect the rights, title or interests of Lessor in or to the Aircraft or Airframe, or any Engine or Part, or under this Agreement or any other Operative Document, and (z) not result in any increases in Taxes to the Lessor which are not indemnifiable hereunder, or otherwise adversely affect applicable tax benefits available to Lessor. SECTION 12. Replacement of Parts, Alterations, Modifications and Additions. (a) Replacement of Parts. (i) Lessee, at its own expense, will replace or cause to be replaced as soon as reasonably practicable and in accordance with applicable manufacturer maintenance manual limits (and in any event within thirty (30) days of removal or, if earlier, on the date the Lease Term expires or terminates) all Parts which may from time to time become worn out, obsolete, lost, stolen, destroyed, seized, confiscated, damaged beyond repair or permanently rendered unfit for use for any reason whatsoever, except as otherwise provided in Section 12(b) with respect to Additional Parts. (ii) All Parts incorporated or installed in or attached or added to the Airframe or any Engine shall (x) be free and clear of all Liens (except for Permitted Liens), (y) except with respect to Additional Parts, be in as good operating condition as, and shall have a value and utility at least equal to, the Parts replaced, assuming such replaced Parts were in the condition and repair required to be maintained by the terms hereof and (z) have a current valid Aviation Authority "serviceable tag" of the manufacturer or maintenance facility providing such items to Lessee identifying the manufacturer, vendor, part number, make, model and serial number, date and hours and/or cycles and, if such a tag is issuable with respect to the Parts, indicating that such Parts are new, serviceable or overhauled. Lessee may substitute for any Part a part that does not meet the requirements of the foregoing sentence if a complying Part cannot be procured or installed within the available ground time of the Aircraft, provided that the original Part is reinstalled or the noncomplying part is removed and replaced by a complying Part, in each case as soon as reasonably practicable (and in any event within thirty (30) days of removal or, if earlier, on the date the Lease Term expires or terminates). (iii) Immediately upon any Part's becoming incorporated in, installed on or attached to the Airframe or any Engine, as above provided, without further act (x) title to such Part shall thereupon vest in Lessor, free and clear of all Liens (other than Permitted Liens), (y) such Part shall become subject to this Agreement and be deemed part of such Airframe or such Engine for all purposes hereof, and (z) title to any replaced Part shall thereupon vest in Lessee, free and clear of all Lessor Liens and shall no longer be deemed a Part hereunder. All Parts (other than Additional Parts) at any time removed from the Airframe or any Engine shall remain the property of Lessor, no matter where located, until such time as such Parts shall be replaced by Parts which have been incorporated or installed in or attached to the Airframe or any Engine and which meet the requirements set forth in clause (iii) above. Upon any removal of Additional Parts, title thereto shall, without further act, vest in Lessee, and such Additional Part shall no longer be deemed a Part hereunder. (iv) Notwithstanding any other provision hereof, no Part that is a life limited part shall be installed on the Aircraft or any Engine, including, without limitation, a Replacement Engine, after the Delivery Date unless such Part is new or Lessee has complete certified, back-to-birth records for such part. (b) Modifications. (i) Lessee, at its own expense, will make, or cause to be made, such Modifications to the Airframe and Engines as may be required from time to time to meet the applicable standards of the Aviation Authority, provided that except as otherwise provided with respect to Required Modifications in Section 10(c)(ii)(B), Lessee may, in good faith, contest the validity or application of any law, rule, regulation or order in any manner which does not involve any risk of the sale, forfeiture or loss of the Aircraft or, in the reasonable judgment of Lessor, materially adversely affect Lessor or involve any risk of civil or criminal liability on Lessor or any Indemnified Party. (ii) Lessee, at its own expense, may from time to time add further parts or accessories and make such Modifications to the Airframe or any Engine as Lessee may deem desirable in the proper conduct of its business, provided that: (y) other than the Reconfiguration, Lessee shall not, without Lessor's prior written consent, make any Major Modifications, including, without limitation, modifications as to the type or manufacture of the avionics and Cabin modifications which change the interior layout, to the Aircraft (it being agreed that Lessee shall, if requested by Lessor, provide advance copies of regulatory approvals and all designs, plans, diagrams, drawings and data used by Lessee in accomplishing such Major Modifications); provided that any such Major Modifications that are performed shall be approved by the Aviation Authority (as evidenced by the issuance of a supplemental type certificate or similar data acceptable to the Aviation Authority and Lessor); and (z) no such Modification shall reduce the remaining useful life of the Airframe or such Engine or diminish the value or utility of the Airframe or such Engine or impair the condition, airworthiness or marketability thereof below the remaining useful life, value, utility, condition, marketability or airworthiness thereof immediately prior to such Modification, assuming the Airframe or such Engine was then of the remaining useful life, value and utility and in the condition and airworthiness required to be maintained by the terms of this Agreement. Title to all Parts incorporated or installed in or attached or added to the Airframe or an Engine as the result of such Modification (the "Additional Parts") shall, without further act, vest in Lessor, and Lessee hereby relinquishes all right, title and interest thereto. Any Part installed as part of the Reconfiguration shall not constitute an Additional Part. (iii) Except as provided in Sections 2(d) and 10(i) hereof, neither Lessor nor Owner Participant shall be required under any circumstances to pay directly or indirectly for any Modifications. Notwithstanding the foregoing, Lessee may, at any time during the Lease Term, so long as no Event of Default shall have occurred and be continuing, remove or suffer to be removed any such Additional Part, provided that such Additional Part (x) is in addition to, and not in replacement of or substitution for, any Part originally incorporated or installed in or attached to the Airframe or any Engine at the time of delivery thereof or any Part in replacement of or substitution for any such Part, (y) is not required to be incorporated or installed in or attached or added to the Airframe or any Engine pursuant to the terms of this Section 12 and (z) can be removed from the Airframe or such Engine without damaging the Airframe or such Engine or diminishing or impairing the value, utility, condition or airworthiness which the Airframe or such Engine would have had at such time had such Modification not occurred, assuming the Airframe or such Engine was then of the fair market value and utility and in the condition and airworthiness required to be maintained by the terms of this Agreement. (iv) Upon expiration or termination of the Lease Term and the written request of Lessor at least ten (10) Business Days prior to such expiration or termination, Lessee shall, at its own expense, remove or cause to be removed any Additional Part. Upon the removal by Lessee of any Additional Part as provided above, title thereto shall, without further act, vest in Lessee, and such Additional Part shall no longer be deemed part of the Airframe or Engine from which it was removed. Any Additional Part not removed by Lessee as above provided prior to the return of the Airframe or Engine to Lessor hereunder shall remain the property of Lessor. (v) Notwithstanding anything to the contrary contained herein, Lessee shall not, without Lessor's prior written consent, remove any Modification which is required by the Aviation Authority. SECTION 13. Risk of Loss, Destruction, Requisition, Etc. (a) Risk of Loss. Throughout the Lease Term and until the Return shall have been effected in accordance with the terms of this Agreement, Lessee shall bear all risk of loss, damage, theft or destruction of, or any other Event of Loss with respect to, the Aircraft or to the Airframe, any Engine or any Part. (b) Event of Loss With Respect to the Aircraft. (i) Upon the occurrence of an Event of Loss with respect to the Airframe or the Airframe and Engines and/or engines then installed thereon, Lessee shall forthwith (and, in any event, within three (3) days after such occurrence) give Lessor written notice of such Event of Loss. By the earlier of (y) sixty (60) days following the Event of Loss Date or (z) the date on which the applicable insurance proceeds are received by the loss payee, Lessee shall pay or cause to be paid to Lessor in immediately available funds the Stipulated Loss Value of the Aircraft together with all other amounts then due and owing by Lessee hereunder. (ii) Until the date on which the Stipulated Loss Value and the other amounts referred to in clause (b)(i) above are paid in full, Lessee shall be obligated to pay all Basic Rent or Renewal Rent, as applicable, as scheduled and shall continue to perform all of its other obligations under the Operative Documents, except to the extent rendered impossible by the occurrence of such Event of Loss or rendered, in the opinion of Lessor, unnecessary. If the Stipulated Loss Value referred to in clause (b)(i) above is paid on a date other than a Basic Rent Date or Renewal Rent Date, Lessor shall refund or cause to be refunded to Lessee any paid but unaccrued Basic Rent or Renewal Rent, as applicable. Upon receipt of the full amount of the Stipulated Loss Value and the other amounts referred to in clause (b)(i) above by Lessor pursuant to this Section 13(b), and if Lessee has paid all other amounts then due and payable by Lessee under this Agreement and the other Operative Documents, then (x) Lessor shall, upon the joint written request of Lessee and each insurer or their appointed representatives which contributed to the payment of the Stipulated Loss Value, transfer to the Person designated in such request all of Lessor's right, title and interest in the Aircraft without recourse or warranty (except as to absence of Lessor Liens) and subject to the disclaimer set forth in Section 5(a), and (y) Lessee shall be relieved of its obligations under Section 7. (c) Event of Loss With Respect to an Engine. (i) Upon the occurrence of an Event of Loss with respect to an Engine under circumstances in which there has not occurred an Event of Loss with respect to the Airframe, Lessee shall promptly (and, in any event, within three (3) days after such occurrence) give Lessor written notice thereof and shall, as soon as reasonably practicable and, in any event, within forty-five (45) days after the occurrence of such Event of Loss (or, if earlier the date of expiration or termination of the Lease Term) and upon five days' prior written notice, convey or cause to be conveyed to Lessor, as replacement for the Engine with respect to which such Event of Loss occurred, title to a Replacement Engine, free and clear of all Liens (other than Permitted Liens) and having an equivalent or greater value, condition, utility, airworthiness, remaining useful life as, and being in as good operating condition as, the Engine with respect to which such Event of Loss occurred, assuming such replaced Engine was in the condition and repair required to be maintained by the terms of this Agreement. For all purposes hereof, each such Replacement Engine shall, after such conveyance, be deemed part of the property leased hereunder, and shall be deemed an "Engine." (ii) Prior to or at the time of any conveyance of a Replacement Engine, Lessee, at its own expense, shall (t) furnish Lessor with a full warranty (as to title) bill of sale, in form and substance satisfactory to Lessor, conveying to Lessor such Replacement Engine, (u) cause supplements to be executed which shall subject such Replacement Engine to this Agreement, (v) cause the filing of such instruments as are necessary or advisable to establish, perfect and protect the interest of Lessor in any such Engine (including, without limitation, cause a Lease Supplement, in form and substance satisfactory to Lessor, to be duly executed by Lessee) (w) furnish Lessor with such evidence of the transfer of title to such Replacement Engine to Lessor as Lessor may reasonably request, including, without limitation, that such Replacement Engine is free and clear of all Liens, except Permitted Liens, such evidence to include, without limitation, an opinion of Lessee's counsel addressed to Lessor, and opining that such title has been so conveyed and that such Replacement Engine has been duly subjected to this Agreement (such opinion to be in form and substance, and from counsel, satisfactory to Lessor), (x) furnish Lessor with such evidence of compliance with the provisions of Sections 10(e), 12(a)(iv) and 15 with respect to such Replacement Engine as Lessor may reasonably request, (y) furnish Lessor with a certificate signed by an officer of Lessee certifying that, upon consummation of such replacement, no Event of Default will exist hereunder and (z) furnish Lessor with an appraisal satisfactory to Lessor which shall establish, and a certificate of an aircraft engineer (who may be an employee of Lessee) certifying, that such Replacement Engine has a value, condition, utility, airworthiness and remaining useful life at least equal to, and is in as good operating condition as, the Engine so replaced, assuming such Engine was in the condition and repair required by the terms of this Agreement immediately prior to the occurrence of such Event of Loss. (iii) Upon compliance by Lessee with the requirements of this Section 13(c), if no Event of Default shall have occurred or be continuing, Lessor shall, upon the joint written request of Lessee and each insurer which contributed to the payment of any insurance proceeds with respect to the lost Engine, transfer to the Person designated in such request all of Lessor's right, title and interest in such Engine without recourse or warranty (except as to absence of Lessor Liens) and subject to the disclaimer set forth in Section 5(a), and such Engine shall thereupon cease to be an Engine leased hereunder. (iv) No Event of Loss with respect to an Engine shall result in any reduction in Basic Rent or Renewal Rent. (d) Application of Payments From any Government Entity for Requisition of Title, Etc. Any payments (other than insurance proceeds the application of which is provided for in Section 15) received at any time by Lessor or by Lessee from any Government Entity or other Person with respect to an Event of Loss will be applied as follows: (i) if payments are received with respect to the Airframe (or the Airframe and an Engine or engines then installed thereon), after reimbursement of Lessor for reasonable costs and expenses, so much of such payments remaining as shall not exceed the Stipulated Loss Value required to be paid by Lessee pursuant to Section 13(b) shall, unless a Default or any Event of Default shall have occurred and be continuing, be applied in reduction of Lessee's obligation to pay such Stipulated Loss Value and such other amounts of Rent, if not already paid by Lessee, or, if already paid by Lessee, shall be applied to reimburse Lessee for its payment of such Stipulated Loss Value, and the balance, if any, of such payments shall be distributed to or retained by Lessor or (ii) if such payments are received with respect to an Engine under circumstances contemplated by Section 13(c), then so much of such payments remaining after reimbursement of Lessor for reasonable costs and expenses; up to an amount equal to Lessee's actual cost of replacing such Engine in accordance with Section 13(c), shall, unless a Default or Event of Default shall have occurred and be continuing, be paid over to, or retained by, Lessee if Lessee shall have fully performed, or concurrently therewith will perform, the terms of Section 13(c) with respect to the Event of Loss for which such payments are made, and the balance, if any, of such payments shall be distributed to or retained by Lessor. (e) Application of Payments During Existence of Default. Any amount referred to in this Section 13 which is payable to or retainable by Lessee shall not be paid to or retained by Lessee if at the time of such payment or retention a Default or any Event of Default shall have occurred and be continuing, but shall be held by or paid over to Lessor, as security for the obligations of Lessee under this Agreement to be held and applied pursuant to Section 20 and applied against Lessee's obligations hereunder as and when due. At such time as there shall not be continuing any such Default or Event of Default, such amount shall be paid to Lessee to the extent not applied in accordance with the preceding sentence. SECTION 14. Maintenance Reserves. (a) Amount. Lessee shall pay the following Maintenance Reserves to Owner Participant during the Lease Term: (i) in respect of the Airframe, US$70 for each Airframe Flight Hour operated by the Aircraft to cover 2C, 4C, 6C and 7C Checks of the Aircraft during the Lease Term ("Airframe Maintenance Reserves"); (ii) in respect of each Engine, US$57 for each Engine Flight Hour and US$52 for each Engine Cycle, in each case operated by that Engine to cover such Engine's Basic Shop Visits during the Lease Term (each, "Engine Maintenance Reserves"); (iii) in respect of the APU, US$15 for each Airframe Flight Hour operated by the Aircraft to cover APU Basic Shop Visits during the Lease Term ("APU Maintenance Reserves"); and (iv) in respect of the Landing Gear, US$6 for each Airframe Flight Hour operated by the Aircraft to cover the Landing Gear Overhaul during the Lease Term ("Landing Gear Maintenance Reserves"). The Airframe Maintenance Reserves, the Engine Maintenance Reserves, the APU Maintenance Reserves and the Landing Gear Maintenance Reserves are referred to collectively herein as the "Maintenance Reserves." It is understood and agreed that Owner Participant may conduct an annual review of the Dollar amounts set forth in this Section 14. Upon each anniversary of the Delivery Date, Owner Participant and Lessee agree to negotiate in good faith any adjustments to the Dollar amounts set forth in this Section 14 (as may have been previously adjusted pursuant to this sentence) as may be necessary or appropriate to reflect changes in Airframe Manufacturer or Engine Manufacturer recommendations, industry overhead cost experience or such other factors as may be relevant for the purposes of establishing appropriate reserve payments. Without agreement to a change in the Dollar amounts as aforesaid, no adjustment will be made thereto. (b) Payments. Lessee shall pay the Maintenance Reserves in respect of each calendar month during which Maintenance Reserves accrue on the tenth day of the subsequent calendar month beginning on the tenth day of the calendar month following the Delivery Date and ending on the tenth day of the calendar month in which the Expiry Date occurs. A final payment of the Maintenance Reserves shall be made on the Expiry Date in respect of the operation of the Aircraft during the final month of the Lease Term. Owner Participant shall keep notional running accounts in respect of the Airframe, each Engine, the APU and the Landing Gear to which shall be credited all amounts in respect thereof received under Section 14(a) and debited all sums paid in respect thereof by Owner Participant to, or on behalf of, Lessee under Section 14(c). (c) Release of Maintenance Reserves. If Lessee submits to Owner Participant, within six months after the commencement of such maintenance work and before the Expiry Date, an invoice and supporting documentation evidencing performance (in reasonable detail) of the following work by or on behalf of Lessee, Owner Participant shall, provided that (i) no reimbursement shall be made in respect of replacement, repair or overhaul caused by foreign object damage, operational or other mishandling, faulty maintenance or any accidental cause or in respect of any cost which is reimbursable by insurance, and (ii) no Default or Event of Default is continuing, release to Lessee the following amounts from the respective Maintenance Reserves: (i) Airframe Checks: with respect to a scheduled 2C, 4C, 6C or 7C Check of the Airframe, the lesser of (i) the amount of such invoice and (ii) the balance of Airframe Maintenance Reserves held by Owner Participant at the time of payment. (ii) Engine Refurbishment: with respect to any Engine Basic Shop Visit, the lesser of (i) the amount of such invoice and (ii) the balance of Engine Maintenance Reserves held by Owner Participant in respect of such Engine at the time of payment; (iii) APU and Landing Gear: with respect to any scheduled APU Basic Shop Visit or Landing Gear Overhaul, the lesser of (i) the amount of such invoice and (ii) the balance of APU Maintenance Reserves or Landing Gear Maintenance Reserves, as applicable, held by the Owner Participant at the time of payment. For the avoidance of doubt, Lessee has no right to payment of any amount from the Maintenance Reserves except as expressly provided in this clause 14(c), and any remaining balances of the Maintenance Reserves following the Expiry Date, after application of the foregoing provisions, shall be retained by Owner Participant as its sole property. Subject to its rights and obligations hereunder, Lessee will not assign, transfer or otherwise dispose of its rights or interest in the Maintenance Reserves. To the extent any maintenance expenses exceed the amount available in the applicable Maintenance Reserves account, such expenses shall be for the account of the Lessee and the shortfall, if any, shall not be carried forward or made the subject of any further claim for reimbursement. Lessee acknowledges that Owner Participant may commingle the Maintenance Reserves with its general funds and no interest shall accrue in favor of Lessee in respect of Maintenance Reserves held by Owner Participant SECTION 15. Insurance. (a) Requirements. At all times during the Lease Term, and until the Aircraft is returned to Lessor in the condition and manner required by this Agreement, Lessee shall maintain or cause to be maintained with respect to the Aircraft, at its own expense, insurance in compliance with the Insurance Requirements of Exhibit E hereto. (b) Application of Proceeds of Hull Insurance. As between Lessor and Lessee, it is agreed that all proceeds of insurance maintained in compliance with this Section 15 (except Section 15(f)) and received as the result of the occurrence of an Event of Loss will be applied as follows: (x) if such payments are received with respect to the Airframe (or the Airframe and the Engines or engines installed thereon), so much of such payments remaining, after reimbursement of Lessor for reasonable costs and expenses, as shall not exceed the Stipulated Loss Value and the other amounts payable under Section 13(b) shall be applied in reduction of Lessee's obligation to pay such Stipulated Loss Value and the other amounts payable under Section 13(b), if not already paid by Lessee, or, if already paid by Lessee, shall be applied to reimburse Lessee for its payment of such Stipulated Loss Value, and the balance, if any, of such payments remaining thereafter shall be paid over to, or retained by, Lessee; and (y) if such payments are received with respect to an Engine under the circumstances contemplated by Section 13(c), so much of such payments remaining, after reimbursement of Lessor and Owner Participant for reasonable costs and expenses, shall be paid over to, or retained by, Lessee, provided that Lessee shall have fully performed or, concurrently therewith, will fully perform the terms of Section 13(c) with respect to the Event of Loss for which such payments are made. As between Lessor and Lessee, the insurance payments with respect to any property damage loss not constituting an Event of Loss with respect to the Airframe or an Engine will be applied in payment (or to reimburse Lessee) for repairs or for replacement property in accordance with the terms of Sections 10 and 12, if not already paid for by Lessee, and any balance remaining after compliance with such sections with respect to such loss shall be paid to Lessee. (c) Insurance for Indemnities; Continuation of Liability Insurance. The insurance referred to in Section 15(a) shall in each case include and insure (to the extent of the risks covered by the policies) the indemnity provisions of Section 9. For a period of twenty-four months after the last day of the Lease Term, or, if earlier, the next C-Check of the Aircraft, and at Lessee's cost, Lessee shall continue to name each Indemnified Party as an additional insured under Lessee's comprehensive airline and war-risk liability insurance described in Exhibit E to the extent of its interest under the indemnities referred to in the preceding sentence. (d) Reports, Etc. Lessee shall furnish, or cause to be furnished, to Lessor and Owner Participant (i) on or before the Delivery Date and not later than each renewal date of any insurance, and otherwise upon reasonable request, a Certificate of Insurance in the same form as the Certificate of Insurance delivered on the Delivery Date and a report, signed by "Insurance Brokers," substantially in the form of Exhibit F, and (ii) on the Delivery Date and no later than five (5) days prior to the date of expiration of any insurance policy referenced in a previously delivered certificate of insurance and a report of the Insurance Broker. (e) Self-Insurance. Lessee may not self-insure the risks required to be insured against pursuant to this Section 15, provided that Lessee may self-insure the risks required to be insured against pursuant to Exhibit E (except total loss) by way of deductible, premium adjustment or similar provisions, in such amounts as are customarily self-insured with respect to aircraft of the same type and used in the same manner as the Aircraft by major international air carriers, but in no event in an amount greater than the Stipulated Deductible Amount per aircraft per occurrence. (f) Additional Insurance. Lessee acknowledges that each of Lessor and Owner Participant has an insurable interest in the Aircraft. Each of Lessor and Owner Participant shall have the right to obtain insurance in its own name with respect to such insurable interest. Lessee will render each of Lessor and Owner Participant all reasonable assistance requested by Lessor or Owner Participant, as the case may be, in order that Lessor or Owner Participant, as the case may be, may adequately protect such insurable interest. Lessee agrees that the maximum amounts payable to it or to others for its account or to be applied in discharge of its obligations by any underwriter or carrier of insurance maintained by Lessee upon the occurrence of an Event of Loss with respect to the Aircraft shall be limited to the Stipulated Loss Value unless the maintenance of any such insurance in an amount in excess of such Stipulated Loss Value in respect of Lessee's insurable interest in the Aircraft does not prejudice Lessor's or any Insured Party's interests under the insurances otherwise required by this Section 15, or prevent Lessor from obtaining such insurances as it requires, in which event nothing herein shall prevent Lessee from effecting such additional insurance for its account. (g) Application of Payments During Existence of a Default. Any amount referred to in this Section 15 which is payable to or retainable by Lessee shall not be paid to or retained by Lessee if at the time of such payment or retention a Default or any Event of Default shall have occurred and be continuing, but shall be held by or paid over to Lessor as security for the obligations of Lessee under this Agreement and, if any such Default or Event of Default shall have occurred and be continuing, applied against Lessee's obligations hereunder as and when due. At such time as there shall not be continuing any such Default or Event of Default, such amount shall be paid to Lessee to the extent not applied in accordance with the preceding sentence. (h) Change of Practice or Insurers. In the event that there is a material change in the generally accepted aviation insurance practice and custom with regard to the insurance of aircraft or any material change with respect to the insurance of aircraft based or operated in any jurisdiction in which the Aircraft may then be based or operated (whether relating to all or any of the types of insurance required to be effected under this Section 15), such that Lessor or Owner Participant, on the basis of advice received from an independent insurance advisor of international reputation (selected by Lessor or Owner Participant and acceptable to Lessee), shall be of the reasonable opinion that the insurance required pursuant to this Section 15 is insufficient to protect the respective interests of Lessor, Owner Participant and/or any other Insured Parties (bearing in mind the nature and route of operation of the Aircraft), the insurance requirements set forth in this Section 15 shall be amended, effective upon notice by Lessor or Owner Participant to Lessee, so as to include such additional or varied requirements as Lessor or Owner Participant (upon the advice of such advisor) may reasonably consider appropriate in order to ensure that the insurance as so varied shall provide comparable protection to Lessor, Owner Participant and the other Insured Parties to that which it would have done if such change had not occurred. In addition, if at any time Lessor or Owner Participant reasonably determines that any insurer or reinsurer providing any of the insurances required under this Section 15 is, or could reasonably be expected to be, unable to meet its obligations as they fall due or may fall due, Lessor or Owner Participant shall so notify Lessee, and Lessee and Lessor or Owner Participant, as the case may be, shall negotiate in good faith the selection of an alternative insurer or reinsurer, as the case may be, which is reasonably acceptable to Lessor or Owner Participant, and Lessee shall promptly after such selection arrange for insurance with such insurer or reinsurer. (i) Change of Circumstance. If any change in circumstance has occurred and is continuing at any time and such change materially adversely affects the insurance of the Aircraft or Airframe, then Lessee shall, as soon as reasonably practicable, make such amendments, supplements or replacements to the insurance coverage in place with respect to the Aircraft as Lessor or Owner Participant may reasonably request in light of such change in circumstances. (j) Negative Undertakings. Lessee shall not (i) act or fail to act, or cause, permit or suffer an act or failure to act, whereby any insurance required by this Section 15 would or might reasonably be expected to be limited or rendered in whole or in part invalid, unenforceable or otherwise not in full force and effect (including any limitation resulting from inaccuracy of any representation or warranty of Lessee, or any illegal use of the Aircraft), and (ii) without limiting the foregoing, use, operate, employ or locate the Aircraft, Airframe, any Engine or any Part, or cause, permit or suffer the Aircraft, Airframe, any Engine or any Part to be used, operated, employed or located, in any place or in any manner or for any purpose (x) in any area excluded from coverage, or in any manner for any purpose that is not covered, by any insurance policy in effect or required by the terms of this Agreement to be maintained by Lessee or (y) that might reasonably be expected to be excluded from coverage under, or to invalidate or in any way limit (including any limitation with respect to coverage of the specified insured perils, events or circumstances) any such insurance policy. (k) Failure to Insure. If at any time Lessee fails to maintain insurance in compliance with this Section 15, each of Lessor and Owner Participant shall be entitled but not bound to do any of the following (without prejudice to any other rights which it may have under this Agreement by reason of such failure): (i) to pay any premiums due or effect or maintain such insurance or otherwise remedy such failure in such manner as Lessor or Owner Participant, as the case may be, considers appropriate (and Lessee shall upon demand reimburse Lessor or Owner Participant, as the case may be, in full for any amount so expended in that connection) and/or (ii) at any time while such failure is continuing, require the Aircraft to remain at any airport or, as the case may be, upon provision by Lessor or Owner Participant, as the case may be, of insurance coverage satisfactory to Lessee, proceed to and remain at any airport designated by Lessor or Owner Participant, as the case may be, until such failure is remedied to Lessor's and Owner Participant's satisfaction. SECTION 16. Inspection. (a) Maintenance Schedule. During the Lease Term, Lessee shall furnish Lessor with such information concerning the location, condition, use and operation of the Aircraft as Lessor may reasonably request. Lessee shall provide Lessor with maintenance schedules relating to the Aircraft upon delivery of the Aircraft and from time to time as such schedules are adjusted or updated. Lessee shall give Lessor reasonable prior notice of the date of, and any change in the date of, any Major Checks, in order to enable Lessor or Owner Participant, or their respective agents, representatives or designees, to inspect the Aircraft, including, without limitation, the Aircraft Documentation (should Lessor or Owner Participant choose to do so), at the time and place any such Major Checks occur and to make a reasonable number of photocopies of any Aircraft Documentation. (b) Reasonable Inspections. At all reasonable times, Lessor, Owner Participant or their respective authorized representatives may inspect the Airframe and Engines and inspect and make copies (at such Person's expense, or if such inspection is made in connection with or following a Default or an Event of Default, at Lessee's expense) of the books and records of Lessee relating to the Airframe and Engines and the maintenance of the Airframe and Engines (including, without limitation, any Aircraft Documentation, the Approved Maintenance Program, and also including any airworthiness directive and service bulletin compliance records, component life status reports, and the then-current aircraft configuration), and if such inspection is made at the time of any maintenance operation, such Persons may inspect behind any panels, bays or other apertures which have already been opened in the course of such maintenance operation, provided that, so long as no Default or Event of Default has occurred and is continuing, no exercise of such inspection right shall interfere with the normal operation of the Aircraft by Lessee. (c) No Duty to Inspect. Neither Lessor nor Owner Participant shall have any duty to make any such inspection nor shall Lessor or Owner Participant incur any liability or obligation by reason of making or not making any such inspection. (d) Follow-On Lease. Upon request by Lessor, Lessee shall from time to time during the Lease Term make the Aircraft, including, without limitation, the Aircraft Documentation, available for inspection and/or a reasonable amount of photocopying to Lessor's designated representatives or technical teams evaluating the Aircraft for use after the end of the Lease Term. Lessor agrees to give Lessee at least five (5) Business Days' advance notice of any such inspection and to coordinate such inspections with Lessee so as not to unreasonably interfere with Lessee's operation or maintenance or with its personnel. (e) Absolute Right. The right of Lessor and Owner Participant and their respective designated representatives to inspect the Aircraft and Aircraft Documentation in accordance with this Section 16 during the Lease Term shall be absolute. SECTION 17. Assignment. (a) Assignment by Lessee. Lessee shall not assign, convey or otherwise transfer (each, an "assignment") any of its rights, title or interests in and to the Aircraft or this Agreement without the prior written consent of Lessor. (b) The Lessor may sell, assign or transfer all or any of its rights under this Agreement and in the Aircraft (a "Transfer") and the Lessor will, other than in the case of an assignment for security purposes, have no further obligation under this Agreement following a Transfer but, notwithstanding any Transfer, will remain entitled to the benefit of each indemnity under this Agreement. In connection with any Transfer, the following conditions shall apply: (i) Lessor shall give Lessee written notice of such Transfer at least 10 Business Days before the date of such Transfer, specifying the name and address of the proposed purchaser, assignee or transferee (the "Transferee"); (ii) the Transfer will not adversely affect the Lessee's rights and interests in the Aircraft and/or this Agreement, not subject the Lessee, on the date of such transfer, to any Tax, claim, liability or any other obligation or expense to which it would not have been subject had such assignment or transfer not taken place; (iii) the Transferee will be a Citizen of the United States and have full corporate power and authority to enter into and perform the transactions contemplated by this Agreement on the part of "Lessor"; (iv) on the Transfer date the Lessor and the Transferee shall enter into an agreement or agreements in which the Transferee confirms that it shall be deemed a party to this Agreement and agrees to be bound by all the terms of, and to under take all of the obligations of, the Lessor contained in this Agreement; and (v) such Transfer shall not violate any applicable law. (c) Upon any Transfer, the Transferee shall be deemed Lessor for all purposes of this Agreement, each reference in this Agreement to the "Lessor" shall thereafter be deemed for all purposes to refer to the Transferee, and the transferor shall be relieved of all obligations of the "Lessor" under this Agreement arising after the time of such Transfer except to the extent attributable to acts or events occurring prior to the time of such Transfer. (d) Upon compliance by Lessor and a Transferee with the terms and conditions of Clause 17(b), Lessee shall at the time of Transfer, at the specific written request of Lessor and with Lessor paying all of Lessee's out-of-pocket costs and expenses: (i) execute and deliver to Lessor and to such Transferee an agreement, in form and substance satisfactory to Lessor, Lessee and such Transferee, dated the date of such transfer, consenting to such transfer, agreeing to pay all or such portion of the Basic Rent and other payments under this Agreement to such Transferee or its designee as such Transferee shall direct, and agreeing that such Transferee shall be entitled to rely on all representations and warranties made by Lessee in this Agreement or in any certificate or document furnished by Lessee in connection with this Agreement as though such Transferee was the original "Lessor"; (ii) execute and deliver to Lessor or such Transferee, as the case may be, precautionary Uniform Commercial Code financing statements or amendments reflecting the interests of such Transferee in the Aircraft and this Agreement; (iii) deliver to Lessor and to such Transferee a certificate, signed by a duly authorized officer or Lessee, dated the date of such transfer, to the effect that no Event of Default has occurred and is continuing or, if one is then continuing, describing such Event of Default; (iv) cause to be delivered to Lessor and such Transferee certificates of insurance and broker's letter of undertaking substantially in the form delivered on the Delivery Date, detailing the coverage and confirming the insurers' agreement to the specified insurance requirements of this Agreement and listing the Lessor and Transferee as additional insureds and the Transferee as sole loss payee; (v) deliver to Lessor and such Transferee information on the location of the Airframe and Engines at all times requested by Lessor in order to permit the Transfer to take place at a time and on a date so as to eliminate or minimize any Taxes applicable to the Transfer; and (vi) such other documents as Lessor or such Transferee may reasonably request, so long as such documents do not adversely affect the rights or obligations of Lessee under this Lease or otherwise adversely effect Lessee. (e) Collateral Assignment. Notwithstanding any of the foregoing, it is understood and agreed that Lessor may, without the prior written consent of Lessee but with prior notice to the Lessee, mortgage or pledge and/or assign all or any portion of its right, title and interest in and to this Agreement, the Aircraft or any Rent due hereunder to any Lender. Lessee shall acknowledge in writing any such mortgage, pledge or assignment by an acknowledgment in a form reasonably satisfactory to the Lessee. Upon notice to the Lessee from any Lender under any such mortgage, pledge or assignment, such Lender may require that all Rent shall be paid directly to such Lender and/or that the Aircraft be returned to such Lender, but, in the case of the return of the Aircraft, only upon completion or termination of this Agreement. Any acknowledgment from the Lessee shall include, without limitation, an agreement of the Lessee that: (i) upon such mortgage, pledge or assignment, all rights of the Lessor hereunder (including without limitation, all rights to be named as loss payee and an additional insured under any policies of insurance maintained pursuant to Section 15 hereof, all rights to receive monies, reports, certificates and any other information pursuant to the terms of this Agreement and all rights to indemnification) shall, to the extent provided for in the mortgage, pledge or assignment, be exercisable by such Lender, and such Lender shall be deemed an Indemnified Party and a Tax Indemnitee for all purposes of this Agreement; (ii) the rights of such Lender shall not be subject to any defense, counterclaim, or set-off that the Lessee may have or assert against Lessor; (iii) such Lender shall not be liable for any of Lessor's obligations hereunder; (iv) subject to the terms of the mortgage, pledge or assignment, such Lender may require that all Rent be paid directly to such party (or its designee), and Lessee agrees that upon receipt of such notice, Lessee shall pay directly to such Lender all Rent due or to become due hereunder; and (v) Lessee shall comply, at the Lessor's expense, with all reasonable requests of Lessor and such Lender in connection with any such mortgage, pledge or assignment including, without limitation, the execution of all consents and amendments in a form reasonably acceptable to Lessee and the making of any and all registrations and filings. Lessee agrees, from and after any such mortgage, pledge or assignment, to pay, as Supplemental Rent, any indemnity obligations which Lessor shall be obligated to pay under any related loan documentation which constitute breakage costs (to the extent arising in connection with an Event of Default hereunder), increased costs or withholding taxes, in each case to the extent such indemnities were, at the time of their grant to such Lender similar to indemnities granted to other similar lenders in the debt markets generally (by execution of the acknowledgment the Lessee agrees to be bound to reimburse Lessor for such indemnities). (f) The Owner Participant may sell, assign or transfer all or any of its rights under this Agreement and in the Aircraft (an "OP Transfer") and the Owner Participant will have no further obligation under this Agreement following an OP Transfer (except with regard to a breach by Lessor of this subpart (f)) but, notwithstanding any OP Transfer, will remain entitled to the benefit of each indemnity under this Agreement. In connection with any OP Transfer, the following conditions shall apply: (i) Owner Participant shall give Lessee written notice of such OP Transfer at least 3 Business Days before the date of such OP Transfer, specifying the name and address of the proposed purchaser, assignee or transferee (the "OP Transferee"); (ii) the OP Transfer will not adversely affect the Lessee's rights and interests in the Aircraft and/or this Agreement, nor subject the Lessee to any Tax, claim, liability or any other obligation or expense to which it would not have been subject had such assignment or transfer not taken place; (iii) the OP Transferee will be a Citizen of the United States (including, for purposes hereof, through compliance with 14 C.F.R. ss. 47.7(c)(3)) and have full corporate power and authority to enter into and perform the transactions contemplated by this Agreement on the part of "Owner Participant"; and (iv) on the OP Transfer date, the Lessor and the OP Transferee shall enter into an agreement or agreements in which the OP Transferee confirms that it shall be deemed a party to this Agreement and agrees to be bound by all the terms of, and to under take all of the obligations of, the Owner Participant contained in this Agreement. Upon any OP Transfer, the OP Transferee shall be deemed Owner Participant for all purposes to refer to the OP Transferee, and the transferor shall be relieved of all obligations of the "Owner Participant" under this Agreement arising after the time of such OP Transfer, except to the extent attributable to acts or events occurring prior to the time of such OP Transfer. (g) Successors and Assigns. Subject to the foregoing, the terms and provisions of this Agreement shall be binding upon and inure to the benefit of Lessor, Owner Participant, Lessee and their respective successors and permitted assigns. SECTION 18. Early Termination. Lessee may not terminate the Lease prior to the Expiry Date. SECTION 19. Events of Default. Lessor, Owner Participant and Lessee agree that it is a fundamental term and condition of this Agreement that none of the following events shall occur during the Lease Term and that the occurrence of any of the following events shall constitute a repudiatory breach of this Agreement and an "Event of Default" (whether any such event shall be voluntary or involuntary or come about or be effected by operation of law or pursuant to or in compliance with any judgment, decree or order of any court or any order, rule or regulation of any Government Entity): (a) Failure to Pay Basic Rent, Renewal Rent or Stipulated Loss Value. Lessee shall have failed to make any payment of Basic Rent, Renewal Rent or Stipulated Loss Value in accordance with this Agreement and the other Operative Documents when the same shall have become due and payable and such failure shall continue for three (3) Business Days from such due date. (b) Failure to Pay Supplemental Rent. Lessee shall have failed to make any payment of Supplemental Rent (other than as specified in paragraph (a) above) in accordance with this Agreement or the other Operative Documents when the same shall have become due and such failure shall continue for five (5) Business Days from such due date. (c) Insurance. (i) Lessee shall have failed to carry and maintain, or cause to be carried and maintained, on or with respect to the Aircraft, any insurance required to be maintained in accordance with the provisions of Section 15; or (ii) The Aircraft shall be operated at a time when any insurance required under Section 15 shall not be in effect. (d) Return. Lessee shall have failed to return the Aircraft at the end of the Lease Term pursuant to the provisions of, and in the condition required by, Section 7. (e) Unauthorized Transfer. There shall be any unauthorized transfer of possession of the Aircraft, Airframe or any Engine by Lessee. (f) Certain Covenants. Lessee shall have failed to comply with its obligations under Section 6(a), 6(b), 10(a), 10(b), 10(d)(ii) or 11. (g) Other Covenants. Lessee shall have failed to comply with, observe or perform, and shall fail to cause to be complied with, observed and performed, any of its covenants, agreements or obligations hereunder or under any other Operative Document, except to the extent provided above in this Section 19, and such failure shall continue for 30 days after the earlier of (i) the date of written notice thereof to Lessee or (ii) the date Lessee, assuming exercise of reasonable diligence, should have known of such failure. (h) Representations and Warranties. Any representation or warranty made by Lessee herein or in any other Operative Document shall have proven to have been incorrect, inaccurate or untrue in any material respect as of the time made. (i) Authorizations. Lessee shall no longer possess the Authorizations required hereunder or under any other Operative Document or material for the conduct of its business as a commercial passenger air carrier in the Lessee Jurisdiction or for the performance of its obligations hereunder or under any other Operative Document, or any such Authorizations are revoked, canceled, adversely modified or otherwise terminated, or the continued use and exercise thereof is prevented. (j) Voluntary Bankruptcy, Etc. Lessee shall have (i) commenced any proceeding or filed any petition seeking relief under any applicable bankruptcy, insolvency, liquidation, examination, administration, receivership or other similar law, (ii) consented to or acquiesced in the institution of, or failed to contravene in a timely and appropriate manner, any such proceeding or the filing of any such petition, (iii) applied for or consented to the appointment of a receiver, examiner, trustee, custodian, sequestrator or similar official for itself or for a substantial part of its property or assets, (iv) filed an answer admitting the material allegations of a petition filed against it in any such proceeding, (v) proposed or entered into any composition or other arrangement, or made a general assignment, for the benefit of creditors or declared a moratorium on the payment of indebtedness, (vi) become insolvent or suspended payments on, become unable to, admitted in writing its inability to or failed generally to pay, any material portion of its debts as they become due, (vii) sought its own liquidation, reorganization, dissolution or winding up, (viii) suspended payment procedures or (ix) taken any corporate action for the purpose of effecting any of the foregoing. (k) Involuntary Bankruptcy, Etc. A proceeding shall have been commenced or a petition shall have been filed, in either case, without the consent or application of Lessee, seeking (i) relief in respect of Lessee or of a substantial part of its property or assets under any applicable bankruptcy, insolvency, liquidation, examination, administration, receivership or similar law, (ii) the appointment of a receiver, examiner, trustee, custodian, sequestrator or similar official for Lessee or for a substantial part of its property or assets or (iii) the liquidation, reorganization, dissolution or winding up of Lessee; and such proceeding or petition shall continue undismissed for 60 days or an order or decree approving or ordering any of the foregoing shall be issued and shall not immediately be stayed. (l) Indebtedness. Lessee shall have failed to pay any amount in respect of any Indebtedness, or any interest or premium thereon, when due (whether by a scheduled maturity, required prepayment, acceleration, demand or otherwise), or Lessee shall fail to perform or to comply with any other covenant, agreement or condition contained in any agreement or instrument relating to such Indebtedness, and such failure to pay or to perform or to comply shall continue after the applicable grace period, if any, specified in the agreement or instrument relating to such Indebtedness, if, as a result of any such failure, the maturity of such Indebtedness is capable of being accelerated and if the aggregate outstanding amount of all such Indebtedness exceeds, in the aggregate together with any other Indebtedness in respect of which Lessee has failed to make any payment or in respect of which Lessee has otherwise failed to perform or comply, US$500,000 (or the equivalent thereof). (m) Government Action. The franchises, concessions, permits, rights or privileges required for the conduct of the business or operations of Lessee shall have been revoked, canceled or otherwise terminated or the free and continued use or exercise thereof curtailed, prevented or modified in a manner that materially adversely affects Lessee's ability to perform its obligations under any Operative Document. (n) Judgments. One or more judgments are rendered against Lessee that either (i) imposes or impose on Lessee at any given point in time an obligation or obligations for the payment of money in excess of US$500,000 (or the equivalent thereof) in the aggregate or (ii) grants or grant to any Person equitable relief of any nature that could, if enforced, have a material adverse effect on Lessee's ability to perform any of its obligations under any Operative Document and, in the case of any such judgment or judgments, the same shall remain undischarged for a period of thirty (30) days or more, during which time execution of such judgment or judgments shall not be effectively stayed nor adequate bonding fully covering such judgment or judgments exist. (o) Cross Default. Any lease, conditional sale, installment sale or forward purchase agreement of the Lessee in respect of an aircraft is terminated as a consequence of an event of default or termination event (however described). (p) Adverse Change. Any event or series of events occurs which, in the reasonable opinion of the Lessor or Owner Participant, causes a material adverse effect on the financial condition or operations of the Lessee and its Affiliates or on the ability of the Lessee to comply with its obligations under this Agreement. (q) Letter of Credit. Any Letter of Credit ceases to be in full force and effect or is repudiated or canceled by the Letter of Credit Bank and Lessee shall have failed to provide a substitute Letter of Credit or Security Deposit as required by Section 3(d) hereof. SECTION 20. Remedies. Upon the occurrence of any Event of Default and so long as the same shall be continuing, Lessor shall have the right, effective upon notice to Lessee, to terminate this Agreement and all of Lessee's rights hereunder; and at any time thereafter Lessor may do all or any of the following, at its option and in its sole discretion (in addition to such other rights and remedies which Lessor may have under applicable law): (a) Retake Possession. Upon the written demand of Lessor and at Lessee's expense, cause Lessee to return promptly, and Lessee shall return promptly, the Airframe and Engines or such part of the Aircraft as Lessor may so demand to Lessor or its order in the manner and condition required by, and otherwise in accordance with, all the provisions of, Section 7 as if such Airframe and Engines were being returned at the expiration of the Lease Term, or Lessor, acting in its individual capacity or as attorney for Lessee, at its option, may enter upon the premises where the Airframe or an Engine is located and take immediate possession of and remove the same (together with any engine which is not an Engine but which is installed on the Airframe, subject to all the rights of the owner, lessor, lienor or secured party of such engine, and such engine shall be held for the account of any such owner, lessor, lienor or secured party or, if owned by Lessee, may, at the option of Lessor, be exchanged with Lessee for an Engine in accordance with the provisions of Section 7(b)) by summary proceedings or otherwise, and Lessee waives any right it may have under applicable law to a hearing prior to repossession of the Aircraft, Airframe or any Engine or Part, all without liability accruing to Lessor for or by reason of such entry or taking of possession or removing whether for the restoration of damage to property caused by such action or otherwise. (b) Termination or Enforcement. Rescind this Agreement, terminate this Agreement and/or exercise any other right or remedy which may be available to it under applicable law or proceed by appropriate court action to enforce the terms hereof and/or exercise any other power, right or remedy which may be available to Lessor hereunder or under applicable law. Without limiting the generality of the foregoing, Lessor shall have the right, without need of any consent, authorization or action of Lessee, to cause the Aircraft to be deregistered by the Aviation Authority, and to be made ready for export and to be exported out of the Lessee Jurisdiction, and to cause all rights of Lessee in respect of the Aircraft and this Lease under or in connection with or resulting from the registration of the Aircraft with the Aviation Authority or otherwise under or in connection with or resulting from any law in the Lessee Jurisdiction, to be terminated and extinguished. In furtherance of the foregoing, Lessor shall be entitled and empowered to act in the name and in the place of Lessee with respect to the Aircraft as may be necessary or desirable, in Lessor's sole discretion, including, without limitation, with respect to the execution of documents and instruments, to effect such deregistration, exportation, termination and extinguishment. (c) Application of Funds. Without limiting any other provision of this Agreement or of any other Operative Document, Lessor shall have the right to withhold or set off against all amounts otherwise payable to Lessee hereunder, all as security for Lessee's obligations and liabilities under this Agreement and the other Operative Documents, and to use and apply in whole or in part any or all of such amounts and setoffs to and against such obligations and liabilities of Lessee (in whatever order and according to whatever priority Lessor may choose), and any such use, application or setoff shall be absolute, final and irrevocable. (d) Damages. In addition to Lessor's rights under Section 9, Lessor may recover from Lessee, and Lessee shall on demand pay, damages to equal the sum of: (i) all accrued and unpaid Rent payable hereunder in respect of any period prior to Return of the Aircraft to Lessor in the condition and otherwise in the manner required under Section 7 together with Break Amount, if any; (ii) all Expenses incurred by Lessor, Owner Participant and any other Indemnified Party in connection with such Event of Default or the exercise of Lessor's remedies with respect thereto, including, without limitation, all costs and expenses incurred in connection with recovering possession of the Airframe or any Engine or in placing such Airframe or Engine in the configuration, condition and airworthiness required by Section 7 and all lost Rent payments during such recovery and reconditioning; (iii) all incidental and consequential damages incurred by Lessor, Owner Participant and any other Indemnified Party in connection with such Event of Default, including, without limitation, all losses (including, without limitation, reasonable lost profits) suffered by Lessor because of Lessor's inability to place the Aircraft on lease with another lessee on terms as favorable to Lessor as this Agreement or because whatever use, if any, to which Lessor is able to put the Aircraft upon its return to Lessor, or the amount received by Lessor upon a sale or other disposal of the Aircraft, is not as profitable to Lessor as leasing the Aircraft in accordance with the terms of this Agreement would have been, including, without limitation, in each case, lost Rent payments during any remarketing period; and (iv) all reasonable and actual legal fees and other reasonable costs and Expenses incurred by Lessor, Owner Participant and any other Indemnified Party by reason of the occurrence of any Event of Default or the exercise of Lessor's remedies with respect thereto. SECTION 21. Transaction Expenses. Except as expressly otherwise provided herein, each of Lessor, Owner Participant and Lessee agrees that it shall be responsible for any and all fees and expenses it incurs in connection with the negotiation, preparation, execution and delivery of this Agreement and any other documents or instruments relating to the transaction contemplated hereby, including, without limitation, legal fees, expenses and disbursements. SECTION 22. No Setoff, Counterclaim, Etc. This Agreement is a net lease and Lessee's obligation to pay Rent under this Agreement and each other Operative Document to which it is a party is and shall be absolute and unconditional and shall not be abated, suspended, diminished, reduced, delayed, discontinued or otherwise affected by any condition, circumstance, act or event of any kind whatsoever, including, without limitation, any of the following: (i) any right of setoff, deduction, counterclaim, recoupment, defense, suspension, deferment or other right (including any right of reimbursement) which Lessee may have against Lessor, Owner Participant, Airframe Manufacturer, Engine Manufacturer, any Insured Party, any Inspecting Party, any Indemnified Party or any other Person for any reason whatsoever, including any claim Lessee may have for the foregoing, any present or future law to the contrary notwithstanding; (ii) the unavailability, interruption or cessation in use of the Aircraft for any reason, including (A) any requisition thereof or any restriction, prohibition or curtailment of, interference with, or other restriction against, Lessee's use, operation or possession of the Aircraft (whether by law, any Government Entity or other Person or otherwise) and (B) any damage to or loss or destruction (including an Event of Loss except as otherwise expressly provided in Section 13(b)) of or to the Aircraft and (C) the removal of the Aircraft from service to correct deficiencies described in Section 2 or to permit the Final Inspection or Return of the Aircraft; (iii) any defect in the title, airworthiness, merchantability, fitness for any purpose, condition, design, specification or operation of any kind or nature of the Aircraft, or the ineligibility of the Aircraft for any particular use or trade or for registration or documentation under the laws of any jurisdiction; (iv) any amendment or modification of or supplement to any of the Operative Documents, any agreements relating to any thereof or any other instrument or agreement applicable to the Aircraft, the Airframe or any Engine, or any assignment or transfer of any thereof, or any furnishing or acceptance of any additional security, or any failure or inability to perfect any security; (v) any insolvency, bankruptcy, reorganization, arrangement, readjustment of debt, dissolution, liquidation, receivership, administration or similar proceedings by or against Lessee, Lessor, Owner Participant, any Indemnified Party or any other Person; (vi) the invalidity, unenforceability or impossibility of performance of this Agreement, any other Operative Document or any of the terms hereof or thereof, the lack of power or authority of Lessee to enter into this Agreement or any other Operative Document, or any other defect in this Agreement or any other Operative Document; (vii) any breach by Lessor, Owner Participant, any Indemnified Party or any other Person of any representation, warranty or covenant, express or implied, made or alleged to be made to Lessee; (viii) any right, claim, bill, action or suit whatsoever by or against or on the part of Lessee, including, without limitation, whether arising out of legal action or otherwise, at law or in equity, whether affirmative, negative or defensive in nature for or on account of the legality, validity, enforceability or otherwise arising as a result of (x) this Agreement or any other Operative Document or any of the terms or conditions hereof or thereof, (y) any express or implied warranty or (z) any contract, agreement or transaction between Lessee and Lessor or any other Person, whether direct or indirect, written or oral; (ix) any waiver, consent, change, extension, indulgence or any action or inaction under or in respect of any such instrument or agreement or any exercise or nonexercise of any right, remedy, power or privilege in respect of any such instrument or agreement or this Agreement or any other Operative Document; (x) any transfer of any interest in this Agreement or in the Aircraft by Lessor or any Indemnified Party or any change of ownership of Lessor, Owner Participant or any Indemnified Party; or (xi) any other circumstance, happening or event whatsoever, whether or not similar to the foregoing, which but for this provision would or might have the effect of terminating or in any other way affecting any obligation of Lessee hereunder, it being the express intention of Lessor, Owner Participant and Lessee that all Rent and other amounts payable by Lessee hereunder or under any other Operative Document shall be payable in all events, unless the obligation to pay the same shall be terminated pursuant to the express provisions of this Agreement. Lessee hereby waives, to the extent permitted by applicable law, any and all rights which it may have or which at any time hereafter may be conferred upon Lessee, by law or otherwise, to terminate, cancel, quit or surrender this Agreement or any other Operative Document, or to abate, suspend, defer, reduce or otherwise fail to comply in full with any obligation imposed upon Lessee hereunder or thereunder or in relation hereto, except termination of this Agreement in accordance with the express provisions hereof. Each Rent payment made by Lessee shall be final, and Lessee shall not seek to recover all or any part of any such payment for any reason whatsoever. Nothing in this Section 22 shall be construed to limit Lessee's rights and remedies in the event of Lessor's or Owner Participant's breach of its representation and warranty of quiet enjoyment as set forth in Section 5(a)(iii) or to limit Lessee's rights and remedies to pursue any claims it may have against Lessor, Owner Participant or any other Person. SECTION 23. Further Assurances, Etc. (a) Further Assurances. Without limiting the other obligations and liabilities of Lessee under this Agreement and the other Operative Documents, Lessee agrees to promptly and duly execute and deliver to Lessor or Owner Participant such further documents and assurances and take such further action as Lessor or Owner Participant may from time to time reasonably request in order to effectively carry out the intent and purpose of this Agreement and the other Operative Documents and to establish, perfect and protect the rights and remedies created or intended to be created in favor of Lessor or any other Person hereunder and thereunder, including, without limitation, (x) any explanations, clarifications or translations (into English) requested by Lessor or Owner Participant relating to the information required to be provided by Lessee under Section 6(c), and (y) the execution and delivery of supplements or amendments hereto, in recordable form, rendering subject to this Agreement any Replacement Engine and the recording or filing of counterparts hereof or thereof or of other appropriate materials, in accordance with the laws of such jurisdictions as Lessor or Owner Participant may from time to time reasonably deem advisable. (b) Lessor's Performance of Lessee's Obligations. If Lessee fails to make any payment of Rent or fails to perform or comply with any agreement, covenant or obligation contained herein or in any other Operative Document, Lessor or Owner Participant shall have the right, but not the obligation, at its election and without waiver of any of its rights or remedies against Lessee, to perform or comply with such covenant, agreement or obligation and/or pay such amount, and the amount of such payment and any Expenses incurred by Lessor or Owner Participant in connection with such payment or the performance of or compliance with such agreement, covenant or obligation, as the case may be, together with interest at the Past Due Rate, shall be payable by Lessee to Lessor, or Owner Participant, as the case may be, upon demand as Supplemental Rent. The taking of any action by Lessor or Owner Participant pursuant to this Section 23(b) shall not constitute a waiver or release of any obligation of Lessee hereunder nor a waiver of any Default which may arise out of Lessee's nonperformance of such obligation, nor an election or waiver by Lessor of any right or remedy available to Lessor under or in relation to this Agreement. (c) No Implied Waivers; Rights Cumulative. (i) No failure on the part of Lessor to exercise and no delay in exercising any right, power, remedy or privilege under any Operative Document or provided by statute or at law or in equity or otherwise shall impair, prejudice or constitute a waiver of any such right, power, remedy or privilege or be construed as a waiver of any Event of Default or as an acquiescence thereto, nor shall any single or partial exercise of any such right, power, remedy or privilege impair, prejudice or preclude any other or further exercise thereof or the exercise of any other right, power, remedy or privilege. No acceptance of partial payment or performance shall, whether or not expressly stated, be or be deemed to be a waiver of any Event of Default then existing or a waiver or release of full payment and performance. No notice to or demand on Lessee shall in any case entitle Lessee to any other or further notice or demand in other or similar circumstances or constitute a waiver of the right of Lessor to any other or further action in any circumstances without notice or demand. (ii) Nothing contained in any Operative Document shall be construed to limit in any way any right, power, remedy or privilege of Lessor hereunder or under any Operative Document or now or hereafter existing at law or in equity. Each and every right, power, remedy and privilege of Lessor under the Operative Documents (x) shall be in addition to and not in limitation of, or in substitution for, any other right, power, remedy or privilege under any Operative Document or at law or in equity, (y) may be exercised from time to time or simultaneously and as often and in such order as may be deemed expedient by Lessor and (z) shall be cumulative and not mutually exclusive, and the exercise of one shall not be deemed a waiver of the right to exercise any other. (iii) Lessee hereby agrees and acknowledges that nothing contained herein or in any Operative Document shall be construed to require in any way, Lessor to take any action, upon a Default by Lessee of this Agreement, or a breach by Lessee of any provision of any Operative Document, to limit the damages suffered by Lessor as a result of any such Default or breach as the case may be. (d) Warranties. Lessor agrees that it will assign to Lessee, for the duration of the Lease Term so long as no Event of Default shall have occurred and be continuing, the benefit of any assignable warranties (including, without limitation, any repair warranties on any Engines or Parts) from the Airframe Manufacturer, Engine Manufacturer or manufacturer or supplier of any Part for which Lessor has an interest (but only to the extent of such interest). SECTION 24. Confidentiality. Each of Lessee, Owner Participant and Lessor shall keep this Agreement and each other Operative Document, and all terms and provisions hereof and thereof, confidential and shall not disclose, or cause to be disclosed, the same to any Person, without the prior written consent of the other, except (a) to prospective and permitted transferees of Lessor's, Owner Participant's or Lessee's interests or their respective counsel or special counsel, certified public accountants, independent insurance brokers or other agents, (b) in connection with any administration or enforcement of any provisions of this Agreement or any other Operative Document by Lessor, Owner Participant or Lessee, (c) to its Affiliates, (d) to its advisors, insurance brokers and accountants, or (e) as may be required by any statute, court or administrative order or decree or governmental ruling or regulation, including insurance regulatory bodies, banking examiners and other government officials; provided, however, that any and all disclosures of all or any part of such documents and provisions which are permitted by this Section 24 shall be made only to the extent necessary to meet the specific requirements or needs of the Persons to whom such disclosures are hereby permitted. SECTION 25. Governing Law and Jurisdiction. (a) Governing Law. THIS AGREEMENT AND EACH OTHER OPERATIVE DOCUMENT, UNLESS OTHERWISE EXPRESSLY PROVIDED THEREIN, SHALL IN ALL RESPECTS, INCLUDING ALL MATTERS OF CONSTRUCTION, VALIDITY AND PERFORMANCE, BE GOVERNED BY AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF ILLINOIS. THIS LEASE IS BEING DELIVERED IN THE STATE OF ILLINOIS. (b) Nonexclusive Jurisdiction in Illinois. Lessee hereby irrevocably consents that any legal action or proceeding against it or any of its assets arising out of or relating to this Agreement or any other Operative Document may be brought in any jurisdiction where it or any of its assets may be found and in the courts of the State of Illinois and U.S. Federal Courts for the Northern District of Illinois and by execution and delivery of this Agreement Lessee hereby irrevocably submits to and accepts with regard to any such action or proceeding, for itself and in respect of its assets, generally and unconditionally, the jurisdiction of the aforesaid courts and irrevocably agrees to be bound by any judgment rendered thereby. Nothing herein shall prevent any party from bringing any legal action or proceeding or obtaining execution of judgment in any other appropriate jurisdiction. Lessee, Owner Participant and Lessor further agree that a final judgment in any action or proceeding arising out of or relating to this Agreement or any other Operative Document shall be conclusive and may be enforced in any other jurisdiction by suit on the judgment, a certified or exemplified copy of which shall be conclusive evidence of the fact and the amount of the indebtedness or liability therein described, or in any other manner provided by law. Each of Lessee, Owner Participant and Lessor hereby irrevocably waives, to the fullest extent permitted by law, any objection which it may now or hereafter have to the laying of venue of any suit, action or proceeding arising out of or relating to this Agreement or any other Operative Document brought in any court in Illinois, and hereby further irrevocably waives any claim that any such suit, action or proceeding brought in any court in Illinois has been brought in an inconvenient forum. LESSEE, OWNER PARTICIPANT AND LESSOR HEREBY WAIVE TRIAL BY JURY IN ANY JUDICIAL PROCEEDING TO WHICH THEY ARE PARTIES INVOLVING, DIRECTLY OR INDIRECTLY, ANY MATTER ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY OTHER OPERATIVE DOCUMENT. SECTION 26. Miscellaneous. (a) Amendments. No provision of this Agreement or any other Operative Document may be amended, changed, waived or discharged orally, but only by an instrument in writing specifying the provision intended to be amended, changed, waived or discharged and signed by each party hereto or thereto; and no provision of this Agreement or any other Operative Document shall be varied, contradicted or explained by any oral agreement, course of dealing or performance or other matter not specifically set forth in an agreement in writing and signed by each party hereto or thereto. (b) Severability. If any provision hereof or of any Operative Document should be held invalid, illegal or unenforceable in any respect in any jurisdiction, then, to the extent permitted by law (i) all other provisions hereof or thereof shall remain in full force and effect in such jurisdiction and (ii) such invalidity, illegality or unenforceability shall not affect the validity, legality or enforceability of such provision in any other jurisdiction. (c) Counterparts. This Agreement, any Operative Document and any amendments, waivers, consents or supplements hereto or thereto may be executed in any number of counterparts, each of which when so executed shall be deemed to be an original, and all of which counterparts, taken together, shall constitute one and the same instrument. (d) Chattel Paper. To the extent, if any, that this Agreement constitutes chattel paper (as defined in the Uniform Commercial Code in effect from time to time in any applicable jurisdiction) no security interest in this Agreement may be created through the transfer or possession of any counterpart other than the original executed counterpart, which shall be identified as the counterpart containing the receipt therefor executed by Lessor on the signature page thereof. (e) Time of the Essence. Subject to the periods of grace referred to in Section 19, time shall be of the essence as regards the performance by Lessee of its obligations under this Agreement and each other Operative Document. (f) Notices. All notices, requests and other communications to Lessee, Lessor, Owner Participant or any other Person hereunder or under any other Operative Document shall be in writing (for this purpose, "writing" includes telecopy or similar electronic transmissions), shall refer specifically to this Agreement or such other Operative Document, as the case may be, and shall be personally delivered or sent by telecopy or other similar electronic facsimile transmission, or sent by overnight courier service (e.g., Federal Express), in each case to the respective address and telecopy number, if any, specified in Schedule 3 or such other address or telecopy number as such Person may hereafter specify by notice to the other party or to the parties hereto. Each such notice, request or other communication shall be effective when received or, if by telecopier or other similar electronic transmission, when "confirmed" by the sending telecopy or similar machine and written evidence of such confirmation is produced by such machine, provided that any such notice by telecopy so "confirmed" after 6:00 p.m., for the recipient, shall be effective on the next succeeding local Business Day. (g) Entire Agreement. This Agreement constitutes the entire agreement between the parties concerning the subject matter hereof, and supersedes all previous proposals, agreements, understandings, negotiations and other written and oral communications in relation hereto. The parties acknowledge that there have been no representations, warranties, promises, guarantees or agreements, express or implied, except as set forth herein. (h) True Lease. Lessee, Owner Participant and Lessor agree that this Lease is to be treated as a true operating lease for federal income tax purposes, that Lessor is the owner of the Aircraft for federal income tax purposes and all other purposes and that the interest of Lessee in the Aircraft is that of a lessee only. IN WITNESS WHEREOF, Lessee, Owner Participant and Lessor have caused this Agreement to be executed by their respective officers as of the day and year first above written. HELLER FINANCIAL LEASING, INC., Owner Participant By: Title: FRONTIER AIRLINES, INC., Lessee By: Title: FIRST SECURITY BANK, NATIONAL ASSOCIATION, not in its individual capacity, but solely as Owner Trustee, Lessor By: Title: RECEIPT OF THIS ORIGINAL COUNTERPART OF THE FOREGOING LEASE AGREEMENT IS HEREBY ACKNOWLEDGED ON THIS _____ DAY OF _______________, 1998. FIRST SECURITY BANK, NATIONAL ASSOCIATION, not in its individual capacity, but solely as Owner Trustee, Lessor By: Title: Exhibit A to Lease Agreement TECHNICAL ACCEPTANCE CERTIFICATE Lessee hereby acknowledges to Lessor, in accordance with the terms and conditions of the Lease Agreement, dated as of November 23, 1998 (the "Lease"), between First Security Bank, National Association, not in its individual capacity, but solely as Owner Trustee, Heller Financial Leasing, Inc. and FRONTIER AIRLINES, INC., that the following Aircraft meets the delivery conditions specified in the Lease and that we accept the condition of the Aircraft for all purposes of the Lease (subject to the provisions of Section 2(b)(ii) of the Lease). Aircraft: Registration Mark: N308FL Manufacturer's Serial Number: 28738 with two installed CFM56-3C-1 engines, Engine Manufacturer's Serial Numbers: Position 1: 858766 Position 2: 858767 IN WITNESS WHEREOF, Lessor, Owner Participant and Lessee have each caused this receipt to be duly executed on the above date. HELLER FINANCIAL LEASING, INC. as Owner Participant By: Title: FRONTIER AIRLINES, INC., as Lessee By: Title: FIRST SECURITY BANK, NATIONAL ASSOCIATION, not in its individual capacity, but solely as Owner Trustee, as Lessor By: Title: Exhibit C to Lease Agreement (MSN 28738) FORM OF LEASE SUPPLEMENT NO. [___] THIS LEASE SUPPLEMENT NO.[___], dated [___________], (this "Lease Supplement"), is entered into between FRONTIER AIRLINES, INC., a Colorado corporation having its principal place of business at 12015 E. 46th Avenue, Denver, Colorado 80239 ("Lessee"), FIRST SECURITY BANK, NATIONAL ASSOCIATION, not in its individual capacity, but solely as Owner Trustee ("Lessor"), and HELLER FINANCIAL LEASING, INC., ("Owner Participant"). WITNESSETH: WHEREAS, Lessor, Owner Participant and Lessee have heretofore entered into that certain Lease Agreement dated as of November __, 1998 (the "Lease"), which provides for the execution and delivery from time to time of Lease Supplements (this and all other capitalized terms used but not defined herein shall have the respective meanings, and shall be interpreted and construed in the manner set forth or incorporated by reference in Section 1 of the Lease) substantially in the form hereof for the purpose of leasing the Aircraft under the Lease as and when delivered by Lessor to Lessee in accordance with the terms thereof; [and] 1WHEREAS, the Lease relates to the airframe and engines described below, and a counterpart of the Lease is attached to and made a part of this Lease Supplement; [and] This Lease Supplement No. [___] has been executed in several counterparts. To the extent, if any, that this Lease Supplement No.[___] constitutes chattel paper (as such term is defined in the Uniform Commercial Code as in effect in any applicable jurisdiction), no security interest in this Lease Supplement No.[___] may be created through the transfer or possession of any counterpart other than the original executed counterpart containing the receipt therefor executed by Lessor or, if Lessor has assigned its rights to any Person in accordance with the Lease Agreement, such Person on the signature page thereof. 2The Lease relates to the Airframe and Engines described below, and a counterpart of the Lease, attached and made a party of Lease Supplement No. 1 dated ________________, to the Lease Agreement, has been recorded by the Federal Aviation Administration on ________________, as one document and assigned Conveyance No. - ----------------. AGREEMENT: NOW, THEREFORE, in consideration of the foregoing premises, and for other good and valuable consideration the adequacy of receipt of which is hereby acknowledged, and pursuant to Section [2] [13(c)] [__] of the Lease, Lessor and Lessee hereby agree as follows: 3[1. Lessor hereby delivers and leases to Lessee, and Lessee hereby accepts and leases from Lessor, under the Lease as hereby supplemented, the Boeing Model 737-3U3 aircraft (the "Aircraft"), which consists of the following components: (a) Airframe: U.S. Registration No. N308FL; Manufacturer's Serial Number 28738 (b) Two CFM International, Inc. CFM56-3C-1 Engines, initially installed on such airframe at delivery to Lessee, bearing Engine Manufacturer's Serial Numbers 858766 and 858767 (each of which Engines has 750 or more rated takeoff horsepower); and (c) Garrett GT CP85-129 APU bearing Manufacturer's Serial Number P-200. 2. The "Delivery Date" for all purposes of the Lease is the date set forth in the opening paragraph of this Lease Supplement. 3. The Lease Term shall commence on the Delivery Date. 4. Lessee hereby confirms its agreement to pay Rent throughout the Lease Term in the amounts, to the Persons and otherwise in accordance with the provisions of Section 3 of the Lease and in accordance with the other provisions of the Lease and the other Operative Documents. 5. Lessee hereby confirms to Lessor that Lessee has accepted the Aircraft for all purposes hereof and of the Lease and the other Operative Documents. 1. The following-described property has been installed on and made a part of the Aircraft and is the property of Lessor and is hereby made subject to the Lease: [Describe property] [6.][2.] A number of counterparts of this Lease Supplement have been executed, each of which shall be deemed an original and all of which together shall constitute but one and the same agreement. To the extent, if any, that this Lease Supplement constitutes chattel paper (as defined in the Uniform Commercial Code) no security interest in this Lease Supplement may be created through the transfer or possession of any counterpart other than the original executed counterpart, which shall be identified as the counterpart containing the receipt therefor executed by Lessor or, if Lessor has assigned its rights to any Person in accordance with the Lease, such Person on the signature page thereof. [7.][3.] All of the provisions of the Lease are hereby incorporated by reference in this Lease Supplement on and as of the date of this Lease Supplement, to the same extent as if fully set forth herein. [8.][4.] THIS LEASE SUPPLEMENT SHALL IN ALL RESPECTS, INCLUDING ALL MATTERS OF CONSTRUCTION, VALIDITY AND PERFORMANCE, BE GOVERNED BY AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF ILLINOIS. THIS LEASE SUPPLEMENT IS BEING DELIVERED IN THE STATE OF ILLINOIS. IN WITNESS WHEREOF, Lessor and Lessee have caused this Lease Supplement No. [____] to be duly executed on and as of the day and year first above written. HELLER FINANCIAL LEASING, INC., as Owner Participant By: Title: FRONTIER AIRLINES, INC., as Lessee By: Title: FIRST SECURITY BANK, NATIONAL ASSOCIATION, not in its individual capacity, but solely as Owner Trustee, as Lessor By: Title: [THIS COUNTERPART IS NOT THE ORIGINAL COUNTERPART.] [RECEIPT OF THIS ORIGINAL COUNTERPART OF THE FOREGOING LEASE SUPPLEMENT NO. [___] IS HEREBY ACKNOWLEDGED ON THIS ___ DAY OF _______________, 199_.] FIRST SECURITY BANK, NATIONAL ASSOCIATION, not in its individual capacity, but solely as Owner Trustee, Lessor By: Title: Exhibit E to Lease Agreement (MSN 28738) INSURANCE REQUIREMENTS (a) At all times during the Lease Term, and until the Aircraft is returned to Lessor in the condition and manner required by this Agreement, Lessee shall maintain or cause to be maintained with respect to the Aircraft, at its own expense, comprehensive airline liability (including, without limitation, third-party and passenger, bodily injury, property damage, product liability, cargo, mail, baggage (checked and unchecked), premises and hangar keepers' liability) insurance (exclusive of the Airframe Manufacturer's product liability insurance), (i) in an amount not less than the greater of (y) the amounts of comprehensive airline liability insurance from time to time applicable to aircraft owned or leased and operated by Lessee of the same type as the Aircraft and (z) $400,000,000, provided that if Lessor, on the basis of advice received from an independent insurance advisor of international reputation, believes that such limit should be revised upwards based on amounts then customary in the industry generally, it shall be replaced by such higher limit (if any) as such advisor may consider appropriate in the light of circumstances prevailing in the commercial airline industry at that time, (ii) of the type and covering the same risks usually carried by air carriers owning or operating similar aircraft and engines and covering risks of the kind customarily insured against by such air carriers, (iii) with insurers of recognized reputation and responsibility reasonably acceptable to Lessor and (iv) that names each Indemnified Party as an additional insured and otherwise complies with the requirements set forth in, and is consistent with the issuance of a valid certificate of insurance and a report of the Insurance Broker. (b) Insurance Against Expense or Damage to the Aircraft. At all times during the Lease Term, and until the Aircraft is returned to Lessor in the condition and manner required by this Agreement, Lessee shall maintain or cause to be maintained, with respect to the Aircraft, at its own expense, all-risk aircraft hull insurance covering the Aircraft, all-risk property damage insurance covering Engines and Parts while temporarily removed from the Aircraft and all-risk spares insurance (i) for an agreed value not less than the Stipulated Loss Value for the Aircraft in respect of all-risk hull insurance, (ii) for the full replacement value, in respect of all-risk property damage insurance, (iii) of the type and covering the same risks usually carried by air carriers owning or operating similar aircraft and engines and covering risks of the kind customarily insured against by such air carriers, (iv) confirming that the insurers shall not be entitled to replace the Aircraft or Airframe upon the occurrence of an Event of Loss with respect thereto, (v) with insurers of recognized reputation and responsibility reasonably acceptable to Lessor and (vi) that names Lessor as the sole loss payee and otherwise complies with the requirements set forth in, and is consistent with the issuance of a valid certificate of insurance in form and substance reasonably satisfactory to Lessor. Lessee agrees that it will not adjust or settle any claim with respect to the insurances provided hereunder without the consent of Lessor (which consent shall not be unreasonably withheld); provided that, so long as no Event of Default shall have occurred and be continuing, such consent shall not be required in respect of claims which do not exceed the Stipulated Deductible Amount. (c) War-Risk, Hijacking and Related Perils Insurance. At all times during the Lease Term, and until the Aircraft is returned to Lessor in the condition and manner required by this Agreement, and, for liability coverage, Lessee shall maintain or cause to be maintained, with respect to the Aircraft, at its own expense, worldwide (subject to standard insurance market geographical limits) coverage of war-risk, hijacking and related perils insurance of the type and in substantially the amounts carried by air carriers operating the same or comparable models of aircraft in such areas (i) in no event in an amount less than (x) $400,000,000 with respect to liability coverage and (y) the Stipulated Loss Value with respect to hull coverage and (z) full replacement value with respect to property damage coverage, (ii) in any event, covering the perils of (u) war, invasion, acts of foreign enemies, hostilities (whether war be declared or not), civil war, rebellion, revolution, insurrection, martial law, military or usurped power or attempts at usurpation of power, (v) strikes, riots, civil commotions or labor disturbances, (w) any act of one or more Persons, whether or not agents of a sovereign power, for political or terrorist purposes and whether the loss or damage resulting therefrom is accidental or intentional, (x) any malicious act or act of sabotage, (y) confiscation, nationalization, seizure, restraint, detention, appropriation, requisition for title or use by or under the order of any government (other than the government of the State of Registration) (whether civil, military or de facto) or public or local authority, and (z) hijacking, or any unlawful seizure or wrongful exercise of control of any aircraft or crew in flight (including any attempt at such seizure or control) made by any Person or Persons on board any aircraft acting without the consent of the insured (including if committed by Persons engaged in a program of irregular warfare for terrorist purposes), (iii) with insurers of recognized reputation and responsibility reasonably acceptable to Lessor and (iv) that names each Indemnified Party as an additional insured with respect to liability insurance and, for hull coverage only, names Lessor or its designee as the sole loss payee and otherwise complies with the requirements set forth in, and is consistent with the issuance of a valid certificate of insurance and a report of the Insurance Broker. Lessee agrees that it will not adjust or settle any claim with respect to the insurances provided hereunder without the consent of Lessor (which consent shall not be unreasonably withheld); provided that, so long as no Event of Default shall have occurred and be continuing, such consent shall not be required in respect of claims which do not exceed the Stipulated Deductible Amount. (d) COMPREHENSIVE AIRLINE LIABILITY, AIRCRAFT THIRD PARTY, CONTRACTUAL LIABILITY (as per endorsement), PROPERTY DAMAGE, PASSENGER, BAGGAGE, CARGO AND MAIL AND AIRLINE GENERAL THIRD PARTY (INCLUDING PRODUCTS) LEGAL LIABILITY for a Combined Single Limit (Bodily Injury/Property Damage) of an amount not less than U.S. $400,000,000 for the time being any one occurrence. War and Allied Risks are also to be covered under this Policy to the same extent as set forth above. (e) All required insurance (as specified in paragraphs (a), (b), (c) and (d) above), shall:- (i) in the case of the insurance required by paragraph (a), name each Indemnified Party as additional assureds for their respective rights and interests, warranted, each as to itself only, no operational interest; (ii) in the case of the insurance required by paragraph (b), provide that any loss shall be settled with the Lessee and shall for amounts in excess of the Stipulated Deductible Amount be payable in Dollars to the Lessor as Loss Payee; (iii) in the case of the insurance required by paragraph (a), include a Severability of Interest Clause which provides that the insurance shall operate to give each assured the same protection as if there were a separate policy issued to each assured; (iv) in the case of the insurance required by paragraph (a), contain a provision confirming that the policy is primary without right of contribution and the liability of the insurers shall not be affected by any other insurance of which any Indemnified Party or Lessee have the benefit so as to reduce the amount payable to the Additional Insureds under such policies; (v) in the case of the insurance required by paragraph (b), contain a 50/50% clause per AVS 103 or its equivalent; (vi) shall provide that in respect of the respective interests of each Indemnified Party in such policies the insurance shall not be invalidated or impaired by any action or inaction of Lessee or any other Indemnified Party and shall insure the respective interests of each Indemnified Party, as they appear, regardless of any breach or violation of any warranty, declaration or condition contained in such policies by Lessee or by any other Person; (vii) be in accordance with normal industry practice of organizations operating similar aircraft in similar circumstances; (viii) provide coverage denominated in Dollars; (ix) acknowledge the insurer is aware of the Lease and that the Aircraft is owned by Lessor; (x) provide that the insurers shall hold harmless and waive any rights of recourse and/or subrogation against each Indemnified Party; (xi) provide that an Indemnified Party shall have no obligation or responsibility for the payment of any premiums due (but reserve the right to pay the same should any of them elect so to do) and that the insurers will not exercise any right of set-off or counter-claim in respect of any premium due against the respective interests of an Indemnified Party; (xii) provide that the Insurances shall continue unaltered for the benefit of each Indemnified Party for at least thirty (30) days after written notice by registered mail or telex of any cancellation, changes, event of non-payment of premium or installment thereof shall have been sent to Lessor, except in the case of war risks for which seven (7) days will be given, or in the case of war between the five great powers or nuclear peril for which termination is automatic; (xiii) in the case of the insurance required by paragraph (a), accept and insure the indemnity provisions of the Lease (Section 15(c)) to the extent of the risks covered by the policies; and (xiv) contain an initial term of at least twelve (12) months and it (or any replacement policy) shall at all times have a remaining term of at least one (1) month in regard to all required insurance. Exhibit I to Lease Agreement (MSN 28738) FORM OF AIRCRAFT STATUS REPORT REPORT FOR THE CALENDAR MONTH ENDED _______________, Aircraft Type: B737-3U3 Actual Registration: _______ Lessor: First Security Bank, National Manufacturer Serial Number: 28738 Association, not in its individual capacity but solely as Owner Trustee AIRFRAME During Period Since New Since C/D Flight Hours: ______ ______ ______ Cycles: ______ ______ ______ ORIGINAL ENGINES Position 1 Position 2 Serial Number of Original Engine: ______ ______ Location of Original Engine: ______ ______ Flight Hours Since New: ______ ______ Cycles Since New: ______ ______ Flight Hours During Period: ______ ______ Cycles During Period: ______ ______ Flight Hours Since Last Shop Visit: ______ ______ Cycles Since Last Shop Visit: ______ ______ Engine Cycle Limit: ______ ______ Cycles Remaining for Limit: ______ ______ Serial Number of Engine Installed: ______ ______ LANDING GEAR During Period Since New Since Overhaul Landing Gear Cycles: ______ _______ _______ ORIGINAL APU Serial Number of Original APU: ______ Location of Original APU: ______ Flight Hours During Period: ______ Flight Cycles During Period: ______ Flight Hours Since Last Shop Visit: ______ Cycles Since Last Shop Visit: ______ Serial Number of APU Installed: ______ TECHNICAL ACTIVITY Engine/APU Removals (if any):______ Off On Serial Number: ______ ______ Date: ______ ______ Flight Hours Since New: ______ ______ Flight Cycles Since New: ______ ______ Reason: LESSEE WILL DESCRIBE ANY MAJOR REPAIRS, MAJOR MODIFICATIONS, INCIDENTS OR ACCIDENTS TO AIRCRAFT DURING PERIOD WITHIN THIRTY DAYS FOLLOWING THE PERIOD We certify that the above information is true, correct and complete as of the date hereof, _________, 19__. FRONTIER AIRLINES, INC. By: Title: Schedule 1 to Lease Agreement (MSN 28738) PERMITTED JURISDICTIONS Anywhere in the world, other than (1) those areas excluded pursuant to Section 15(l) of the Lease Agreement, (2) Afghanistan, Chad, Ethiopia, Iran, Iraq, Lebanon, Libya, Mali, Niger, Nigeria, Pakistan, Somalia, Sudan, Syria, Yemen (North and South), Yugoslavia (as was) and Zaire and (3) any other jurisdiction that shall become subject to a U.S. or United Nations sanction or prohibition. Schedule 2 to Lease Agreement (MSN 28738) DELIVERY CONDITIONS The Aircraft will be delivered in the condition required by the Purchase Agreement. Annex A to Schedule 2 (Delivery Conditions) DELIVERY RECEIPT Lessee hereby accepts and acknowledges receipt from Lessor, in accordance with the terms and conditions of the Lease Agreement (MSN 28738), dated as of November 23, 1998 (the "Lease"), between FIRST SECURITY BANK, NATIONAL ASSOCIATION, not in its individual capacity but solely as Owner Trustee, HELLER FINANCIAL LEASING, INC. and FRONTIER AIRLINES, INC. of one (1) Boeing Model B737-3U3. Aircraft: Manufacturer: The Boeing Company Model: 737-3U3 Registration No.: N308FL U.S. Manufacturer's Serial Number: 28738 with two installed CFM56-3C-1 engines, Engine Manufacturer's Serial Numbers: Position 1: 858766 Position 2: 858767 in [place] on [Date], at /a.m.//p.m./ IN WITNESS WHEREOF, Lessor, Owner Participant and Lessee have each caused this receipt to be duly executed on the above date. HELLER FINANCIAL LEASING, INC., as Owner Participant By: Title: FRONTIER AIRLINES, INC., as Lessee By: Title: FIRST SECURITY BANK, NATIONAL ASSOCIATION, not in its individual capacity but solely as Owner Trustee, as Lessor By: Title: Schedule 3 to Lease Agreement (MSN 28738) ADDRESSES AND ACCOUNTS (1) (2) Addresses Accounts: As advised by Lessee Lessee from time to time FRONTIER AIRLINES, INC. 12015 E. 46th Avenue Denver, Colorado 80239 Attention: General Counsel Facsimile: (303) 371-7007 Account No: As advised by Lessee Telephone: (303) 371-7400 from time to time Principal place of business: 12015 E. 46th Avenue Denver, Colorado 80239 (1) (2) Addresses Accounts Lessor FIRST SECURITY BANK, NATIONAL ASSOCIATION First Security Bank, N.A. 79 South Main Street ABA No. 124-0000-12 Salt Lake City, Utah 84111 Acct No. 051-0922115 Attn: Corporate Trust Department Fax No.: 801-246-5053 Tel No.: 801-246-5826 Owner Participant Heller Financial Leasing, Inc. 500 West Monroe Street First Chicago Chicago, Illinois 60661 ABA No. 071000013 Attn: Managing Director-Aircraft Finance Division Fax No.: (312) 441-7378 Tel No.: (312) 441-7083 with a copy to: Heller Financial, Inc. 500 West Monroe Street Chicago, Illinois 60661 Attn: Legal Services Division Fax No.: (312) 441-7208 Tel No.: (312) 441-6798 with a further copy to: Vedder, Price, Kaufman & Kammholz 222 North LaSalle Street Suite 2600 Chicago, Illinois 60601 Attn: Dean N. Gerber Telephone: (312) 609-7500 Facsimile: (312) 609-5005 Schedule 4 to Lease Agreement (MSN 28738) FILINGS AND RECORDINGS Document Authority Lease FAA Lease Supplement No. 1 FAA Application for Aircraft Registration FAA UCC-1 Financing Statements Secretary of State of Colorado Schedule 5 to Lease Agreement (MSN 28738) RETURN CONDITIONS The Aircraft shall be returned in at least as good of operating condition, ordinary wear and tear excepted, as on the Delivery Date, with all items of equipment, Engines, APU's, systems and appliances fully functional and operating in accordance with manufacturer specifications. At the time of return, the Aircraft shall conform to the following standards: A. The Aircraft shall be returned free and clear of all Liens (other than Lessor Liens) and rights of third parties under pooling, exchange, overhaul, repair or other similar agreements and arrangements. B. The Aircraft shall not have been discriminated against whether by reason of its leased status or otherwise in maintenance, use, operation or in any other manner whatsoever, including, without limitation, as to the type of maintenance program applicable to the Aircraft, any Engine or as to compliance with Airworthiness Directives. C. The Airframe shall have at least 3,500 hours or 12 months, whichever is more limiting, remaining until the next scheduled inspection. D. The Aircraft shall be returned fresh from the next due "C" Check. During the accomplishment of the "C" Check, Lessee shall comply with Lessor's reasonable requests, subject to availability of manpower and materials, to accomplish work which is beyond the scope of that required by the Return Conditions, provided that (i) the magnitude of the work is not so large as to reasonably be expected to disrupt Lessee's operation, (ii) Lessor provides at least 45 days advance written notice for any significant maintenance or modification tasks, (iii) work will be requested early enough to allow for the ordering and delivery of any required parts, and (iv) Lessee's cost for such additional work is reimbursed by Lessor at Lessee's reasonable cost. If the requested work delays the return of the Aircraft beyond its Expiry Date, the Lease shall continue to be in effect. Provided Lessee is making all reasonable efforts to complete the work prior to return, Lessee shall owe no additional rent for the delay period. E Any deviations from Boeing MPD tasks shall be brought into compliance with the MPD prior to return. F. The Aircraft shall be returned with a valid and current Transport Category Airworthiness Certificate issued by the Aviation Authority, suitable for operation under 14 C.F.R. Part 121 of the FAA Regulations. The Aircraft, Engine and Parts as well as their records shall meet all regulatory requirements for continued airworthiness in compliance with all Aviation Authority requirements. G. The Aircraft shall have all temporary repairs replaced by permanent repairs per the manufacturer's repair manual. The fuselage, wings and empennage shall be free of significant dents, abrasions and loose or pulled rivets. H. There shall be no evidence of untreated, improperly treated or noticeable corrosion. All CPCP inspections will be current and up to date, in accordance with manufacturer specifications and Aviation Authority requirements. I. The Aircraft shall be in compliance with all Aviation Authority requirements for operation as a transport category aircraft including all Aviation Authority issued airworthiness directives ("AD's") and manufacturer alert service bulletins that are issued prior to the Expiry Date and are applicable to the Aircraft, without special deferment, exemption or alternate means of compliance, with terminating action accomplished for all AD's and manufacturer alert service bulletins which require that the terminating action be accomplished prior to one hundred eighty days after the Expiry Date. The Aircraft shall conform to its Type Certificate Data Sheet. All major modifications and repairs accomplished on the Aircraft shall have been performed in accordance with FAA approved data that is to be redelivered with the Aircraft Documentation. Any deficiencies with respect to Aviation Authority requirements shall be corrected prior to the return of the Aircraft at Lessee's cost. J. There shall be no open, outstanding, or deferred maintenance items, scheduled or unscheduled, routine or non-routine, against the Aircraft. K. The Aircraft shall be clean, cosmetically acceptable, all compartments reasonably free of foreign objects, accumulated dirt, grime, grease and liquids, and be prepared for immediate placement into commercial service. Any deterioration of paint or other protective coatings due to leakage, impact damage or other presence of foreign materials or liquids shall be repaired and replaced per manufacturer specifications. L. Each Engine shall be returned in serviceable condition with maintenance records that are satisfactory to Lessor. M. Each Engine shall be returned with not more than 5,000 hours since its last major shop visit and shall have at least 5,000 cycles remaining until next scheduled shop visit based upon disk life limits or other hard-time requirements. For purposes hereof, "major shop visit" shall mean a full performance restoration in which all modules are inspected and/or repaired and overhauled. N. Each Engine shall pass power assurance performance tests without operational limitations in accordance with the manufacturer's maintenance manual. The Aircraft and its Engine's shall be capable of certificated full rated performance without limitations throughout the entire operating envelope as defined by the Aviation Authority approved Aircraft Flight Manual. O. Each Engine shall pass a complete video borescope inspection, conducted by Lessor at Lessee's cost, of all accessible Engine sections (accessible whether by borescope port or other means) in accordance with manufacturer specifications. If any Engine fails to pass a borescope inspection, Lessee must correct each found defect at its sole expense. In the event Lessee shall cause any Engine to be removed from any Aircraft to accomplish repairs by the above, Lessee shall bear all costs associated with the installation and lease of a loaner engine and reinstallation of the respective Engine. P. No Engine shall be on engineering watch or on a reduced interval inspection of any nature that could lead to premature removal of the Engine. If Engine historical records, engine power assurance runs, borescope inspection or trend monitoring data indicate a level of performance deterioration or oil consumption, or acceleration in performance deterioration or oil consumption, which based on Lessee's specifications and/or experience, would require shop maintenance to be performed prior to 5000 engine flying hours (assuming a l.5 hour to cycle utilization) after return, Lessee shall correct or cause to be corrected, such conditions as necessary to rectify all Engine performance parameters in accordance with manufacturer specifications. In the event Lessee shall cause any Engine to be removed from the Aircraft to accomplish repairs by the above, Lessee shall bear all costs associated with the installation and lease of a loaner engine and reinstallation of the respective Engine. Q. All Landing Gear shall have not less than 24 months or 25% of their normal overhaul interval (whichever is greater) remaining before next scheduled overhaul or replacement in accordance with Lessee's maintenance program. R. The APU shall have not more than 1,500 hours since its last hot section inspection and shall be returned in serviceable condition. S. The components that are controlled by calendar time, flight hours or flight cycles shall be returned in serviceable condition. Each such component shall have a minimum of 12 months, 3500 hours and 1200 cycles remaining until next scheduled overhaul, repair or replacement. Controlled parts which have a scheduled maintenance interval of less than 12 months, 3500 hours and 1200 cycles shall have the full scheduled maintenance interval remaining until next scheduled maintenance. All such components shall be supported by maintenance records which satisfy all Aviation Authority requirements (including records of last overhaul for those items requiring to be overhauled per Lessee's maintenance program and/or per the Boeing MPD). T. Complete and current maintenance records, as specified in Attachment 1 to Annex A, which comply with all Aviation Authority requirements shall be returned with the Aircraft. Maintenance records required to be maintained by the Aviation Authority shall be in the English language and include complete documentation for all airworthiness directives, life limited parts (including back-to-birth records for all internal Engine life limited parts) and major repairs and alterations in accordance with Aviation Authority requirements. For each AD that is applicable to the Aircraft, the records shall include the current status of the Aircraft, the date of compliance, and the method of compliance with appropriate supporting documentation. Any deficiencies with Aviation Authority requirements are to be corrected prior to return of the Aircraft at Lessee's cost. U. Any manufacturer no-charge service bulletin parts which Lessee has received but not installed for the Aircraft shall be returned to Lessor with the Aircraft. V. All windows shall be free of delamination, blemishes, and crazing that is beyond maintenance manual limits. W. All doors shall be free moving, correctly rigged and fitted with serviceable seals. X. All ceiling, sidewall and bulkhead panels shall be clean and free from significant or unserviceable damage. All seats shall be serviceable and in good overall condition in accordance with international air carrier standards. Y. All flight control surfaces and wing leading edges shall be free from damage that is beyond serviceable limits. Z. All cargo compartment floor, sidewall and ceiling panels shall be in serviceable condition in accordance with Boeing maintenance manual limits. AA. The entire fuselage, vertical stabilizer including wing to body fairings, engine cowls and wheel well doors shall be prepared for painting by sanding or stripping as needed (including stripping any areas which have more than one layer of paint) and repainted in a paint scheme as selected by Lessor. Annex A to Schedule 5 (Return Conditions) Delivery Receipt Lessor hereby accepts and acknowledges receipt from Lessee, in accordance with the terms and conditions of the Lease Agreement dated as of November __, 1998 (the "Lease"), between First Security Bank, National Association, not in its individual capacity, but solely as Owner Trustee, Heller Financial Leasing, Inc. and Frontier Airlines, Inc. of one (1) Boeing Model 737-3U3. Aircraft: Manufacturer: The Boeing Company Model: 737-3U3 Registration Mark: N308FL Manufacturer's Serial Number: 28738 with two installed General Electric CFM56-3C-1 engines, Engine Manufacturer's Serial Numbers: Position 1: 858766 Position 2: 858767 together with the Aircraft Documentation described in Attachment 1 hereto and with the operating times and cycles as accumulated on the Aircraft up to the time of redelivery as described in Attachment 2 hereto, in [place] on [Date], at /a.m.//p.m./ IN WITNESS WHEREOF, Lessor and Lessee have each caused this receipt to be duly executed on the above date. FIRST SECURITY BANK, NATIONAL ASSOCIATION, not in its individual capacity, but solely as Owner Trustee, as Lessor By: Title: FRONTIER AIRLINES, INC., as Lessee By: Title: Attachment 1 to Annex A to Schedule 5 (Return Conditions) Aircraft Documentation A. Certificates 1. Certificate of Airworthiness 2. Noise Certificate 3. Radio License Certificate 4. Export Statement of Airworthiness (on delivery only) 5. Original Export Certificate of Airworthiness from FAA delivered in connection with original delivery of Aircraft from Boeing 6. Certificate of Sanitary Construction of Galleys B. Aircraft Status Records 1. Technical Log Books 2. Airframe Maintenance Status Report 3. Manufacturer's Service Bulletin Status Report 4. Airworthiness Directive Compliance Report (terminated and repetitive) 5. Local Modification Status Report List 6. Last Weighing Report 7. Last Compass Swing C. Aircraft Maintenance Records 1. Test Flight Reports 2. All Boeing "C" Checks and last lower level maintenance check 3. WorkCards for each C-Check multiple (or segment) 4. Modification records including accomplishing documents 5. CPCP compliance report 6. Aging Aircraft compliance report D. Aircraft History Records 1. Aircraft Structural Repair History (if applicable) 2. Service Difficulty Report (if applicable) 3. Accident or Incident Report (if applicable) 4. Damage Chart E. Engine Records 1. Log Books 2. Last overhaul and repair documents for each module 3. Airworthiness Directive Compliance Report (terminated and repetitive) 4. Manufacturer's Service Bulletin Status Report 5. Engine Disk Sheet 6. Engine Data Submittal Sheet 7. Condition Monitoring Status Report F. APU Records 1. Log Book 2. Last overhaul and repair documents 3. Manufacturer's Service Bulletin Status Report G. Component Records (including components installed on Engines and APU) 1. Time Monitored Component Status Report with installed part numbers, serial numbers, remaining hours and cycles (if applicable) 2. Serviceability tags or back-up documentation for components replaced since delivery from Boeing 3. Serialized latest shop records on the JAR Form 1, as applicable, including all serviceable tags, release to service, and repair orders detailing maintenance checks, inspections, tests, repairs, replacements, restorations, overhauls, modifications and refurbishments H. Manuals 1. Airplane Flight Manual 2. Quick Reference Handbook 3. Aircraft Operating Manual 4. Weight and Balance Manual Supplement 5. Wiring Diagram Manual (microfilm) 6. Illustrated Parts Catalog (microfilm) 7. Aircraft Maintenance Manual (microfilm) 8. CFMI Illustrated Parts Catalog 9. Systems Schematic Manual 10. Minimum Equipment List I. Miscellaneous Technical Documents 1. Maintenance Program Specifications/Requirements/Schedule 2. Interior Configuration Drawings 3. Loose Equipment Inventory List Attachment 2 to Annex A to Schedule 5 (Return Conditions) Aircraft Status Aircraft Type: 737-3U3 Manufacturer Serial/Registration Number: 28738 / [REG#] AIRFRAME During Since Period New Airframe Flight Hours: Airframe Cycles: ENGINES Position 1 Position 2 Serial Number of Original Engine*: Present Location of Original Engine*: Engine Flight Hours Since New: Cycles Since New: Engine Flight Hours Performed During Period: Engine Cycles Flown During Period: Date of Last Basic Shop Visit: Engine Flight Hours Since Last Basic Shop Visit: Engine Cycles Flown Since Last Basic Shop Visit: Serial Number of Installed Engine: * or Replacement Engine, if applicable LANDING GEAR During Since Period New Main Main Nose APU Serial Number of APU: Present Location of APU: Serial Number of Installed APU: During Since Period New APU Flight Hours (Original APU): APU Cycles (Original APU): Date of Last Basic Shop Visit: APU Flight Hours Since Last Basic Shop Visit: APU Cycles Since Last Basic Shop Visit: TECHNICAL ACTIVITY Engine Removals (if any) APU Serial Number: Date: Hours: Cycles: REASON MAINTENANCE CHECKS COMPLETED Number Date Hours Cycles - -A Check S-A Check - - "C" Check S - "C" Check SI Check NEXT CHECKS DUE Number (E) Date (E)Hours (E) Cycles (E) - - "C" Check* S - "C" Check* SI Check AD's AND SB's INCORPORATED INCLUDED IN RETURN RECORDS EXHIBIT B FOR PURPOSES OF CONFIDENTIALITY, EXHIBIT B TO THE LEASE AGREEMENT IS INTENTIONALLY OMITTED FROM THE COPY OF THE LEASE AGREEMENT ON FILE WITH THE FEDERAL AVIATION ADMINISTRATION. EX-10 3 AIRCRAFT LEASE AGREEMENT _______________________________________________________________ Exhibit 10.36 AIRCRAFT SUBLEASE AGREEMENT between INDIGO PACIFIC AB as Sublessor and FRONTIER AIRLINES, INC. as Sublessee Dated as of December 14, 1998 _____________________________________________________________________ Aircraft Make and Model: Boeing 737-3U3 Aircraft Manufacturer's Serial Number 28734 Aircraft Registration Number: N309FL Make and Model of Engines: CFM INTERNATIONAL CFM 56-3C1 To the extent, if any, that this Agreement constitutes chattel paper under the Uniform Commercial Code in any jurisdiction, no security interest in this Agreement may be created through the transfer and possession of any counterpart other than the original counterpart of this Agreement, so identified by the signature of Sublessor's Lender on the receipt set forth on the signature page of such original counterpart. TABLE OF CONTENTS 1. SUMMARY OF TRANSACTION.....................................................7 2. DEFINITIONS................................................................9 2.1 Definitions............................................................9 2.2 Construction..........................................................19 3. REPRESENTATIONS AND WARRANTIES............................................20 3.1 Sublessee's Representations and Warranties............................20 3.2 Sublessor's Representations and Warranties............................23 3.3 Survival of Representations and Warranties............................25 4. CONDITIONS PRECEDENT......................................................25 4.1 Sublessor's Conditions Precedent......................................25 4.2 Waiver................................................................27 4.3 Sublessee's Conditions Precedent......................................27 4.4 Waiver................................................................28 5. DELIVERY CONDITION AND INSPECTION OF AIRCRAFT.............................28 5.1 Sublessee Selection of Aircraft.......................................28 5.2 Conditions at Delivery................................................28 5.3 Sublessee Inspection of Aircraft at Delivery..........................28 5.4 Delivery of Aircraft to Sublessee.....................................29 5.5 Sublessee Acceptance of Aircraft......................................29 6. LEASE TERM................................................................29 6.1 Initial Lease Term....................................................29 6.2 Lease Extension Date..................................................29 6.3 Expiry Date...........................................................30 6.4 Risk..................................................................31 7. DELIVERY..................................................................31 7.1 Delivery..............................................................31 8. RENT......................................................................31 8.1 Rent Date.............................................................31 8.2 Time of Payment.......................................................32 8.3 Amount of Basic Rent..................................................32 8.4 Reserves..............................................................32 8.5 Increased Rent for Hour/Cycle Ratio...................................32 9. SECURITY DEPOSIT..........................................................32 9.1 Security Deposit......................................................32 9.2 Letter of Credit......................................................32 9.3 Sublessor's Rights....................................................32 10. MAINTENANCE RESERVES.....................................................33 10.1 Amount...............................................................33 10.2 Payments.............................................................33 10.3 Adjustment...........................................................33 10.4 Release of Maintenance Reserves......................................34 10.5 Costs in Excess of Reserves..........................................35 10.6 Reimbursement after Expiry Date......................................35 10.7 LLP Maintenance Reserve..............................................35 10.8 No Anticipated Draw-down.............................................36 11. PAYMENTS.................................................................36 11.1 Account for Sublessee Payments.......................................36 11.2 Default Interest.....................................................36 11.3 Absolute Obligations.................................................37 11.4 Application of Payments to Sublessor.................................37 11.5 Currency Indemnity...................................................37 11.6 Set-off..............................................................38 11.7 Time for Payments....................................................38 12. SUBLESSOR'S CONVENANTS...................................................38 12.1 Quiet Enjoyment......................................................38 12.2 Sublessor Obligations Following Expiry Date..........................38 13. SUBLESSEE'S COVENANTS....................................................39 13.1 Duration.............................................................39 13.2 Information..........................................................39 13.3 Sublessor visits.....................................................41 13.4 Periodic Estoppel Certificates.......................................41 13.5 Airport and Navigation Charges.......................................41 13.6 Operation of Aircraft................................................42 13.7 Areas of Operation...................................................42 13.8 Non-Prejudicial Action...............................................42 13.9 Non-Representation of Sublessor......................................42 13.10 Inspection..........................................................43 13.11 Registration........................................................43 13.12 Name Plates.........................................................44 13.13 Geneva Convention...................................................44 13.14 Merger and Shareholding.............................................44 13.15 Ownership...........................................................45 14. POSSESSION...............................................................46 14.1 No Relinquishment of Possession......................................46 14.2 Sublessee Primarily Liable...........................................49 14.3 Recognition of Rights................................................49 15. SECURITY INTERESTS.......................................................49 15.1 Title................................................................49 15.2 No Security Interests; Base of Aircraft..............................49 15.3 Notice to Sublessor..................................................50 15.4 Procure Release......................................................50 16. MAINTENANCE AND REPAIR...................................................50 16.1 General Obligations..................................................50 16.2 Specific Obligations.................................................51 17. REPLACEMENT OF PARTS.....................................................53 17.1 Replacement of Parts.................................................53 17.2 Title to Replacement Parts...........................................53 17.3 Pooling of Parts.....................................................53 17.4 Alterations..........................................................54 17.5 Removal of Parts.....................................................54 17.6 Substitution of Engine...............................................55 17.7 Temporary Removal of Parts...........................................56 18. MANUFACTURER'S WARRANTIES................................................57 18.1 Authorization........................................................57 18.2 Proceeds.............................................................58 18.3 Agreements with Manufacturers........................................58 19. DISCLAIMERS..............................................................58 19.1 As Is, where Is......................................................59 19.2 No Sublessor Liability for Losses....................................61 19.3 Exclusion............................................................61 19.4 Waiver...............................................................62 19.5 Confirmation.........................................................62 20. INDEMNITIES..............................................................62 20.1 General..............................................................62 20.2 Survival of Indemnification..........................................63 20.3 Notice to Sublessee..................................................63 21. TAXATION.................................................................63 21.1 Gross-up.............................................................63 21.2 Tax Indemnity........................................................64 21.3 Value Added Taxes....................................................65 21.4 Taxation of Indemnity Payments.......................................65 21.5 Benefit of Indemnities...............................................66 21.6 Sublessor Indemnification............................................66 21.7 Survival of Tax Indemnities..........................................66 21.8 Mitigation and Cooperation...........................................66 21.9 Furnishing Forms.....................................................66 22. INSURANCE................................................................67 22.1 Insurances...........................................................67 22.2 Requirements.........................................................67 22.3 Insurance Covenants..................................................67 22.4 Renewal of Insurances................................................69 22.5 AVN 2000.............................................................69 22.6 Failure to Insure....................................................69 22.7 Continuation of Insurances...........................................70 22.8 Application of Insurance Proceeds....................................70 22.9 Pursuit of Claims....................................................70 23. LOSS, DAMAGES AND REQUISITION............................................71 23.1 Total Loss Prior to Pre-Delivery Acceptance..........................71 23.2 Total Loss After Pre-Delivery Acceptance.............................71 23.3 Total Loss of Engines................................................72 23.4 Requisition..........................................................72 24. REDELIVERY...............................................................73 24.1 Redelivery of Aircraft; General Conditions...........................73 24.2 Final Inspection.....................................................74 24.3 Operational Ground Check; Demonstration Flight.......................74 24.4 Non-compliance.......................................................75 24.5 Acknowledgment.......................................................76 24.7 Return of the Letter of Credit.......................................76 25. EVENTS OF DEFAULT........................................................76 25.1 Events...............................................................76 25.2 Sublessor's Rights...................................................79 25.3 Default Payments.....................................................81 26. ASSIGNMENT AND TRANSFER..................................................82 26.1 By Sublessee.........................................................82 26.2 By Sublessor.........................................................82 26.3 Assignment to Lender.................................................82 26.4 Sublessor Includes Sublessor's Assignee and Sublessor's Lender.......83 27. MISCELLANEOUS PROVISIONS.................................................83 27.1 Rights Cumulative, Waivers...........................................83 27.2 Delegation...........................................................84 27.3 Expenses.............................................................84 27.4 Time of Essence......................................................84 27.5 Entire Agreement.....................................................84 27.6 Further Assurances...................................................84 27.7 Language.............................................................85 27.8 Variation............................................................85 27.9 Invalidity of any Provision..........................................85 27.10 Survival............................................................85 27.11 Reimbursement.......................................................85 27.12 Press Releases......................................................85 27.13 Power of Attorney...................................................86 27.14 Usury Laws..........................................................86 27.15 Confidentiality.....................................................86 27.16 Counterparts........................................................86 28. NOTICES..................................................................87 29. GOVERNING LAW AND JURISDICTION...........................................88 29.1 New York Law.........................................................88 29.2 Non-exclusive Jurisdiction in New York...............................88 29.3 Waiver...............................................................89 SCHEDULES Schedule 1 Aircraft Specification 96 Schedule 2 Delivery Conditions 99 Schedule 3 Acceptance Certificate 100 Schedule 4 Sublease Supplement 102 Schedule 5 Insurance Requirements 104 Schedule 6 Return Conditions 108 Schedule 7 Return Acceptance Certificate 111 Schedule 9 Monthly Aircraft Utilization and Status Report 119 Schedule 10 Power of Attorney 121 THIS AGREEMENT is made on the 14th day of December, 1998. BETWEEN: (1) INDIGO PACIFIC AB, a company incorporated under the laws of Sweden whose registered office is at Sodra Forstadsgatan 4, SE-21143 Maluno, Sweden ("Sublessor"); and (2) FRONTIER AIRLINES, INC., a company incorporated under the laws of Colorado whose chief executive office and principal place of business is 12015 E. 46th Avenue, Denver, Colorado, 80239 ("Sublessee"). WHEREAS: Owner Trustee (as hereinafter defined) holds title to the Aircraft for the benefit of Subessor (as hereinafter defined); Owner Trustee leases the Aircraft to Sublessor; Sublessor wishes to sublease the Aircraft (as hereinafter defined) to Sublessee and Sublessee is willing to sublease the Aircraft from Sublessor on the terms of this Agreement; therefore IT IS AGREED as follows: 1. summary of transaction The following is a summary of the lease transaction between Sublessor and Sublessee. It is set forth for the convenience of the parties only and will not be deemed in any way to amend, detract from or simplify the other provisions of this Agreement. (i) Description of the Aircraft One Boeing 737-3U3 MSN 28734 Reg No. N309FL (ii) Scheduled Delivery Date and Location December 14, 1998, at Evergreen Air Center Marana, Arizona. (iii) Initial Lease Term From Delivery Date to 1 May 2000. (iv) Lease Extension Option Sublessor has an option to extend until October 31, 2000, subject to six (6) month prior written notice. (v) Security Deposit US$ 100,000, payable as follows: In cash upon signing of Letter of Intent; upon Delivery the Security deposit will be set off against the first month's Rent. US$ 600,000 Irrevocable Letter of Credit to the value of $600,000.00 provided 1 day prior to Delivery, in a form acceptable to Sublessor. (vi) Transaction Fee Not applicable. (vii) Rent During Initial Lease Term US$ 258,000 per month, payable in advance. (viii) Rent During Lease Extension Term US$ 258,000 per month, payable in advance. (ix) Reserves Airframe Maintenance Reserve: US$ 70 per Flight Hour. Engine Maintenance Reserve: US$ 80 per Flight Hour for each Engine. LLP Maintenance Reserve: US$20 per Flight Hour. Landing Gear Maintenance Reserve: US$ 10 per Cycle. APU Maintenance Reserve: US$6 per Flight Hour. (x) Country of Aircraft Registration United States of America. (xi) Agreed Value of Aircraft US$ 33,000,000 (xii) Damage Notification Threshold US$ 250,000 (xiii) Sublessor's Bank Account Proceeds Account KBC New York 125 W 55th Street NY 10019, New York Accoutn Number: 21557003 SWIFT: KREDUS33 for credit to KBC Finance Ireland quoting Indigo Proceeds Account #03/43824/77 (xiv) Indemnitees Sublessor Owner Trustee Sublessor's Lender 2. DEFINITIONS 2.1 Definitions In this Agreement the following words and expressions have the following meanings unless the context otherwise requires: Acceptance Certificate means a certificate substantially in the form set out in Schedule 3; Agreed Value means THIRTY THREE MILLION US DOLLARS (US$33,000,000); Aircraft means the aircraft described in Schedule 1 (which term includes where the context admits a separate reference to any or all Engines, Parts and Aircraft Documents); Aircraft Documents means the documents, data and records identified in Annex 1 to Schedule 3 of this Agreement and all additions, renewals, revisions and replacements from time to time made to any of the foregoing in accordance with this Agreement all of which shall be in the English language; Airframe means the Aircraft, excluding the Engines and the Aircraft Documents; Air Navigation Charges means all charges incurred with the furnishing, issue or provision of information, directions and other facilities in connection with the navigation or movement of the Aircraft (including the control or movement of vehicles in any part of an airport used for the movement of aircraft); Airport Charges means all charges incurred in connection with the landing, parking or taking-off of aircraft at airports or for the use of, or for services provided at, airports; Airworthiness Directive means an airworthiness directive or other mandatory requirement issued by the FAA or any other Aviation Authority or Government Entity; APU means the auxiliary power unit installed on the Aircraft on the Delivery Date and any replacement auxiliary power unit installed in accordance with this Agreement, title to which is transferred to Owner Trustee; Assignment of Insurances means the assignment by Sublessee to Sublessor, or at the request of Sublessor, to Sublessor's Lender, of all of Sublessee's rights, title and interest in and to the Insurances with respect to the Aircraft (other than the Insurances relating to liability) or any other form of Security Interest in favor of Sublessor, Owner Trustee or Sublessor's Lender in and to the Insurances with respect to the Aircraft; Aviation Authority means all and any of the authorities, government departments, committees or agencies which under the laws of the State of Registration shall from time to time: (a) have control or supervision of civil aviation in that state; or (b) have jurisdiction over the registration, airworthiness or operation of, or other matters relating to, the Aircraft; Basic Rent means all amounts payable pursuant to Clause 8.3. Business Day means any day (other than a Saturday or Sunday or holidays scheduled by law) on which banks are open for foreign exchange business in Dublin, London, Stockolm and New York; "C" Check means a "C" check (a complete zonal and systems check and the corresponding lower "A" and "B" checks or equivalent in accordance with the MPD) in accordance with Sublessee's maintenance program approved by the Aviation Authority that shall at least meet the requirements of the MPD; Conditions Precedent means the conditions specified in Clause 4.1; CPCP means corrosion protection control program; Cycle means one take-off and landing of the Airframe or, in relation to an Engine or Part, one take-off and landing of the airframe to which that Engine or Part may be attached; Damage Notification Threshold means US$250,000; Default means any Event of Default and any event which with the passing of time and/or giving of notice and/or making of any determination, would constitute an Event of Default; Default Rate means, for the relevant period, 3% above the rate of interest at the start of that relevant period publicly quoted by The Chase Manhattan Bank N.A. as its Prime Rate; Delivery means delivery of the Aircraft by Sublessor to Sublessee pursuant to Clause 7; Delivery Date means the date on which Delivery occurs; Delivery Location means Evergreen Air Center Marana, Arizona or such other location as the parties may agree; Delivery Work means the maintenance and modification work to be performed at Sublessor's expense on the Aircraft just prior to Delivery as described in Schedule 2 hereto; Dollars and US$ means the lawful currency of the United States of America; Engine means, whether or not for the time being installed on the Aircraft: (a) each engine of the manufacture, model and serial number specified in Schedule 1 which Sublessor elects to tender to Sublessee with and whether or not installed on the Airframe on the Delivery Date, such engines being described as to serial numbers on the certificate of acceptance to be executed by Sublessee upon Delivery; or (b) any engine that has replaced that engine, title to which has, or should have, passed to Owner Trustee in accordance with this Agreement, and in each case includes all modules and Parts from time to time belonging to or installed in that engine but excludes any properly replaced engine title to which has, or should have, passed to Sublessee pursuant to this Agreement; Engine Agreed Value means six million Dollars (US$6,000,000); Engine Performance Restoration Visit means any overhaul, refurbishment, hot section inspection, replacement of internal life limited parts, disassembly, assembly and testing required thereof during an engine shop visit which requires, as a minimum, a major disassembly of an Engine and the removal and reinstallation of internal rotating parts; Engine Total Loss means the occurrence with respect to an Engine only, whether or not installed on the Airframe, of any of those events described in the definition of Total Loss; Event of Default means any event specified in Clause 25.1; Expiry Date means the date determined in accordance with Clause 6.3; Extension Lease Expiry Date means October 31, 2000 or such other date as agreed to between the parties; Extension Lease Term means the period commencing on the day following the Initial Lease Expiry Date and ending on the Extension Lease Expiry Date; FAA means the Federal Aviation Administration of the United States of America and any successor thereof; Facility Agreement means the facility agreement entered into between Sublessor's Lender and Sublessor in respect of the financing of Sublessor's acquisition of the Aircraft; FAR means the Federal Aviation Regulations set forth in Title 14 of the United States Code of Federal Regulations, as amended, modified or replaced from time to time; Federal Aviation Act means 49 United States Code Subtitle VII, the former Federal Aviation Act as amended, as further amended, modified or replaced from time to time; Final Inspection has the meaning given to it in Clause 24.2; Financial Indebtedness means any indebtedness in respect of: (a) money borrowed or raised; (b) payments due under finance or operating leases; (c) any guarantee or indemnity in respect of obligations of the type referred to in paragraphs (a) or (b); Flight Hour means each hour or part thereof (rounded up to two decimal places) elapsing from the moment the wheels of the Aircraft leaves the ground on the tarmac before take off until the wheels of the Aircraft next touch ground; Geneva Convention means the Convention on the International Recognition of Rights in Aircraft signed at Geneva, Switzerland on 19 June 1948, and amended from time to time, but excluding the terms of any adhesion thereto or ratification thereof containing reservations to which the State of Registration does not accede; Government Entity means: (a) any national government, political subdivision thereof, or local jurisdiction therein; (b) any instrumentality, board, commission, court, or agency of any thereof, however constituted including, for the avoidance of doubt, the Aviation Authority; and (c) any association, organization, or institution of which any of the above is a member or to whose jurisdiction any thereof is subject or in whose activities any of the above is a participant; Head Lease Agreement means the aircraft lease agreement entered into between Owner Trustee and Sublessor dated as of even date herewith which is being filed with the FAA simultaneously herewith; Indemnitees means Sublessor, Owner Trustee, Sublessor's Lender or any other person identified by Sublessor prior to the Delivery Date or, with the consent of Sublessee, after the Delivery Date to have an interest in the Transaction Documents and their respective successors and assigns, shareholders, subsidiaries, affiliates, partners, contractors, directors, officers, servants, agents and employees; Initial Lease Expiry Date means 1 May, 2000; Initial Lease Term means the period commencing on the Delivery Date and ending on the Initial Lease Expiry Date; Insurances bears the meaning ascribed to it in Clause 22.1 (a); Landing Gear means the landing gear assembly of the Aircraft, including all life limited parts; Lease Term means the Initial Lease Term and, if the lease is extended in accordance with Clause 6.2, the Extension Lease Term; Letter of Credit bears the meaning ascribed to it in Clause 9.2; Loss means any and all loss, liability, obligation, action, claim, suits, proceeding, judgment, penalty, fine, damages, fee, cost, disbursement and expense and Losses shall be construed accordingly; Maintenance Facility means, prior to Delivery, Evergreen Air Center Marana, Arizona and, after Delivery, such FAA approved maintenance facility as the Sublessor may approve in writing; Maintenance Reserves means all amounts payable pursuant to Clause 10; Manufacturer means The Boeing Company, a Delaware corporation with its principal office in Seattle, State of Washington, U.S.A.; Minimum Liability Coverage means US$500,000,000 on each occurrence; Monthly Report means a report substantially in the form of Schedule 9; Mortgage means a mortgage over the Aircraft created for the benefit of Sublessor's Lender; MPD mean the Maintenance Planning Data published by the Manufacturer and applicable to the Aircraft; Other Agreements means any other aircraft lease or sublease agreement or other agreement from time to time entered into between Sublessor (or any partner, subsidiary, associate or affiliate of Sublessor) and Sublessee (or any subsidiary, associate or affiliate of Sublessee); Owner Trustee means First Security Bank, National Association, not in its individual capacity but solely as owner trustee pursuant to a trust agreement dated on or about the date hereof with Indigo Pacific AB as beneficiary; Part means, whether or not for the time being installed on the Aircraft: (a) any component, furnishing or equipment (other than a complete Engine) furnished with the Aircraft on the Delivery Date; and (b) any other component, furnishing or equipment (other than a complete Engine) title to which has, or should have, passed to Owner Trustee pursuant to this Agreement; but excludes any such items title to which has, or should have, passed to Sublessee pursuant to this Agreement; Permitted Lien means: (a) any lien for Taxes not assessed or, if assessed, not yet due and payable, or being contested in good faith by appropriate proceedings; (b) any inchoate liens of a repairer, materialman, workman, employee, mechanic, carrier, hangar keeper or other similar lien arising in the ordinary course of business in respect of obligations which are not overdue or are being contested in good faith by appropriate proceedings; (c) liens arising out of judgments or awards with respect to which at the time (i) an appeal proceedings for review is being contested diligently and in good faith and (ii) a stay of execution shall have been secured (and remains in force); (d) any Sublessor Lien; and (e) any Security Interest created by Sublessee with the written consent of Sublessor, but only if (in the case of (a), (b) and (c)) (i) adequate resources are available for the payment of those Taxes or obligations and (ii) such proceedings, or the continued existence of the lien, do not involve any danger (in the reasonable opinion of Sublessor) of the sale, forfeiture or other loss of the Aircraft or any interest therein; Physical Redelivery Location means Long Beach Airport or such other location as the parties may agree; Redelivery Date means the Expiry Date or the earlier date of termination of the leasing of the Aircraft in accordance with the terms of this Agreement; Rent means all amounts payable pursuant to Clause 8.3; Rent Date means the first day of each Rent Period; Rent Period means each period ascertained in accordance with Clause 8.1; Replacement Engine means an engine complying with Clause 17.6; Reserves means the Airframe Maintenance Reserve, the Engine Maintenance Reserves, the LLP Maintenance Reserve, the Landing Gear Maintenance Reserve and the APU Maintenance Reserve as specified in Clause 10; Return Conditions means the conditions specified in Schedule 6; Scheduled Delivery Date means December 14, 1998, or such other date as the parties may mutually agree and Sublessor may be able to deliver the Aircraft to Sublessee; Security Deposit means the amount payable pursuant to Clause 9.1 as it may be adjusted from time to time (upwards or downwards) pursuant to Clause 9; Security Interest means any mortgage, charge, pledge, lien, encumbrance, assignment, hypothecation or any other agreement or arrangement conferring security; State of Incorporation means Colorado, United States of America; State of Registration means in relation to the Aircraft, the United States of America or any other state or territory in which the Aircraft is, in accordance with the provisions hereof, registered from time to time; Sublease Supplement means the Sublease Supplement, substantially in the form of Schedule 4 hereto, entered into between Sublessor and Sublessee; Sublessor's Lender means KBC Finance Ireland and the Banks (as defined in the Facility Agreement) or any person or persons notified by Sublessor to Sublessee under Clause 26 as providing financing to Owner Trustee in respect of the acquisition, ownership or leasing of the Aircraft from time to time (including any successors in title or assignees of any such persons); Sublessor Lien means: (a) any Security Interest from time to time created by or through Sublessor in connection with the financing of the Aircraft; (b) any other Security Interest in respect of the Aircraft that results from acts of or claims against Sublessor not related to the transactions contemplated by or permitted under this Agreement; (c) any Security Interest in respect of the Aircraft for Sublessor Taxes; (d) any Security Interest in respect of the Aircraft existing prior to Delivery; or (e) any Security Interest arising as a result of any act or omission of Sublessor that constitutes a breach of this Agreement; (f) any Security Interest that results from any indebtedness, liability or other obligation arising by, through or under Sublessor or any of the Indemnitees and that is not indemnified against by Sublessee under this Agreement; Sublessee's Maintenance Program means the maintenance program adopted by the Sublessee for its 737-300 aircraft that shall at least meet the requirements of the Aviation Authority in the State of Registration and of the MPD; Sublessor Taxes means Taxes: (a) imposed as a result of activities of Sublessor in the jurisdiction imposing the liability unrelated to this Agreement or the operation of the Aircraft by Sublessee; (b) imposed on the net income, profits or gains of Sublessor; or (c) imposed with respect to (i) any event occurring prior to the Delivery Date or after the Expiry Date or (ii) any period commencing and ending prior to Delivery Date or any period commencing after the Expiry Date; Supplemental Rent means any and all amounts, liabilities and obligations (other than Basic Rent) which Sublessee assumes, agrees or is otherwise obligated to pay Sublessor hereunder including Reserves, Total Loss Proceeds, payment of Indemnity, interest or Default Interest; Taxes means all present and future taxes, imports, levies, duties or charges, deductions, withholdings of any nature (including without limiting the foregoing any value added, franchise, transfer, sales, gross receipts, business, excise, personal property, stamp, documentary, registration or other tax of whatsoever nature) together with any assessments, fines, additions to tax or interest thereon included and Tax and Taxation shall be construed accordingly; Technical Redelivery Location means Sublessee's facilities in Denver Colorado or such other location as the parties may agree; Total Loss means with respect to the Aircraft (including for the purposes of this definition the Airframe): (a) the actual, constructive, compromised, arranged or agreed total loss of the Aircraft; or (b) the Aircraft being destroyed, damaged beyond economic repair or permanently rendered unfit for normal use for any reason whatsoever; or (c) the requisition of title, confiscation, sequestration restraint, detention, forfeiture or any compulsory acquisition or seizure or requisition for hire (other than a requisition for hire for a temporary period not exceeding One Hundred Twenty (120) days or by the U.S. Government or any agency thereof) by or under the order of any government (whether civil, military or de facto) or public or local authorities or courts ; or (d) the hi-jacking, theft or disappearance of the Aircraft or any other occurrence resulting in loss of possession by Sublessee and/or operation thereof for a period of sixty (60) consecutive days or longer; (e) any sale of the Aircraft in connection with a Sublessee bankruptcy whether by an administrator, trustee or court; (f) any other occurrence not permitted under this Agreement that deprives Sublessee of use and possession for a period of sixty (60) consecutive days or longer; For the avoidance of doubt, a Total Loss of the Aircraft will be deemed to have occurred when a Total Loss of the Airframe occurs even if there has not been a Total Loss of an Engine or Engines; Total Loss Date means: (a) in the case of an actual total loss or destruction, damage beyond repair, or being rendered permanently unfit, the date on which such loss, destruction, damage or rendition occurs (or, if the date of loss or destruction is not known, the date on which the Aircraft or the relevant part thereof was last heard of); (b) in the case of a constructive, compromised, arranged or agreed total loss, whichever shall be the earlier of (i) the date being sixty (60) days after the date on which notice claiming such total loss is issued to the insurers or brokers, and (ii) the date on which such loss is agreed or compromised by the insurers; (c) in the case of requisition for title, sequestration, confiscation, restraint, detention, forfeiture, compulsory acquisition or seizure, the date on which the same takes effect; (d) in the case of requisition for hire by a person other than the U.S. Government or an agency thereof, the expiration of a period of One Hundred Twenty (120) days from the date on which such requisition commenced (or, if earlier, the date on which the insurers make payment on the basis of a total loss); (e) in the case of paragraph (d) in the definition of Total Loss, the final day of the said period of sixty (60) consecutive days; (f) in the case of paragraph (e) in the definition of Total Loss, the date on which the Aircraft is sold; and (g) in case of paragraph (f) above the definition of Total Loss, the final day of the said period of sixty (60) consecutive days; Total Loss Proceeds means the proceeds of any insurance, or any compensation or similar payment, arising in respect of a Total Loss; Transaction Documents means (a) this Agreement; (b) the Assignment of Insurances; (c) the acknowledgement by Sublessee of the security assignment and/ or the pledge of, inter alia, this Agreement in favor of the Sublessor's Lender and any documents duly executed pursuant to any of the foregoing by Sublessee or Sublessor; (d) the Sublease Supplement; (e) the Acceptance Certificate. "US Air Carrier" means an air carrier (a) operating under (i) a certificate of public convenience and necessity issued under 49 U.S.C 41102(a) and of the type referred to in U.S.C section 1110, which is in full force and effect and (ii) an air carrier operators certificate issued pursuant to chapter 447 of the FAA for aircraft capable of carrying ten or more individuals or 6,000 pounds or more of cargo which is in full force and effect; and (b) qualifying as a debtor subject to 11 U.S.C section 1110. 2.2 Construction 2.2.1 References in this Agreement to: (i) Clauses or Schedules are, unless otherwise specified, references to Clauses of, and Schedules to, this Agreement; (ii) any statutory or other legislative provision shall be construed as including any statutory or legislative modification or re-enactment thereof, or any provision enacted in substitution therefor; (iii) the Aircraft includes any part of the Aircraft, and, where the context so admits, any of the Aircraft Documents, and references to any part of the Aircraft include any part of any Engine; (iv) the word person or persons or to words importing persons include individuals, partnerships, limited liability companies, corporations, government agencies, committees, departments, authorities and other bodies, corporate or unincorporated, whether having distinct legal personality or not; (v) Sublessor or Sublessee include any assignee or successor in title to the Sublessor or the Sublessee respectively (subject to the provisions of Clause 26); (vi) any agreement or instrument shall include such agreement or instrument as it may from time to time be amended, supplemented or substituted; (vii) an agreement shall also include a concession, contract, deed, franchise, license, treaty or undertaking (in each case, whether oral or written); (viii) the assets of any person shall be construed as a reference to the whole or any part of its business, undertaking, property, assets and revenues (including any right to receive revenues); (ix) law includes common or customary law and any constitution, decree, judgement, legislation, order, ordinance, regulation, statute, treaty or other legislative measure in any jurisdiction or any present or future directive, regulation, request or requirement in each case, whether or not having the force of law but, if not having the force of law, the compliance with which is in accordance with the general practice of persons to whom the directive, regulation, request or requirement is addressed; (x) month are references to a period starting on one day in a calendar month and ending on the day preceding the numerically corresponding day in the next calendar month (and references to months shall be construed accordingly) save that, where any such period would otherwise end on a non-Business Day, it shall end on the next preceding Business Day. (xi) any statute or other legislative provision or regulation shall be read to include any statutory or legislative or administrative modification or re-enactment thereof, or any substitution therefor; (xii) the words "including" or "include" are used herein without limitation to mean by way of example; (xiii) the words "Agreement", "hereof", "herein" and "hereinafter" refer to this entire Agreement; and (xiv) the word "or" is used inclusively to mean "and/or". 2.2.2 Headings are for ease of reference only. 2.2.3 Where the context so admits, words importing the singular number only shall include the plural and vice versa, and words importing neuter gender shall include the masculine or feminine gender. 3. REPRESENTATIONS AND WARRANTIES 3.1 Sublessee's Representations and Warranties Sublessee represents and warrants to Sublessor as of execution of this Agreement and each other Transaction Document and as of the Delivery Date (unless, in each case such representation and warranty is expressly applicable on and as of another date or dates): (a) Corporate Status: Sublessee is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Incorporation and has the corporate power and authority to carry on its business as presently conducted and to perform its obligations hereunder. (b) Government Approvals. No authorization, approval, consent, license or order of, or registration with, or the giving of notice to the Aviation Authority or any other Government Entity is required for the valid authorization, execution, delivery and performance by Sublessee of the Transaction Documents or to make the Transaction Documents admissible in evidence in the State of Incorporation except as will have been duly effected as of the Delivery Date. (c) Binding. Sublessee's Board of Directors has authorized Sublessee to enter into the Transaction Documents and perform its obligations under the Transaction Documents. This Agreement and the other Transaction Documents have been duly executed and delivered by Sublessee and represent the valid, enforceable and binding obligations of Sublessee except as enforceability may be limited by bankruptcy, insolvency, reorganization or other laws of general application affecting the enforcement of creditors' rights. When executed by Sublessee at Delivery, the same will apply to the Acceptance Certificate. (d) No Breach. The execution and delivery of the Transaction Documents, the consummation by Sublessee of the transactions contemplated herein and by the other Transaction Documents and compliance by Sublessee with the terms and provisions hereof do not and will not contravene any law applicable to Sublessee, or result in any breach of or constitute any default under or result in the creation of an Security Interest upon any property of Sublessee, pursuant to any indenture, mortgage, chattel mortgage, deed of trust, conditional sales contract, bank loan or credit agreement, corporate charter, by-law or other agreement or instrument to which Sublessee is a party or by which Sublessee or its properties or assets may be bound or affected. When executed by Sublessee at Delivery, the same will apply to the Acceptance Certificate. (e) Filings. Except for the filing or recording of this Agreement with the FAA and the filing of a UCC-1 at the location of Sublessee's executive offices, no other filing or recording of any instrument or document (including the filing of any financial statement) is advisable under the laws of the State of Colorado to evidence the interests of Owner Trustee, Sublessor's Lender and Sublessor in the Aircraft or any Transaction Document. (f) Licenses. Sublessee holds, all licenses, certificates and permits (including a US airworthiness certificate, registration certificate and radio licence) from all applicable Government Entities for the conduct of its business as a certificated air carrier and performance of its obligations under the Transaction Documents, including but not limited to a current certificate of public convenience and necessity and a current operating certificate for the operation of Boeing 737-300 aircraft. (g) No Suits. There are no suits, arbitrations or other proceedings pending or threatened against Sublessee before any court or administrative agency against or affecting Sublessee that, if adversely determined, would have a material adverse effect on the financial condition or business of Sublessee or its ability to perform its obligations under this Agreement or any other Transaction Document. (h) General Obligations. The obligations of Sublessee under this Agreement are direct, general and unconditional obligations of Sublessee and rank or will rank at least pari passu with all other present and future unsecured and unsubordinated obligations (including contingent obligations) of Sublessee, with the exception of such obligations as are mandatorily preferred by law. (i) Tax Returns. All necessary returns have been delivered by Sublessee to all relevant taxation authorities in the jurisdiction of its incorporation and Sublessee is not in default in the payment of any taxes due and payable. (j) No Material Adverse Effect. Sublessee is not in default under any agreement to which it is a party or by which it may be bound that would have a material adverse effect on its business, assets or condition and no material litigation or administrative proceedings before any Government Entity is presently pending or to the knowledge of Sublessee threatened against it or its assets that would have a material adverse effect on the business, assets or condition (financial or otherwise) of Sublessee. (k) No Default under this Sublease. At the time of execution of this Agreement , no Default has occurred and is continuing and the balance sheet and other financial statements for Sublessee for the year ended March 31, 1998 were prepared in accordance with accounting principles generally accepted and consistently applied in the State of Incorporation. (l) No Winding Up. No meeting has been convened or other action taken for winding up or dissolution, or for the appointment of any receiver or similar officer, in relation to Sublessee or any of its assets. (m) Continuation of Business. Sublessee will continue to operate substantially the same business as it is presently engaged in, will preserve its corporate existence, conduct its business in an orderly and efficient manner, satisfy its debts and obligations as they fall due and keep and maintain all of its assets and properties in good working order and condition. (n) No immunity: in any proceedings taken in the State of Incorporation in relation to the Transaction Documents it would not be entitled to claim for itself or any of its assets any immunity from suit, execution, attachment or other legal process. (o) Information: all information furnished by or on behalf of the Sublessee in connection with all transactions contemplated by the Transaction Documents is complete, true and correct in all material respects and all relevant facts concerning the business and affairs of the Sublessee have been disclosed to the Sublessor. (p) Status: Sublessee is a US Air Carrier and a "citizen of the United States as defined in 49 U.S.C Section 40102. Sublessee shall operate the Aircraft under Part 121 of the FAR and shall at all times remain a duly certified US Air Carrier; (q) Principal Place of Business: Sublessee's principal place of business and chief executive office as such terms are used in Article 9 of the Uniform Commercial Code are located at 12015 E. 46th Avenue, Denver, Colorado, 80239; (r) Flight Records: Sublessee's flight records are located at 12015 E. 46th Avenue, Denver, Colorado, 80239; 3.2 Sublessor's Representations and Warranties Sublessor represents and warrants to Sublessee as of the Delivery Date that: (a) Title to Aircraft. Sublessor warrants that title to the Aircraft will be vested in Owner Trustee and the Aircraft shall be free and clear of any and all Security Interests except for the Security Interests of Owner Trustee and Sublessor under the Head Lease Agreement and of Sublessor's Lender. (b) Organizational Status. Sublessor is a company created and validly existing under the laws of Sweden and has the organizational power and authority to carry on its business as presently conducted and to perform its obligations under this Agreement and each other Transaction Document to which it is party. (c) Trust Agreement. The Trust Agreement dated as of even date herewith, 1998, by and between Owner Trustee and Sublessor (the "Trust Agreement"), has been duly authorized, validly executed and delivered on the part of Sublessor, is legally binding upon the Sublessor, and creates a legally enforceable trust (as hereinafter referred to as the "Trust"). Owner Trustee, in its capacity as Trustee of the Trust, has legal power and authority to take legal title to the Aircraft and has legal authority and is qualified as the holder of legal title to the Aircraft to register the Aircraft in accordance with the terms of the Federal Aviation Act. (d) Government Approvals. No authorization, approval, consent, license or order of, or registration with, or the giving of notice to any Government Entity is required for the valid authorization, execution, delivery and performance by Sublessor of this Agreement, except as will have been duly effected as of the Delivery Date. (e) Binding. This Agreement and the other Transaction Documents to which it is a party have been duly executed and delivered by Sublessor and represent the valid, enforceable and binding obligations of Sublessor except as enforceability may be limited by bankruptcy, insolvency, reorganization or other laws of general application affecting the enforcement of creditors' rights. (f) No Breach. The execution and delivery of the Transaction Documents, the consummation by Sublessor of the transactions contemplated herein and compliance by Sublessor with the terms and provisions hereof do not and will not contravene any law applicable to Sublessor, or result in any breach of or constitute any default under or result in the creation of any Security Interest upon any property of Sublessor, pursuant to any indenture, mortgage, chattel mortgage, deed of trust, conditional sales contract, bank loan or credit agreement, corporate charter, by-law or other agreement or instrument to which Sublessor is a party or by which Sublessor or its properties or assets may be bound or affected. Sublessor has no permanent establishment of business in the United States as defined by or interpreted pursuant to the Convention between the Government of New Zealand and the Government of the United States of America for Avoidance of Double Taxation and the Prevention of Fiscal Evasion With Respect to Taxes on Income. 3.3 Survival of Representations and Warranties All of the foregoing representations and warranties shall survive the execution and delivery of this Sublease and the Delivery of the Aircraft. 4. CONDITIONS PRECEDENT 4.1 Sublessor's Conditions Precedent Sublessor's obligation to deliver and Sublease the Aircraft to Sublessee under this Agreement is subject to satisfaction of each of the following conditions: 4.1.1 receipt by Sublessor from Sublessee on or prior to the Delivery Date of the following, each in form and substance reasonably satisfactory to Sublessor: (i) Constitutional Documents. Copies of the Sublessees articles of incorporation and Bylaws, certified as true, complete and up-to-date by an officer of Sublessee. (ii) Resolutions. A copy, duly certified as a true copy by an officer of Sublessee of a board resolution of Sublessee approving the execution, delivery and performance of the Transaction Documents and naming the person or persons authorized to sign the Transaction Documents on behalf of Sublessee and authorized to sign on behalf of Sublessee any documents to be delivered by Sublessee pursuant hereto or contemporaneously herewith; (iii) Specimen signatures. A certificate of an officer of Sublessee setting out the names and signatures of the persons authorized to sign on behalf of Sublessee the Transaction Documents and any documents to be delivered by Sublessee pursuant hereto contemporaneously herewith; (iv) Consents. Evidence that all governmental or other consents, licenses, approvals and authorizations required for the execution, delivery and performance by Sublessee of the Transaction Documents have been obtained or made and are in full force and effect including, without limitation, a FAA certificate of airworthiness, FAA certificate of registration in the State of Registration and a radio licence; (v) Accounts. The balance sheet and other financial statements of Sublessee for the year ended March 31 1998; (vi) Licences. Copies of Sublessee's Certificate of Public Convenience and Necessity and operating certificate covering its operation of 737-300 aircraft issued by the US Department of Transportation and FAA, respectively; (vii) Transaction Documents. Originals of the Transaction Documents (duly executed by all parties other than Sublessor); (viii) Insurances. A certificate from the Insurer's confirming that the Insurances are in place together with an insurance broker's letter of undertaking (in a form acceptable to Owner Trustee, Sublessor's Lender and Sublessor) addressed to Owner Trustee, Sublessor's Lender and Sublessor; (ix) Opinions. Legal opinions from: (a) Counsel to Sublessee addressed to Owner Trustee, Sublessor's Lender and Sublessor confirming the representations (except for 3.1(d)) made by Sublessee hereunder in a form and substance acceptable to Owner Trustee, Sublessor's Lender and Sublessor; (b) Special FAA counsel to Sublessee addressed to Owner Trustee, Sublessor's Lender and Sublessor confirming that this Sublease and other appropriate documents including Sublessor's Lender's mortgage have been filed with the FAA; (x) Security Deposit and Rent. Receipt by Sublessor of the Security Deposit to the extent set forth in Clause 9, the first monthly instalment of Rent and the Letter of Credit; (xi) Others. Any other documents, approvals, consents, certificates that Sublessor may reasonably require; (a) the representations and warranties of Sublessee under Clause 3.1 shall be correct and would be correct if repeated on Delivery; and (b) no Default shall have occurred and be continuing. 4.2 Waiver The Sublessor's Conditions Precedent are for the sole benefit of Sublessor and may be waived or deferred by Sublessor in whole or in part and with or without conditions. If any of the Conditions Precedent are not satisfied on the Delivery Date and Sublessor (in its absolute discretion) nonetheless agrees to deliver the Aircraft to Sublessee, Sublessee shall ensure that such Conditions Precedent are fulfilled within 15 days after the Delivery Date, and Sublessor may treat the failure of Sublessee to do so as an Event of Default. 4.3 Sublessee's Conditions Precedent Sublessee's obligation to accept and Sublease the Aircraft from Sublessor under this Agreement is subject to satisfaction of each of the following conditions: 4.3.1 The Aircraft is substantially and materially in the condition set forth in Schedule 2. 4.3.2 The receipt by Sublessee from Sublessor on or prior to the Delivery Date of the following, each in form and substance reasonably satisfactory to Sublessee: (i) Evidence of Authority. Certified copies of evidence of appropriate action approving the execution, delivery and performance of the Transaction Documents by Sublessor and of the person or persons authorized to sign the Transaction Documents on behalf of Sublessor or any other documents to be delivered to Sublessee by Sublessor; (ii) Specimen signatures. A certificate of an officer of Sublessor setting out the names and signatures of the persons authorized to sign on behalf of Sublessor the Transaction Documents and any documents to be delivered by Sublessor pursuant hereto contemporaneously herewith; (iii) Transaction Documents. Originals of the following documents (duly executed by Sublessor): (a) this Agreement; and (b) The Sublease Supplement. (iv) the representations and warranties of Sublessor under Clause 3.2 shall be correct and would be correct if repeated on Delivery; and (v) no Default by Sublessor shall have occurred and be continuing. 4.4 Waiver The Sublessee's Conditions precedent are for the sole benefit of Sublessee and may be waived or deferred by Sublessee in whole or in part and with or without conditions. 5. DELIVERY CONDITION AND INSPECTION OF AIRCRAFT 5.1 Sublessee Selection of Aircraft IN ADDITION TO THE DISCLAIMER AT CLAUSE 19, SUBLESSEE REPRESENTS AND WARRANTS TO SUBLESSOR THAT SUBLESSEE HAS USED ITS OWN JUDGMENT IN SELECTING THE AIRCRAFT AND HAS DONE SO BASED ON ITS SIZE, DESIGN AND TYPE. SUBLESSEE ACKNOWLEDGES THAT SUBLESSOR IS NOT A MANUFACTURER OF THE AIRCRAFT NOR A DEALER IN THE AIRCRAFT. 5.2 Conditions at Delivery In addition to the disclaimer at Clause 19, Sublessor has advised Sublessee that at Delivery the Aircraft will be substantially and materially in the condition set forth in Schedule 2 provided that this confirmation expires as at Delivery. 5.3 Sublessee Inspection of Aircraft at Delivery Sublessee will have the right to perform such ground inspection of the Aircraft as it deems appropriate. After completion of the ground inspection, if the Aircraft is acceptable to Sublessee ("Preliminary Acceptance") (subject to the results of the acceptance flight), Sublessee will technically accept the Aircraft (subject to the results of the acceptance flight) and will provide insurance coverage for the Aircraft, including the acceptance flight. Sublessee may, subject to having technically accepted the Aircraft and having provided for insurance coverage reasonably acceptable to Sublessor, have up to two observers on board the Aircraft during Air New Zealand Limited's acceptance flight from Manufacturer with respect to the Aircraft. Sublessee acknowledges that, as between it and Sublessor, in accepting the Aircraft it is relying on its own inspection and knowledge of the Aircraft in determining whether it meets the requirements of this Agreement. 5.4 Delivery of Aircraft to Sublessee Subject to Sublessee having performed all of the conditions precedent to Delivery or waiver by the Sublessor set forth herein, Sublessor will deliver the Aircraft to Sublessee at the Delivery Location. Provided that the Aircraft is in the condition required by Clause 5.2 hereof, upon the tender of the Aircraft by Sublessor to Sublessee, Sublessee will accept the Aircraft and the date of tender by Sublessor to Sublessee will be deemed to be the Delivery Date for all purposes under this Agreement, including, but not limited to, the commencement of Sublessee's obligation to pay Rent hereunder. Sublessee shall execute and deliver the Acceptance Certificate to Sublessor 5.5 Sublessee Acceptance of Aircraft So long as the Aircraft is in the condition, specified in Clause 5.2 hereof, Sublessee will accept the Aircraft when tendered for delivery by Sublessor. If Sublessee fails to (i) comply with the conditions contained in Clauses 4.1 so as to allow Delivery to take place upon tender or (ii) take delivery of the Aircraft when properly tendered for Delivery by Sublessor in the condition required hereunder, Sublessee will indemnify Sublessor for all reasonable costs and expenses incurred by Sublessor as a result thereof including (but without limitation) any payments that Sublessor or affiliates or related companies to Sublessor become obliged to make to any third party to put the Aircraft in the condition set forth in Schedule 2. 5.6 Post Delivery Obligations Promptly following Delivery the Sublessor and Sublessee shall remove any components or parts on the Aircraft at Delivery which Sublessor and Sublessee agree to be surplus. In addition, Sublessee acknowledges that Sublessor intends to replace certain parts and components on the Aircraft. If requested by Sublessor Sublessee will on reasonable notice and at reasonable times make the Aircraft available to Sublessor, at the expense of Sublessor, to enable Sublessor to make such replacements. 6. LEASE TERM 6.1 Initial Lease Term Sublessor shall Sublease the Aircraft to Sublessee and Sublessee shall take the Aircraft on Sublease in accordance with this Agreement for the duration of the Initial Lease Term and, subject to Clause 6.2, the Extension Lease Term. 6.2 Lease Extension Date 6.2.1 Sublessor shall have the option to extend the Initial Lease Term under this Agreement for the period of the Extension Lease Term. 6.2.2 In order to exercise the option set out in Clause 6.2.1, Sublessor must give written notice to Sublessee not less than six (6) months prior to the Initial Lease Expiry Date. 6.3 Expiry Date The Expiry Date shall be the Initial Lease Expiry Date or where Sublessor has served notice under Clause 6.2.2, the Extension Lease Expiry Date subject to the following provisions: (a) If Sublessor, acting in accordance with Clause 4.2, notifies Sublessee that it is terminating this Agreement, Sublessee shall immediately redeliver the Aircraft in accordance with Clause 24 and the Expiry Date shall be the date upon which the Aircraft is redelivered and Sublessee has complied with its obligations hereunder; (b) If Sublessor, acting in accordance with Clause 25.2, terminates the leasing of the Aircraft to Sublessee under this Agreement, Sublessee shall immediately redeliver the Aircraft in accordance with Clause 24 and the Expiry Date shall be the date upon which the Aircraft is redelivered and Sublessee has complied with all its obligations hereunder; (c) If the Aircraft or Airframe suffers a Total Loss, the Expiry Date shall be the date on which Sublessee pays to Sublessor the Agreed Value and all other sums due from Sublessee to Sublessor hereunder. (d) If Clause 24.4 becomes applicable, the Expiry Date shall be the date when any non-compliance referred to in Clause 24.4 has been fully rectified and Sublessor shall have accepted redelivery of the Aircraft and Sublessee shall have complied with all its obligations hereunder; (e) Under any circumstances, the Expiry Date shall be the date upon which the Aircraft is redelivered in accordance with Clause 24 and the Return Acceptance Receipt executed and delivered in accordance with that clause; and For the avoidance of doubt in respect of Clauses 6.3(a), (b), (d) and (e) the obligations of Lessee in respect of payment of Rent and all other obligations shall continue to be payable in respect of those days prior to the redelivery to Sublessor of the Aircraft in the Return Conditions, and in respect of Clause 6.3(c) such obligations shall continue until payment of the Total Loss Proceeds. The obligations of Sublessee set forth in Clauses 13.17, 20, 21, 25 (b), (f) or (g) and any other obligations of Sublessee that were due to have been performed but have not been fully performed prior to the termination of the Agreement pursuant to this Clause 6.3, will survive the Expiry Date. 6.4 Risk 6.4.1 Throughout the Lease Term and until redelivery of the Aircraft in accordance with Clause 24, Sublessee shall bear all risks of loss, theft, damage, confiscation and destruction of or to the Aircraft and every part thereof. 6.4.2 If the Aircraft is lost, stolen, confiscated, damaged, destroyed or otherwise rendered unfit and unavailable for use, Sublessor shall not be liable to repair the same or supply any equipment in substitution therefor unless caused by the intentional act or gross negligence of Sublessor, its employees or agents. 7. DELIVERY 7.1 Delivery Sublessor will deliver the Aircraft to Sublessee at the Delivery Location on or about the Scheduled Delivery Date and Sublessee will accept Delivery on that Date. Sublessor will notify Sublessee from time to time and in a timely manner of any changes to the Scheduled Delivery Date. Sublessee and Sublessor expressly acknowledge that Delivery of the Aircraft to Sublessee is subject to and conditioned upon delivery of the Aircraft by Manufacturer. Sublessor will not be liable for any loss or expense, or any loss of profit, arising from any delay or failure in Delivery to Sublessee unless such delay or failure arises as a direct consequence of the gross negligence or wilful default of Sublessor, and in no event will Sublessor be liable for any delay or failure that is caused by any failure, breach or delay on the part of the Manufacturer. If a delay, not caused by Sublessors or Sublessees breach of this Agreement, causes Delivery to be delayed beyond thirty (30) days after the Scheduled Delivery Date this Agreement shall, at the option of either party hereto, terminate and in such event, neither party will have any further obligation or liability under this Agreement, except that Sublessor will repay to Sublessee the amount of Security Deposit paid under this Agreement. So long as the Aircraft is in the condition specified in clause 5.2 hereof, Sublessee acknowledges its obligations to take Delivery on the Scheduled Delivery Date notwithstanding that pre-Delivery modifications requested by Sublessee are not complete on the Scheduled Delivery Date. 8. RENT 8.1 Rent Date The first Rent payment date shall be one (1) day prior to the Delivery Date, and each subsequent Rent payment date shall be on the monthly anniversary of the Delivery Date. 8.2 Time of Payment Sublessee shall pay Rent to Sublessor or to its order in advance on each Rent Date. Sublessee shall initiate payment adequately in advance of each Rent Date to ensure that Sublessor receives credit for the payment on such Rent Date. If a Rent Date is a day which is not a Business Day, the Rent payable in respect of that Rent Period shall be paid on the Business Day immediately preceding the Rent Date. Each payment will be in accordance with clause 11.1 and accompanied by the annotation "[ ] Rent for month of [ ]". 8.3 Amount of Basic Rent The Basic Rent payable on each Rent Date shall be the amount determined in accordance with Schedule 8. 8.4 Reserves Sublessee will pay to Sublessor as Supplemental Rent, based on Sublessee's use of the Aircraft during the Lease Term, Reserves in accordance with Clause 10. 9. SECURITY DEPOSIT 9.1 Security Deposit Sublessee has paid to Sublessor a cash Security Deposit in the amount of $100,000 which amount shall be credited to the Basic Rent payable on the first Rent payment date. 9.2 Letter of Credit The Sublessee shall provide the Sublessor with an additional security deposit in the form of an irrevocable, assignable standby letter of credit in favor of the Sublessor in the amount set forth in Schedule 8 in form and substance reasonably acceptable to Sublessor issued by a major commercial bank reasonably acceptable to Sublessor (the "Letter of Credit") on or prior to the Delivery Date. The Letter of Credit will serve as security for the performance by Sublessee of its obligations under this Agreement or the Other Agreements. 9.3 Sublessor's Rights 9.3.1 If an Event of Default shall have occurred and be continuing, in addition to all rights and remedies accorded to Sublessor elsewhere in this Agreement or under applicable law in respect of the or Letter of Credit Sublessor may immediately, or at any time thereafter, without prior notice to Sublessee, apply all or part of the Letter of Credit in or towards the payment or discharge of any matured obligation owed by Sublessee under the Transaction Documents or the Other Agreements, in such order as Sublessor sees fit, and/or exercise any of the rights of set-off described in Clause 11.6 against all or part of the Security Deposit or Letter of Credit. 9.3.2 If Sublessor exercises the rights described in Clause 9.3.1, Sublessee shall, following a demand in writing from Sublessor, immediately restore the Letter of Credit to the level at which it stood immediately prior to such exercise. 9.3.3 Sublessee acknowledges that Sublessor may commingle all or any part of the Reserves with its general funds and that no interest shall accrue in favor of Sublessee in respect of the Letter of Credit or the Reserves (except as provided herein). 9.3.4 Sublessor's obligations in respect of return of the Maintenance Reserves and Letter of Credit shall be those of debtor and not those of a trustee or other fiduciary. 10. Maintenance reserves 10.1 Amount Sublessee shall during the Lease Term pay Reserves to Sublessor in respect of (i) the Airframe, in the amount set forth in Schedule 8 for each Flight Hour operated by the Aircraft during the Lease Term ("Airframe Maintenance Reserve") and (ii) each of the Engines, in the amount set forth in Schedule 8 per Engine for each Flight Hour operated by such Engine ("Engine Maintenance Reserves") and (iii) the Engine Life Limited Parts ("LLP's"), in the amount set forth in Schedule 8 for each Flight Hour operated by each of the Engines ("LLP Maintenance Reserve") and (iv) the Landing Gears, in the amount set forth in Schedule 8 for each Cycle operated by the Aircraft ("Landing Gear Maintenance Reserve") and (v) the APU, in the amount set forth in Schedule 8 for each Flight Hour ("APU Maintenance Reserve"). 10.2 Payments Sublessee shall pay the Reserves in respect of each calendar month during which Reserves accrue on the tenth (10) day immediately following the end of that calendar month on the basis of the information contained in the applicable Monthly Report. Each payment will be made in accordance with clause 11 and accompanied by the annotation "[ ] Maintenance Reserve Payment for month of [ ]". 10.3 Adjustment The amount payable by Sublessee to the Reserves shall be subject to escalation on each anniversary of this Agreement in respect of the increase, if any, in the costs for which the Reserves are maintained. The parties shall agree upon such reasonable escalation to apply for each payment to the Reserves that becomes payable thereafter. Such escalation shall not exceed the increase in the Boeing Index and the other relevant manufacturer's index. 10.4 Release of Maintenance Reserves 10.4.1 Sublessor will reimburse Sublessee from the actual Airframe Maintenance Reserves paid by Sublessee, provided that no Default has occurred and is continuing, for the actual cost of the structural inspection portion of completed scheduled checks as described in the MPD and the rectification of any structural deficiencies resulting from such inspection whenever such inspections and rectification work is performed (provided that such inspection and rectification extends the available life of the Aircraft). Work performed for all other causes is excluded from such reimbursement, including the charges set forth in Section 10.4.5 below. 10.4.2 Sublessor will reimburse Sublessee provided that no Default has occurred and is continuing from the Engine Maintenance Reserves and LLP Maintenance Reserves for the actual cost of completed Engine Performance Restoration Visits and LLP Replacements to the extent the work performed during such Engine Performance Restoration Visit and LLP Replacements consisted of the replacement of life/time limited components resulting in performance restoration, with work performed for all other causes excluded, including those causes set forth in Clause 10.4.5 below. Reimbursement will be made up to the amount in the Engine Maintenance Reserve and LLP Maintenance Reserve applicable to such Engine. 10.4.3 Sublessor will reimburse Sublessee provided that no Default has occurred and is continuing from the Landing Gear Maintenance Reserves for the actual cost associated with the completed Landing Gear overhauls, with work performed for all other causes excluded, including those causes set forth in Clause 10.4.5. Reimbursement will be made up to the amount in the Landing Gear Maintenance Reserve at the time for the Landing Gear Overhaul. 10.4.4 Sublessor will reimburse Sublessee provided that no Default has occurred and is continuing from the APU Maintenance Reserves for the actual cost associated with the completed APU performance restoration, with work performed for all other causes excluded, including those causes set forth in Clause 10.4.5. Reimbursement will be made up to the amount in the APU Maintenance Reserve at the time for the APU performance restoration. 10.4.5 Each of the following causes shall be excluded from this Clause 10.4: accomplishment of Airworthiness Directives and FAR's, accident, faulty maintenance or installation, incident, improper operations, abuse, neglect, misuse, optional parts replacement (where such replacement does not increase operational life) or work covered by manufacturer's service bulletins or which is reimbursed by a claim under manufacturer's warranties or by insurance (with deductibles being treated as reimbursable by insurance for this exclusion). For the avoidance of doubt, Sublessee has no right to payment of any amount from the Reserves not paid in cash by Sublessee and, subject to Clause 26.1, any remaining balances of the Reserves on the Expiry Date, after application of the foregoing provisions, shall be retained by Sublessor as its sole property unless otherwise set out in Clause 10.7. 10.5 Costs in Excess of Reserves Sublessee will be responsible for payment of all costs in excess of the amounts reimbursed hereunder. If on any occasion the balance in the relevant Reserve is insufficient to satisfy a claim for reimbursement in respect of the Airframe, an Engine, the Landing Gears or the APU, as the case may be, the shortfall may not be carried forward or made the subject of any further claim for reimbursement. 10.6 Reimbursement after Expiry Date Sublessee may not submit any invoice for reimbursement from the Reserves after the Expiry Date unless on or prior to such date Sublessee has notified Sublessor in writing that such outstanding invoice will be submitted after the Expiry Date and the anticipated amount of such invoice. So long as Sublessee has provided such notice to Sublessor, Sublessee may then submit such outstanding invoice at any time within three (3) months after the Expiry Date; provided, however, if Sublessee contests any such invoice and provides Sublessor with notice of such contest and periodic updates of the progress of such contest, the time for submitting an invoice shall be extended until the resolution of such contest. 10.7 Engine LLP Maintenance Reserve Upon redelivery of the Aircraft by Sublessee in accordance with the terms of this Agreement and subject to Sublessee having complied with its obligations hereunder the parties hereto shall make a financial settlement in respect of amounts paid by Sublessee to the Engine LLP Maintenance Reserve in accordance with the following: (i) Sublessee shall be debited an amount equal to (a) the actual number of Flight Hours consumed in respect of each of the LLP's during the Lease Term divided by (b) the approved life and flight hours of each relevant LLPand multiplied by (c) the current cost of LLP replacement as published by the Engine Manufacturer and totalled for all the LLPs in each Engine; and (ii) Sublessee shall be credited an amount equal to the total amount remaining in the Engine LLP Maintenance Reserve. Any positive difference between (i) and (ii) shall be due and payable by Sublessee to Sublessor and any negative difference shall be due and payable by Sublessor to Sublessee. 10.8 No Anticipated Draw-down Without prejudice to Sublessee's reimbursement rights under this clause 10, based on the age of the Aircraft, the fact the Aircraft will not have operated at Delivery and on the length of the Lease Term, it is not anticipated that Sublessor will be obliged to reimburse Sublessee from any of the Reserves. 11. Payments 11.1 Account for Sublessee Payments All payments (except in respect of Maintenance Reserves) by Sublessee to Sublessor under this Agreement will be made for value on the due date in dollars and in same day funds to: KBC New York 125 W 55th Street NY 10019, New York Accoutn Number: 21557003 SWIFT: KREDUS33 for credit to KBC Finance Ireland quoting Indigo Proceeds Account #03/43824/77 All payments in respect of Maintenance Reserves shall be made for value on the due date in dollars and the same day funds to: KBC New York 125 W 55th Street NY 10019, New York Account Number: 21557003 SWIFT: KREDUS33 for credit to KBC Finance Ireland quoting reference Indigo Maintenance Account #03/43832/81 or to such other account as Sublessor may from time to time notify to Sublessee in writing. 11.2 Default Interest If Sublessee fails to pay any amount payable under this Agreement on the due date, Sublessee shall pay to Sublessor on demand from time to time interest both before and after judgment on that amount, from the due date or, in the case of amounts expressed to be payable on demand, from the date of receipt of such demand to the date of payment in full by Sublessee to Sublessor, at the Default Rate (subject to applicable law). All such interest will be compounded weekly and calculated on the basis of the actual number of days elapsed and a 360 day year. Interest payable pursuant to this Clause 11.2 that is unpaid at the end of such period thereafter shall itself bear interest, to the extent legally permissible, at the rate provided in this Clause 11.2. 11.3 Absolute Obligations Sublessee's obligations to make payments under this Agreement are absolute and unconditional, irrespective of any contingency or circumstance whatsoever, including: 11.3.1 any right of set-off, counterclaim, recoupment, reimbursement, defense or other right which Sublessor or Sublessee may have against the other or against any other person; 11.3.2 any unavailability of the Aircraft for any reason, including, but not limited to, requisition of the Aircraft or any prohibition or interruption of or interference with or other restriction against Sublessee's use, operation or possession of the Aircraft; 11.3.3 any lack or invalidity of title or any other defect in title, airworthiness, merchantability, fitness for any purpose, condition, design, or operation of any kind or nature of the Aircraft for any particular use or trade, or for registration or documentation under the laws of any relevant jurisdiction, or any Total Loss in respect of or any damage to the Aircraft; 11.3.4 any insolvency, bankruptcy, reorganisation, arrangement, readjustment of debt, dissolution, liquidation or similar proceedings by or against Sublessor or Sublessee or any other person; 11.3.5 any invalidity, illegality, unenforceability or lack of due authorization of, or other defect in, this Agreement; and 11.3.6 any other cause or circumstance that, but for this provision, would or might otherwise have the effect of terminating or in any way affecting any obligation of Sublessee under this Agreement. 11.4 Application of Payments to Sublessor If any sum paid to Sublessor or recovered by Sublessor in respect of the liabilities of Sublessee under this Agreement is less than the amount then due, Sublessor may apply that sum to amounts due under this Agreement in such proportions and order and generally in such manner as Sublessor may determine. 11.5 Currency Indemnity If, under any applicable law, whether as a result of judgement against Sublessee or the liquidation of Sublessee or for any other reason, any payment under or in connection with this Agreement is made or is recovered in a currency ("other currency") other than United States dollars, the currency ("contractual currency") in which it is payable pursuant to this Agreement then, to the extent that the payment (when converted into the contractual currency at the rate of exchange on such date or, in the case of a liquidation, the latest date for the determination of liabilities permitted by the applicable law) falls short of the amount payable under this Agreement, Sublessee shall, as a separate and independent obligation, fully indemnify Sublessor against the amount of the shortfall. For the purposes of this sub-Clause "rate of exchange" means the rate at which the Sublessor is able on the relevant date to purchase the contractual currency in London or any other place Sublessor may reasonably choose with the other currency. 11.6 Set-off Sublessor may set off any matured obligation owed by Sublessee under the Transaction Documents or any Other Agreement against any obligation, whether or not matured, owed by Sublessor to Sublessee. 11.7 Time for Payments If any payment due under this Agreement other than a payment of Rent would otherwise be due on a day that is not a Business Day, it shall be due on the next preceding Business Day. 12. Sublessor's Convenants 12.1 Quiet Enjoyment Provided no Default has occurred and is continuing, Sublessor shall not, and no one claiming by or through the acts or omissions of Sublessor or Owner Trustee shall, interfere with the quiet use, possession and enjoyment of the Aircraft by Sublessee during the Lease Term. 12.2 Sublessor Obligations Following Expiry Date Within five (5) Business Days after: 12.2.1 redelivery of the Aircraft to Sublessor (or, if applicable, the Owner Trustee) in accordance with and in the condition required by this Agreement; or 12.2.2 payment received by Sublessor of the Agreed Value following a Total Loss after the Delivery Date; or in each case such later time as Sublessor is reasonably satisfied Sublessee has irrevocably paid to Sublessor all amounts that may then be outstanding or become payable under the Transaction Documents and the Other Agreements, Sublessor shall (provided that no Default has occurred and is continuing) pay or deliver to Sublessee, as the case may be: (i) an amount equal to the balance of the Security Deposit, if any, paid by Sublessee under this Agreement and then held by Sublessor; (ii) the amount of any Rent received in respect of any period falling after the date of redelivery of the Aircraft or payment of the Agreed Value, as the case may be; provided, however, if there is a dispute between Sublessor and Sublessee as to the amount due to Sublessee, Sublessor shall nevertheless pay to Sublessee such amount as in Sublessor's reasonable judgement is not in dispute or is in excess of the amount Sublessor claims is due; and (iii) the Letter of Credit. 13. Sublessee's covenants 13.1 Duration Sublessee shall perform and comply with its undertakings and covenants in this Agreement and the other Transaction Documents at all times during the Lease Term. All such undertakings and covenants shall, except where expressly otherwise stated, be performed at the expense of Sublessee. 13.2 Information Sublessee shall: 13.2.1 notify Sublessor forthwith of the occurrence of a Default or an Event of Default and the steps it is taking to cure such Default or Event of Default; 13.2.2 furnish to Sublessor: (i) as soon as available, but not in any event later than ninety (90) days after the last day of each financial year of Sublessee, its audited consolidated balance sheet as of such day and its audited consolidated profit and loss statement for the year ending on such day prepared in accordance with generally accepted accounting principles in the State of Incorporation; (ii) as soon as available, but not in any event later than forty-five (45) days after the last day of each quarter of Sublessee, its unaudited consolidated balance sheet as of such day and its unaudited consolidated profit and loss statement for the quarter ending on such day prepared in accordance with generally accepted accounting principles in the State of Incorporation; (iii) such information as may reasonably be requested by Sublessor to fulfil its Tax filing or other information reporting requirements with respect to the transactions contemplated by this Agreement; (iv) within ten (10) days following the term of each month a Monthly Report in the form of Schedule 9, detailed technical reports following completion of each "C" Check and other information reasonably requested by Sublessor concerning the location, condition, use and operation of the Aircraft; and (v) such other information and documents regarding Sublessee's business and financial condition as Sublessor may from time to time reasonably request; 13.2.3 promptly notify Sublessor of any loss, theft, damage or destruction to the Aircraft, any Engine or any Part if the cost of the repair or replacement thereof may exceed the Damage Notification Threshold, or any modification to the Aircraft if the potential cost of repair or of such modification may exceed the Damage Notification Threshold. 13.2.4 promptly notify Sublessor in writing of any suit, arbitration or proceeding before any court, administrative agency or Government Entity which, if adversely determined, would materially adversely affect Sublessee's financial condition, affairs, operations or its ability to perform under this Agreement. 13.2.5 promptly notify Sublessor in the event Sublessee is made aware of or determines that any computer application (including those of its suppliers, customers and vendors) that is material to the business and operation of Sublessee will not be Year 2000 Compliant on a timely basis, except to the extent that such failure could not reasonably be expected to have a materially adverse effect. 13.2.6 promptly notify Sublessor in writing of any Total Loss to the Aircraft or any damage caused to the Aircraft that is expected to be in excess of the Damage Notification Threshold and the amount of the deductible under the Insurance or equivalent in any currency. 13.2.7 promptly notify Sublessor in writing of any loss, arrest, hijacking, confiscation, seizure, requisitioning, impounding, taking in execution, or forfeiture of the Aircraft or any Engine or any major part thereof. 13.2.8 promptly notify Sublessor in writing of any substantial injury or damage to a third party causes by, or in connection with, the Aircraft which is expected to give rise to any loss or liability on the part of the Sublessor or to a loss or liability in excess of the Damage Notification Threshold. 13.2.9 as soon as available provide Sublessor with a copy of any Engineering Order in respect of the Aircraft together with any documentary supplements to such Engineering Order. 13.2.10 promptly notify Sublessor in writing of any other event in respect of the Aircraft which in the reasonable opinion of the Sublessee might reasonably be expected to involve the Sublessor in any loss or liability. 13.3 Sublessor visits Sublessor may visit, upon reasonable notice, Sublessee's premises to discuss Sublessee's general affairs and finances with Sublessee's principal officers. 13.4 Periodic Estoppel Certificates Sublessee will, within ten (10) Business Days after receipt of written notice from Sublessor (which will not occur more often than four (4) times in any calendar year), execute, acknowledge and deliver to Sublessor a written statement as to each of the following: 13.4.1 certifying that this Agreement is unmodified and in full force and effect (or, if modified, stating the nature of such modification and certifying that this Agreement, as so modified, is in full force and effect) and the date to which the Rent and other charges are paid in advance, if any. 13.4.2 acknowledging that there are not, to Sublessee's knowledge, any uncured defaults on the part of Sublessor hereunder, or specifying such defaults if there are any claimed by Sublessee. 13.4.3 acknowledging that Sublessee has no claims against Sublessor by reason of the condition of the Aircraft as of the Delivery Date or arising subsequent thereto to the date of such statement. If Sublessee does not deliver such statement within such timeframe, the statements set forth in this Clause 13.4 will be deemed correct and binding upon Sublessee. 13.5 Airport and Navigation Charges Sublessee will promptly pay and discharge when due all landing fees and other similar Airport Charges imposed by the authorities of any airport from or to which the Aircraft may operate and any charges (including without limitation, all Air Navigation Charges) imposed by virtue of any regulations made by any relevant authority or any other charges in respect of air navigation incurred, in each case in respect of all aircraft of which it is the operator. Sublessee will ensure that all such charges are paid on a regular basis and that invoices are received (and, if not received, are specifically requested) by it from the relevant authorities no more than three (3) months after the event to which the charges relate. 13.6 Operation of Aircraft Sublessee shall not maintain, use or operate the Aircraft in violation of any law or any mandatory rule, regulation or order of any Government Entity having jurisdiction in any country, state, province or other political subdivision in or over which the Aircraft is flown or in violation of any airworthiness certificate, license or registration relating to the Aircraft issued by the Aviation Authority or any similar authority or any jurisdiction in or over which the Aircraft is flown. If any such law, rule, regulation or order requires alteration of the Aircraft, Sublessee shall conform or procure conformance thereto at its own expense and maintain or procure maintenance of the Aircraft in proper operating condition under such laws, rules, regulations and orders; provided that Sublessee may in good faith contest, or procure the contest of, the validity or application of any such law, rule, regulation or order in any reasonable manner that does not adversely affect Sublessor or its interest in the Aircraft. In particular, Sublessee will ensure that the Aircraft at all times during the Lease Term is operated by duly qualified pilots and aircrew employees, and is not used to transport contraband or illegal narcotics or hazardous or perilous cargo (other than pursuant to applicable FAA and carrier regulations). The Aircraft may be used or operated in flight crew conversion, training for Sublessee's own employees and for experimental flights; provided, however, prior to any such flights Sublessee shall notify Sublessor and shall deliver to Sublessor evidence that insurance coverage is in effect for such flights. At all times the Aircraft will be operated in passenger configuration. 13.7 Areas of Operation Sublessee shall not operate or locate the Airframe or any Engine or Part or suffer the Airframe or any Engine or Part to be operated or located, (i) in any area or for carriage of any goods excluded from coverage by any insurance required by the terms of this Agreement, (ii) in any recognized or threatened area of hostilities unless fully covered by war risk insurance; or (iii) outside the United States of America, Mexico or Canada. 13.8 Non-Prejudicial Action Sublessee shall not do anything that, or omit to do anything the omission of which, prejudices any right Sublessor may have against either the Manufacturer or against the manufacturer or supplier of any part of the Aircraft in respect of the Aircraft or any part thereof. 13.9 Non-Representation of Sublessor Sublessee shall not at any time represent Sublessor Owner Trustee or Sublessor's Lender as carrying goods or passengers in the Aircraft or as being in any way connected or associated with any operation or carriage (whether for hire or reward or gratuitously) being undertaken by Sublessee or as having any operational interest in or responsibility for the Aircraft. 13.10 Inspection Sublessor and its agents (including Sublessor's Lender) may at all reasonable times on reasonable notice inspect, or appoint an inspector on its behalf to inspect, the Aircraft or any part thereof, provided that if no Default or Event of Default has occurred and is continuing Sublessee shall not be obliged hereunder to permit, or procure permission for, any such inspection that would result in an unreasonable disruption of the operation of the Aircraft or the operation of the business of Sublessee as an airline. Sublessee agrees to reimburse the out-of-pocket expenses of Sublessor for such inspector incurred in making any such inspection when such inspection shows that the Aircraft is not materially in the condition required by the terms of this Agreement provided that Sublessee shall in all cases pay or reimburse Sublessor for the costs of such inspection or survey if Sublessor is required by law or change of law to make an inspection or survey. Sublessor shall have no duty to make any such inspection and shall not incur any liability or obligation by reason of not making any such inspection. Sublessee shall provide Sublessor with such information regarding the present and anticipated location and regarding the condition of the Aircraft as Sublessor may reasonably require. For the purposes mentioned in this Clause 13.10 and subject to the limitations herein contained, Sublessor and any inspector may gain access to the Aircraft, including the Aircraft Documents. Sublessee shall forthwith effect such repairs to the Aircraft as such inspection may reasonably show are required for the terms of this Agreement to be complied with but if it fails to do so after receipt of notice requiring it to do so from Sublessor, Sublessor may at the cost and expense of Sublessee, itself arrange for such repairs to be carried out. Sublessee shall on demand reimburse the costs and expenses incurred by Sublessor in effecting such repairs. 13.11 Registration Sublessee shall at its own expense: 13.11.1 provide that the Aircraft and the interests of the parties set out below is duly registered, recorded or filed with the Aviation Authority (to the extent that the Aviation Authority permits registration in that manner) as follows: (i) Owner Trustee as owner; (ii) the first priority security interest of Sublessor's Lender; (iii) Sublessor's interest, by filing the Sublease Supplement; and maintain or provide the maintenance of such registration throughout the Lease Term. Sublessee shall further provide that the interests of any successors and assigns to the parties referred to in this paragraph will be filed and recorded with the FAA and that such recordation will be maintained in the same manner as required herein. Sublessee will not take any action or omit to take any action that will invalidate any such registration or recordation. Sublessee shall not change the State of Registration without Sublessor's prior written consent. 13.11.2 provide that at all times during the Lease Term, the Aircraft possesses a valid current FAA Certificate of Airworthiness (or if the Aircraft is registered with an Aviation Authority other than the FAA, the equivalent for the time being of such a certificate), and all such other certificates, licenses, permits and authorizations as are from time to time required for the use and operation of the Aircraft for the public transport of passengers or cargo from any Government Entity having jurisdiction in any country, state, province or other political subdivision in or over which the Aircraft is flown including without limitation any Aviation Authority. Sublessee shall, prior to the Delivery Date, provide Sublessor with certified true copies of its current Certificate of Public Convenience and Necessity and its Operating Certificate, the latter of which shall include reference to the Aircraft. 13.12 Name Plates On the Delivery Date or as soon thereafter as is reasonably practicable, Sublessee shall affix and thereafter maintain, or procure the affixation and maintenance of, in a prominent position in the cockpit of the Aircraft and on each Engine a fireproof metal nameplate bearing a legible inscription in a form reasonably required by Sublessor, denoting the name of (i) First Security Bank, National Association as Owner Trustee; (ii) Indigo Pacific, AB. as Sublessor of the Aircraft; and (iii) Sublessor's Lender as mortgagee and stating the Aircraft type, manufacturer's serial number and current registration letters of the Aircraft. Except as above provided Sublessee will not allow the name of any person to be placed on the Airframe or on any Engine as a designation that constitutes a claim of ownership or a claim of any Security Interest; provided that nothing herein contained shall prohibit Sublessee (or any person to which possession of the Airframe or any Engine is delivered or transferred in accordance with Clauses 14 and 15) from placing its customary colors and insignia on the Airframe. 13.13 Geneva Convention Whenever the State of Registration is a signatory state that has ratified the Geneva Convention, Sublessee shall, at its own cost, do any and all things necessary in the State of Registration to perfect recognition of the interests of Owner Trustee and Sublessor's Lender to the Aircraft by every other signatory state that has ratified such Convention. 13.14 Merger and Shareholding Sublessee will not sell its business to or operate its business in any other corporate form or entity (the new entity) unless (a) such new entity is solvent and duly organised and existing under the Law of the State of Incorporation or any state of the United States of America and the new entity has executed and delivered to Sublessor an agreement in form and substance acceptable to Sublessor assuming the due and punctual performance and observance of each of the terms of this Agreement and the other Transaction Documents, and (b) immediately after such sale or the giving effect to such operation as that new entity, the tangible net worth of such new entity is equal to or greater than that of Sublessee and the creditworthiness of such new entity does not, in Sublessor's reasonable opinion, adversely affect the ability of such new entity to perform its obligations under this Agreement and the other Transaction Documents or any Other Agreements and (c) the new entity is a US Air Carrier authorised to transport passengers in common carriage. Sublessee will give Sublessor prior written notice of any such proposed sale or change in operation together with a request of Sublessors approval. Sublessee shall reimburse Sublessor within ten (10) days of Sublessor's invoice for all reasonable out-of-pocket expenses incurred by Sublessor as a result of such proposed merger whether or not Sublessor approves and whether or not it actually occurs. 13.15 Ownership Sublessee shall not hold itself out as owner of the Aircraft and, on all occasions when the ownership of the Aircraft or any part of it is relevant, will make clear to third parties that title to the same is held by Owner Trustee subject to the Mortgage in favour of Sublessor's Lender. 13.16 Maintenance of Principal Business Place Sublessee shall maintain its principal place of business and chief executive office and the office where it keeps its business and financial records and files concerning the Transaction Documents at the location specified in the opening paragraph hereof. Sublessee shall hold and preserve such records and files concerning the Transaction Documents and shall permit representatives of Sublessor at any time during normal business hours to inspect and make abstracts from such records and files. Sublessee shall give Sublessor at least 30 days' prior written notice of any change in Sublessee's principal place of business and chief executive office, and shall co-operate with Sublessor in executing and delivering all such documents as Sublessor may reasonably request which are required or desirable as a result of such change of principal place of business of Sublessee. 13.17 Maintenance of Flight Records Sublessee shall maintain flight records pertaining to the Aircraft required to be maintained pursuant to section 47.9(e) of the FAR at the address given in Clause 3.1(t) hereof and shall hold and preserve such records at such address and permit inspection of such records by the FAA, the Sublessor, the Owner Trustee and Sublessor's Lender. Sublessor shall give Sublessee at least 30 days prior written notice of change in location of the flight records of the Aircraft. 13.18 Substitution of Aircraft Sublessee and Sublessor shall use reasonable endeavours to agree within 90 days of the date of this Agreement the basis whereby Sublessor may substitute a 737-200 aircraft for the Aircraft. 13.19 UCC Finance Statement. Sublessee undertakes to file, within 2 Business Days of the date of this Agreement, a UCC-1 financing statement with the Colorado Division of Corporations and Commercial Code executed by Sublessee for precautionary purposes under Section 9-408 of the UCC. 14. Possession 14.1 No Relinquishment of Possession Sublessee shall not sub-lease or otherwise deliver, transfer or relinquish possession of the Airframe or any Engine or install any Engine or permit any Engine to be installed, on any airframe other than the Airframe, provided that, (i) so long as no Default shall have occurred and be continuing, (ii) Sublessee continues to be fully responsible to Sublessor for all its obligations hereunder and (iii) Sublessee in advance, obtains written acknowledgement(s) of Sublessor's Lender's Security Interest in the Airframe and/or any Engines from any person who will be in possession of the Airframe and/or any Engine in the form and substance requested by Sublessor, Sublessee may; 14.1.1 subject any Engine to normal interchange or pooling agreements or arrangements in each case customary in the airline industry and entered into by Sublessee in the ordinary course of its business with a commercial air operator which is approved by Sublessor in writing and on terms and conditions that Sublessor has approved (such approval not to be unreasonably withheld) (any such commercial air operator being hereinafter called a Permitted Air Carrier) provided THAT the terms of this Agreement shall be observed and if either: (i) Owner Trustee's title to the Engine shall be divested under the terms of any such agreement or arrangement, or (ii) any Permitted Air Carrier shall have possession of any such Engine under any such agreement or arrangement for more than ninety (90) days, Sublessee shall forthwith substitute, or procure the substitution of, a Replacement Engine therefor in accordance with and which satisfies the conditions of Clause 17.6; 14.1.2 deliver possession of the Airframe or any Engine to the manufacturer thereof for testing or other similar purposes or to any organisation for service, repair, maintenance or overhaul work on the Airframe or such Engine or any part thereof or for alterations or modifications in or additions to the Airframe or such Engine to the extent required or permitted by the terms of Clauses 17.4 and 17.5; 14.1.3 install an Engine on an airframe owned by Sublessee and operated by and under the operating control of flight crew engaged by Sublessee which is free and clear of all Security Interests, except (i) Permitted Liens, (ii) Security Interests that apply only to the engines (other than Engines), appliances, parts, instruments, appurtenances, accessories, furnishings and other equipment (other than Parts) installed on such airframe but not to the airframe as an entirety and (iii) the rights of Permitted Air Carriers under normal interchange agreements which are customary in the airline industry and do not contemplate, permit or require the transfer of title to the airframe or engines installed thereon; 14.1.4 install an Engine on an airframe operated by Sublessee that is owned by or leased or subleased to Sublessee and/or subject to any security agreement, provided that (i) such airframe is free and clear of all Security Interests except the rights of the parties to any security agreement covering such airframe and except Permitted Liens and any Security Interests or rights of the type permitted by sub-paragraphs (ii) and (iii) of Clause 14.1.3 and (ii) Sublessee shall have obtained from the Sublessor or secured party, as relevant, of such airframe a written agreement, which may be in the Sublease agreement or security agreement in respect of such airframe, in form and substance satisfactory to Sublessor (it being understood that an agreement from such Sublessor or secured party to substantially the same effect as the agreement of Sublessor set forth in the final sentence of Clause 14.3 shall be deemed to be satisfactory to Sublessor), whereby such Sublessor or secured party expressly agrees that neither it nor its successors or assignees will acquire or claim any right, title or interest in any Engine by reason of such Engine being installed on such airframe at any time while such Engine is subject to this Agreement; 14.1.5 install an Engine on an airframe owned by Sublessee, leased or subleased to Sublessee, or purchased by Sublessee, subject to any security agreement under circumstances where neither Clause 14.1.1 nor 14.1.2 can be fulfilled in the circumstances, provided that it would otherwise have resulted in an unreasonable disruption of the operation of the Aircraft or the business of the Sublessee and in such event Sublessee shall, as promptly as possible and in any event within fifteen (15) days substitute a Replacement Engine therefor in accordance with Clause 17.6 and which satisfies the conditions specified in Clause 17.6; 14.1.6 sub-lease the Aircraft or Airframe to any person provided that the Aircraft or Airframe is operated by, and remains throughout the term of such sub-lease under the operational control of, flight crew engaged by Sublessee, and provided further that: (i) no Default has occurred and is continuing; (ii) any such sublease will not result in any change in the State of Registration; (iii) the length of any such sublease does not extend beyond twelve months (including any renewals); (iv) the sub-Sublessee shall acknowledge that its rights are subordinate to Sublessor's rights under this Agreement and the rights Sublessor's Lender under any finance document or security document entered into by Owner Trustee or Sublessor in relation to the Aircraft; (v) the conditions in clause 14.1.7 are satisfied in respect of that sub-lease; 14.1.7 sublease the Aircraft or Airframe to any wholly-owned subsidiary of Sublessee on terms that the Aircraft or Airframe is not operated by, and does not remain under the operational control of, flight crew engaged by Sublessee provided that the following conditions are satisfied in relation to any such sublease hereunder: (i) no Default has occurred and is continuing; (ii) the sub-lease shall acknowledge that its rights are subordinated to the rights of Sublessor, Owner Trustee and Sublessor's Lender under any finance or security document entered into between Sublessor and/or Owner Trustee and Sublessor's Lender in relation to the Aircraft. (iii) the proposed sub-Sublessee and the proposed form of the sublease is approved by Sublessor and Sublessor's Lender in writing, including any proposed right to sub-sub-lease the Aircraft which must be approved by Sublessor and Sublessor's Lender at its absolute discretion; (iv) the sublease shall terminate on or before termination of this Agreement and the terms and conditions of the sublease are not inconsistent with those contained in this Agreement or any finance or security document entered into between Sublessor and/or Owner Trustee and/or Sublessor's Lender and the sub-Sublessee shall acknowledge that its rights are subordinate to Sublessor's rights under this Agreement (provided that the sublease shall not permit further sub-leasing); (v) the Insurances are in full force and effect in accordance with the terms of this Agreement and, if the sub-Sublessee is to maintain such insurances during the term of such sub-lease, it shall have furnished to Sublessor all such documents, evidence and information relating to such insurances which Sublessee is required to furnish or cause to be provided to Sublessor under this Agreement; (v) if the Aviation Authority for the duration of the sublease is to be other than the FAA, Sublessor and Sublessor's Lender approves the change of registration and Sublessor receives (x) an opinion of counsel in the State of Registration in form and substance reasonably satisfactory to Sublessor and the Sublessor's Lender which opinion must, at least, address the satisfactory recognition of Owner Trustee's ownership of, and Sublessor's Lender's Security Interest in the Aircraft and (y) evidence that all actions recommended in such opinion have been or will be duly taken; (vi) the proposed Sublessee is a US Air Carrier authorised to transport passengers in common carriage. No less than three (3) Business Days after the execution of any sub-lease entered into by Sublessee under Clause 14.1.6 or Clause 14.1.7 Sublessee shall provide Sublessor with a copy of such executed sub-lease. 14.2 Sublessee Primarily Liable Notwithstanding anything contained in Clause 14.1, Sublessee shall remain primarily liable hereunder for the performance of all of the terms of this Agreement to the same extent as if such sublease or transfer had not occurred. No interchange agreement, sublease or other relinquishment of possession of the Airframe or any Engine permitted by this Clause 14 shall in any way discharge or diminish any of Sublessee's obligations hereunder. 14.3 Recognition of Rights If Sublessee shall have obtained from the sublessor or secured party of any engine subleased to Sublessee or owned by Sublessee subject to any Security Interest, a written agreement complying with the terms of sub-paragraph (ii) of Clause 14.1.4, Sublessor hereby agrees for the benefit of such sublessor or secured party that Sublessor shall not acquire or claim, as against such sublessor or secured party, any right, title or interest in any such engine as a result of such engine being installed on the Airframe at any time while such engine is subject to such sublease or security agreement and owned by such sublessor or subject to a Security Interest in favour of such secured party and Sublessor shall, at the request of Sublessee, confirm such agreement in writing for any such sublessor or secured party. 15. Security interests 15.1 Title Sublessee shall not do, or permit to be done, any act which might reasonably be expected to jeopardise the interest of Owner Trustee, Sublessor or Sublessor's Lender. Sublessee shall make clear to all third parties that legal title to the Aircraft is owned by Owner Trustee, subject tothe Mortgage or the relevant title holder advised by Sublessor. 15.2 No Security Interests; Base of Aircraft Sublessee shall not create, incur or permit to subsist over the Aircraft or any part thereof any Security Interest other than Permitted Liens. 15.3 Notice to Sublessor Sublessee shall notify Sublessor: (i) as and when it becomes aware of the same, of any Security Interest (x) (excluding Permitted Liens) arising over the Aircraft or any Engine or other major part thereof or (y) (in the case of all Security Interests including Permitted Liens) exercised over the Aircraft or any Engine or other major part thereof or (z) of any arrest or detention or purported or attempted arrest or detention of the Aircraft; and (ii) promptly on request of Sublessor of the location of the Airframe and each Engine including an Engine that is not for the time being installed on the Airframe. 15.4 Procure Release Sublessee shall as soon as possible and in any event within five (5) Business Days of becoming aware of the same procure the release of any Security Interest (other than Permitted Liens) arising over the Aircraft or any part thereof and procure the release of the Aircraft from any arrest or detention to which it is subject. 16. Maintenance and repair 16.1 General Obligations 16.1.1 Sublessee shall at its own expense at all times during the Lease Term: (a) maintain, service, repair, overhaul and test the Aircraft and all Parts thereon and equipment thereon and Parts and equipment therein (whether or not such Parts and equipment are the property of Sublessor), or procure the same, in accordance with the applicable requirements of the Aviation Authority and the Insurances and comply with all Airworthiness Directives and alert service bulletins issued by the Manufacturer (unless to do so would be in breach of the Aviation Authority's requirements, in which case the Aviation Authority's requirements shall prevail) and the MPD so as to keep the Aircraft in good operating condition, ordinary wear and tear excepted, and in accordance with sound international aviation industry practice and in such condition as may be necessary to enable (i) the airworthiness certification of the Aircraft with the Aviation Authority to be maintained in good standing at all times during the Lease Term (ii) the issuance of a standard certificate of airworthiness for transport category aircraft issued by the Aviation Authority in accordance FAR Part 21 and, (iii) the Aircraft to be placed on the operations specifications of a U.S. airline in accordance with Part 121 of the FARs. (b) maintain, service, repair, overhaul and test the Aircraft, in the same manner and with the same care as used by Sublessee with respect to similar aircraft and engines operated by Sublessee and without in any way adversely discriminating against the Aircraft; (c) maintain, or procure the maintenance of, the Aircraft Documents including technical records and any other records, logs and other materials required by the FAA to be maintained in respect of the Aircraft in the English language and permit Sublessor or its agent to examine such records, logs and other materials at any reasonable time upon reasonable notice. 16.1.2 The maintenance programme and performer shall be approved by the Sublessor with such approval not to be unreasonably withheld. 16.2 Specific Obligations Without limiting Clause 16.1, Sublessee agrees that the performance by Sublessee of such maintenance and repairs will include but will not be limited to each of the following specific items: (i) performance in accordance with the Maintenance Program of all routine and non-routine maintenance work; (ii) incorporation in the Aircraft of all applicable Airworthiness Directives or equivalent, all alert service bulletins of Manufacturer, Engine manufacturer and other vendors or manufacturers of Parts incorporated on the Aircraft and any service bulletins which must be performed in order to maintain the warranties on the Aircraft, Engines and Parts; (iii) incorporation in the Aircraft of all other service bulletins of Manufacturer, the Engine Manufacturer and other vendors which Sublessee schedules to adopt within the Lease Term for the major part of its Boeing aircraft fleet. It is the intent of the parties that the Aircraft will not be discriminated from the rest of Sublessee's fleet in service bulletin compliance (including method of compliance) or other maintenance matters. Sublessee will not discriminate against the Engines with respect to Overhaul build standards and life limited part replacements; (iv) incorporation into the Maintenance Program for the Aircraft of a corrosion prevention and control program as recommended by Manufacturer, the Aviation Authority and the FAA and the correction of any discrepancies in accordance with the recommendations of Manufacturer and the Structural Repair Manual. In addition, all inspected areas will be properly treated with corrosion inhibitor as recommended by Manufacturer; (v) incorporation into the Maintenance Program of an anti-fungus/biological growth and contamination prevention, control and treatment program of all fuel tanks in accordance with Manufacturer's approved procedures; (vi) providing without delay written summaries of all sampling programs and amendments thereof involving or affecting the Aircraft; (vii) maintaining in English and keeping in an up-to-date status all relevant records and historical documents; (viii) maintaining historical records, in English, for condition-monitored, hard time and life limited Parts (including tags from the manufacturer of such Part or a repair facility which evidence that such Part is new or overhauled and establish authenticity, total time in service and time since overhaul for such Part), the hours and cycles the Aircraft and Engines operate and all maintenance and repairs performed on the Aircraft; (ix) properly documenting all repairs, modifications and alterations and the addition, removal or replacement of equipment, systems or components in accordance with the rules and regulations of the Aviation Authority and reflecting such items in the Aircraft Documentation. In addition, all repairs, to the Aircraft will be accomplished in accordance with Manufacturer's Structural Repair Manual, where possible, or approved data from the Manufacturer accepted by the Aviation Authority; (x) ensuring that Overhauls are accomplished utilising maintenance and quality control procedures approved by the Aviation Authority and that the repair agency provides a complete record of all work performed during the course of such Overhaul and certifies that such Overhaul was accomplished, that the equipment is airworthy and released for return to service and that the Overhaul was in conformity with the original type design. 17. replacement of parts 17.1 Replacement of Parts Sublessee shall, at its own expense, promptly replace, or procure the replacement of, all Parts that become worn out, lost, stolen, destroyed, seized, confiscated, damaged beyond economical repair or permanently rendered unfit for use for any reason whatsoever, except as otherwise provided in Clause 17.4 or 17.5. In addition, Sublessee may at its own cost and expense, remove, or permit the removal of any Parts including Engines , whether or not worn out, lost, stolen, destroyed, seized, confiscated, damaged beyond repair or permanently rendered unfit for use, provided that Sublessee shall, except as otherwise provided in Clause 17.7, at its own cost and expense, immediately replace, or procure the replacement of, such Parts. Title to all replacement Parts shall be vested in Owner Trustee, subject to the Mortgage free and clear of all Security Interests except Permitted Liens and shall, except as otherwise provided in Clause 17.7, be in as good operating condition as, and shall have a value, age, configuration and utility at least equal to, the Parts replaced, assuming such replaced Parts were in the condition and repair required to be maintained by the terms hereof, and shall have a current "serviceable tag" of the manufacturer or maintenance facility providing such items to Sublessee. 17.2 Title to Replacement Parts All Parts at any time removed from the Airframe or any Engine shall remain the property of Owner Trustee and subject to the terms of this Agreement, no matter where located, until such time as such Parts shall be replaced by parts that have been incorporated or installed in or attached or added to the Airframe or Engine and which meet the requirements for replacement parts specified above. Immediately upon any replacement part becoming incorporated or installed in or attached or added to the Airframe or any Engine as above provided, without further act, (a) title to the replaced Part shall thereupon vest in Sublessee, free and clear of all rights of Owner Trustee, shall cease to be subject to this Agreement and shall no longer be deemed a Part hereunder and (b) title to such replacement part shall pass to Owner Trustee, subject to the Mortgage free and clear of all Security Interests except Permitted Liens and such replacement part shall become subject to this Sublease Agreement and be deemed part of the Airframe or Engine for all purposes hereof to the same extent as the Parts originally incorporated or installed in or attached or added to such Airframe or Engine and shall become a Part hereunder. 17.3 Pooling of Parts Any Part removed from the Airframe or any Engine as provided in Clause 17.1 or 17.2 may be subjected to a normal pooling arrangement customary in the airline industry entered into in the ordinary course of Sublessee's business, provided that the part replacing such removed Part shall be incorporated or installed in or attached to the Airframe or such Engine in accordance with Clause 17.1 and 17.2 as soon as practicable after the removal of such removed Part. Without prejudice to the generality of the foregoing sentence, any replacement part when incorporated or installed in or attached to the Airframe or any Engine may be owned by a third person subject to such a normal pooling arrangement, provided that Sublessee, at its own expense, as promptly thereafter as possible, either (a) causes title to such replacement part to vest in Owner Trustee in accordance with Clause 17.1 and 17.2 free and clear of all Security Interests except Permitted Liens, or (b) replaces or procures the replacement of such replacement part by the incorporation or installation in or attachment to such Airframe or Engine of a further replacement part (which meets the requirements of this clause 17) free and clear of all Security Interests except Permitted Liens and by causing title to such further replacement part to vest in the Owner Trustee subject to the Mortgage in accordance with Clause 17.1 and 17.2 and such further replacement part shall forthwith be deemed part of the Airframe or Engine to the same extent as the Part originally incorporated or installed in or attached to the Airframe or such Engine and shall become a Part hereunder. 17.4 Alterations Sublessee shall at its own expense, make, or procure the making of, such alterations and modifications in and additions to the Airframe and Engines as may be required from time to time to meet the standards of the Aviation Authority or any Government Entity having jurisdiction in any country, state, county or other political subdivision in or over which the Aircraft is flown or the FAA and any mandatory service bulletins of the Manufacturer. In addition, Sublessee may, at its own expense, from time to time, make, or procure the making of, such alterations and modifications in and additions including the making of any improvements to the Airframe or any Engine as Sublessee may deem desirable in the proper conduct of its business, including, removal of Parts (for purposes of this Clause, "Obsolete Parts") which Sublessee deems obsolete or no longer suitable or appropriate for use in the Airframe or such Engine, provided that no such alteration, modification, addition or removal shall cost over US$ 200,000, or alter the fundamental nature of the Aircraft as a passenger carrying aircraft, or change its original type design or configuration, or materially diminish the value or utility of the Airframe or any such Engine, or impair the condition or airworthiness thereof, below the value, utility, condition and airworthiness thereof immediately prior to such alteration, modification, addition or removal assuming such Airframe or Engine was then in the condition and repair required to be maintained by the terms of this Agreement. Title to all Parts incorporated or installed in or attached or added to the Airframe or any such Engine as the result of such alteration, modification or addition shall be vested in Owner Trustee, subject to the Mortgage and shall forthwith be deemed part of the Airframe or such Engine. Neither Owner Trustee, Sublessor's Lender nor Sublessor shall be required under any circumstances to pay directly for any alteration, modification or addition to the Aircraft or to reimburse Sublessee for the cost thereof. Any other alterations other than those permitted according to Clause 17.5 require Sublessors prior written consent, which consent shall not be unreasonably withheld or delayed. 17.5 Removal of Parts Notwithstanding the foregoing, so long as no Default shall have occurred and be continuing, Sublessee may remove, or permit the removal of, at any time during the Lease Term, any Part, provided that (a) such Part is in addition to, and not in replacement of or substitution for, any Part originally incorporated or installed in or attached to the Airframe or any Engine at the time of delivery thereof to Sublessee or in replacement of, or substitution for, any such Part, (b) such Part is not required to be incorporated or installed in or attached or added to the Airframe or such Engine pursuant to the terms of Clause 17.4 or 17.5, and (c) such Part can be removed from the Airframe or such Engine without causing damage to the Airframe or such Engine or if it causes any such damage is to be repaired and promptly thereafter is repaired and without diminishing or impairing the value, utility, condition or airworthiness required to be maintained by the terms of this Agreement that the Airframe or such Engine would have had at such time had such alteration, modification or addition not occurred assuming it was in the condition and repair required to be maintained under this Agreement. Upon the removal of any Part as provided in the immediately preceding sentence and the removal of any Obsolete Part, title thereto shall, without further act, vest in Sublessee, free and clear of all rights of Owner Trustee, Sublessor's Lender and Sublessor and such Part shall no longer be deemed part of the Airframe or Engine from which it was removed. Any Part not so removed shall remain the property of Owner Trustee subject to the Mortgage. 17.6 Substitution of Engine In addition to its rights under Clause 14, Sublessee shall have the right at its option at any time, on at least thirty (30) days' prior written notice to Owner Trustee, Sublessor's Lender and Sublessor, to substitute or procure the substitution of a CFM INTERNATIONAL CFM 56-3C1 engine or an engine of an improved model suitable for installation and use on the Airframe for any such Engine not then installed or held for use on the Airframe. Any such engine that is substituted in accordance with the provisions of this Clause 17.6 and that complies with the requirements of this Clause 17.6 being a "Replacement Engine" provided that title to the Replacement Engine shall be vested in Owner Trustee, subject to the Mortgage free and clear of all Security Interests, other than Permitted Liens, and the Replacement Engine shall have a value and utility and maintenance status, including time since last Engine Performance Restoration Visit, at least equal to the replaced Engine and time since new no greater than the replaced Engine as reasonably determined by Sublessor, assuming that such Engine was in the condition and repair required to be maintained by the terms of this Agreement and Sublessee shall deliver such documents including a bill of sale, Sublease Supplement, and opinion of counsel as to title and recordation with the FAA, as Sublessor may reasonably request to evidence the foregoing. In such event, immediately upon the effectiveness of such substitution on the date set forth in such notice and without further act: (a) title to the replaced Engine shall thereupon vest in Sublessee free and clear of all rights of Owner Trustee, Sublessor's Lender and Sublessor, and the replaced Engine shall cease to be subject to this Agreement and shall no longer be deemed an Engine hereunder; and (b) title to such Replacement Engine shall vest in Owner Trustee subject to the Mortgage free and clear of all Security Interests except Permitted Liens and such Replacement Engine shall become subject to this Agreement and an Engine hereunder and be deemed part of the Aircraft for all purposes hereof. 17.7 Temporary Removal of Parts Sublessee shall be entitled, so long as no Default shall have occurred which has not been remedied or waived to the reasonable satisfaction of Sublessor, to substitute, replace or renew any Part with a part that does not satisfy the requirements of Clause 17.1 or 17.2 provided that: (a) there shall not have been available to Sublessee, at the time and in the place that such substitute or replacement part was required to be installed on the Airframe or Engines a substitute or replacement part complying with the requirements of Clause 17.1 and 17.2; (b) it would have resulted in an unreasonable disruption of the operation of the Aircraft or the business of Sublessee as an airline to have grounded the Aircraft until such time as a substitute or replacement part complying with the requirements of Clause 17.1 and 17.2 became available for installation in or on the Aircraft; (c) Sublessee shall have notified Sublessor prior to or, in the case of an extreme urgency as soon as possible after, the making of such substitution, replacement or renewal of any material Part; (d) as soon as possible after installation of the same in or on the Airframe or Engine (and in any event no later than fifteen (15) days thereafter) Sublessee shall remove any such part not complying with the requirements of Clause 17.1 and 17.2 and replace or substitute the same with a Part complying with such requirements. 17.8 If any replacement Part is incapable of becoming the property of the Sublessor free of all Security Interests (other than Permitted Liens) as required by clause 17 the part which is has replaced shall, unless the Sublessor shall otherwise agree in writing be kept and maintained by the Sublessee until the last day of the Lease Term and replaced on the Aircraft in working order before the Aircraft is re-delivered to the Sublessor on the termination or expiry of the hiring of the Aircraft hereunder. 17.9 Re-delivery Notwithstanding any term hereof, unless Sublessor consents in writing, the Aircraft when re-delivered shall contain the Engines and Parts installed on the Aircraft at Delivery. 18. manufacturer's warranties 18.1 Authorization (a) With effect from Delivery, Sublessor authorizes Sublessee to exercise such rights as Sublessor may have in relation to any warranty with respect to the Aircraft, any Engine or any Part made by any manufacturer, vendor, subcontractor, maintenance facility, including the maintenance facility that performed the Delivery Work, or supplier subject to Sublessee notifying Sublessor in writing of any warranty claim of a material nature and keeping Sublessor continuously informed of the development of such warranty claim. To the extent that the same may not be exercised by Sublessee, Sublessor agree to, at the sole cost and expense of Sublessee, enforce such rights as Sublessor may have with respect thereto for the benefit of Sublessee. Sublessor shall also have the right, rather than enforcing or making such claim on behalf of Sublessee under such warranties, to appoint Sublessee as its agent for such purpose, and in such instance, Sublessee agrees to accept such appointment and make such claims and enforce such warranties at its sole cost and expense. This authorization shall cease on the Expiry Date. Sublessee shall not be entitled to exercise its authorisation hereunder, while a Default is continuing (during which time all such rights shall revert to Sublessor and Sublessor hereby agrees to exercise and enforce such rights during such period). (b) Sublessee shall give Sublessor prompt written notice of any warranty claim that is settled with Sublessee on the basis of a total or partial cash payment. Any cash payments shall be applied to remedy the defect subject to such warranty claim unless Sublessor otherwise consents in writing. Any cash payments to Sublessee in respect of warranty claims that (either with Sublessor's written consent or because the defect can not be remedied) are not applied to the repair or remedy of defects in the Aircraft or to compensate Sublessee for the costs incurred for any such repair or remedy, and which are not in respect of compensation for loss of use of the Aircraft, an Engine or Part during the Lease Term due to a defect covered by such warranty, shall be for Sublessor's account. 18.2 Proceeds So long as no Default has occurred and is continuing, Sublessor agrees subject to Clause 18.1(b) to co-operate with Sublessee to cause any proceeds from any rights assigned by Sublessor to Sublessee under Clause 18.1 to be paid directly to Sublessee, and, if any such proceeds are nonetheless paid to Sublessor, Sublessor agrees to remit promptly such proceeds to Sublessee. However, while a Default is continuing, Sublessor may immediately: (a) retain for its own account any such proceeds previously paid to Sublessor which would have been remitted to Sublessee under this Clause 18.2 in the absence of such Default or Event of Default; and (b) cause any proceeds of any pending claims to be paid to Sublessor, rather than to Sublessee. Once the Default is cured, Sublessor shall reimburse Sublessee to the extent that it would have been obliged to under this Clause 18.2 had no such Default occurred. 18.3 Agreements with Manufacturers To the extent that any warranties relating to the Aircraft are made available under an agreement between any manufacturer, vendor, subcontractor or supplier and Sublessee, Sublessee will: (a) apply the proceeds of any claim under such agreement in accordance with Clause 18.2; and (b) take all such steps as are necessary at the end of the Lease Term to ensure that the benefit of any of those warranties that have not expired is vested in Sublessor. 18.4 Operation Contrary to Warranties Sublessee shall not operate the Aircraft contrary to the terms of any warranty referred to in Clause 18.1(a) (provided that Sublessor advises Sublessee of the terms of such warranty). 19. Disclaimers SUBLESSOR AND SUBLESSEE AGREE THAT THE DISCLAIMERS, WAIVERS AND CONFIRMATIONS SET FORTH IN CLAUSES 19.1 THROUGH 19.5 BELOW SHALL APPLY AT ALL TIMES DURING THE LEASE TERM WITH EFFECT FROM SUBLESSEE'S ACCEPTANCE OF THE AIRCRAFT BY EXECUTION OF THE CERTIFICATE OF ACCEPTANCE, WHICH SHALL BE CONCLUSIVE EVIDENCE THAT SUBLESSEE HAS FULLY INSPECTED THE AIRCRAFT AND EVERY PART THEREOF AND THAT THE AIRCRAFT, THE ENGINES, THE PARTS AND THE AIRCRAFT DOCUMENTS ARE IN ALL RESPECTS ACCEPTABLE TO SUBLESSEE (SAVE AS EXPRESSLY NOTED ON THE ACCEPTANCE CERTIFICATE) AND ARE IN SUITABLE CONDITION FOR DELIVERY TO AND ACCEPTANCE BY SUBLESSEE. 19.1 As Is, where Is AS BETWEEN SUBLESSOR AND SUBLESSEE: (a) PRIOR TO DELIVERY HEREUNDER, SUBLESSEE HAD THE OPPORTUNITY TO INSPECT THE AIRCRAFT, ACCORDINGLY, SUBLESSEE UNCONDITIONALLY ACKNOWLEDGES AND AGREES THAT EXCEPT AS SPECIFICALLY SET FORTH IN ANY OF THE TRANSACTION DOCUMENTS NEITHER OWNER TRUSTEE, SUBLESSOR'S LENDER, OR SUBLESSOR, NOR ANY OF THEIR RESPECTIVE OFFICERS, DIRECTORS, EMPLOYEES AND/OR REPRESENTATIVES HAVE MADE OR WILL BE DEEMED TO HAVE MADE ANY TERM, CONDITION, REPRESENTATION, WARRANTY OR COVENANT EXPRESSED OR IMPLIED (WHETHER STATUTORY OR OTHERWISE) AS TO (i) THE CAPACITY, AGE, AIRWORTHINESS, VALUE, QUALITY, DURABILITY, DESCRIPTION, CONDITION (WHETHER OF THE AIRCRAFT, ANY ENGINE, ANY PART THEREOF OR THE AIRCRAFT DOCUMENTATION), DESIGN, WORKMANSHIP, MATERIALS, INCLUDING DELIVERY WORK AS DEFINED IN SCHEDULE 2, MANUFACTURE, CONSTRUCTION, OPERATION, DESCRIPTION, STATE, MERCHANTABILITY, PERFORMANCE, FITNESS FOR ANY PARTICULAR USE OR PURPOSE (INCLUDING THE ABILITY TO OPERATE OR REGISTER THE AIRCRAFT OR USE THE AIRCRAFT DOCUMENTATION IN ANY OR ALL JURISDICTIONS) OR SUITABILITY OF THE AIRCRAFT OR ANY PART THEREOF, AS TO THE ABSENCE OF LATENT OR OTHER DEFECTS, WHETHER OR NOT DISCOVERABLE, KNOWN OR UNKNOWN, APPARENT OR CONCEALED, EXTERIOR OR INTERIOR, (ii) THE ABSENCE OF ANY INFRINGEMENT OF ANY PATENT, TRADEMARK, COPYRIGHT OR OTHER INTELLECTUAL PROPERTY RIGHTS, OR (iii) ANY OTHER REPRESENTATION OR WARRANTY WHATSOEVER, EXPRESS OR IMPLIED WITH RESPECT TO THE AIRCRAFT OR ANY PART THEREOF, ALL OF WHICH ARE HEREBY EXPRESSLY EXCLUDED AND EXTINGUISHED. (b) Waiver of Warranty of Description. EXCEPT AS SPECIFICALLY OTHERWISE SET FORTH IN ANY OF THE TRANSACTION DOCUMENTS, SUBLESSEE HEREBY AGREES THAT ITS ACCEPTANCE OF THE AIRCRAFT AT DELIVERY AND ITS EXECUTION AND DELIVERY OF THE ACCEPTANCE CERTIFICATE WILL RE-AFFIRM AND INDEPENDENTLY CONSTITUTE ITS WAIVER OF THE WARRANTY OF DESCRIPTION AND ANY CLAIMS IT MAY HAVE, AND OF ANY RIGHT TO MAKE ANY CLAIM AGAINST OWNER TRUSTEE, SUBLESSOR'S LENDER, OR SUBLESSOR BASED UPON THE FAILURE OF THE AIRCRAFT TO CONFORM WITH SUCH DESCRIPTION OR ANY AIRCRAFT SPECIFICATIONS AND ITS AGREEMENT NOT TO LOOK TO OWNER TRUSTEE, SUBLESSOR'S LENDER, OR SUBLESSOR FOR DAMAGES OR RELIEF ARISING OUT OF THE FAILURE OF THE AIRCRAFT TO CONFORM TO SUCH DESCRIPTIONS OR SPECIFICATIONS, NOTWITHSTANDING ANY ASSURANCES FROM SUBLESSOR, THE DIFFICULTY OF DISCOVERING ANY DEFECT OR ITS ASSUMPTION THAT ANY NONCONFORMITY WOULD BE CURED. (c) With All Faults. Sublessee agrees that it is leasing the Aircraft "AS IS, WHERE IS AND WITH ALL FAULTS". (d) Sublessee Waiver. Except as specifically permitted in any of the Transaction Documents, sublessee hereby waives as between itself and Owner Trustee and Sublessor and agrees not to seek to establish or enforce any rights and remedies, express or implied (whether statutory or otherwise) against Owner Trustee, Sublessor or the Aircraft relating to any of' the matters mentioned in Clause 19.1 and the leasing thereof by Sublessor to Sublessee. (e) Sublessee Examination of Aircraft. DELIVERY BY SUBLESSEE TO SUBLESSOR OF THE ACCEPTANCE CERTIFICATE IS CONCLUSIVE PROOF AS BETWEEN SUBLESSOR AND SUBLESSEE THAT SUBLESSEE'S TECHNICAL EXPERTS HAD EXAMINED AND INVESTIGATED THE AIRCRAFT, ENGINES AND EACH PART THEREOF AND DETERMINED THAT (1) EACH WAS AIRWORTHY AND IN GOOD WORKING ORDER AND REPAIR AND (II) THE AIRCRAFT, ENGINES, EACH PART THEREOF AND THE AIRCRAFT DOCUMENTATION WERE WITHOUT DEFECT (WHETHER OR NOT DISCOVERABLE AT DELIVERY) AND IN EVERY WAY SATISFACTORY TO SUBLESSEE. 19.2 No Sublessor Liability for Losses Sublessee agrees that Sublessor will not be liable to Sublessee, any sub-Sublessee or any Person, whether in contract or tort or otherwise and however arising, for any unavailability, loss of use or service, cost, loss (consequential or otherwise), liability, damage or delay of or to or in connection with the Aircraft, any Person or property whatsoever, whether on board the Aircraft or elsewhere and irrespective of whether such occurrences arise from any act or omission or the active or passive negligence of Sublessor or Owner Trustee or their agents or representatives excepting only Sublessor's or Owner Trustee or their respective agents or representatives gross negligence or wilful misconduct. 19.3 Exclusion Neither Owner Trustee, Sublessor's Lender or Sublessor shall have any obligation or liability whatsoever to Sublessee, any sub-Sublessee or any other person whether arising in contract, in tort or otherwise and whether arising by reference to negligence or strict liability of Sublessor, Owner Trustee or Sublessor's Lender or otherwise for: (a) any liability, loss or damage (consequential or otherwise) caused or alleged to be caused directly or indirectly by the Aircraft or any Engine or by any inadequacy thereof or deficiency or defect therein or by any other circumstance in connection therewith; (b) the use, operation or performance of the Aircraft or any risks relating thereto; (c) any interruption of service, loss of business or anticipated profits or any other direct, indirect or consequential loss or damage; or (d) the delivery, operation, servicing, maintenance, repair, improvement or replacement of the Aircraft, any Engine or any Part except as otherwise expressly provided under this Agreement. 19.4 Waiver Except as may be specifically permitted by any of the Transaction Documents sublessee hereby waives, as between itself and Owner Trustee, Sublessor's Lender and Sublessor, all its rights in respect of any warranty or representation, express or implied, on the part of Owner Trustee, Sublessor's Lender or Sublessor and all claims against Owner Trustee, Sublessor's Lender or Sublessor howsoever and whenever arising at any time in respect of or out of the matters referred to in Clause 19.1 and waives its rights under Section 2A-517 of the New York Uniform Commercial Code. 19.5 Confirmation Sublessee confirms that the foregoing provisions of this Clause 19 and the following provisions in Clause 20 have been taken into account by both parties in negotiating the rent and other amounts payable under this Agreement. 20. indemnities 20.1 General Sublessee agrees to defend, indemnify and hold harmless on an after Tax basis each of the Indemnitees on demand from and against any and all Losses arising from events occurring during the Lease Term: 20.1.1 that may at any time be suffered or incurred directly or indirectly as a result of or in connection with the possession, delivery, performance, management, ownership, registration, import, control, maintenance, condition, service, repair, overhaul, leasing, subleasing, deregistration, export, manufacture, storage, transportation, design, testing, replacement, use, operation or redelivery of the Aircraft, any Engine or Part (either in the air or on the ground) whether or no such Losses may be attributable to any defect in the Aircraft, any Engine or any Part or to its design, testing or use or otherwise, and regardless of when the same arises (but excluding any injuries or claims which arise prior to Predelivery Acceptance) or whether it arises out of or is attributable to any act or omission, negligent (active or passive) or otherwise, of any Indemnitee (including without limitation claims for death, personal injury, property damage, other loss or harm to any person and claims relating to any Laws, including without limitation environmental control, noise and pollution laws rules or regulations); 20.1.2 that may at any time be suffered or incurred as a consequence of any breach of the Transaction Documents by the Sublessee or by misrepresentation of or breach of warranty by Sublessee; 20.1.3 that may at any time be suffered or incurred as a consequence of any design, article or material in the Aircraft, any Engine or any Part or its operation or use constituting an infringement of patent, copyright, trademark, design or other proprietary right or a breach by Sublessee, or anyone acting by or through Sublessee, of any obligation of confidentiality owed to any person in respect of any of the matters referred to in this Clause 20.1.3, but excluding any Loss in relation to a particular Indemnitee to the extent that such Loss: (i) arises as a direct result of the gross negligence or wilful misconduct of such Indemnitee; or (ii) arises as a direct result of Sublessor Taxes, a Sublessor Lien or a wilful breach by Sublessor of its obligations under any of the Transaction Documents; or (iii) constitutes a Tax or liability for Taxes; 20.2 Survival of Indemnification Notwithstanding anything in this Agreement to the contrary, the provisions of Clause 20.1 shall survive the Expiry Date for one (1) year and continue in full force and effect notwithstanding any breach by Sublessor or Sublessee of the terms of this Agreement, the termination of the Sublease of the Aircraft to Sublessee under this Agreement or the repudiation by Sublessor or Sublessee of this Agreement. 20.3 Notice to Sublessee Sublessor shall promptly after obtaining actual knowledge thereof notify the Sublessee of any claim as to which indemnification is sought; provided that a failure to so notify will not diminish or relieve Sublessee of any obligations hereunder, unless such failure materially adversely affects Sublessees defense of such claim and directly results in a material increase in liability of the Sublessee in respect of such claim or prevents it from materially reducing liability therefor, in which case the Sublessee shall not be required to indemnify such Indemnitee for the amount by which such liability was increased or not reduced. 21. taxation 21.1 Gross-up 21.1.1 All payments by Sublessee under or in connection with this Agreement shall be made without set-off or counterclaim, free and clear of and without deduction for or on account of all Taxes, except Sublessor Taxes, unless Sublessee is required by law to make any such deduction or withholding; 21.1.2 If any Taxes, except Sublessor Taxes, are required to be deducted or withheld from any amount payable hereunder, Sublessee shall pay to Sublessor by way of supplemental Rent such additional amounts, in the same currency as such payment as may be necessary in order that the amount of such payment received by Sublessor on the date of such payment, after deduction or withholding for all such Taxes, will be equal to the amount that Sublessor would have received if such Taxes had not been deducted or withheld. 21.1.3 If any payment is made by Sublessee under Clause 21.1.2 and Sublessor in good faith determines that it is entitled to receive a credit against, or relief or remission for, or repayment of, any Tax paid or payable by Sublessor in respect of or calculated with reference to the deduction or withholding giving rise to such payment, Sublessor shall, to the extent that it can do so without prejudice to the retention of the amount of such credit, relief, remission or repayment and without leaving Sublessor in any worse net after tax position than that in which it would have been had such deduction or withholding not been required to be made, promptly pay to Sublessee such amount as Sublessor shall reasonably have determined to be attributable to the relevant deduction or withholding. 21.2 Tax Indemnity 21.2.1 Sublessee shall indemnify Sublessor on demand against all Taxes (other than Sublessor Taxes) levied or imposed against or upon Sublessor or Sublessee or the Aircraft directly or indirectly in connection with the importation, exportation, registration, ownership, leasing, sub-leasing, purchase, delivery, sale, possession, use, operation, repair, maintenance, overhaul, transportation, landing, storage, presence or redelivery of the Aircraft or any part thereof or any rent, receipts, insurance proceeds, income or other amounts arising therefrom except to the extent that such liability for such Taxes: (i) arises as a result of a Sublessor Lien; or (ii) is directly attributable to Sublessors gross negligence or wilful misconduct; or (iii) relates to any deduction or withholding on any payment to be made to Sublessor that is covered by Clause 21.1; or (iv) imposed as a direct result of the, sale, transfer or assignment or other disposition of the Aircraft or this Agreement by Sublessor, or by any party claiming by or through Sublessor and except (i) any sale, transfer, assignment or other disposition that is made solely as a result of the occurrence of an Event of Default or Total Loss of the Aircraft or any part thereof or interest therein and (ii) any Taxes imposed by the State of Registration. 21.2.2 If Sublessor becomes aware of any claim against Sublessor for any Loss that Sublessee is required to pay or indemnify against pursuant to this Clause 21.2, Sublessor shall as soon as is reasonably practicable notify Sublessee in writing of such claim. If requested in writing by Sublessee that it wishes Sublessor to contest such claim, Sublessor will consult with Sublessee with a view to determining whether there are grounds for contesting such claim. Sublessor will consider in good faith any representation made by Sublessee in this respect. Sublessor shall not be under any obligation to bring any proceedings in respect of any such claim in any court of law or other relevant forum except that Sublessor shall bring such proceedings in the event that tax counsel reasonably acceptable to Sublessor in the relevant jurisdiction provides Sublessor with a legal opinion to the effect that there are legitimate grounds for contesting such claim. Any costs and expenses of any such contest shall be fully indemnified by Sublessee. Further Sublessor shall be under no obligation to take any action in respect of any claim unless it shall previously have been provided with security in an amount equal to the amount of such claim and reasonable costs and otherwise satisfactory in its absolute discretion for any such costs. Any amount payable under this Clause 21.2 shall be paid to or on behalf of Sublessor or, if so directed by Sublessor, directly to the relevant taxing authority, promptly after receipt by Sublessee of a written demand therefor. 21.3 Value Added Taxes The Rent and other amounts payable by Sublessee under this Agreement are exclusive of any value added tax, turnover tax or similar tax or duty. If a value added tax or any similar tax or duty is payable in any jurisdiction in respect of any Rent or other amounts as aforesaid, Sublessee will pay all such tax or duty and indemnify Sublessor against any claims for the same and any related claims, losses or liabilities. 21.4 Taxation of Indemnity Payments 21.4.1 Notwithstanding any other provision of this Agreement, if and to the extent that any sums payable to any Indemnitee by Sublessee under this Agreement by way of indemnity are insufficient, by reason of any Taxes payable in respect of those sums, for such Indemnitee to discharge the corresponding liability to the relevant third party (including any taxation authority), or to reimburse such Indemnitee for the cost incurred by it to a third party (including any taxation authority) Sublessee shall pay to such Indemnitee such sum as will after the tax liability has been fully satisfied leave that Indemnitee with the same amount as it would have been entitled to receive in the absence of that liability. 21.4.2 If and to the extent that any sums constituting (directly or indirectly) an indemnity to an Indemnitee but paid by Sublessee to any person other than such Indemnitee are treated as taxable in the hands of such Indemnitee, Sublessee shall pay to such Indemnitee such sum as will, after the tax liability has been fully satisfied, indemnify such Indemnitee to the same extent as it would have been indemnified in the absence of such liability. 21.5 Benefit of Indemnities All rights expressed to be granted to each Indemnitee (other than Sublessor) under this Agreement are given to Sublessor on behalf of that Indemnitee. 21.6 Sublessor Indemnification Without prejudice to Clause 21.5, Sublessor shall be entitled (but not obliged) to indemnify Indemnitees (other than Sublessor) on terms equivalent to the indemnities given by Sublessee under this Agreement and the obligations of Sublessee to Sublessor shall extend to reimbursement of Sublessor of any amount properly paid by Sublessor to such other Indemnitee provided always that nothing in this Clause 21.6 shall operate to increase the obligations or liabilities of Sublessee. 21.7 Survival of Tax Indemnities Notwithstanding anything in this Agreement to the contrary, the provisions of Clause 20 shall survive the Expiry Date and continue in full force and effect notwithstanding any breach by Sublessor or Sublessee of the terms of this Agreement, the termination of the Sublease of the Aircraft to Sublessee under this Agreement or the repudiation by Sublessor or Sublessee of this Agreement. 21.8 Mitigation and Cooperation In any case where Sublessee would be obliged to bear Taxes or make additional payment on account of Taxes pursuant to the provisions of this Agreement as a result of any change in applicable laws or regulations or practice, Sublessor shall at the written request of Sublessee, without limiting, reducing or otherwise qualifying the rights of the Sublessor and the Security Interest of Sublessor's Lender, consult with Sublessee in good faith as to such steps which Sublessor and Sublessee can mutually accept and agree upon in order to mitigate or avoid the effects of such circumstances. In case Sublessor and Sublessee can not agree within a period of thirty (30) days after Sublessee has made a written request, Sublessor shall not have any further obligation towards Sublessee. 21.9 Furnishing Forms Sublessor agrees to furnish, and to procure that any other Indemnitee furnishes to Sublessee, or to such other person as Sublessee may designate, at Sublessees sole cost and expense, such duly executed and properly completed forms as such Indemnitee may be permitted and legally able to deliver and as may be necessary or appropriate in order to claim any reduction of, or exemption from any Tax which Sublessee may be required to indemnify against hereunder, unless such Indemnitee reasonably determines that furnishing such forms may have an adverse effect on either the business, tax status, tax liability or operations of such Indemnitee. 22. insurance 22.1 Insurances 22.1.1 Sublessee shall, at its own expense, maintain in full force during the Lease Term insurances in respect of the Aircraft that, subject to this Clause 22, comply with the requirements set out in Schedule 5 (the "Insurances"). 22.1.2 The Insurances shall be effected through brokers of international standing and repute in the London or New York aviation insurance markets and which are approved by Sublessor's Lender. 22.1.3 The Insurance shall be effected either: (i) on a direct basis with insurers of recognised standing who normally participate in aviation insurances in the leading international insurance markets and led by reputable underwriter(s) approved by Sublessor and Sublessor's Lender; or (ii) with a single insurer or group of insurers approved by Sublessor or Sublessor's Lender who does not fully retain the risk but effects substantial reinsurance with reinsurers in the leading international insurance markets and through brokers each of recognised standing and acceptable to the Sublessor and Sublessor's Lender for a percentage acceptable to the Sublessor and Sublessor's Lender of all risks insured (the Reinsurances); 22.2 Requirements The current requirements of Sublessor and Sublessor's Lender as to the Insurances are as specified in this Clause 22 and in Schedule 5. Sublessor and Sublessor's Lender may from time to time stipulate other requirements for the Insurances so that (a) the scope and level of cover are maintained in line with best industry practice; and (b) the interests of the Sublessor and Sublessor's Lender continue to be fully protected and Sublessee will procure that such changes are effected. 22.3 Insurance Covenants Sublessee shall: 22.3.1 ensure that all requirements as to insurance of the Aircraft, any Engine or any Part which may from time to time be imposed by the laws of the State of Registration or any state to, from or over which the Aircraft may be flown, in so far as they affect or concern the operation of the Aircraft, are complied with; 22.3.2 comply with the terms and conditions of each policy of the Insurances and not do, consent or agree to any act or omission which: (i) invalidates or may invalidate the Insurances; or (ii) renders or may render void or voidable the whole or any part of any of the Insurances; or (iii) brings any particular insured liability within the scope of an exclusion or exception to the Insurances; 22.3.3 not make any modification or alteration to the Insurances material and adverse to the interests of any of the Indemnitees; 22.3.4 be responsible for any deductible under the Insurances; 22.3.5 provide any other information and assistance in respect of the Insurances that Sublessor may from time to time reasonably require including, for the avoidance of doubt, lists of the underwriters and the exposures of each of those underwriters which may carry the Insurances from time to time; 22.3.6 not create any Security Interests over the Insurances except pursuant to the Assignment of Insurances; 22.3.7 not use or keep or permit the Aircraft or any part thereof to be used or kept for any purpose, in any manner or in any place not covered by the required policies; 22.3.8 not cause or permit the Aircraft or any part thereof to be employed in any place or in any manner or for any purpose inconsistent with the terms or outside the cover provided by any required policy; 22.3.9 not knowingly effect or authorise the placement of insurance covering the same subject matter as that covered by the Insurances (except on a contingent or other secondary basis); and 22.3.10 furnish to the Sublessor: (i) on the date hereof and thereafter within seven (7) days after each renewal date of each policy a certificate or certificates signed by the insurers or the insurance broker providing evidence of insurance coverage pursuant to this Agreement; (ii) on request, confirmation of payment by, or at the direction of the Sublessor of each sum payable under or in connection with any required policy; (iii) on request, such evidence as the Sublessor may require of the Sublessee's compliance with its obligations under this Agreement; and (iv) any notice received from the insurers or the insurance brokers (within three Business Days of receipt) relating to or in connection with any cancellation of the Insurances or any material alteration of the Insurances. 22.4 Renewal of Insurances Sublessee shall commence renewal procedures at least thirty (30) days prior to expiry of any of the Insurances, and provide to Sublessor: 22.4.1 confirmation of completion of renewal at least 15 days prior to each expiry date of any of the Insurances; 22.4.2 certificates of insurance and a brokers' letter of undertaking in a form acceptable to Sublessor and in English, detailing the coverage and confirming the insurers' agreement to the specified insurance requirements of this Agreement within seven (7) days after each renewal date; and 22.4.3 any other information as Sublessor may reasonable request be provided by the insurance broker at least fifteen (15) days before such expiry; 22.5 AVN 2000 22.6 Failure to Insure If Sublessee fails to maintain the Insurances in compliance with this Agreement, Sublessee shall: 22.6.1 forthwith ground or cause to be grounded the Aircraft and shall keep or procure that the Aircraft be kept grounded until such time as all the Insurances shall again be in full force and effect; and 22.6.2 immediately notify Sublessor of the non-compliance of the Insurances and provide Sublessor with full details of any steps which Sublessee is taking or proposes to take, in order to remedy such non-compliance; and each of the Indemnitees will be entitled but not bound, without prejudice to any other rights of Sublessor under this Agreement: (i) to pay the premiums due or to effect and maintain insurances satisfactory to Sublessor and substantially the same as the Insurances required hereunder or otherwise remedy Sublessee's failure in such manner, including to effect and maintain an "owner's interest" policy, as Sublessor considers appropriate. Any sums so expended by Sublessor will become immediately due and payable by Sublessee to Sublessor together with interest thereon at the Default Rate, from the date of expenditure by Sublessor up to the date of reimbursement by Sublessee; and (ii) at any time while such failure is continuing to require the Aircraft to remain at any airport or to proceed to and remain at any airport designated by Sublessor until the failure is remedied to Sublessor's satisfaction. 22.7 Continuation of Insurances Sublessee agrees to effect and maintain at Sublessee's cost airline general third party liability insurances in the form required by this Agreement for two (2) years after the Expiry Date whether or not Sublessee or Sublessor continues to have any interest in the Aircraft. 22.8 Application of Insurance Proceeds As between Sublessor and Sublessee: 22.8.1 all insurance payments received as the result of a Total Loss occurring during the Lease Term will be paid to Sublessor or to Sublessor's Lender pursuant to the terms of any security given by Owner Trustee; 22.8.2 all insurance proceeds of any damage or loss to the Aircraft, any Engine or any Part occurring during the Lease Term not constituting a Total Loss and in excess of the Damage Notification Threshold will be paid to Sublessor and applied in payment (or to reimburse Sublessee) for repairs or replacement property, upon Sublessor being satisfied that the repairs or replacement have been effected in accordance with this Agreement; and 22.8.3 notwithstanding clause 22.8.1 and 22.8.2 above, if at the time of the payment of any such insurance proceeds a Default has occurred and is continuing, all such proceeds will be paid to or retained by Sublessor to be applied toward payment of any amounts which may be or become payable by Sublessee in such order as Sublessor sees fit or as Sublessor may elect. 22.9 Pursuit of Claims The parties shall cooperate in the pursuit of any claims under the Insurances. In pursuing any such claims, the parties shall take account of each others interests but, if there is any material disagreement between the parties in respect of how any such claim shall be pursued, the interests of Sublessor shall be paramount. 23. loss, damages and requisition 23.1 Total Loss Prior to Pre-Delivery Acceptance If a Total Loss occurs prior to Pre-Delivery Acceptance of the Aircraft to Sublessee, this Agreement shall immediately terminate, and except as expressly stated in this Agreement neither party will have any further obligation or liability under this Agreement, except that Sublessor will repay to Sublessee the amount of Security Deposit paid under this Agreement. 23.2 Total Loss After Pre-Delivery Acceptance 23.2.1 If a Total Loss occurs after Pre-Delivery Acceptance of the Aircraft to Sublessee, Sublessee shall pay the Sublessor on or prior to the earlier of: (i) Sixty (60) days after the Total Loss Date; and (ii) the date of receipt of insurance proceeds in respect of that Total Loss, the aggregate of (x) the Agreed Value and (y) Rent to the date of payment. 23.2.2 Subject to the rights of any insurers or other third parties, including Sublessor's Lender upon irrevocable payment in full to Sublessor of the Agreed Value and all other amounts which may be or become payable to Sublessor under this Agreement, Sublessor shall direct Owner Trustee to transfer to Sublessee all of Owner Trustee's and Sublessor's rights (if any) to (x) the Airframe or any Engines and Parts whether or not installed when the Total Loss occurred, on an as-is where-is basis and without recourse or warranty (save as to freedom from Sublessor Liens), and Sublessor shall procure the execution and delivery of such bills of sale and other instruments as Sublessee may reasonably request to evidence such transfer, free and clear of all rights of Owner Trustee and Sublessor and (y) any other rights in respect of the Aircraft or any part thereof or any further requisition or insurance proceeds in respect thereof. Sublessee shall indemnify Owner Trustee and Sublessor for all fees, expenses and Taxes incurred by Sublessor in connection with any such transfer. 23.2.3 If a Total Loss of the Aircraft or the Airframe occurs during the Lease Term, Rent shall continue until the date of payment of the Agreed Value and all other amounts due under the Sublease and upon payment of the Agreed Value and all other sums due under this Agreement, the leasing of the Aircraft shall immediately terminate, but without prejudice to the continuing obligations of the Sublessee (as to indemnity or otherwise) under this Agreement; and Sublessor and, if not already recovered, Sublessee shall proceed diligently and co-operate fully with each other in the recovery of the Total Loss Proceeds. 23.3 Total Loss of Engines 23.3.1 Upon an Engine Total Loss of any Engine not installed on the Aircraft, or an Engine Total Loss of an Engine installed on the Airframe not involving a Total Loss of the Airframe (in either case, a "Destroyed Engine"), Sublessee shall give Sublessor prompt written notice thereof and Sublessee shall replace the Destroyed Engine as soon as reasonably possible by procuring that Owner Trustee acquires, at Sublessee's expense, title to another engine complying with the requirements of Clause 17.6. Such Replacement Engine shall upon acquisition by the Sublessor be an Engine as defined herein; 23.3.2 Sublessee agrees to take such action as Sublessor may reasonably request in order that any such Replacement Engine shall be the property of Owner Trustee, and subleased hereunder on the same terms as the Destroyed Engine. Sublessee's obligation to pay Rent shall continue in full force and effect, but an amount equal to the Total Loss Proceeds received by Sublessor or, as the case may be, Sublessor's Lenders with respect to the Destroyed Engine, less any cost, expenses, Taxes or duties incurred in connection with the collection thereof, shall, subject to Sublessor's right to deduct therefrom any amounts then due and payable by the Sublessee under this Agreement, be paid to Sublessee; 23.3.3 Immediately upon the effectiveness of such substitution, and without further act, title to the replaced Engine shall thereupon vest in Sublessee, in an as-is, where-is condition, free and clear of all rights and Security Interests of Owner Trustee, Sublessor's Lender and Sublessor and shall no longer be deemed an Engine hereunder. 23.4 Requisition 23.4.1 During any requisition for use or hire of the Aircraft, any Engine or Part that does not constitute a Total Loss: (i) the Rent and other amounts payable under this Agreement will not be suspended or abated either in whole or in part, and Sublessee will not be released from any of its other obligations under the Agreement (other than operational obligations with which Sublessee is unable to comply solely by virtue of the requisition); (ii) so long as no Default or Event of Default has occurred and is continuing, Sublessee shall be entitled to any hire paid by the requisitioning authority in respect of the Lease Term; (iii) Sublessee shall, as soon as practicable after the end of any such requisition, cause the Aircraft to be put into the condition required by this Agreement. 23.4.2 If the Aircraft is under requisition for hire at the Expiry Date the leasing of the Aircraft under this Agreement shall continue until the earlier of (x) when the Aircraft becomes a Total Loss and Sublessor receives the Agreed Value together with any other amounts then due and unpaid under this Agreement and (y) when the Aircraft is returned prior to becoming a Total Loss, and Sublessee satisfies the Return Conditions PROVIDED THAT: (i) the obligations of Sublessee including in respect of payment of Rent, including Reserves, shall continue in full force and effect until the leasing ends except that during the continuation of the requisition for hire while it does not constitute a Total Loss, Sublessee shall be released from those of its obligations that it is prevented from performing as a result of the requisition of the Aircraft; (ii) unless a Total Loss has occurred (in which case Clause 23.2 shall apply), Sublessee shall be obliged to redeliver the Aircraft to Sublessor in accordance with Clause 24; (iii) provided no Default or Event of Default is continuing Sublessee shall be entitled to receive and retain any requisition payments made in respect of the Aircraft. (iv) Sublessee shall indemnify Sublessor for any Losses which Sublessor suffers (Sublessor undertakes to use its reasonable best efforts to mitigate such Losses) as a result of Sublessee returning the Aircraft to Sublessor after the Expiry Date. 24. redelivery 24.1 Redelivery of Aircraft; General Conditions On the Redelivery Date, Sublessee shall unless a Total Loss has occurred redeliver the Aircraft and the Aircraft Documents to Sublessor at Sublessee's expense at the Redelivery Location. If the Aircraft has been damaged and is being repaired in a timely manner, then the term of the Sublease will be extended and Sublessee's obligations under this Agreement shall continue in full force and effect and during the course of such repair and, so long as no Default or Event of Default shall have occurred and be continuing, the Sublessor will make insurance proceeds available to accomplish such repairs as provided in Clause 23. When the repairs are completed, the Aircraft shall be redelivered to Sublessor. At the time of the redelivery of the Aircraft: 24.1.1 the Aircraft shall be free and clear of all Security Interests other than Sublessor Liens; 24.1.2 all maintenance to the Aircraft due for performance on or before the Expiry Date shall have been completed in accordance with this Agreement; 24.1.3 the Aircraft shall be in compliance with the Return Conditions; 24.1.4 the Aircraft shall comply with such other reasonable requirements to which Sublessor and Sublessee have agreed and that Sublessor has agreed to pay for; provided, however, that if compliance with Sublessor's request is the sole cause of a delay in the return of the Aircraft beyond the Expiry Date, then Rent shall abate for the period of such delay solely attributable to Sublessee's compliance with Sublessor's request; 24.1.5 any service bulletin kits which are allocated to the Aircraft at no charge by the Manufacturer and not delivered to Sublessor as at the Expiry Date will be shipped to a location specified by Sublessor at Sublessee's cost. For the avoidance of doubt, Sublessee will not be responsible for any inaccuracy or incompleteness in the Aircraft Documents that pertains to any period preceding Delivery, provided always that the foregoing shall not in any way be construed as waiver by Sublessor of Sublessees obligations to keep, maintain and update Aircraft Records during the Lease Term in accordance with the other provisions of this Agreement. 24.2 Final Inspection Immediately prior to redelivery of the Aircraft, Sublessee shall make the Aircraft available to Sublessor for inspection (Final Inspection) at the Technical Redelivery Location in order to verify that the condition of the Aircraft complies with the Return Conditions. The Final Inspection shall be long enough to permit Sublessor to: (i) inspect the Aircraft Documents; (ii) inspect the Aircraft and uninstalled Parts; (iii) inspect the Engines, including without limitation (i) a video boroscope inspection of (A) the low pressure and high pressure compressors and (B) turbine area and (ii) engine condition runs. 24.3 Operational Ground Check; Demonstration Flight 24.3.1 Promptly after completion of any corrections required under Clause 24.2, Sublessee shall conduct an operations ground check in accordance with the applicable Return Conditions and with Sublessee's maintenance manual criteria for the purpose of demonstrating to Sublessor the satisfactory operation of the systems that are normally ground checked by Sublessee, including a full fuel tank leak stand test, hydraulic internal leak check and pitot static systems check. Sublessee shall promptly correct any discrepancies required to be corrected in order to comply with the maintenance manual criteria or the provisions of this Agreement. 24.3.2 The Aircraft shall have at least a two hour demonstration flight performed by and at the expense of Sublessee (with Sublessor's representatives as on-board observers) using the manufacturer's acceptance test flight procedure or any other procedure used by Sublessee and acceptable to Sublessor in its reasonable discretion. 24.3.3 Sublessee shall repair all discrepancies discovered during the final inspection and demonstration flight, which exceed maintenance manual allowable limits, and shall correct all discrepancies in the Aircraft Documents. 24.3.4 When Sublessee has complied with the provisions of Clause 24.3.3 Sublessee shall deliver the Aircraft at the Physical Redelivery Location. 24.4 Non-compliance To the extent that, at the time of Final Inspection, the condition of the Aircraft does not comply with this Agreement (except Clause 24.1.4), Sublessee shall at Sublessor's option: 24.4.1 immediately rectify the non-compliance and to the extent the non-compliance extends beyond the Redelivery Date, the Lease Term will be automatically extended until the non-compliance has been rectified and Sublessee shall be required to pay Rent to Sublessor during that period at the rate equal to two (2) times the daily Rent (Rent per month divided by 30) per day payable monthly or, if earlier, on the date on which the non-compliance is rectified and the return of the Aircraft is accepted by Sublessor; or 24.4.2 redeliver the Aircraft to Sublessor and indemnify Sublessor, and provide cash to Sublessor in an amount reasonably satisfactory to Sublessor as security for that indemnity, against the cost of putting the Aircraft into the condition required by this Agreement. Sublessor's option in Clause 24.4 is not available to Sublessor provided that (i) Sublessee has notified Sublessor of its intent to rectify the non-compliance prior to the Expiry Date and (ii) Sublessee will in the reasonable opinion of Sublessor be able to rectify such non-compliance on or before Expiry Date. For the avoidance of doubt, Sublessor shall not be entitled to exercise its option under this Clause 24.4 and Sublessee shall suffer no loss or penalty to the extent that the Aircraft does not, on Final Inspection, comply with Clause 24.1.4 but is otherwise in compliance with the Return Conditions. 24.5 Acknowledgment Provided Sublessee has complied with its obligations under this Agreement, following redelivery of the Aircraft by Sublessee to Sublessor at the Redelivery Location, the parties shall execute an acknowledgement confirming that Sublessee has redelivered the Aircraft to Sublessor in accordance with this Agreement substantially in the form of Schedule 6. 24.6 Return of the Letter of Credit Upon compliance by Sublessee with all its obligations under this Agreement (including reconciliation of all maintenance reserves and any carried over deficiency at re-delivery) and the execution of the acknowledgement set out in Clause 24.5, Sublessor shall return to Sublessee the Letter of Credit. 25. events of default 25.1 Events Each of the following events will constitute an Event of Default and a material breach of this Agreement: (a) Non-payment: Sublessee fails to pay any amount payable by it under the Transaction Documents or Other Agreements in the currency in which such sum fell due in respect of payments of Rent or Maintenance Reserves, within three (3) Business Days of the due date for payment thereof and, in respect of any other payments, within five (5) Business Days of the date of receipt of written notice for payment thereof; (b) Insurance: insurance cover on or with respect to the Aircraft for the benefit of Sublessor (and any additional insured) is not maintained in accordance with the provisions of this Agreement or the Aircraft is operated outside the scope of such insurance coverage; or (c) Delivery: Sublessee fails to take Delivery of the Aircraft when obligated to do so under the terms of this Agreement; or (d) Redelivery: Sublessee fails to return the Aircraft to Sublessor on the Redelivery Date in accordance with Clause 24; or (e) Breach: Sublessee defaults in the due performance and observance of any other obligations contained in the Transaction Documents and such default is not remedied within twenty (20) days of becoming aware of such default; or (f) Representation: any representation, warranty or statement made or deemed to be made by Sublessee in the Transaction Documents or in any certificate, statement or opinion delivered by it hereunder or in connection herewith is incorrect, inaccurate or misleading in any respect which is material when made or deemed to be made or if the effects or consequences of such incorrect, inaccurate or misleading representation, warranty or statement are capable of cure and Sublessee fails to cure such effects or consequences within twenty (20) days after becoming aware of such default; or (g) Approvals: any governmental or other consent, license or authorization required by law for the validity or legality of the Transaction Documents or the performance hereof or thereof (other than any such which may be required to be obtained by Sublessor) is withdrawn or ceases, for any reason, to be in full force and effect or is not renewed or obtained when required and such withdrawal, cessation, non-renewal or non-obtaining in the opinion of Sublessor may prejudice the rights of Sublessor under this Agreement or in the reasonable opinion of Sublessor may have a material adverse effect on Sublessees obligation to perform its obligations under this Agreement; or (h) Registration: (i) the registration of the Aircraft is cancelled other than as a result of an act or omission of Sublessor or another Indemnitee including the Owner Trustee and Sublessor or an affiliate of the Owner Trustee and Sublessor; or (ii) Sublessee ceases to be a US Air Carrier authorised to transport passengers in common carriage; or (iii) the Aircraft ceases to be "based and primarily used in the United States" within the meaning of 14 Code of Federal Regulations 47.9. (i) Possession: Sublessee abandons the Aircraft or the Engines, or Sublessee or any Permitted Air Carrier no longer has unencumbered control (other than Permitted Liens) or possession of the Aircraft or Engines, except as otherwise permitted by this Agreement; or (j) Discontinuation: Sublessee threatens to or temporarily or permanently discontinues business or sells or otherwise disposes of all or substantially all of its assets; or (k) Adverse change: A material adverse change occurs in the financial condition of Sublessee which in the reasonable opinion of Sublessor may have a material negative impact on Sublessees ability to perform its obligations hereunder; or (l) Cross Default: any Financial Indebtedness of Sublessee (in an aggregate amount in excess of US$1,000,000 or its equivalent in other currencies) becomes due and payable, or may be declared due and payable, prior to its stated maturity by reason of default by Sublessee (having regard to any applicable grace period) or any such Financial Indebtedness is not paid on the due date for payment thereof (as extended by any applicable grace period); or (m) Insolvency: Sublessee is declared bankrupt or becomes insolvent or is unable to pay its debts as and when the same fall due or declares a moratorium on the payment of its indebtedness or makes an assignment for the benefit of creditors generally or is subject to bankruptcy, liquidation, debt negotiations or any analogous proceedings; or (n) Proceedings: Any proceedings, resolutions, filings or other steps are instituted or threatened with respect to the Sublessee or a substantial part of Sublessees property relating to the bankruptcy, liquidation, reorganisation or protection from creditors of Sublessee. If instituted by Sublessee or done by the Sublessee, the same will be an immediate Event of Default. If instituted by another Person, the same will be an Event of Default if not dismissed, remedied or relinquished within twenty (20) days; or (o) Judgments: Any order, judgement or decree is entered by any court of competent jurisdiction appointing a receiver, trustee or liquidator of Sublessee or a substantial part of its property or if a substantial part of its property is to be sequestered. If instituted by Sublessee or done by the Sublessee, the same will be an immediate Event of Default. If instituted by another Person, the same will be an Event of Default if not dismissed, remedied or relinquished within twenty (20) days; or (p) Air Navigation Charges: Any competent authority has unpaid Air Navigation Charges due from Sublessee (unless such charges are being contested in good faith and by appropriate proceedings and such proceedings do not involve any danger of the detention, interference with the use or operation, sale, forfeiture or loss of the Aircraft) and such charges remain outstanding of a period of ten (10) days from the due date thereof; provided that such 10 day grace period will not apply if there is a danger of detention, interference with the use or operation, sale, forfeiture or loss of the Aircraft; or (q) Airport Charges: any airport has unpaid Airport Charges due from Sublessee (unless such charges are being contested in good faith and by appropriate proceedings and such proceedings do not involve any danger of the detention, interference with the use or operation, sale, forfeiture or loss of the Aircraft) and such charges remain outstanding for a period of ten (10) days from the due date thereof; provided that such 10 day grace period will not apply if there is a danger of detention, interference with the use or operation, sale, forfeiture or loss of the Aircraft; or (r) Other Default: an Event of Default is continuing unremedied under any Other Agreement between Sublessee and Sublessor or another lessor or sublessor that either (i) shares the same general partner or controlling shareholder with Sublessor or (ii) whose beneficiary shares the same general partner or controlling shareholder with Sublessor. 25.2 Sublessor's Rights 25.2.1 If an Event of Default occurs, without prejudice, and in all cases addition to any other rights of Sublessor under this Agreement or under applicable law (to the extent permitted by and subject to compliance with any mandatory requirement, of law): (i) in the case of a default under Clause 25.1(m) or (o), without the need for notice or demand, this Agreement will automatically terminate together with any and all other rights of Sublessee with respect to the Aircraft but without prejudice to the continuing obligations of Sublessee under this Agreement, whereupon all rights of Sublessee under this Agreement shall cease; or (ii) in all other cases Sublessor may at any time thereafter: (aa) by notice to Sublessee and with immediate effect terminate the leasing of the Aircraft and any and all other rights of Sublessee with respect to the Aircraft but without prejudice to the continuing obligations of Sublessee under this Agreement, whereupon all rights of Sublessee under this Agreement shall cease; or (bb) proceed by appropriate court action or actions to enforce performance of this Agreement or to recover damages for the breach of this Agreement provided that damages recoverable under UCC 2-A sections 527 through 530 and 532 shall be recoverable in the case of any Event of Default hereunder; or (cc) for Sublessees account do anything that may reasonably be required to cure any default and recover from Sublessee all reasonable costs, including reasonable legal fees and expenses incurred in doing so and interest thereon at the Default Rate; or (dd) either: (A) at its option, may enter upon the premises where the Airframe or any or all Engines are located or believed to be located and take immediate possession of and remove such Airframe or Engines without the necessity for first instituting proceedings, or by summary proceedings or otherwise, and Sublessee shall comply therewith, all without liability to Sublessor for or by reason of such entry or taking possession, whether for the restoration or damage to property caused by such taking or otherwise; (B) by serving notice require Sublessee to redeliver the Aircraft to Sublessor at the Redelivery Location or such other location as Sublessor may require. (ee) Whether or not Subessor shall have exercised, or shall thereafter at any time exercise, any of its rights under clause 25.2.1(dd) above with respect to all or any part of the Aircraft, Sublessor, by written notice to Sublessee specifying a payment date not earlier than ten (10) days from the date of such notice, may demand that the Sublessee pay to Sublessor, and Sublessee shall pay Sublessor, on the payment date specified in such notice as liquidated damages and not as a penalty (in lieu of the instalments of Rent due for periods commencing on or after the payment date in such notice), any unpaid instalments of Rent due for periods prior to the period commencing with the payment date specified in such notice plus the present value of the remaining instalments of Rent during the Initial Lease Term and Extension Lease Term, if any (together, the "Term") using in each case a discount rate of the amount of interest then paid on U.S. Treasury Bills of similar maturity. In addition, Sublessee shall be liable for the amounts set forth in Clause 25.3(ii) and (iii). 25.2.2 If an Event of Default occurs, Sublessor may sell or re-lease or otherwise deal with the Aircraft at such time and in such manner as Sublessor considers appropriate in a commercially reasonable manner, free and clear of any interest of Sublessee as if this Agreement had never been entered into and as if Sublessee had never made any payments hereunder. While an Event of Default is continuing, Sublessee will not operate the Aircraft without the consent of Sublessor. 25.3 Default Payments Sublessee shall be liable for: (i) any and all unpaid Rent due hereunder before or after any termination hereof; (ii) any and all unpaid Supplemental Rent due hereunder before or after any termination hereof; (iii) all costs and expenses (including reasonable attorney's fees and disbursements) incurred by Sublessor in connection with or as a result of any Event of Default or exercise of remedies hereunder, including, but not limited to, (i) all costs and expenses incurred in connection with recovering possession of the Aircraft and in carrying out any works or modifications required to place the Aircraft in the condition specified in Clause 24.1 and remarketing the Aircraft, (ii) interest at the Default Rate on any amount not paid when due under this Agreement and (iii) an amount sufficient to fully compensate Sublessor for any loss or damage to Sublessor's residual interest in the Aircraft. All costs and expenses referred to in the preceding sentence shall be payable by Sublessee upon demand by the Sublessor unless otherwise specified in this Agreement. All such obligations shall survive any termination of this Agreement or the leasing of the Aircraft or any portion thereof hereunder. Expect as otherwise expressly provided above, no remedy referred to in this Clause 25 is intended to be exclusive, but each shall be cumulative and in addition to any other remedy referred to above or otherwise available to Sublessor at law or in equity. The exercise or beginning of exercise by Sublessor of any one or more of such remedies shall not preclude the simultaneous or later exercise by Sublessor of any or all such other remedies. No express or implied waiver by Sublessor of any Event of Default hereunder shall in any way be, or be construed to be, a waiver of any future or subsequent Event of Default. 26. assignment and transfer 26.1 By Sublessee No assignment, novation, transfer, mortgage or other change may be made by Sublessee in any of its rights with respect to the Aircraft, Engine, or Parts or this Agreement. 26.2 By Sublessor Subject to Sublessees rights pursuant to this Agreement, Sublessor may at its expense and at any time and without Sublessees consent sell, assign or transfer its rights and interest hereunder to a third party, ("Sublessors's Assignee"), provided that such sale, transfer, or assignment shall not increase Sublessees obligations. Sublessor will cooperate with Sublessee to ensure minimum practical disturbance or cost in connection with such assignment or transfer of rights and interest hereunder and Sublessor shall reimburse Sublessee for any expense incurred by Sublessee in connection with such assignment or transfer. Sublessee agrees to cooperate in good faith with Sublessor in such sale, assignment or transfer and provide Sublessor and Sublessor's Assignee with such reasonable assistance as Sublessor may require, including but not limited to assisting in any of Sublessor's and Sublessors Assignee's efforts to minimize or eliminate any Taxes related to such assignment or transfer. For a period of two (2) years after any such sale or assignment and at Sublessee's cost, Sublessee will continue to name Owner Trustee, Sublessor and Sublessor's Lender as additional insureds in accordance with the insurance requirements set out in Clause 22. 26.3 Assignment to Lender 26.3.1 Subject to Sublessee's rights under this Agreement, Owner Trustee may at any time grant Security Interests over the Aircraft and the benefit of this Agreement and any other agreement related to the Aircraft to any Sublessor's Lender as security for Owner Trustee's obligations to such Sublessor's Lender, provided by doing so the obligations of Sublessee under this Agreement shall not materially increase. Owner Trustee's rights to grant any such Security Interests shall be subject only to receipt by Sublessee of an acknowledgement, in form and substance reasonably satisfactory to Sublessee, from or on behalf of Sublessor's Lender relating to quiet enjoyment and other related rights. 26.3.2 On Sublessor's request, Sublessee will execute all such documents as Owner Trustee or Sublessor's Lender may reasonably require (including an Estoppel Certificate) to confirm Sublessee's obligations under this Agreement and for the purpose of perfecting and ensuring and maintaining the perfection of any Security Interest granted by Owner Trustee over the Aircraft or this Agreement and obtain Sublessee's confirmation that no Event of Default is outstanding. Sublessee, at Sublessors expense, will provide all other reasonable assistance and cooperation to Sublessor, Owner Trustee or Sublessor's Lender in connection with any of the matters referred to in this Clause 26 or the perfection and maintenance of any related Security Interest, the making of any necessary changes to the Insurances, the making of any necessary filings and registrations in the State of Incorporation or the provision of any appropriate counsel's opinions in relation to Sublessee's obligations. Except with respect to the initial documentation and filings to be done in connection with this Agreement or at the time of Delivery of the Aircraft hereunder, Sublessor will reimburse Sublessee for its reasonable out-of-pocket costs including reasonable legal fees and expenses in reviewing documents required by Sublessor or Sublessor's Lender 26.3.3 Sublessor will obtain for the benefit of Sublessee an acknowledgement from any Sublessors Assignee or Sublessor's Lender that, so long as no Default has occurred and is continuing hereunder, such Person will not interfere with Sublessees quiet, peaceful use and enjoyment of the Aircraft. 26.4 Sublessor Includes Sublessor's Assignee and Sublessor's Lender Wherever the term "Sublessor" is used in this Agreement in relation to any of the provisions relating to registration, title, disclaimer, indemnity and insurance contained in Clauses 12, 20, and 22 respectively, the term "Sublessor" will be deemed to include Sublessors Assignee and Sublessor's Lender, if applicable. 27. miscellaneous provisions 27.1 Rights Cumulative, Waivers The rights of Sublessor under this Agreement are cumulative, may be exercised as often as Sublessor considers appropriate and are in addition to Sublessor's rights under the general law. The rights of Sublessor against Sublessee or in relation to the Aircraft, whether arising under this Agreement or the general law, shall not be capable of being waived or varied otherwise than by an express waiver or variation in writing; and in particular any failure to exercise or any delay in exercising any of such rights shall not operate as a waiver or variation of that or any other such right; any defective or partial exercise of any of such rights shall not preclude any other or further exercise of that or any other such right; and no act or course of conduct or negotiation on Sublessor's part or on its behalf shall in any way preclude it from exercising any such right or constitute a suspension or any variation of any such right. 27.2 Delegation Sublessor may delegate to any person or persons all or any of its rights, powers or discretions vested in it by this Agreement, and any such delegation may be made upon such terms and conditions and subject to such regulations (including power to sub-delegate) as Sublessor in its absolute discretion thinks fit. 27.3 Expenses 27.3.1 So long as the Aircraft is tendered for Delivery to Sublessee pursuant to this Agreement, Sublessee shall pay to Sublessor on demand: (i) all reasonable expenses including legal, professional, and out-of-pocket expenses incurred or payable by Sublessor in connection with any amendment to or extension of or other documentation requested by Sublessee in connection with, or the granting of any waiver or consent under this Agreement or the monitoring of compliance by Sublessee with this Agreement, but in the case of such monitoring of compliance, only if upon such monitoring Sublessee is found to be in Default under this Agreement; and (ii) all expenses including legal and other costs payable or incurred by Sublessor following a Default in connection with the enforcement of or preservation of any of Sublessor's rights under this Agreement, or in respect of the repossession of the Aircraft. All expenses payable pursuant to this Clause 27.3 shall be paid in the currency in which they are incurred by Sublessor. 27.4 Time of Essence The time stipulated in this Agreement for all payments by Sublessee to Sublessor and for the prompt performance of Sublessee's other obligations under this Agreement will be of the essence for this Agreement. 27.5 Entire Agreement The Transaction Documents are the sole and entire agreements between Sublessor and Sublessee in relation to the leasing of the Aircraft, and supersede all previous agreements in relation to that leasing. 27.6 Further Assurances The parties shall take such action as Sublessor and Sublessee reasonably consider to be in furtherance of the commercial intent of the parties under the Transaction Documents including, without limitation, such action as may be required properly to transfer title to engines and parts as contemplated in this Agreement in compliance with the laws of the lex situs of the relevant engine or part at the relevant time. 27.7 Language All notices to be given under this Agreement will be in English. All documents delivered to Sublessor pursuant to this Agreement will be in English or, if not in English, will be accompanied by a certified English translation. If there is any inconsistency between the English version of this Agreement and any version in any other language, the English version will prevail. 27.8 Variation The provisions of this Agreement shall not be varied or amended otherwise than by an instrument in writing executed by or on behalf of Sublessor and Sublessee. 27.9 Invalidity of any Provision If any provision of this Agreement becomes invalid, illegal or unenforceable in any respect under any law, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired. 27.10 Survival All indemnities and other obligations of Sublessee which arise or are attributable to circumstances occurring during the Lease Term shall survive, and remain in full force and effect, notwithstanding the expiration or other termination of this Agreement or the leasing of the Aircraft hereunder. 27.11 Reimbursement If Sublessee defaults in the performance of any of its obligations under this Agreement that can be rectified by the spending of money, Sublessor shall be entitled (but not obliged) to expend money to rectify such matter and Sublessee shall reimburse Sublessor on demand the money so expended. Any expenditure by Sublessor pursuant to this Clause 27.11 shall not prejudice the rights of Sublessor in respect of any Default or Event of Default. 27.12 Press Releases The parties will give copies to one another, in advance if possible, of all news, articles and other releases provided to the public media regarding this Agreement or the Aircraft. 27.13 Power of Attorney Sublessee hereby irrevocably appoints Sublessor as its attorney for the purpose of putting into effect the intent of this Sublease following an Event of Default, including without limitation, the return, repossession, deregistration and exportation of the Aircraft. To evidence this appointment, Sublessee has executed the Power of Attorney in the form of Schedule 10. Sublessee will take all steps required under the laws of the State of Registration to provide such power of attorney to Sublessor. 27.14 Usury Laws The parties intend to contract in strict compliance with the usury laws of the State of New York and, to the extent applicable, the United States. Notwithstanding anything to the contrary in the Transaction Documents, Sublessee will not be obligated to pay Default Interest or other interest in excess of the maximum non-usurious interest rate, as in effect from time to time, which may by applicable law be charged, contracted for, reserved, received or collected by Sublessor in connection with the Transaction Documents. 27.15 Confidentiality The Transaction Documents and all non-public information obtained by either party about the other are confidential and are between Sublessor and Sublessee only and the commercial terms and other material provisions of this Sublease will not be disclosed by a party to third parties (other than to such party's auditors, lenders and legal advisors) without the prior written consent of the other party except in connection with enforcement of rights hereunder. If disclosure is required as a result of applicable law, Sublessee and Sublessor will cooperate with one another to obtain confidential treatment as to the commercial terms and other material provisions of this Sublease; provided, however, if they are unable to obtain such confidential treatment and disclosure is required by applicable law, then such disclosure may be made in accordance with such law. 27.16 Counterparts This Agreement may be executed in any number of identical counterparts, each of which will be deemed to be an original, and all of which together will be deemed to be one and the same instrument when each party has signed and delivered one such counterpart to the other party. Delivery of an executed counterpart of this Agreement by telefacsimile will be deemed effective as delivery of an originally executed counterpart. Any party delivering an executed counterpart of this Agreement by telefacsimile will also deliver an originally executed counterpart; provided, however, the failure of any party to deliver an originally executed counterpart of this Agreement will not affect the validity or effectiveness of this Agreement. 27.17 Bankruptcy It is the intention of the parties that the Sublessor shall be entitled to the benefits of 11 U.S.C 1110 with respect to the right to repossess the Airframe, Engines and Parts as provided herein, and in any circumstances where more than one construction of the terms and conditions of this Agreement is possible, a construction which would preserve such benefits shall control over any construction which would not preserve such benefits or would render them doubtful. To the extent consistent with the provisions of 11 U.S.C 1110 or any analogous section of the Federal bankruptcy laws, as amended from time to time, it is hereby expressly agreed and provided that, notwithstanding any other provisions of the Federal bankruptcy laws, as amended from time to time , any right of the Sublessor to take possession of the Aircraft in compliance with the provisions of this Agreement shall not be affected by the provisions of 11 U.S.C 362 or 363, as amended from time to time, or any analogous provisions of any superseding statute or any power of the bankruptcy court to enjoin such taking of possession. This Agreement is a true lease and not one intended as security. 28. notices Any notice or other communication under or in connection with this Agreement shall be in writing and shall be delivered personally, by reputable overnight courier or express service or by post or facsimile transmission to the respective addresses or facsimile numbers given below or such other address or facsimile number as the recipient may have notified to the sender in writing. Proof of posting or despatch shall be deemed to be proof of receipt. Notice shall be deemed received: (i) in the case of a letter, on the fifth Business Day after posting; and (ii) in the case of a facsimile, on the Business Day immediately following the date of despatch or transmission. In the case of a notice sent by expedited delivery, notice will be deemed received on the date of delivery set forth in the records of the person which accomplished the delivery. If any notice is sent by more than one of the above listed methods, notice will be deemed received on the earliest possible date in accordance with the above provisions. Notices will be addressed as follows: Sublessor: Indigo Pacific AB. Address: Sodra Forstudsgatan SE-21143 Maluno Sweden Attention: Legal Department Telephone: 46406603001 Facsimile: 4640302350 Sublessee: FRONTIER AIRLINES, INC. Address: 12015 E. 46th Avenue Denver, Colorado 80239 Attention: General Counsel Facsimile: (303) 371 9669 29. governing law and jurisdiction 29.1 New York Law THIS SUBLEASE WILL IN ALL RESPECTS BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK INCLUDING ALL MATTERS OF CONSTRUCTION, VALIDITY AND PERFORMANCE BUT EXCLUDING SECTION 7-101 OF THE GENERAL OBLIGATIONS LAW (NOTWITHSTANDING THE CONFLICT LAWS OF THE STATE OF NEW YORK). 29.2 NON-EXCLUSIVE JURISDICTION IN NEW YORK EACH OF SUBLESSOR AND SUBLESSEE (A) IRREVOCABLY SUBMIT TO THE NON-EXCLUSIVE JURISDICTION OF THE SUPREME COURT OF THE STATE OF NEW YORK, NEW YORK CITY COUNTY, AND THE UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK FOR THE PURPOSES OF ANY SUIT, ACTION, OR OTHER PROCEEDING ARISING OUT OF THIS AGREEMENT OR THE TRANSACTION DOCUMENTS OR THE SUBJECT MATTER HEREOF OR THEREOF OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY BROUGHT BY THE OTHER PARTY OR ITS SUCCESSOR OR ASSIGN AND (B) TO THE EXTENT PERMITTED BY APPLICABLE LAW, IRREVOCABLY WAIVES AND AGREES NOT TO ASSERT BY WAY OF MOTION, AS A DEFENSE OR OTHERWISE ANY CLAIM THAT IT IS NOT PERSONALLY SUBJECT TO THE JURISDICTION OF THE ABOVENAMED COURTS; THAT THE SUIT, ACTION OR PROCEEDING IS BROUGHT IN AN INCONVENIENT FORUM, THAT VENUE IS IMPROPER OR THAT THIS AGREEMENT OR THE OTHER TRANSACTION DOCUMENTS OR THE SUBJECT MATTER HEREOF OR THEREOF MAY NOT BE ENFORCED IN OR BY SUCH COURT. NOTHING HEREIN CONTAINED SHALL PREVENT EITHER PARTY FROM BRINGING SUIT IN ANY OTHER APPROPRIATE JURISDICTION. 29.3 SERVICE OF PROCESS WITH RESPECT TO ACTIONS, SUITS AND PROCEEDINGS BROUGHT IN THE COURTS NAMED IN 29.2, EACH OF SUBLESSOR AND SUBLESSEE HEREBY WAIVES PERSONAL SERVICE OF PROCESS AND AGREES THAT SERVICE OR PROCESS MAY BE MADE UPON IT BY CERTIFIED OR REGISTERED MAIL, RETURN RECEIPT REQUESTED, AT THE ADDRESSED SPECIFIED IN CLASUE 28 AND THAT SUCH SERVICE SHALL BE DEEMED COMPLETED ON THE FIFTH BUSINESS DAY AFTER SERVICE IS DEPOSITED IN THE MAIL. NOTHING HEREIN SHALL AFFECT THE RIGHT TO SERVICE PROCESS IN ANY OTHER MANNER PROVIDED BY APPLICABLE LAW OR ACCORDANCE WITH THE HAGUE CONVENTION IF APPLICABLE. 29.4 WAIVER SUBLESSEE AND SUBLESSOR HEREBY WAIVE THE RIGHT TO A TRIAL BY JURY. SIGNATURE PAGE IN WITNESS whereof the parties hereto have executed this Agreement on the date shown at the beginning of this Agreement. SIGNED on behalf of INDIGO PACIFIC AB By: ___________________________ Name: ___________________________ Title: ___________________________ SIGNED on behalf of FRONTIER AIRLINES, INC. By: ___________________________ Name: ___________________________ Title: ___________________________ Receipt of the "original" counterpart of this Agreement is hereby acknowledged. SCHEDULE 1 AIRCRAFT SPECIFICATION Model Boeing 737-3U3 Serial Number 28734 Current Registration N309FL Line Number 2974 Date of Manufacture December 1997 Engines CFM INTERNATIONAL MODEL CFM 56-3C1, ENGINE SERIAL NUMBERS 858670 AND 858673 APU Garrett GTCP85-129K Present Operator N/A WEIGHTS Lbs Max Taxi Weight 140,000 Max Take Off Weight 139,500 Max Landing Weight 116,600 Max Zero Fuel Weight 109,600 Basic Empty Weight 69,721 Max Fuel capacity 5,311 US Gallons INTERIOR CONFIGURATION Seating 136 Y Burus Airest 2000 Galleys G1, G2, G4B WEBER Lavatories Three 1 Forward, 2 Aft NAVIGATIONAL, COMMUNICATION, ELECTRONIC SYSTEMS, FURNISHING & EQUIPMENT LIST DESCRIPTION MANUFACTURER MODEL OR PART NUMBER QTY Flight Control Computer Honeywell 10-62038 2 AFDS Controller Honeywell 10-62038-239 1 Yaw Damper System Honeywell 10-60447 1 Autothrottle Computer Smiths Industries 10-62017 1 VHF Com TRX Collins 822-0693-004 3 VHF Comm. Cntrl Panel Collins 622-6831-022 3 PA Amplifier Collins 346D-2B 1 Boarding Music System Matsushita RD-AX7351 1 Selcal decoder Team SC2253AD01 1 CVR Fairchild A 100A 1 HF Communication Collins 622-5272-001 2 ACARS Management Unit Allied Signal 965-0728-003 1 Video Monitors 14" Transcom Various 9 Video Tape Reproducer VHS Transcom 743-0238-001 1 Control Distr Monitor Unit Transcom 743-0313-005 1 Cabin Info Video I/face unit Sony Transcom 700-1388-001 1 Audio Tape Reproducer Matsushita RD-AX7002-01 1 Audio System - PES Matsushita Various Digital Flight Recorder Allied Signal 980-4700-001 1 DFDAU Allied Signal 967-0202-001 1 Electric Altimeter Smiths 10-61826-8 1 Digital Air Data Computer Smiths 10-62153-1 2 EHSI Colour Collins S242T404-611 2 EADI Colour Collins S242T404-511 2 EFIS Control Panel Collins 622-8001-001 2 IRU Honeywell S242T101-112 2 GPWS Allied Signal S220T102 1 VHF Nav Collins 822-0761-001 2 ATC Transponder Allied Signal 066-01127-1301 2 DME Collins 622-4540-122 2 NAVIGATIONAL, COMMUNICATION, ELECTRONIC SYSTEMS, FURNISHING & EQUIPMENT LIST ADF Collins 777-1492-005 2 Marker Collins 522-2996-011 1 FMC Smiths 10-62225-002 1 Radio Altimeter Thompson 9599-607-14931 2 WX-Radar Allied Signal 066-50008-0102 1 TCAS Processor Allied Signal 066-50000-1508 1 EFIS Symbol Generator Collins 622-8000-101 2 Wheels/Brakes Allied Signal MW 10-61819-28 NW 10-61063-22 SCHEDULE 2 DELIVERY CONDITIONS The Aircraft will be delivered "AS IS, WHERE IS" at Delivery Location and with a valid and effective Certificate of Airworthiness in the Standard Category. The following agreed Delivery Work shall have been performed: 1. Configuration: The Aircraft will be delivered with a standard class 136 passenger configuration with seats to be procured by Sublessee. 2. Paint: The existing markings will be removed and the Aircraft will be delivered in a Frontier paint scheme, using the currently existing base white color and Frontier provided tail decal. 3. TCAS: Installed, as agreed to between Air New Zealand and the Manufacturer. SCHEDULE 3 ACCEPTANCE CERTIFICATE This Acceptance Certificate is delivered, on the date set out below by FRONTIER AIRLINES, INC. (Sublessee), to INDIGO PACIFIC AB (Sublessor), pursuant to the Aircraft Sublease Agreement dated November [ ], 1998 between Sublessor and Sublessee (the Sublease). Capitalized terms used in this Certificate shall have the meanings given to such terms in the Sublease. 1. Sublessee has this [ ] day of [ ] (Time: [ ]) at [ ] received from Sublessor possession of: (a) one (1) Boeing 737-3U3 Aircraft, bearing manufacturer's serial number 28734, registration mark[ ] together with two (2) CFM INTERNATIONAL CFM 56-3C1 engines bearing manufacturer's serial numbers [ ] and [ ], all Parts attached thereto and thereon in an airworthy condition; and (b) all Aircraft Documents as listed in the Document Receipt attached hereto. 2. The Airframe, Engines and Parts had the following Flight Hours/Cycles at delivery: (a) Airframe: Total hours Total landings Flight Hours/ Cycles Flight Hours/ Cycles since last "C" Check since last "A" Check [ ] [ ] [ ] Flight Hour [ ] Flight Hour [ ] Cycles [ ]Cycles (b) Engines: Position Serial No. Total Total Cycles Flight Hours/ Flight Hours/ Flight Cycles since Cycles since Hours last shop visit last Engine Performance Restoration Visit [ ] [ ] [ ] [ ] [ ] Flight [ ] Flight Hours Hours [ ] Cycles [ ] Cycles Position Serial No. Total Total Cycles Flight Hours/ Flight Hours/ Flight Cycles since Cycles since Hours last shop visit last Engine Performance Restoration Visit [ ] [ ] [ ] [ ] [ ] Flight [ ] Flight Hours Hours [ ] Cycles [ ] Cycles Time Remaining to next life limited part removal Flight Hours Cycles MSN [ ] [ ] [ ] MSN [ ] [ ] [ ] (c) APU: MSN Total Flight Hours Flight Hours/ Cycles Flight Hours/Cycles remaining until next HSI remaining on turbine inspection and compressor life limited parts [ ] [ ] [ ] [ ] (d) Landing Gears: Position Serial No. Total Flight Flight Hours/ Cycles Flight Hours/ Hours/Cycles since last overhaul Cycles to next sched. Removal Nose [ ] [ ] Flight Hours [ ] Flight Hours [ ] Flight Hours [ ] Cycles [ ] Cycles [ ] Cycles Right Main [ ] [ ] Flight Hours [ ] Flight Hours [ ] Flight Hours [ ] Cycles [ ] Cycles [ ] Cycles Left Main [ ] [ ] Flight Hours [ ] Flight Hours [ ] Flight Hours [ ] Cycles [ ] Cycles [ ] Cycles (e) Status of components or Parts with time/Cycle and calendar limits (see attached sheet); (f) Fuel on board at Delivery: [ ] kilos ([ ] gallons) 3. Other technical information regarding the Aircraft and its components and any damage thereto are correctly set forth on the Aircraft report and damage chart attached hereto. 4. Place of Acceptance: 5. Sublessee confirms to Sublessor that as at the time indicated above, being the Delivery Date: (a) the representations and warranties contained in Article 2 of the Sublease are hereby repeated; (b) the Aircraft is insured as required by the Lease; and (c) Sublessee's authorised technical experts have inspected the Aircraft and the Aircraft Documents to ensure the Aircraft and the Aircraft Documents conform to Sublessee's requirements. The Aircraft and the Aircraft Documents are in accordance with the specifications of the Lease and satisfactory in all respects. 6. This Acceptance Certificate is executed and delivered by the parties in [ ]. IN WITNESS WHEREOF, the parties hereto have caused this Acceptance Receipt to be executed in their respective corporate names by their duly authorised representatives as of the day and year first above written. INDIGO PACIFIC AB By: - ---------------------------------- FRONTIER, INC By: - ---------------------------------- SCHEDULE 4 SUBLEASE SUPPLEMENT SUBLEASE SUPPLEMENT NO. ______ dated November ___, 1998, between Indigo Pacific AB ("Sublessor") and FRONTIER AIRLINES, INC. ("Sublessee"). Sublessor and Sublessee have previously entered into that certain Aircraft Sublease Agreement dated as of November [ ], 1998 (herein called the "Sublease" and the defined terms therein being hereinafter used with the same meaning). The Sublease provides for the execution and delivery from time to time of a Sublease Supplement substantially in the form hereof for the purpose of leasing the aircraft described below under the Sublease as and when delivered by Sublessor to Sublessee in accordance with the terms thereof. The Sublease relates to the Aircraft, Parts and Engines as more precisely described below. A counterpart of the Sublease is attached hereto and this Sublease Supplement and the Sublease shall form one document. In consideration of the premises and other good and sufficient consideration, Sublessor and Sublessee hereby agree as follows: 1. Sublessor hereby delivers and subleases to Sublessee under the Sublease and Sublessee hereby accepts and subleases from Sublessor under the Sublease, that certain used Boeing Model 737-3U3 Aircraft bearing FAA Registration Mark N309FL, including the Airframe bearing manufacturers serial number 28734 and the two (2) CFM INTERNATIONAL CFM 56-3C1 Engines bearing manufacturer's serial numbers 858670 and 858673 (each of which Engines has in excess of 750 rated takeoff horsepower or the equivalent of such horsepower) described in Schedule 1 herewith ("Delivered Aircraft"). 2. The Delivery Date of the Delivered Aircraft is the date of this Sublease Supplement set forth in the opening paragraph hereof. 3. The Lease Term for the Aircraft shall commence on the Delivery Date and shall end on the Expiry Date. 4. The amount of Rent for the Delivered Aircraft is set forth in the Sublease and is payable as provided in the Sublease. 5. Sublessee hereby confirms to Sublessor that (i) the Aircraft and each Engine installed thereon or belonging thereto have been duly marked in accordance with the terms of Clause 13.12 of the Sublease, (ii) Sublessee has accepted the Aircraft for all purposes hereof and of the Sublease, and (iii) Sublessee has inspected the Aircraft and the Aircraft satisfies the conditions set forth in the Sublease. 6. All of the terms and provisions of the Sublease are hereby incorporated by reference in this Sublease Supplement to the same extent as if fully set forth herein. 7. This Sublease Supplement may be executed in any number of counterparts, each of such counterparts, except as provided in Clause ___ of the Sublease, shall for all purposes be deemed to be an original; and all such counterparts shall together constitute but one and the same Sublease Supplement. 8. This Lease Supplement has been delivered in New York. IN WITNESS WHEREOF, Sublessor and Sublessee have caused this Sublease Supplement No. __ to the Sublease to be duly executed as of the day and year first above written. SUBLESSOR, INDIGO PACIFIC AB By: Title: SUBLESSEE, FRONTIER AIRLINES, INC. By: Title: SCHEDULE 5 INSURANCE REQUIREMENTS 1.1 Types of Insurance The Insurances required to be maintained are as follows: (a) an All Risks Hull Insurance Policy on the Aircraft on an agreed value basis in an amount not less than the Agreed Value with insurers not entitled to replace the Aircraft in the event of an insured Total Loss and All Risk Hull Insurance Policy on each Engine when not installed no the Aircraft on an agreed value basis not less than the Engine Agreed Value; (b) insurance covering all risks of physical loss or damage howsoever occasioned in respect of engines, spare parts and equipment forming part of the Aircraft but which for the time being are removed from the Aircraft, and are not insured by the Aircraft's hull and war risk insurance in an agreed value of not less than their replacement cost; (c) a War Risks Insurance Policy on the Aircraft covering all of those risks which are currently enumerated in Lloyds Form AVN.48B War, Hi-jacking and Other Perils Exclusion Clause (Aviation), other than paragraph (b) thereof to the fullest extent possible and any additional risks which may hereafter be included therein or in any form succeeding to any of its functions on an agreed value basis in any amount not less than the Agreed Value; (d) Liability Insurance, being Aircraft Third Party Legal Liability, Passenger, Contractual Legal Liability, Baggage Legal Liability, Cargo and Mail Legal Liability and Airline General Third Party Legal Liability including war and allied perils to the fullest extent available for a combined single limit of liability bodily injury/property damage of not less than the Minimum Liability Coverage any one accident provided that if the Sublessor on the basis of advice received from an independent insurance adviser believe that such limit should be revised upwards, it shall be replaced by such higher limit as may be appropriate in the light of circumstances prevailing in the international airline industry at the time and provided further that the Sublessor shall not be obliged by this Clause to effect and maintain insurance in respect of any inability to recover from any manufacturer of the Airframe, Engines or any Part, losses and liabilities incurred as a result of negligent manufacture. 1.2 Terms of Hull and Spares Insurance All required hull and spares insurance, so far as it relates to the Aircraft, will: (a) Settlement of Losses: provided that any loss will be payable in Dollars to Sublessor's Lender, if none, to Sublessor or at the request of Sublessor to Sublessor's Lender. In respect of any other claim, the relevant policy shall provide that settlement (net of any relevant policy deductible) shall be made with such parties as may be necessary to repair the Aircraft or as otherwise agreed after consultation between the Sublessor's Lender, the Owner Trustee, the Sublessor and the Sublessee. The relevant policy shall provide that such payments shall only be made provided the same are in compliance with all applicable laws and regulations; (b) 50/50 Provision: if separate hull "all risks" and "war risks" insurances are arranged, include a 50/50 provision in accordance with market practice AVS. 103A is the current market language; (c) Deductibles: provide for deductibles in respect of the Aircraft All Risks Hull Insurance Policy or War Risks Insurance Policy of no more than US$250,000 or such other limit as the parties may from time to time agree. (d) Customary Risks: cover at least such risks as are customarily insured against in the airline industry for an amount not less that the Agreed Value; (e) Sound Practice: be in accordance with sound international airline practice. 1.3 Terms of Liability Insurance All required liability insurances will: (a) cover at least such risks as are customarily insured against in the airline industry and names the additional assured as additional named insured for their respective rights and interest; (b) be in form and substance in accordance with sound international airline practice (having regard to the type of aircraft or engines involved); (c) provide that upon payment of any loss or claim by the insurers in accordance with the endorsement relating to the relevant policy naming the additional assured as additional assureds, the insurers shall to the extent and in respect of such payment be thereupon subrogated to all legal and equitable rights of the additional assured indemnified under such endorsement relating to the Insurances (but not against any additional assured) and further provides that the insurers shall not exercise such rights without the consent of those additional assured such consent not to be unreasonably withheld and at the expense of the insurers such additional assured shall do all things reasonably necessary to assist the insurers to exercise the said rights; (d) provide that except in respect of any provision for automatic termination or cancellation specified in the policy or any endorsement thereof, cover for the interests added by the endorsement relating to the relevant policy may only be cancelled or materially altered in a manner adverse to the additional assured by the giving of not less than thirty (30) days (but seven (7) days or such lesser period as may be customarily available in respect of War risks) notice in writing to the insurance brokers and that notice shall be deemed to commence from the date such notice is given by the insurers and that such notice will not be given at the normal expiry date of the policy or any endorsement; (e) is primary without right of contribution from any other insurance which may be available to the additional assured; (f) subject to the provisions naming the additional assured as additional assured, operates in all respects as if a separate policy had been issued covering each additonal assured; (g) provides that none of the additional assured shall be responsible for any premiums in respect thereof, and that the insurers shall waive any right of set-off or counterclaim against the additional assured (except in respect of any outstanding premiums in respect of the Aircraft); (h) provides that the insurance thereunder shall not be invalidated by any act or omission, including misrepresentation and non-disclosure, of any other person which results in breach of any term, condition or warranty of the relevant policy provided that the additional assured so protected has not caused or contributed to or knowingly condoned the said act or omission; (i) has a deductible in respect of passenger baggage and cargo of an amount which, at any time, is customary in the international aviation market at that time for Boeing 737-300 aircraft in each case in respect of any one claim; (j) contains a provision insuring (to the extent of the risks covered by the policy) the indemnity provisions of security document entered into in favour of the Sublessor's Lender; and (k) specifically refers to any security document entered into in favour of the Sublessor's Lender or any loan agreement, 1.4 Terms of All Insurances All Insurances will: (a) Dollars: provide cover denominated in dollars; (b) Worldwide: operate on a worldwide basis subject to such limitations and exclusions as the parties and the insurance market may agree; (c) Acknowledgment: acknowledge the insurer is aware and has seen a copy of this Agreement, that the Aircraft is owned by Owner Trustee for the benefit of and the existence of any financing or security documents to which Sublessor's Lenders may be party; (d) Breach of Warranty: provide that, in relation to the interests of each of the additional assureds, the Insurances will not be invalidated by any act or omission, including misrepresentation and non-disclosure, by Sublessee, or any other person provided that such additional assureds regardless of any breach or violation by Sublessee, or any other person other than the respective additional assured seeking protection of any warranty, declaration or condition, contained in such Insurances has not caused or contributed to or knowingly condoned the said act or omission; (e) Subrogation: provide that upon payment of any loss or claim by the insurers in accordance with the endorsement relating to the relevant policy naming the additional assured as additional assureds, the insurers shall to the extent and in respect of such payment be thereupon subrogated to all legal and equitable rights of the additional assured indemnified under such endorsement relating to the Insurances (but not against any additional assured) and further provides that the insurers shall not exercise such rights without the consent of those additional assured such consent not to be unreasonably withheld and at the expense of the insurers such additional assured shall do all things reasonably necessary to assist the insurers to exercise the said rights; (f) Premiums: provide that the additional assureds will have no obligation or responsibility for the payment of any premiums due but reserve the right to pay the same should any of them elect so to do and that the insurers will not exercise any right of set-off or counter-claim in respect of any premium due against the respective interests of the additional assureds other than outstanding premiums relating to the Aircraft, any Engine or Part the subject of the relevant claim; (g) Cancellation/Change: provide that the Insurances will continue unaltered for the benefit of the additional assureds for at least thirty (30) days after written notice by registered mail or telex of any cancellation, change, event of non-payment of premium or instalment thereof has been sent to Sublessor, except in the case of war risks for which 7 days or such lesser period as is or may be customarily available in respect of war risks or allied perils will be given and that notice shall be deemed to commence from the date such notice is given by the insurers and that such notice will not be given at the normal expiry date of the policy or any endorsement; and (h) Indemnities: accept and insure the indemnity provisions of this Agreement to the extent of the risks covered by the policies (it being understood that certain matters listed in Clause 20.1.1: registration, import, overhaul, deregistration, export, manufacture, design and testing and (c) are not covered). (i) Endorsement: contains an endorsement naming: (i) the Sublessor's Lender as loss payee in the case of a Total Loss; (ii) the Sublessor's Lender as loss payee in the case where the amount payable by the insurers upon any claim other than in respect of Total Loss is greater than US$5,000,000; and (iii) the Sublessor as loss payee in the case where the amount payable by the Insurers upon any claim other than in respect of a Total Loss is less than US$5,000,000 unless and until the Sublessor's Lender notifies the insurance brokers or the insurers that an Event of Default has occurred, in which event the loss payee shall be the Sublessor's Lender; (j) specifically refers to each loan agreement or charge between the Owner Trustee and/or the Sublessor and/or any Sublessor's Lender. 1.5 Deductibles Sublessee shall be responsible for any and all deductibles under the Insurances. 1.6 AVN 67B Notwithstanding the foregoing, if Sublessee provides insurance certificates in compliance with AVN 67B it shall be regarded as having satisfied those of the insurance provisions set out above that are covered by that endorsement. 1.7 AVN 2000 (or similar) If AVN 2000 or similar "Date Recognition Exclusion Clause" applies in respect of the Insurances then: (a) the Insurance certificate shall state that this is the case; and (b) the Insurances must provide for AVN 2001 (aircraft exposures) and AVN 2002 (non-aircraft exposures) or similar "Date Recognition Limited Coverage Clauses" and the insurance certificates must state that this is the case. SCHEDULE 6 RETURN CONDITIONS On the Redelivery Date, the Aircraft, the Aircraft Documents and all other documents listed in Annex 1 to Schedule 7 will be redelivered to Sublessor by Sublessee in accordance with the procedures and in the condition set out below: 1. the Aircraft shall be returned with a current FAA standard Certificate of Airworthiness and shall meet the requirements of the FAA under Part 121 of the Federal Aviation Regulations or with a FAA Certificate of Airworthiness, if requested by Sublessor; 2. the appearance of the Aircraft shall be clean and cosmetically acceptable by domestic commercial airline standards that will allow immediate placement into commercial passenger service. All passenger windows will be free of crazing; 3. the Aircraft shall have installed the full complement of Engines and other equipment, parts, components, accessories and loose equipment as required by the Agreement to be installed on the Aircraft at Delivery (by serial number), unless agree otherwise by Sublessor in writing, each such item functioning in accordance with manufacturers' specifications and the aircraft maintenance manual provided the passengers seats shall be removed and shall remain the sole property of the Sublessee; 4. the Aircraft shall have been maintained in accordance with Clauses 16 and 17 of the Agreement with the same care and consideration for the technical condition of the Aircraft as if it were to have been kept in continued regular service by Sublessee. The Aircraft will be returned either: (a) fresh from the next due C-Check at a FAA approved repair station.; or (b) "as is where is" with an appropriate payment of US$35.00 per hour for each flight hour flown since the last most recent C-Check. 5. there shall be no open, outstanding or deferred maintenance items, scheduled or unscheduled, routine or non-routine, against the Aircraft with no evidence of untreated or noticeable corrosion; 6. all major modifications and repairs to the Aircraft will have been accomplished in accordance with current FAA approved data or the Manufacturer's Structural Repair Manual ("SRM" and have been properly documented); 7. each landing gear assembly of the Aircraft will be the same as of Delivery unless otherwise agreed between Sublessee and Sublessor; 8. the Engines will not have been discriminated against, whether by reason of it being Subleased by Sublessee or otherwise, during any shop visit with respect to Sublessee's disk replacement and performance restoration policies for CFM INTERNATIONAL CFM 56-3C1 engines it owns or operates; 9. each engine will be in good working condition with no acceleration in performance deterioration based on the engine trend monitoring data and will pass complete borescope inspections and power assurance runs; 10. the auxiliary power unit (APU) shall be in serviceable condition and meet the same conditions as were met at Delivery (as evidenced by the Acceptance Certificate); 11. Sublessee shall return the Aircraft with the paint restored to original and all logos and markings removed either painted in grey or white or (as Sublessor's option) without any change from Sublessee's livery with the intent that Sublessor repaints the Aircraft, in either case at the sole cost and expense of Sublessee; 12. the Aircraft shall be free and clear of all Security Interests (other than Sublessor Liens) and shall have no components or parts installed which are loaned, borrowed or are subject to rights of third parties under pooling, exchange, overhaul, repair or other similar arrangements; 13. the Aircraft shall be duly registered with the FAA; 14. neither the Aircraft nor any Engine or Part shall have been discriminated against whether by reason of it being Subleased by Sublessee or otherwise in maintenance, operation, use or in any other manner whatsoever, including, without limitation as to the type of maintenance program applicable to the Aircraft, any Engine or as to compliance with Airworthiness Directives; 15. the Aircraft will be in full compliance with all Airworthiness Directives (AD) issued prior to the Expiry Date and applicable to the Aircraft including operation under FAR Part 121 and which require terminating action or modification by a date (or date based upon projected Flight Hours or Cycles based on average utilization of the Aircraft by Sublessee during the Sublease Period) on or before twelve (12) months after the Expiry Date; 16. any FAA AD's applicable to the Aircraft (including, but not limited to, ageing aircraft and corrosion prevention and control program type) which allow sampling of tasks to be accomplished on other aircraft shall have 100% accomplishment of tasks on the Aircraft, as specified in the relevant FAA AD; 17. the Aircraft will be returned with one (1) complete shipset of Sublessee's galley equipment (containers, waste bins, trolleys and beverage containers); 18. all Manufacturer's free of charge service bulletin kits delivered to Sublessee for the Aircraft will be on board; 19. all Aircraft Documents, and other current and historical records acquired, delivered to or prepared by Sublessee, shall be returned with the Aircraft including, without limitation, time logs showing Aircraft and Engine Flight Hours and Cycles on any given date, documents, manuals (revised up to and including the most current revisions issued by the manufacturer), data, overhaul records, time controlled part traceability to overhaul and "zero time since new" for time controlled parts that have life limits as determined by the manufacturer, the FAA, log books, original Aircraft and Engine delivery documents, serviceable parts tags (including teardown reports for time controlled parts that have been overhauled during the Sublease Period), the FAA forms, modification records, inspection records (including NDT documentation such as x-ray, eddy current, etc.), and all other documentation pertaining to the Aircraft, Engines and Parts. All records discrepancies shall be corrected, and any missing records shall be reconstructed, by Sublessee at Sublessee's sole cost and expense prior to the return of the Aircraft. Records for major alterations (or modifications) shall include FAA approved data, such as supplemental type certificates (STC's), technical standar orders (TSO's) and service bulletin documentation; SCHEDULE 7 RETURN ACCEPTANCE CERTIFICATE 1. FRONTIER AIRLINES, INC. (Sublessee) and INDIGO PACIFIC AB (Sublessor) have entered into an Aircraft Sublease Agreement dated November [ ], 1998 (Sublease). Unless otherwise defined, capitalised terms used herein will have the meanings set forth in the Sublease. 2. Sublessor has this [ ] day of [ ] (Time: [ ]) at [ ] received from Sublessee possession of: (a) one (1) Boeing 737-3U3 Aircraft, bearing manufacturer's serial number 28734, registration mark[ ] together with two (2) CFM INTERNATIONAL CFM 56-3C1 engines bearing manufacturer's serial numbers 85716 and 85717, all Parts attached thereto and thereon in an airworthy condition; and (b) all Aircraft Documents as listed in the Document Receipt attached hereto. 3. The Airframe, Engines and Parts had the following Flight Hours/Cycles at return: (a) Airframe: Total hour Total landings Flight Hours/ Cycles Flight Hours/ Cycles since last "C" Check since last "A" Check [ ] [ ] [ ] Flight Hour [ ] Flight Hour [ ] Cycles [ ] Cycles (b) Engines: Position Serial Total Total Flight Hours/ Flight Hours/ No. Flight Cycles Cycles since Cycles since Hours last shop visit last Engine Performance Restoration Visit [ ] [ ] [ ] [ ] [ ] Flight [ ] Flight Hours Hours [ ] Cycles [ ] Cycles Position Serial Total Total Flight Hours/ Flight Hours/ No. Flight Cycles Cycles since Cycles since Hours last shop visit last Engine Performance Restoration Visit [ ] [ ] [ ] [ ] [ ] Flight [ ] Flight Hours Hours [ ] Cycles [ ] Cycles Time Remaining to next life limited part removal Flight Hours Cycles MSN [ ] [ ] [ ] MSN [ ] [ ] [ ] (c) APU: MSN Total Flight Flight Hours/ Cycles Flight Hours/Cycles Hours remaining until next HSI remaining on turbine inspection and compressor life limited parts [ ] [ ] [ ] [ ] (d) Landing Gears: Position Serial Total Flight Flight Hours/ Cycles Flight Hours/ No. Hours/Cycles since last overhaul Cycles to next sched. Removal Nose [ ] [ ] Flight [ ] Flight [ ] Flight Hours Hours Hours [ ] Cycles [ ] Cycles [ ] Cycles Right Main [ ] [ ] Flight [ ] Flight [ ] Flight Hours Hours Hours [ ] Cycles [ ] Cycles [ ] Cycles Left Main [ ] [ ] Flight [ ] Flight [ ] Flight Hours Hours Hours [ ] Cycles [ ] Cycles [ ] Cycles (e) Status of components or Parts with time/Cycle and calendar limits (see attached sheet); (f) Fuel on board at return: [ ] kilos ([ ] gallons) 4. Other technical information regarding the Aircraft and its components including damage are correctly set forth on the Aircraft report and damage chart attached hereto. 5. The above specified Aircraft, Engines and documents are hereby accepted by Sublessor subject to: (a) the provisions of the Sublease; and (b) correction by Sublessee of the discrepancies specified in Annexure 2 hereto (which correction Sublessee hereby undertakes to perform as soon as reasonably possible). 6. Subject to Paragraph 7, the leasing of the Aircraft by Sublessor to Sublessee pursuant to the Sublease is hereby terminated without prejudice to Sublessee's continuing obligations under the Sublease including, without limitation, Clauses 19 and 20. 7. Sublessee represents and warrants that during the term of the Sublease all maintenance and repairs to the Airframe and Engines were performed in accordance with the requirements contained in the Sublease. Sublessee further confirms that all of its obligations under the Sublease whether accruing prior to the date hereof or which survive the termination of the Sublease by their terms and accrue after the date hereof, will remain in full force and effect until all such obligations have been satisfactorily completed. Sublessee represented that the documents delivered and listed in Annexure 1 are true and accurate. 8. This Return Acceptance Certificate is executed and delivered by the parties in [ ]. IN WITNESS WHEREOF, the parties hereto have caused this Return Acceptance Receipt to be executed in their respective corporate names by their duly authorised representatives as of the day and year first above written. INDIGO PACIFIC AB By: Title: FRONTIER AIRLINES, INC. By: Title: ATTACHMENTS: 1. Aircraft Documents 2. List of Discrepancies Annexure 1 Aircraft Documents The (a) manuals and (b) Aircraft Documents set forth below are to be returned with the Aircraft in a current, up-to-date and correct status. List Quantity Required 1. Specific List of all Records and Documents transferred with the equipment 2. Cross Reference List; Operator/Manufacturer Part Number and Serial Number Documents Quantity Required 1. Aircraft Description and Status Summary in the form of Schedule 1 to the Sublease Agreement. 2. Emergency Equipment Installation Drawings 3. Aircraft Readiness log (revised to Expiry Date) 4. FAA approved Airplane Flight Manual (AFM) 5. Manufacturer's Flight Crew Operating Manual 6. Weight and Balance Control and Loading Manual; last weighing 7. Minimum Equipment List (MEL) 8. MEL Procedures Manual 9. Maintenance Manual (Manufacturer and Sublessee) (Tape) 10. Wiring Diagram Manual 11. System Schematics 12. Fault Isolation Manuals 13. Non-Destructive Test (NDT) Manual (if Sublessee unique) 14. Structural Repair Manual (SRM) 15. Illustrated Parts Catalog (IPC) (Manufacturer and Sublessee) 16. A copy of galley drawings and galley manuals 17. Scheduled Maintenance Program 18. Maintenance Requirement Items List 19. Ageing Aircraft Programmes: (a) Ageing Aircraft Service Action Requirements; (b) Corrosion Prevention and Control; (c) Supplemental Inspection Program (SID); (d) Ageing Aircraft Repair Assessment Program; (e) Ageing Aircraft Maintenance Planning (f) Aircraft Detail Specification Records Quantity Required 1. Current Component Inventory List (updated to the date of Redelivery) ----------------------------------- 2. Service Bulletin (SB) Accomplishment List 3. Record of last Compass Swing 4. List of Oils and Fluids 5. Aircraft/Cockpit Log Books (current and file copies) 6. Engine Log Books 7. Auxiliary Power Unit (APU) Log Book 8. All applicable Modification Records 9. All applicable Forms 337's, Major Repair and Alteration 10. All applicable Major and Minor Repair Records 11. Airworthiness Directive (AD) Compliance Summary 12. All applicable Airworthiness Directive Records and Documentation 13. Quality Control Statements: (a) List of Supporting FAR 145 Repair Stations; (b) Accidents and Incidents Statements; (c) Assistance, as required, in acquiring outstanding records; 14. Time Controlled Component List, history and status 15. Life Limited Part (LLP) List, history and status 16. Maintenance Check Status and Summary 17. Total Time and Cycle Justification 18. All other applicable Maintenance Records including: (a) All records including the most recent of all Aircraft checks (service checks, A Checks, B Checks, C Checks, D Checks, etc); (b) All Engine and APU shop repair/overhaul records including the most recent restoration of each engine module and last overhaul and HSI for the APU; (c) All Landing Gear overhaul records including the most recent overhaul of each Landing Gear. Certificates Quantity Required 1. Current Airworthiness Certificate 2. Current Noise Certificate 3. Current Registration 4. Current Radio License 5. Supplemental Type Certificates and back up data Confirmation 1. At Sublessor's request, confirmation that the Aircraft has been deregistered. Receipt of the foregoing documents, except as noted, is hereby acknowledged. Annexure 2 Discrepancies SCHEDULE 9 MONTHLY AIRCRAFT UTILIZATION AND STATUS REPORT To: INDIGO PACIFIC AB From: FRONTIER Aircraft type: Boeing 737-300 Registration: Serial number: Month of: - -------------------------------------------------------------------------------- Aircraft Total Time Since New Flight Hours: - -------------------------------------------------------------------------------- Aircraft Total Cycles Since New Cycles: - -------------------------------------------------------------------------------- Airframe Flight Hours Flown During Month Flight Hours: - -------------------------------------------------------------------------------- Airframe Cycles/Landing During Month Cycles: - -------------------------------------------------------------------------------- Time Remaining to C7 Check - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Engine Serial Number: Engine Serial Number Original Position: Original Position: - -------------------------------------------------------------------------------- Actual Location: Actual Location: - -------------------------------------------------------------------------------- Total Time Since New Total Time Since New - -------------------------------------------------------------------------------- Total Cycles Since New Total Cycles Since New - -------------------------------------------------------------------------------- Flight Hours Flown During Month Flight Hours Flown During Month - -------------------------------------------------------------------------------- Cycles During Month Cycles During Month - -------------------------------------------------------------------------------- Time since last Borescope Time since last Borescope - -------------------------------------------------------------------------------- Time remaining until next Borescope - -------------------------------------------------------------------------------- Time remaining until next Borescope - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Landing Gear: TSN CSN - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- RH Main - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- LH Main - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Nose - -------------------------------------------------------------------------------- Note: If an Engine is removed or installed on another Aircraft (subject to the provisions of the Agreement) it must be reported monthly on this form. Any service bulletins, Airworthiness Directives, engineering modifications or changes: ....................................................................... ................................................................................ - -------------------------------------------------------------------------------- Hours/Cycles Flown x US$ Per Flight = Reserve payment During Month Hour/Cycle - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Airframe Hrs. x $70.00 = - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Original Engine Serial Hrs x = Number: - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Original Engine Serial Hrs. x = Number: - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Total Engines: Hrs. x $80,00 = - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- LLP Hrs. x $20,00 = - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Landing Gear Cycles: x $10,00 = - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- APU Hrs. x $6,00 = - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Total - -------------------------------------------------------------------------------- SCHEDULE 10 POWER OF ATTORNEY The undersigned, [ ] (the Sublessee) refers to the Aircraft Lease Agreement dated as of [ ], as amended and supplemented from time to time (the Lease) between, among others [ ] (the Sublessor) and the Company with respect to one (1) Aircraft bearing manufacturer's serial number [ ] and registration mark [ ] (the Aircraft). In consideration of the sum of US$ 1 paid by the Sublessor to the Sublessee (the receipt and sufficiency of which is hereby acknowledged). The Sublessee irrevocably appoints each of the Sublessor and [ ] (severally each an Attorney) its true and lawful attorney to execute and to do an perform upon its behalf and in its name or otherwise to deliver any documents, instruments or certificates with such amendments thereto (if any) which may be required to obtain deregistration of the Aircraft from the register of aircraft maintained by the Federal Aviation Administration of the United States of America and the export of the Aircraft from the [ ] upon the lawful termination of the Lease of the Aircraft. AND generally to do any and all such acts and things and to execute under seal or hand (as appropriate) and deliver any and all documents under seal or under hand (as appropriate) as may be requested or required for such deregistration and export. AND the Sublessee hereby undertakes from time to time and at all times to indemnify the Attorney against all costs, claims, expenses and liabilities howsoever incurred by all such Attorney in connection herewith and further undertakes to ratify and confirm whatsoever the Attorney shall lawfully do or cause to be done in or by virtue of this Power of Attorney. AND for the better doing, performing and executing of the matters and things aforesaid the Sublessee hereby further grants unto the Attorney full power and authority to substitute and appoint in its place one or more attorney or attorneys to exercise for them as attorney or attorneys of the Sublessee any or all the powers and authorities hereby conferred and to revoke any such appointments from time to time and to substitute or appoint any other or others in the place of such attorney or attorneys as each attorney shall from time to time think fit. This Power of Attorney shall be subject to, governed by and construed in accordance with the laws of the State of New York. EX-27 4 FDS --
5 9-MOS MAR-31-1999 APR-01-1998 DEC-31-1999 25,322,423 0 10,356,266 191,834 1,192,077 59,881,832 11,052,921 4,152,515 82,121,500 51,600,232 0 0 0 15,316 24,633,523 82,121,500 150,434,054 150,434,054 0 137,988,535 (979,149) 0 661,870 12,762,798 12,762,798 12,762,798 0 0 0 12,762,798 .93 .86
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