-----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, IklRXHKtqSn8NiKuknHHWroE3JvVug81lnZaPsfgzNWFgXUCO4mYTlcImHMx2Lxg veNV+KCCJQfjDPJ9pwdWFw== 0000921929-99-000008.txt : 19990623 0000921929-99-000008.hdr.sgml : 19990623 ACCESSION NUMBER: 0000921929-99-000008 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990622 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-K SEC ACT: SEC FILE NUMBER: 000-24126 FILM NUMBER: 99650179 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-K 1 ANNUAL REPORT FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended March 31, 1999 [ ] 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 (I.R.S. Employer Identification No.) incorporated or organization) 12015 E. 46th Avenue, Denver, CO 80239 (Address of principal executive offices) (Zip Code) Registrant's telephone number including area code: (303) 371-7400 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, No Par Value Title of Class Indicate by check mark whether the Registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act 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 Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K or any amendment to this Form 10-K. [X] Aggregate market value of Common Stock held by non-affiliates of the Company computed by reference to the last quoted price at which such stock sold on such date as reported by the Nasdaq National Market as of June 18, 1999: $190,236,939. The number of shares of the Company's Common Stock outstanding as of June 18, 1999 is 17,232,772. Documents incorporated by reference - Part III is incorporated by reference to the Company's 1999 Proxy Statement. TABLE OF CONTENTS Page PART I Item 1: Business...........................................................1 Item 2: Properties .......................................................12 Item 3: Legal Proceedings.................................................12 Item 4: Submission of Matters to a Vote of Security Holders...............12 PART II Item 5: Market for Common Equity and Related Stockholder Matters..........13 Item 6: Selected Financial Data...........................................16 Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations.............................................17 Item 7a: Quantitative and Qualitative Disclosures About Market Risk .......29 Item 8: Financial Statements..............................................29 Item 9: Changes in and Disagreements with Accountants on Accounting and Financial Disclosure..............................................29 PART III Item 10: Directors and Executive Officers of the Registrant................29 Item 11: Executive Compensation............................................30 Item 12: Security Ownership of Certain Beneficial Owners and Management... 30 Item 13: Certain Relationships and Related Transactions....................30 PART IV Item 14: Exhibits, Financial Statement Schedules and Reports on Form 8-K...31 - 7 - PART I 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. ("Frontier" or the "Company") and the expectations of our Company and management. All statements, other than statements of historical facts, included in this report that address activities, events or developments that we expect, believe, intend or anticipate will or may occur in the future, are forward-looking statements. When used in this document, the words "estimate," "anticipate," "project" and similar expressions are intended to identify forward-looking statements. Forward-looking statements are inherently subject to risks and uncertainties, many of which cannot be predicted with accuracy and some of which might not even be anticipated. Future events and actual results, financial and otherwise, could differ materially from those set forth in or contemplated by the forward-looking statements herein. These risks and uncertainties include, but are not limited to, those discussed in "Risk Factors" below. Item 1: Business General The Company is a scheduled airline based in Denver, Colorado. We currently operate routes linking our Denver hub to 19 cities in 15 states spanning the nation from coast to coast. We were organized in February 1994 and we began flight operations in July 1994 with two leased Boeing 737-200 jets. We have since expanded our fleet to 20 leased jets, including eight Boeing 737-200s and 12 larger Boeing 737-300s. We currently use up to seven gates at our hub, Denver International Airport ("DIA"), where we operate approximately 92 daily system flight departures and arrivals. Our current route system links our Denver hub to 19 cities. The following table lists the cities we serve as of June 14, 1999, as well as the dates we commenced service to those cities: El Paso, Texas October 13, 1994 Albuquerque, New Mexico October 13, 1994 Omaha, Nebraska January 16, 1995 Chicago/Midway, Illinois September 25, 1995 Phoenix, Arizona September 25, 1995 Los Angeles, California November 3, 1995 Minneapolis/St. Paul, Minnesota November 13, 1995 Salt Lake City, Utah November 13. 1995 San Francisco, California November 17, 1995 Seattle, Washington May 1, 1996 Bloomington/Normal, Illinois January 6, 1997 Boston, Massachusetts September 16, 1997 Baltimore, Maryland November 16, 1997 New York/LaGuardia, New York December 3, 1997 San Diego, California July 23, 1998* Atlanta, Georgia December 17, 1998 Dallas/Fort Worth, Texas December 17, 1998 Las Vegas, Nevada December 17, 1998* Portland, Oregon June 14, 1999 *reintroduction of service We initiated service to four additional markets during fiscal year 1999: Atlanta, Georgia; Dallas/Ft. Worth, Texas; Las Vegas, Nevada and San Diego, California. On November 1, 1998, we initiated complimentary shuttle service between Boulder, Colorado and Denver International airport. We currently operate six daily round trip bus routes between Boulder and DIA. We also began serving Portland, Oregon on June 14, 1999. Our senior management team includes executives with substantial experience in the airline industry, including several executives who occupied similar positions at a former airline called Frontier Airlines. The former Frontier Airlines served regional routes to and from Denver from 1950 to 1986. There were various occasions when the former Frontier Airlines served most of the Company's current and intended markets with jet equipment from its Denver hub. Our corporate headquarters are located at 12015 East 46th Avenue, Denver, Colorado 80239. Our administrative office telephone number is 303-371-7400; our reservations telephone number is 800-432-1359; and our world wide Web site address is www.frontierairlines.com. Business Strategy and Markets Our business strategy is to provide air service at low fares to high volume markets from our Denver hub. Our strategy is based on the following factors: o Stimulate demand by offering a combination of low fares, quality service and frequent flyer credits in Continental Airlines' OnePass program. o Expand our Denver hub operation and increase connecting traffic by adding additional high volume markets to our current route system. o Continue filling gaps in flight frequencies to high volume markets from our Denver hub. In April 1999, we were named "Best Domestic Low Fare Carrier" by Entrepreneur Magazine in the publication's sixth annual Business Travel Awards. Route System History Our route system strategy encompasses connecting our Denver hub to top business and leisure destinations. We currently serve 15 of the top 25 destinations from Denver, as defined by the U.S. Department of Transportation's Origin and Destination Market Survey. In addition, as we bring additional aircraft into our fleet and add new markets to our route system, connection opportunities increase. During fiscal year 1999, connection opportunities for our passengers connecting through DIA increased from 3.2 flights to 5.3 flights. Marketing and Sales Our sales efforts are targeted to price-sensitive passengers in both the leisure and corporate travel markets. In the leisure market, we offer discounted fares marketed through newspaper, radio and television advertising along with special promotions. We market these activities in both our Denver hub and throughout our route system. To balance the seasonal demand changes that occur in the leisure market, we introduced several programs in late 1996 designed to capture a larger share of the corporate market, which tends to be less seasonal than the leisure market. These programs include negotiated fares for large companies that sign contracts committing to a specified volume of travel, future travel credits for small and medium size businesses contracting with us and special discounts for members of various trade and nonprofit associations. As of June 10, 1999, we had signed contracts with over 2,300 corporations. We also pursue sales opportunities with meeting and convention arrangers, government travel offices and vacation clubs. The primary tools we use to attract this business include personal sales calls, direct mail and telemarketing. In addition, we offer air/ground vacation packages to many destinations on our route system under contracts with various tour operators. An important marketing tool in today's airline environment is the frequent flyer program. In 1995, we joined Continental Airlines' OnePass program. We selected the OnePass program because there was an established membership base in Denver and in other cities we served and planned to serve. In addition, the OnePass program consistently receives high marks when compared with other programs. An important relationship for airlines is the relationship with travel agencies. We currently pay travel agent commissions of eight percent. Unlike some other airlines, we do not limit the earnings potential of travel agents through a commission cap. We have implemented marketing strategies designed to maintain and encourage relationships with travel agencies throughout our route system. We communicate with travel agents through personal visits by company executives and sales managers, sales literature mailings, telemarketing and advertising in various travel agent trade publications. We participate in the four major computer reservation systems used by travel agents to make airline reservations. We maintain a reservations center in Denver, operated by our employees. We also maintain an "overflow" center in Miami, Florida, staffed by contract personnel, which assists our Denver reservations center during peak booking periods. In January 1999, we renewed an agreement with Electronic Data Systems ("EDS") for continued and enhanced airline customer information services, including computerized reservations, passenger processing and telecommunications services. Since early 1997, we have made greater use of electronic or "paperless" ticketing, a lower cost alternative to ticketing passengers on relatively expensive ticket stock. Currently, we do not offer electronic ticketing through travel agents. Through our agreement with EDS, we are taking steps to offer travel agents with this ticketing option. We anticipate that by August 1999 we will be able to offer travel agents electronic ticketing capabilities through two of the major computer reservations systems and that by the end of our fiscal year 2000 we will be able to offer travel agents electronic ticketing capabilities through the other two major computer reservations systems. Our agreement with EDS enhances our ability to provide Internet bookings through the EDS SHARESWEB booking engine. In April 1999, we began offering "Spirit of the Web" fares via our Web site, which permits customers to make "close in" bookings beginning on Wednesdays for the following weekend. This is intended to fill seats that might otherwise go unfilled. In order to gain connecting traffic from other carriers, we have negotiated various types of interline agreements with approximately 140 domestic and international airlines serving cities on our route system. Generally, these agreements include joint ticketing and baggage services and other conveniences designed to expedite the connecting process. Product Pricing We generally offer our seats at discount fares. We believe by doing so, we reduce the cost of travel in markets we serve by as much as 60 percent compared to other carriers. Seat inventories on each flight are managed through a yield management system and we generally offer discounts with three levels of advance purchase requirements. In contrast to most carriers, our fares generally do not require travelers to include a Saturday overnight stay in order to take advantage of these discount rates. We also do not charge a premium for one-way fares and, generally, our fares do not require a round-trip purchase. Competition The Airline Deregulation Act of 1978 (the "Deregulation Act") produced a highly competitive airline industry, freed of certain government regulations that for 40 years prior to the Deregulation Act had dictated where domestic airlines could fly and how much they could charge for their services. Since then, small carriers such as Frontier have entered markets long dominated by large airlines with substantially greater resources, such as United Airlines, American Airlines, Northwest Airlines and Delta Air Lines. We compete principally with United Airlines, the dominant carrier at DIA, and its commuter affiliates with a total market share of approximately 74%. This gives United a significant competitive advantage compared to us and other carriers serving DIA. We believe our current market share at DIA is approximately 5.6%. We compete with United primarily on the basis of fares, fare flexibility and the quality of our customer service. Aircraft As of June 1999, we operated 20 leased Boeing 737 twinjet aircraft in all-coach seating configurations. We anticipate we will operate 19 aircraft between August and mid-October 1999, at which time we expect to increase our fleet size to 20 aircraft. Our intent is to add the 21st aircraft in approximately April 2000. The age of our current aircraft, their passenger capacities and their lease expirations are shown in the following table: Approximate Number of Aircraft No. of Year of Passenger Lease Model Aircraft Manufacture Seats Expiration B-737-200 5 1968-1969 108 July-October 1999 B-737-200A 3 1978-1981 119 2001-2005 B-737-300 12 1985-1998 136 2000-2006 Stage 3 noise level requirements presently require that 75% of an operator's fleet comply with Stage 3. Our aircraft fleet currently complies with Stage 3 noise level requirements. See "Description of Business - Government Regulation." By January 1, 2000, our entire fleet must comply with Stage 3 requirements. We plan to return our five smaller B-737-200 aircraft, which are not Stage 3 compliant, to the lessor in the second half of 1999. We intend to replace these aircraft with B-737-200A and B-737-300 aircraft that meet the Stage 3 noise level requirements. We regularly seek to lease additional aircraft in order to replace aircraft with expiring lease terms and to expand our service and route system. However, the aircraft lease market is cyclical, and we cannot be certain that additional aircraft will be available when we need or want to procure them, or that they will be available at acceptable lease rates and terms. By way of example, we are returning five of our smaller B-737-200 aircraft to the lessor in the second half of 1999. We have firm lease agreements to replace three of these aircraft and have signed letters of intent to replace the other two. However, delivery delays could cause us to temporarily reduce our fleet size and our passenger revenues could therefore be adversely affected. Maintenance and Repairs All of our aircraft maintenance and repairs are accomplished in accordance with the our maintenance program approved by the United States Federal Aviation Administration ("FAA"). Spare or replacement parts are maintained by us primarily in Denver. A major airline and a spare parts vendor supply us with certain of these and we purchase or lease others from other airline or vendor sources. We terminated a contract with Continental Airlines for routine maintenance at Denver in August 1996. Since that time, we have trained, staffed and supervised our own maintenance work force at Denver. We lease a portion of Continental Airlines' hangar at DIA where we presently perform our own maintenance through the "C" check level. Other major maintenance such as airframe overhauls and major engine repairs, continues to be performed by outside FAA approved contractors. We also maintain a smaller maintenance facility at El Paso, Texas. Under our aircraft lease agreements, we pay all expenses relating to the maintenance and operation of our aircraft, and we are required to pay monthly maintenance reserve deposits to the lessors based on usage. Maintenance reserve deposits are applied against the cost of scheduled major maintenance. Scheduled major maintenance has occurred or will occur for three of our aircraft in the fiscal year ending March 31, 2000. To the extent not used for major maintenance during the lease terms, maintenance reserve deposits remain with the aircraft lessors upon redelivery of the aircraft. Our monthly completion factors for the years ending March 31, 1999, 1998 and 1997 ranged from 97.6% to 99.8%, from 92.8% to 99.9%, and from 94% to 99.8%, respectively. The completion factor is the percentage of our scheduled flights that were operated by us (i.e., not canceled). Flights not completed were canceled principally as a result of mechanical problems, and to a lesser extent, weather. There can be no assurance that our aircraft will continue to be sufficiently reliable over longer periods of time. Fuel During the years ending March 31, 1999, 1998 and 1997, jet fuel accounted for 11.6%, 14.1% and 16.6%, respectively, of our operating expenses. We have arrangements with major fuel suppliers for substantial portions of our fuel requirements, and we believe that such arrangements assure an adequate supply of fuel for current and anticipated future operations. However, we have not entered into any agreements that fix the price of fuel over any period of time. Jet fuel costs are subject to wide fluctuations as a result of sudden disruptions in supply beyond our control. Therefore, we cannot predict the future availability and cost of jet fuel with any degree of certainty. Our average fuel price per gallon including taxes and into-plane fees was 55.4(cent) for the year ended March 31, 1999, with the monthly average price per gallon during the same period ranging from a low of 48.3(cent) to a high of 62.3(cent). As of June 11, 1999, the price per gallon was 60.2(cent). Newer aircraft are more fuel efficient than our Boeing 737-200 aircraft due to improved aircraft airframe design and engine technology. Significant increases in the price of jet fuel would result in a higher increase in our overall total costs than those of competitors whose fleets consist of more fuel efficient aircraft such as our Boeing 737-300 aircraft. Increases in fuel prices or a shortage of supply could have a material adverse affect on our operations and financial results. Our ability to pass on increased fuel costs to passengers through price increases or fuel surcharges may be limited, particularly given our low fare strategy. Insurance We carry $700 million per aircraft per occurrence in property damage and passenger and third-party liability insurance, and insurance for aircraft loss or damage as required by our aircraft lease agreements, and customary coverage for other business insurance. While we believe such insurance is adequate, there can be no assurance that such coverage will adequately protect us against all losses which we might sustain. Our property damage and passenger and third-party liability insurance coverage exceeds the minimum amounts required by the DOT regulations. Employees As of June 1, 1999, we had 1650 employees, including 1273 full-time and 377 part-time personnel. Our employees included 194 pilots, 271 flight attendants, 646 customer service agents, 156 reservations agents, 256 mechanics and related personnel, and 127 general management personnel. We consider our relations with our employees to be good. We believe we operate with lower personnel costs than many established airlines, principally due to lower base salaries and greater flexibility in the utilization of personnel. There can be no assurance that we can continue to realize these advantages over established or other air carriers for any extended period of time. In November 1998, our pilots voted to be represented by an independent union, the Frontier Airlines Pilots Association. This is our only employee group that currently is represented by a union. The impact of this unionization on labor costs is unknown at this time since the first bargaining agreement has not been negotiated. We have enhanced our Retirement Savings Plan [401(k)] by announcing a matching contribution by the Company for April 1999 through December 31, 1999. Participants will receive a 25% Company match for contributions up to 15%. We anticipate that the match and related vesting schedule of 20% per year will reduce our turnover rates. Training, both initial and recurring, is required for many employees. We train our pilots, flight attendants, ground service personnel, reservationists and mechanics. FAA regulations require pilots to be licensed as commercial pilots, with specific ratings for aircraft to be flown and to be medically certified as physically fit. Licenses and medical certification are subject to periodic continuation requirements, including recurrent training and recent flying experience. Mechanics, quality control inspectors and flight dispatchers must be licensed and qualified for specific aircraft. Flight attendants must have initial and periodic competency, fitness training and certification. The FAA approves and monitors our training programs. Management personnel directly involved in the supervision of flight operations, training, maintenance and aircraft inspection must meet experience standards prescribed by FAA regulations. Employees performing safety-sensitive functions are subject to pre-employment and subsequent random drug and alcohol testing. Government Regulation All interstate air carriers are subject to regulation by the U.S. Department of Transportation ("DOT") and the Federal Aviation Administration ("FAA") under the Federal Aviation Act. The DOT's jurisdiction extends primarily to the economic aspects of air transportation, while the FAA's regulatory authority relates primarily to air safety, including aircraft certification and operations, crew licensing and training and maintenance standards. In general, the amount of regulation over domestic air carriers in terms of market entry and exit, pricing and inter-carrier agreements has been greatly reduced subsequent to enactment of the Deregulation Act. U.S. Department of Transportation. We hold a Certificate of Public Convenience and Necessity issued by the DOT that allows us to engage in air transportation. Pursuant to law and DOT regulation, each United States carrier must qualify as a United States citizen, which requires that its President and at least two-thirds of its Board of Directors and other managing officers be comprised of United States citizens; that not more than 25% of its voting stock may be owned by foreign nationals, and that the carrier not be otherwise subject to foreign control. U.S. Federal Aviation Administration. We also hold an operating certificate issued by the FAA pursuant to Part 121 of the Federal Aviation Regulations. The FAA has jurisdiction over the regulation of flight operations generally, including the licensing of pilots and maintenance personnel, the establishment of minimum standards for training and maintenance, and technical standards for flight, communications and ground equipment. We must have and we maintain FAA certificates of airworthiness for all of our aircraft. Our flight personnel, flight and emergency procedures, aircraft and maintenance facilities are subject to periodic inspections and tests by the FAA. At the present time, four airports, including New York City (LaGuardia), are regulated by means of "slot" allocations, which represent government authorization to take off or land at a particular airport within a specified time period. FAA regulations require the use of each slot at least 80% of the time and provide for forfeiture of slots in certain circumstances. The Company currently holds an exemption representing six take-off and landing slots to serve the Denver-New York City (LaGuardia) market. The DOT and FAA also have authority under the Aviation Safety and Noise Abatement Act of 1979, the Airport Noise and Capacity Act of 1990 ("ANCA") and Clean Air Act of 1963 to monitor and regulate aircraft engine noise and exhaust emissions. We are required to comply with all applicable FAA noise control regulations and with current exhaust emissions standards. According to FAA rules, we must presently have at least 75% of our fleet in compliance with the FAA's Stage 3 noise level requirements. The balance of our fleet must be brought into full compliance by January 2000. Our aircraft fleet is currently in compliance with Stage 3 noise level requirements. See "Description of Business-Aircraft." Railway Labor Act/National Mediation Board. Our pilots organized in 1998 under an independent union, the Frontier Airlines Pilots Association. Our labor relations with respect to the pilots are now covered under Title II of the Railway Labor Act and are subject to the jurisdiction of the National Mediation Board. Miscellaneous. All air carriers are also subject to certain provisions of the Communications Act of 1934 because of their extensive use of radio and other communication facilities, and are required to obtain an aeronautical radio license from the Federal Communications Commission ("FCC"). To the extent that we are subject to FCC requirements, we take all necessary steps to comply with those requirements. Risk Factors In addition to the other information contained in this Form 10-K, the following risk factors should be considered carefully in evaluating us and our business. We Have a History of Net Losses, Substantial Third-Party Credit and A Limited Operating History Although we had net income of $30,566,000 for the fiscal year ended March 31, 1999, we had net losses of $17,746,000 and $12,186,000 for the years ended March 31, 1998 and 1997, respectively. We had working capital of $25,488,000 at March 31, 1999. Our suppliers currently provide goods, services and operating equipment on open credit terms. If such terms were modified to require immediate cash payments, we would be materially adversely affected. We have a limited operating history in a highly competitive industry, and we face all of the difficulties inherent in a relatively new entrant in the airline industry. The Airline Industry is Seasonal and Cyclical Our operations primarily depend on passenger travel demand, and, as such are subject to seasonal variations. Our weakest travel periods are generally during the quarters ending in June and December. The airline industry is also a highly cyclical business with substantial volatility. Airlines frequently experience short-term cash requirements. This is caused by seasonal fluctuations in traffic, which often put a drain on cash during off-peak periods, and various other factors, including price competition from other airlines, national and international events, fuel prices and general economic conditions, including inflation. Because a substantial portion of airline travel is discretionary, our operating and financial results may be negatively impacted by any downturn in national or regional economic conditions in the United States, particularly Colorado. Airlines require substantial liquidity to continue operating under most conditions. The airline industry also has low gross profit margins and revenues that vary to a substantially greater degree than do the related costs. Therefore, a significant shortfall from expected revenue levels could have a material adverse effect on our operations. Working capital deficits are not uncommon in the airline industry since airlines typically have no product inventories and ticket sales not yet flown are reflected as current liabilities. Increasing Number of Consolidations and Alliances Has Also Increased Competition The U.S. airline industry has consolidated in recent years and may further consolidate in the future. Consolidations have enabled certain carriers to expand their international operations and increase their presence in the U.S. domestic market. In addition, many major domestic carriers have formed alliances with domestic regional carriers and foreign carriers. As a result, many of the carriers with which we compete in our markets are larger and have substantially greater resources than we have. Continuing developments in the industry will affect our ability to compete in the various markets in which we operate. We Are in a High Fixed Cost Business The airline industry is characterized by fixed costs that are high in relation to revenues. Accordingly, a shortfall from expected revenue levels can have a material adverse effect on our profitability and liquidity. Increases in Fuel Costs Affect Our Operating Costs Fuel is a major component of operating expense for all airlines. Both the cost and availability of fuel are subject to many economic and political factors and events occurring throughout the world, and fuel costs fluctuate widely. Fuel accounted for 11.6% of our total operating expenses for the year ended March 31, 1999. We cannot predict our future cost and availability of fuel, and substantial sustained price increases or the unavailability of adequate fuel supplies could have a material adverse effect on our operations and profitability. Because newer aircraft are more fuel efficient than our Boeing 737-200 aircraft a significant increase in the price of jet fuel would therefore result in a higher increase in our total costs than those of competitors using more fuel-efficient aircraft. In addition, larger airlines may have a competitive advantage because they pay lower prices for fuel. We intend generally to follow industry trends by raising fares in response to significant fuel price increases. However, our ability to pass on increased fuel costs through fare increases may be limited by economic and competitive conditions. We are Subject to Federal Regulatory Oversight We have obtained the necessary authority to conduct flight operations, including a Certificate of Public Convenience and Necessity from the Department of Transportation and an operating certificate from the FAA. However, the continuation of such authority is subject to continued compliance with applicable statutes, rules and regulations pertaining to the airline industry, including any new rules and regulations that may be adopted in the future. We believe that small and start-up airlines are often subject to strict scrutiny by FAA officials, making them susceptible to regulatory demands that can negatively impact their operations. No assurance can be given that we will be able to continue to comply with all present and future rules and regulations. In addition, we can give no assurance about the costs of compliance with such regulations and the effect of such compliance costs on our profitability. In May 1996 a relatively new domestic airline, as we are, sustained an accident in which one of its aircraft was destroyed and all persons on board were fatally injured. In June 1996, that airline agreed at the FAA's request to cease all of its flight operations. Although the FAA, after an intensive and lengthy investigation, allowed that airline to resume its operations, should we experience a similar accident it is probable that there would be a material adverse effect on our business and results of operations. We Experience High Costs at Denver International Airport; the Future Availability and Location of Our DIA Gates and Their Cost is Uncertain DIA opened in March 1995, and Stapleton International Airport was closed. Financed through revenue bonds, DIA depends on landing fees, gate rentals and other income from airlines, the traveling public and others to pay debt service and support operations. Generally, our cost of operations at DIA will vary as traffic increases or diminishes at that airport. We believe that our operating costs at DIA substantially exceed those we would have incurred at Stapleton or that other airlines incur at most hub airports in other cities. We currently sublease from Continental Airlines, on a preferential-use basis, four departure gates on Concourse A at DIA. In addition, we use, on a non-preferential use basis, another three gates under the direct control of the City and County of Denver ("CCD"). Our sublease with Continental expires on February 29, 2000, as does Continental's lease with CCD for these four gates and an additional six gates it leases on Concourse A. Continental has an option to renew its lease for five years and reduce its lease obligation to three gates and related space. United Airlines, which occupies all of DIA's Concourse B gates, has a right of first refusal on any of the ten Continental gates for which Continental does not renew its lease. Continental's lease and lease renewal option for gates on Concourse A, as well as United's right of first refusal on Continental's Concourse A gates, are provided for in a 1995 agreement between CCD, Continental and United (the "1995 Agreement"). We have requested of CCD a lease, effective March 1, 2000, for the four gates we currently sublease from Continental and an additional four gates contiguous to those we now use. However, our request is contingent upon the implementation of a rate making methodology for DIA terminal facilities that remedies what we consider to be unfair and discriminatory aspects of the current methodology, as established by the 1995 Agreement. Under the present methodology costs related to a non-functioning Concourse A automated baggage system and associated equipment and space ("AABS") are allocated exclusively to Concourse A, causing rental rates on Concourse A to be higher than those on DIA's Concourse C. Our sublease for Concourse A gates with Continental, which expires in February 2000, provides that Continental pays, on our behalf, a significant portion of the AABS costs that would otherwise be payable by us under the current rate-making methodology. CCD has indicated that it is considering alternative means of treating AABS costs upon expiration of the Continental lease in February 2000. CCD and the signatory airlines at DIA, including us, are discussing possible changes to the rate-making methodology to deal with the AABS costs, although CCD has stated that absent an agreement with a majority-in-interest of the DIA signatory airlines, CCD will unilaterally impose a solution to the issue. Unless the issue is resolved by agreement of all or at least a majority in interest of the affected parties, there is a significant possibility that the 1995 Agreement, or any rate-making methodology unilaterally imposed by CCD, will be subject to litigation. In these circumstances, there is uncertainty with respect to the number and location of gate facilities at DIA that will be available to us, as well as the rates and charges that we will be required to pay for such facilities after February 2000. If we were required to operate at fewer gates than we have requested or if the rate-making methodology is not amended, it could have a material adverse effect on our business and results of operations. We Have a Limited Number of Routes Because of our relatively small fleet size and limited number of routes, we are at a competitive disadvantage compared to other airlines, such as United Airlines, that can spread their operating costs across more equipment and routes and retain connecting traffic (and revenue) within their much more extensive route networks. We Face Intense Competition and Market Dominance by United Airlines The airline industry is highly competitive, primarily due to the effects of the Airline Deregulation Act of 1978 (the "Deregulation Act"), which has substantially eliminated government authority to regulate domestic routes and fares and has increased the ability of airlines to compete with respect to flight frequencies and fares. We compete with United Airlines in the Denver market, which is our hub, and we anticipate that we will compete principally with United Airlines in our future market entries. United Airlines and its commuter affiliates is the dominant carrier out of DIA, accounting for approximately 74% of all passenger boardings and approximately 490 departures per day. Effective in February 1997, United Airlines commenced service using its low fare United "Shuttle" between Denver and Phoenix, Arizona, and on October 31, 1997 service to Salt Lake City was added, markets in which we provide services, as well as additional United Airlines flights in certain of our other markets. Additionally, from June 29, 1997 until February 4, 1998 when it ceased flight operations entirely, Western Pacific Airlines, another low-fare carrier provided hub service at DIA. This additional competition, as well as other competitive activities by United Airlines and other carriers, have had in the past and could continue to have a material adverse effect on our revenues and results of operations. Most of our current and potential competitors have significantly greater financial resources, larger route networks and superior market identity than we have. We are Dependent on Our Chief Executive Officer We are dependent on the active participation of Samuel D. Addoms, our President and Chief Executive Officer. The loss of his services could materially and adversely affect our business and future prospects. We do not maintain key person life insurance on any of our officers. We Could Lose Airport and Gate Access We have not initially encountered barriers to airport or airport gate access other than cost. However, any condition that would deny or limit our access to the airports that we intend to utilize in the future or that diminishes the desire or ability of potential customers to travel between any of those cities may have a materially adverse effect on our business. In addition, gates may be limited at some airports, which could adversely affect our operations. There are Certain Risks Associated with Our Boeing 737 Aircraft A. Maintenance. Under our aircraft lease agreements, we are required to bear all routine and major maintenance expenses. Maintenance expenses comprise a significant portion of our operating expenses. In addition, we are required periodically to take aircraft out of service for heavy maintenance checks, which can adversely affect revenues. We also may be required to comply with regulations and airworthiness directives issued by the Federal Aviation Administration, the cost of which may be partially assumed by our aircraft lessors depending upon the magnitude of the expense. There can be no assurance that we will not incur higher than anticipated maintenance expenses. Our leased aircraft are in compliance with all FAA-issued Airworthiness Directives ("ADs"). However, other ADs are presently required to be performed in the future and there is a high probability that additional ADs will be required. B. Stage 3 Noise Regulations. FAA rules require each new entrant airline such as Frontier to have at least 75% of its fleet in compliance with the FAA's Stage 3 noise level requirements. We are currently in compliance. The balance of each airline's fleet must be brought into full compliance by January 2000. Five of our eight leased Boeing 737-200 aircraft do not presently meet Stage 3 requirements, and we plan to return them to the lessor in 1999. We believe that we will be able to replace these aircraft with Stage 3 compliant aircraft but there can be no assurance that we will not be required to temporarily reduce our fleet size during this replacement process. The remaining 12 Boeing 737-300 aircraft we lease are Stage 3 compliant. C. Local Noise Regulations. As a result of litigation and pressure from airport area residents, airport operators have taken local actions over the years to reduce aircraft noise. These actions have included regulations requiring aircraft to meet prescribed decibel limits by designated dates, curfews during night time hours, restrictions on frequency of aircraft operations and various operational procedures for noise abatement. The Airport Noise and Capacity Act of 1990 ("ANCA") recognized the right of airport operators with special noise problems to implement local noise abatement procedures as long as such procedures do not interfere unreasonably with the interstate and foreign commerce of the national air transportation system. ANCA generally requires FAA approval of local noise restrictions on Stage 3 aircraft and establishes a regulatory notice and review process for local restrictions on Stage 2 aircraft. An agreement between the City and County of Denver and another city adjacent to DIA precludes the use of Stage 2 aircraft, such as certain of our Boeing 737-200 aircraft, on one of DIA's runways. On occasion, this results in longer taxi times for our aircraft than would otherwise be the case. This has not had a material adverse effect on our operations to date, and we would not expect it to have such an effect in the future due to the fact that our entire aircraft fleet must be Stage 3 compliant by January 2000. We Have a Limited Number of Aircraft, and the Market for Aircraft Fluctuates We currently schedule all of our aircraft in regular passenger service with limited spare aircraft capability in the event one or more aircraft is removed from scheduled service for unplanned maintenance repairs or other reasons. The unplanned loss of use of one or more of our aircraft for a significant period of time could have a materially adverse effect on our operations and operating results. The market for leased aircraft fluctuates based on worldwide economic factors. There can be no assurance that we will be able to lease additional aircraft on satisfactory terms or at the times needed. By way of example, we are returning five of our smaller B-737-200 aircraft to the lessor in the second half of 1999. We have firm lease agreements to replace three of these aircraft and have signed letters of intent to replace the other two. However, delivery delays could cause us to temporarily reduce our fleet size and our passenger revenues could therefore be adversely affected. Our Relations With Our Employees is Very Important We believe we operate with lower personnel costs than many established airlines, principally due to lower base salaries and greater flexibility in the utilization of personnel. There can be no assurance that we will continue to realize these advantages over established or other air carriers for an extended period of time. Our pilots are represented by an independent labor union, the Frontier Airlines Pilots Association. Our mechanics and stock clerks voted in October 1997, and our flight attendants voted in 1998, not to be represented by a union. Unionization of our employees could materially increase our labor costs. We Have Not Paid Dividends We have never declared or paid cash dividends on our Common Stock. We currently intend to retain any future earnings to fund operations and to continue development of our business and do not expect to pay any cash dividends on our Common Stock in the foreseeable future. We Face the Year 2000 Issue We began operations in July 1994, and our operations depend predominantly on third party computer systems. Because of our limited resources during our start-up, the most cost effective way to establish our computer systems was to outsource or to use manual systems. Internal systems we developed and any software we acquired were limited and designed or purchased with the Year 2000 taken into consideration. We have 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. We rely on third party business and government agencies to provide goods and services which are critical to our operations, including the FAA, the DOT, local airport authorities, including DIA, utilities, communication providers, financial institutions including credit card companies and fuel suppliers. We are reviewing, and have initiated formal communications with, these third party service providers to determine their Year 2000 readiness, the extent to which we are vulnerable to any failure by such third parties to remediate their Year 2000 problems and to resolve such issues to the extent practicable. All internal systems are in the testing and remediation phases. The customer reservations and ticketing system and the credit card processing system, for example, have already been tested and remediated. These systems are outsourced and the costs of modifying and testing these systems are being absorbed by the third party provider. Our general accounting and payroll systems have been upgraded to new versions that are certified as being Year 2000 compliant at an insignificant cost to us. Our crew and dispatch training records, aircraft maintenance records and inventory control are in the final stages of being automated from manual systems to computer systems that are certified as being Year 2000 compliant. The Boeing Company has verified that the computer systems on the aircraft type operated by us are, or will be, Year 2000 compliant before the year 2000. We plan to complete the testing and remediation phases by September 30, 1999, and the contingency planning phase by October 31, 1999. We have utilized existing resources with the exception of four temporary personnel and have incurred $60,000 of expenses to implement our Year 2000 project as of March 31, 1999. The total remaining costs of the Year 2000 project are expected to be insignificant and will be funded through cash from operations. The costs and the dates on which we anticipate completion of the Year 2000 project are based on our best estimates. There can be no guarantee that these estimates will be achieved and actual results could differ materially from those anticipated. Despite our efforts to address Year 2000 issues, we could potentially experience disruptions to some of our operations, including those resulting from non-compliant systems used by third party businesses and governmental entities. Our business, financial condition or results of operations could be materially adversely affected by the failure of our systems or those operated by third parties upon which our business relies. Item 2: Properties We have leased approximately 42,000 square feet of office space in Denver with terms ending August 2000 and January 2001 at a current annual rental of approximately $543,000. This facility provides space for our reservations center together with space for administrative activities, including senior management, purchasing, accounting, sales, marketing, advertising, human resources, maintenance and engineering and management information systems. Each airport location requires leased space associated with gate operations, ticketing and baggage operations. We either lease the ticket counters, gates and airport office facilities at each of the airports we serve from the appropriate airport authority or sublease them from other airlines. We have entered into an airport lease and facilities agreement with the City and County of Denver at DIA that expires in 2005. We sublease ticket counter space and four gates at DIA from Continental Airlines until March 1, 2000 and a portion of Continental Airlines' hangar at DIA until January 1, 2004. See "Management's Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources" and "Risk Factors." Item 3: Legal Proceedings In February 1997, we filed a complaint with the U.S. Department of Justice ("DOJ") alleging that United Airlines has engaged in predatory, anticompetitive and monopolistic practices at DIA. The complaint asks the agency to investigate eight separate counts of potential antitrust violations. The eight counts range from "capacity dumping" in markets served by competitors to alleged abuses relating to United's pricing practices, "exclusive dealing" with corporate customers and commuter carriers, and other tactics used by United to allegedly drive competitors from its markets. In early 1998 we received and answered a DOJ Civil Investigative Demand which requested information and documents in our possession relating to possible violations of the federal antitrust laws concerning monopolization or attempts to monopolize air transportation in certain markets, including certain Denver city-pair markets. To date, the DOJ has not acted on our complaint. Although the DOJ recently filed a federal civil antitrust action against another major U.S. carrier with respect to certain alleged anti-competitive practices against smaller carriers, we are unable to predict what action, if any, the DOJ will take in response to our complaint. In a related matter, the DOT, in response to complaints by us and other smaller airlines, in April 1998 published a number of proposed guidelines designed to identify predatory practices in the airline industry, along with enforcement policies. We are unable to predict what actions, if any, will be taken either by the DOT or by Congress with respect to these issues. From time to time, we are engaged in routine litigation incidental to our business. Except as may be otherwise specifically discussed in this section, we believe there are no legal proceedings pending in which we are a party or of which any of our property is the subject that are not adequately covered by insurance maintained by us, or which if adversely decided, would have a material adverse effect upon our business or financial condition. Item 4: Submission of Matters to a Vote of Security Holders During the fourth quarter of the year covered by this report, we did not submit any matters to a vote of our security holders through the solicitation of proxies or otherwise. PART II Item 5: Market for Common Equity and Related Stockholder Matters Price Range of Common Stock Until May 26, 1999, our Common Stock was traded on the Nasdaq SmallCap Market under the symbol "FRNT." Effective May 26, 1999, our Common Stock began trading on the Nasdaq National Market. Our stock will continue to trade under the symbol "FRNT." We were able to move from the SmallCap Market to the National Market because of our ability to meet minimum requirements in areas such as net tangible assets, market capitalization, public float, number of shareholders and corporate governance. The following table shows the range of high and low bid prices per share for our Common Stock for the periods indicated and as reported by Nasdaq through May 25, 1999, and thereafter the high and low sale prices as reported by Nasdaq. Market quotations listed here represent prices between dealers and do not reflect retail mark-ups, mark-downs or commissions. As of June 18, 1999 there were 652 holders of record of our Common Stock. Price Range of Common Stock Quarter Ended High Low June 30, 1997 $ 4 7/16 $ 2 15/16 September 30, 1997 4 5/16 2 13/32 December 31, 1997 3 5/8 1 9/16 March 31, 1998 4 1 3/4 June 30, 1998 3 7/8 2 7/8 September 30, 1998 4 5/8 3 December 31, 1998 5 3/8 3 March 31, 1999 10 4 15/16 June 30, 1999 (through June 18, 1999) 17 3/16 9 1/2 Recent Sales of Securities In April 1998, in connection with a private placement of 4,363,001 shares of our Common Stock, we issued a warrant to an institutional investor to purchase 716,929 shares of our Common Stock at a purchase price of $3.75 per share, which warrant expires in April 2002. In May 1998, we issued a warrant to a financial advisor in connection with debt and equity financings to purchase 548,000 shares of our Common Stock at a purchase price of $3.00 per share, which warrant expires in May 2003. In September 1998 we issued to a financial consultant a warrant to purchase 15,000 shares of our common stock at a purchase price of $3.57 per share, which warrant expires in September 2003. Each of these transactions was made under an exemption from registration under the Securities Act of 1933 pursuant to Sections 4(2) or 4(6) thereof, although the shares underlying the warrants issued to the institutional investor and financial advisor were subsequently registered with the Securities and Exchange Commission on Forms S-3. During the period April 1, 1998 through June 16, 1999, various holders of warrants to purchase our Common Stock exercised their warrants and we issued Common Stock as described below: Warrant Number of Exercise Dates of Warrant Holder Shares Issued Price Exercise Initial Public Offering Underwriter (and affiliates) 110,000 $5.525 3/29/99- 5/18/99 Aircraft Lessor 395,000 $5.00-$7.19 5/6/99 & 6/16/99 Lender 1,750,000 $3.00 7/30/98- 2/19/99 Financial Advisor 548,000 $3.00 6/14/99 Consultant 20,000 $3.00 12/23/98 As of June 18, 1999, we have granted stock options to our employees and directors to purchase up to 2,658,750 shares of Common Stock, 927,396 of which options have been previously exercised and 1,038,020 of which are currently exercisable at exercise prices ranging from $1.00 to $3.86 per share. Dividend Policy We have not declared or paid cash dividends on our Common Stock. We currently intend to retain any future earnings to fund operations and the continued development of our business, and, thus, do not expect to pay any cash dividends on our Common Stock in the foreseeable future. Future cash dividends, if any, will be determined by our Board of Directors and will be based upon our earnings, capital requirements, financial condition and other factors deemed relevant by the Board of Directors. Rights Dividend Distribution In February 1997, our Board of Directors declared a dividend distribution of one right (a "Right") for each outstanding share of our Common Stock to shareholders of record at the close of business on March 15, 1997. Except as described below, each Right, when exercisable, entitles the registered holder to purchase from us one share of Common Stock at a purchase price of $17.50 per share (the "Purchase Price"), subject to adjustment. The Rights expire at the close of business on February 20, 2007, unless we redeem or exchange them earlier as described below. The description and terms of the Rights are set forth in a Rights Agreement, as amended by amendments dated June 30, 1997 and December 5, 1997 (as so amended, the "Rights Agreement"). The Rights are exercisable upon the earlier of (i) 10 days following a public announcement that a person or group of affiliated or associated persons other than us, our subsidiaries or any person receiving newly-issued shares of Common Stock directly from us or indirectly via an underwriter in connection with a public offering by us (an "Acquiring Person") has acquired, or obtained the right to acquire, beneficial ownership of 20% or more of the outstanding shares of Common Stock (the "Stock Acquisition Date"), or (ii) 10 business days following the commencement of a tender offer or exchange offer that would result in a person or group beneficially owning 20% or more of such outstanding shares of Common Stock. If any person becomes an Acquiring Person other than pursuant to a Qualifying Offer (as defined below), each holder of a Right has the right to receive, upon exercise, Common Stock (or, in certain circumstances, cash, property or other securities of the Company) having a value equal to two times the exercise price of the Right. Notwithstanding any of the foregoing, all Rights that are beneficially owned by any Acquiring Person will be null and void. However, Rights are not exercisable in any event until such time as the Rights are no longer redeemable by us as set forth below. A "Qualifying Offer" means a tender offer or exchange offer for, or merger proposal involving, all outstanding shares of Common Stock at a price and on terms determined by at least a majority of the Board of Directors who are not our officers or employees and who are not related to the Person making such offer, to be fair to and in the best interests of the Company and our shareholders. If after the Stock Acquisition Date we are acquired in a merger or other business combination transaction in which the Common Stock is changed or exchanged or in which we are not the surviving corporation (other than a merger that follows a Qualifying Offer) or 50% or more of the Company's assets or earning power is sold or transferred, each holder of a Right shall have the right to receive, upon exercise, common stock of the acquiring company having a value equal to two times the exercise price of the Right. The Purchase Price payable, and the number of shares of Common Stock or other securities or property issuable, upon exercise of the Rights are subject to adjustment from time to time to prevent dilution (i) in the event of a stock dividend on, or a subdivision, combination or reclassification of, the Common Stock, (ii) if holders of the Common Stock are granted certain rights or warrants to subscribe for Common Stock or convertible securities at less than the current market price of the Common Stock, or (iii) upon the distribution to holders of the Common Stock of evidences of indebtedness or assets or of subscription rights or warrants. At any time until ten days following the Stock Acquisition Date, we may redeem the Rights in whole at a price of $.01 per Right. Upon the action of the Board of Directors ordering redemption of the Rights, the Rights will terminate and the only right of the holders of Rights will be to receive the $.01 redemption price. While the distribution, if any, of the Rights will not be taxable to shareholders or to us, shareholders may, depending upon the circumstances, recognize taxable income if the Rights become exercisable for Common Stock (or other consideration) of the Company or for common stock of the acquiring company. Item 6: Selected Financial Data The following selected financial data as of and for each of the years ended March 31, 1999, 1998, 1997, 1996 and 1995 are derived from our audited financial statements. This data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations," and the financial statements and the related notes thereto included elsewhere in this Report.
Year Ended March 31, 1999 1998 1997 1996 1995 ------------------------------------------------------------------ Statement of Operations Data: Total operating revenues (000s) $220,608 $147,142 $116,501 $70,393 $24,595 Total operating expenses (000s) 195,928 165,697 129,662 76,325 32,692 Operating income (loss) (000s) 24,680 (18,554) (13,161) (5,933) (8,122) Net income (loss) (000s) 30,566 (17,746) (12,186) (5,582) (7,999) Net income (loss) per share basic 2.14 (1.95) (1.49) (1.23) (2.56) diluted 1.98 (1.95) (1.49) (1.23) (2.56) Balance Sheet Data: Cash and cash equivalents (000s) $47,289 $3,641 $10,286 $6,359 $3,835 Current assets (000s) 94,209 33,999 31,470 25,797 8,270 Total assets (000s) 119,620 50,598 44,093 30,990 13,746 Current liabilities (000s) 68,721 50,324 32,745 25,844 9,529 Long-term debt (000s) 435 3,566 56 92 147 Total liabilities (000s) 75,230 56,272 34,210 26,289 12,104 Stockholders' equity (deficit) (000s) 44,391 (5,673) 9,883 4,701 1,642 Working capital (deficit) (000s) 25,488 (16,325) (1,275) (47) (1,259) Selected Operating Data: Passenger revenue (1) (000s) $214,311 $142,018 $113,758 $68,455 $23,883 Revenue passengers carried (000s) 1,664 1,356 1,180 758 269 Revenue passenger miles (RPMs) (2) (000s) 1,506,597 1,119,378 839,939 479,887 147,215 Available seat miles (ASMs) (3) (000s) 2,537,503 1,996,185 1,419,720 844,161 357,089 Passenger load factor (4) 59.4% 56.1% 59.2% 56.8% 41.2% Break-even load factor (5) 52.4% 63.1% 65.5% 61.5% 55.0% Block hours (6) 52,789 42,767 32,459 20,783 9,719 Departures 25,778 22,257 18,910 14,957 8,779 Average seats per departure 125 124 118 112 108 Average stage length 787 723 636 504 377 Average length of haul 905 826 712 633 547 Aircraft miles 20,300 16,098 12,032 7,537 3,306 Average daily block hour utilization (7) 9.6 9.5 10.3 9.9 8.7 Yield per RPM ( 8) (cents) 14.22 12.69 13.54 14.26 16.22 Total yield per RPM (9) (cents) 14.64 13.15 13.87 14.67 16.71 Total yield per ASM (10) (cents) 8.69 7.37 8.21 8.34 6.89 Expense per ASM (cents) 7.72 8.30 9.13 9.04 9.16 Expense per ASM excluding fuel (cents) 6.82 7.13 7.61 7.65 7.73 Passenger revenue per block hour $4,060 $3,321 $3,505 $3,294 $2,457 Average fare (11) $123 $100 $92 $88 $88 Average aircraft in service 15.0 12.3 9.6 5.7 4.1 EBITDAR (12) (000s) 58,848 7,437 4,576 942 (5,618) EBITDAR as a % of revenue 26.7% 5.1% 3.9% 1.3% (22.8%) Note: We did not begin flight operations until July 1994 (during the fiscal year ended March 31, 1995).
(1) "Passenger revenue" includes revenues for non-revenue passengers, administrative fees, and revenue recognized for unused tickets that are greater than one year from issuance date. (2) "Revenue passenger miles," or RPMs, are determined by multiplying the number of fare-paying passengers carried by the distance flown. (3) "Available seat miles," or ASMs, are determined by multiplying the number of seats available for passengers by the number of miles flown. (4) "Passenger load factor" is determined by dividing revenue passenger miles by available seat miles. (5) "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 (6) "Block hours" represent the time between aircraft gate departure and aircraft gate arrival. (7) "Average daily block hour utilization" represents the total block hours divided by the weighted average number of aircraft days in service. (8) "Yield per RPM" is determined by dividing passenger revenues by revenue passenger miles. (9) "Total Yield per RPM" is determined by dividing total revenues by revenue passenger miles. (10) "Total Yield per ASM" is determined by dividing passenger revenues by available seat miles. (11) "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. (12) "EBITDAR", or "earnings before interest, income taxes, depreciation, amortization and aircraft rentals," is a supplemental financial measurement we and many airline industry analysts use in the evaluation of our business However, EBITDAR should only be read in conjunction with all of our 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 our operating performance or to cash flows from operating activities (as determined in accordance with generally accepted accounting principles) as a measure of liquidity. Item 7: Management's Discussion and Analysis of Financial Condition and Result of Operations Selected Operating Statistics The following table provides our operating revenues and expenses expressed as cents per total available seat miles ("ASM") and as a percentage of total operating revenues, as rounded, for the years ended March 31, 1999, 1998 and 1997.
1999 1998 1997 ------------------------ ----------------------- ----------------------- Per % Per % Per % total of total of total of ASM Revenue ASM Revenue ASM Revenue Revenues: Passenger 8.44 97.2% 7.11 96.5% 8.01 97.6% Cargo 0.19 2.2% 0.15 2.1% 0.14 1.7% Other 0.06 0.6% 0.11 1.4% 0.06 0.7% ----------- ----------- ----------- ---------- ----------- ---------- Total revenues 8.69 100.0% 7.37 100.0% 8.21 100.0% Operating expenses: Flight operations 3.12 35.9% 3.32 45.1% 3.71 45.2% Aircraft and traffic servicing 1.35 15.5% 1.54 20.9% 1.75 21.3% Maintenance 1.42 16.4% 1.59 21.6% 1.76 21.4% Promotion and sales 1.40 16.1% 1.47 19.9% 1.52 18.5% General and administrative 0.36 4.2% 0.32 4.3% 0.33 4.0% Depreciation and amortization 0.07 0.7% 0.06 0.9% 0.08 0.9% =========== =========== =========== ========== =========== ========== Total operating expenses 7.72 88.8% 8.30 112.6% 9.13 111.3% =========== =========== =========== ========== =========== ========== Total ASMs (000s) 2,537,503 1,996,185 1,419,720
Results of Operations - Year Ended March 31, 1999 Compared to Year Ended March 31, 1998 General We are a scheduled airline based in Denver, Colorado. We currently operate routes linking our Denver hub to 19 cities in 15 states spanning the nation from coast to coast. At present, we use up to seven gates at Denver International Airport ("DIA") for approximately 92 daily flight departures and arrivals. During the year ended March 31, 1999, we added Atlanta, Georgia and Dallas/Ft. Worth, Texas to our route system and re-entered the San Diego, California and Las Vegas, Nevada markets. On June 14, 1999 we commenced service in the Denver-Portland, Oregon market. Organized in February 1994, we commenced flight operations as a regional carrier in July 1994 with two leased Boeing 737-200 jet aircraft. We have since expanded our fleet to 20 leased jets as of June 1999, including eight Boeing 737-200s and twelve larger Boeing 737-300s. During the year ended March 31, 1999, we added two additional leased Boeing 737-300 aircraft and one Boeing 737-200A to our fleet. On June 30, 1997, we signed an Agreement and Plan of Merger ("the Merger Agreement") providing for our merger (the "Merger") with Western Pacific Airlines. Pursuant to the Merger Agreement, a "code share" marketing alliance between us and Western Pacific went into effect on August 1, 1997, in effect integrating the route networks of the two airlines. On September 29, 1997, we both mutually agreed to terminate the Merger Agreement and the code-share arrangement. The separation of the two carriers required us to implement a costly restructuring of our 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. The Merger Agreement and our competition with Western Pacific adversely affected our results of operations for the year ended March 31, 1998. As a result of the expansion of our operations and the cessation of service by Western Pacific during the year ended March 31, 1999, our results of operations are not necessarily indicative of future operating results or comparable to the prior year ended March 31, 1998. Small fluctuations in our yield per RPM or expense per ASM can significantly affect operating results because we, like other airlines, have high fixed costs 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 our liquidity, cash flows and results of operations. Results of Operations We had net income of $30,566,000 or $1.98 per diluted share for the year ended March 31, 1999 as compared to a net loss of $17,746,000 or $1.95 per share for the year ended March 31, 1998. During the year ended March 31, 1999 as compared to the prior comparable period, we 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. Our cost per ASM declined to 7.72(cent) during the year ended March 31, 1999 from 8.30(cent) for the prior comparable period, principally as a result of lower fuel prices and improved operating efficiencies and economies of scale as our fixed costs were spread across a larger base 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 year ended March 31, 1999, our break-even load factor was 52.4% compared to the passenger load factor achieved of 59.4%. For the year ended March 31, 1998, our break-even load factor was 63.1% compared to the achieved passenger load factor of 56.1%. Our break-even load factor decreased from the prior comparable period largely as a result of an increase in our average fare to $123 during the year ended March 31, 1999 from $100 during the year ended March 31, 1998, an increase in our total yield per RPM from 13.15(cent) for the year ended March 31, 1998 to 14.64(cent) for the year ended March 31, 1999, and a decrease in our expense per ASM to 7.72(cent) for the year ended March 31, 1999 from 8.30(cent) for the year ended March 31, 1998. Revenues Our revenues are highly sensitive to changes in fare levels. Fare pricing policies have a significant impact on our revenues. Because of the elasticity of passenger demand, we believe that increases in fares will result in a decrease in passenger demand in many markets. We 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 our markets, we believe that we must, in most cases, match those competitive fares in order to maintain our market share. Passenger revenues are seasonal in leisure travel markets depending on the markets' locations and when they are most frequently patronized. Our average fare for the years ended March 31, 1999 and 1998 was $123 and $100, respectively. We believe that the increase in the average fare during the year ended March 31, 1999 over the prior comparable period was largely a result of our 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 825 miles for the year ended March 31, 1998 to 905 miles for the year ended March 31, 1999. We also experienced higher average fares in certain of our 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 $214,311,000 for the year ended March 31, 1999 compared to $142,018,000 for the year ended March 31, 1998, or an increase of 50.9%. We carried 1,664,000 revenue passengers for the year ended March 31, 1999 compared to 1,356,000 for the year ended March 31, 1998 or an increase of 22.7%. We had an average of 15 aircraft in our fleet during the year ended March 31, 1999 compared to an average of 12.3 aircraft during the year ended March 31, 1998, an increase of 22%, and ASMs increased 541,318,000 or 27.1%. Cargo revenues, consisting of revenues from freight and mail service, totaled $4,881,000 and $3,009,000 for the years ended March 31, 1999 and 1998, respectively, representing 2.2% and 2.0% of total operating revenues, respectively, or an increase of 62.2%. 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 $1,415,000 and $2,115,000 or .6% and 1.4% of total operating revenues for each of the years ended March 31, 1999 and 1998, respectively. Other revenues were higher during the year ended March 31, 1998 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 our code share partner. We recognized approximately $1,007,000 in ticket handling fees associated with our code share agreement with Western Pacific during the year ended March 31, 1998. 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 $195,928,000 and $165,697,000 for the years ended March 31, 1999 and 1998 and represented 88.8% and 112.6% of total revenue, respectively. Operating expenses decreased as a percentage of revenue during the year ended March 31, 1999 as we experienced significantly lower fuel prices and improved operating efficiencies and economies of scale as our fixed costs were spread across a larger base of operations. Flight Operations. Flight operations expenses of $79,247,000 and $66,288,000 were 35.9% and 45.1% of total revenue for the years ended March 31, 1999 and 1998, 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 $22,758,000 for 41,082,000 gallons used and $23,332,000 for 33,098,000 gallons used resulted in an average fuel cost of 55.4(cent) and 70.5(cent) per gallon and represented 28.7% and 35.2% of total flight operations expenses for the years ended March 31, 1999 and 1998, respectively. The average fuel cost per gallon decreased for the years ended March 31, 1999 and 1998 from the comparable prior period due to an overall decrease in the market price of fuel. Fuel prices are subject to change weekly as we do not purchase supplies in advance for inventory. Fuel consumption for each of the years ended March 31, 1999 and 1998 averaged 778 and 774 gallons per block hour, respectively. Aircraft lease expenses totaled $32,958,000 (14.9% of total revenue) and $24,330,000 (16.5% of total revenue) for the years ended March 31, 1999 and 1998, respectively, or an increase of 35.5%. The increase is largely due to higher lease expenses for larger and newer Boeing 737-300 aircraft added to the fleet which resulted in the increase in the average number of aircraft to 15 from 12.3, or 22%, for the years ended March 31, 1999, respectively. Aircraft insurance expenses totaled $2,425,000 (1.1% of total revenue) for the years ended March 31, 1999 and 1998 offset by a profit commission of $153,000 for the policy period ended June 6, 1998. The profit commission was earned because we had no aircraft hull insurance claims during the 1997-1998 policy year. Aircraft insurance expenses for the year ended March 31, 1998 were $2,989,000 (2% of total revenue). Aircraft insurance expenses decreased as a percentage of revenue as a result of competitive pricing in the aircraft insurance industry, our favorable experience rating since we began flight operations in July 1994 and economies of scale due to the increase in fleet size. Pilot and flight attendant salaries before payroll taxes and benefits totaled $10,653,000 and $8,708,000 or 5% and 6.1% of passenger revenue for each of the years ended March 31, 1999 and 1998, or an increase of 22.3%. Pilot and flight attendant compensation increased principally as a result of a 22% increase in the average number of aircraft in service, general wage rate increases, and an increase of 23.4% in block hours. We pay 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 we are not in the process of adding aircraft to our system, pilot and flight attendant expense per aircraft normalizes. With a scheduled passenger operation, and with salaried rather than hourly crew compensation, our 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 $34,147,000 and $30,685,000 (an increase of 11.3%) for the years ended March 31, 1999 and 1998, respectively, and represented 15.5% and 20.9% of total revenue. These include all expenses incurred at airports served by us, 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 year ended March 31, 1999 over the year ended March 31, 1998 as a result of our rental costs (in particular, the gate rentals at DIA and other cities where we added additional frequencies), which are largely fixed costs, remaining relatively constant as compared to the increase in revenue. Additionally, we began our 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 our route system. Maintenance. Maintenance expenses of $36,090,000 and $31,791,000 were 16.4% and 21.6% of total revenue for the years ended March 31, 1999 and 1998, 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. Effective March 1999, we began to conduct certain aircraft heavy maintenance checks in-house which we expect will reduce maintenance expenses in future years. During the quarter ended March 31, 1999, we reduced our accrued maintenance expenses for these heavy maintenance checks by approximately $1,100,000 as a result of the reduced costs associated with performing these heavy maintenance checks in-house. Maintenance cost per block hour was $684 and $743 per block hour for the years ended March 31, 1999 and 1998, respectively. Maintenance costs per block hour decreased as a result of six new aircraft we added to our fleet during the past two years, by bringing certain aircraft heavy maintenance checks in-house, the fixed rental cost of the hangar facility being spread over a larger aircraft fleet offset by FAA mandated corrosion inspections on our 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. We believe that these costs will continue to normalize as we add additional aircraft to our fleet. Promotion and Sales. Promotion and sales expenses totaled $35,621,000 and $29,329,000 and were 16.1% and 19.9% of total revenue for the years ended March 31, 1999 and 1998, 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. Our promotion and sales expenses for the year ended March 31, 1998 included expenses as a result of the code share agreement with Western Pacific, under which we 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. We did not have any code share agreements during the year ended March 31, 1999 that had as large of an impact on our expenses as the code share agreement with Western Pacific. Promotion and sales expenses decreased as a percentage of revenue for the year ended March 31, 1999 over the prior comparable period largely as a result of the increase in revenue. Promotion and sales expenses per passenger decreased to $21.41 from $21.63 for year ended March 31, 1999, 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 our reservations requirements. These increased costs were offset by a decrease in travel agency commissions. During April 1998, we reduced travel agency commissions to 8% from 10%, matching an 8% commission instituted by our competitors in the fall of 1997. Additionally, our 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 5.6% for the year ended March 31, 1999 from 7.6% for the year ended March 31, 1998. Advertising expenses of $3,900,000 were 1.8% of passenger revenue for the year ended March 31, 1999, compared to $3,048,000 or 2.2% of passenger revenue for the year ended March 31, 1998. As new cities are added to our flight schedule, advertising and marketing promotions are designed and implemented to increase awareness of our 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 year ended March 31, 1998 we competed with Western Pacific for the low fare market which required a higher volume of advertising. General and Administrative. General and administrative expenses for the years ended March 31, 1999 and 1998 totaled $9,163,000 and $6,353,000, respectively, and were 4.2% and 4.3% of total revenue, respectively. These expenses include the wages and benefits for our 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 for the year ended March 31, 1999 were accrued bonuses and related payroll taxes for our employees which totaled approximately $1,830,000. This was the first time we paid bonuses to our employees. Included in general and administrative expenses during the year ended March 31, 1998 were unusual expenses of approximately $500,000 associated with the terminated Merger Agreement with Western Pacific. Depreciation and Amortization. Depreciation and amortization expenses of $1,659,000 and $1,251,000 were approximately .8% and .9% of total revenue for the years ended March 31, 1999 and 1998, respectively. These expenses include depreciation of office equipment, ground station equipment, and other fixed assets. 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 $406,000 for the year ended March 31, 1999 compared to $808,000 for the year ended March 31, 1998. Interest income increased from $722,000 to $1,556,000 during the year ended March 31, 1999 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 expenses increased to $701,000 from $324,000 during the year ended March 31, 1999 from the prior year. In December 1997, we sold $5,000,000 of 10% senior notes. In connection with this transaction, we 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 associated with the senior secured notes totaled $568,000 and $263,000 during the years ended March 31, 1999 and 1998, respectively. See Note 4 to the Financial Statements. Other, net nonoperating expense was $449,000 for the year ended March 31, 1999 compared to other, net nonoperating income of $410,000 for the year ended March 31, 1998. Other, net nonoperating expense for the year ended March 31, 1999 includes $486,000 of unamortized deferred loan and warrant costs associated with the senior secured notes that remained at the time we prepaid the debt. Income Tax Benefit: We recognized an income tax benefit of $5,480,000 primarily attributable to the probable realization of our remaining income tax loss carryforwards for which a valuation allowance had been previously recorded. As a result of our profitability for the year ended March 31, 1999 and projected taxable income for the year ending March 31, 2000, a valuation allowance was no longer considered necessary. Expenses per ASM. Our expenses per ASM for the years ended March 31, 1999 and 1998 were 7.72(cent) and 8.30(cent), respectively, or a decrease of 7%. 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 increase in average ASMs per aircraft as we added aircraft with greater seating capacity compared to earlier fleet additions. Expenses per ASM excluding fuel for the year ended were 6.82(cent) and 7.13(cent), respectively, or a decrease of 4.3%. 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 us on five of our Boeing 737-200 aircraft, the expenses per ASM for us are higher by 11% when compared with the 120 seat alternative used by many carriers. Our average seats per aircraft for the year ended March 31, 1999 were 125 as compared to 124 seats per aircraft for the year ended March 31, 1998, with the increase in our Boeing 737-300 aircraft. Results of Operations - Year Ended March 31, 1998 Compared to Year Ended March 31, 1997 General During the year ended March 31, 1998, we added four new Boeing 737-300 aircraft to our fleet. As a result of these new aircraft fleet additions, we added service to Boston, Massachusetts in September 1997, Baltimore, Maryland in November 1997 and New York (LaGuardia), New York in December 1997. We terminated service to Las Vegas, Nevada in August 1997 and San Diego, California and St. Louis, Missouri in November 1997. In June 1997, we signed the Merger Agreement with Western Pacific. In September 1997, we mutually agreed to terminate the Merger Agreement. On October 5, 1997, Western Pacific filed for protection under Chapter 11 of the U.S. Bankruptcy Code. Western Pacific, which originally began service to and from Colorado Springs, Colorado, commenced service from DIA on June 29, 1997. On February 4, 1998, Western Pacific ceased flight operations and has since been engaged in liquidating its business. As a result of our expansion of operations during the year ended March 31, 1998, our results of operations are not necessarily indicative of future operating results or comparable to the prior year ended March 31, 1997. Results of Operations We incurred a net loss of $17,746,000 or $1.95 per share for the year ended March 31, 1998 as compared to a net loss of $12,186,000 or $1.49 per share for the year ended March 31, 1997. We believe that our operating results were adversely affected during the year ended March 31, 1998 by a code share agreement with Western Pacific which, in connection with the proposed merger with Western Pacific, was effective August 1, 1997. The code share was designed to coordinate our schedule with Western Pacific's schedule at DIA. The code share agreement was terminated effective November 15, 1997 as a part of the mutual termination of the Merger Agreement. As a result of the schedule implemented under the code share agreement, we had flights scheduled in certain markets that were not at peak travel times. This arrangement did not benefit us as an independent airline. As a result of the termination of the Merger Agreement and code share agreement, we introduced a new, independent schedule, terminated service to San Diego, California and St. Louis, Missouri, and added routes to Baltimore, Maryland and to New York City's La Guardia Airport in November and December 1997. Competition from Western Pacific on several of our routes adversely affected our yields and load factors. Additionally, during the year ended March 31, 1998 as compared to the prior comparable period, we experienced higher average aircraft lease expenses on our newer aircraft, higher maintenance expenses associated with our in-house maintenance operation which began in September 1996, and unusual general and administrative expenses associated with the Western Pacific merger. Revenues General. Airline revenues are primarily a function of the number of passengers carried and fares charged by the airline. We believe that revenues will gradually increase in a new market over a 60 to 120 day period as market penetration is achieved. We added three new markets during the year ended March 31, 1998 and four new markets during the year ended March 31, 1997. During the years ended March 31, 1998 and 1997, we faced significant competitive actions by two airlines that maintained hubs at DIA. During the year ended March 31, 1997, we competed with United Airlines with respect to fare and other competitive actions. During the year ended March 31, 1998, we, as well as competing with United Airlines for passenger traffic and on fares, also were forced to compete with Western Pacific in six of our markets where Western Pacific was offering extremely low fares in an effort we believe was targeted toward increasing load factor and revenues. The effect upon us of this competition during the year ended March 31, 1997 was a low average fare and, to a lesser degree, fewer passengers carried, and during the year ended March 31, 1998 fewer passengers carried and with a slight downward effect on the average fare. Western Pacific discontinued all flight operations on February 4, 1998 and has since been engaged in liquidating its business. Our average fares for the years ended March 31, 1998 and 1997 were $100 and $92, respectively. We believe that the increase in the average fare during the year ended March 31, 1998 over the prior comparable period was largely a result of our focus on increasing business travelers, an increase in the average length of haul and stage length, and reduced fare competition from United Airlines, offset by low pricing by Western Pacific. Effective October 1, 1997, the U.S. Congress reduced the 10% excise tax to 9%, but added a per-flight-segment fee of $1 on domestic flights. The tax decreases to 8% October 1, 1998 and to 7.5% on October 1, 1999. The per-flight-segment fee increased to $2 effective October 1, 1998, $2.25 effective October 1, 1999 and thereafter increases in annual amounts of 25 cents until it reaches $3 effective October 1, 2002. Passenger Revenue. Passenger revenues totaled $142,018,000 for the year ended March 31, 1998 compared to $113,758,000 for the year ended March 31, 1997, or an increase of 24.8%. Competition increased dramatically during the months of July through January 1998 when Western Pacific began operations at DIA and even more significantly during the months of October 1997 through January 1998 once our merger and code share agreements with Western Pacific were terminated. This increased competition had a negative impact on the number of revenue passengers we carried. The number of revenue passengers carried was 1,356,000 for the year ended March 31, 1998 compared to 1,181,000 for the year ended March 31, 1997 or an increase of 14.9%. We had an average of 12.3 aircraft in service during the year ended March 31, 1998 compared to an average of 9.6 aircraft in service during the year ended March 31, 1997 resulted in an increase in ASMs of 576,465,000 or 40.6%. For the year ended March 31, 1998, our break-even load factor was 63.1% compared to a passenger load factor of 56.1%. For the year ended March 31, 1997, our break-even load factor was 65.5% compared to a passenger load factor of 59.2%. Our break-even load factor decreased from the prior comparable period largely as a result of an increase in our average fare to $100 during the year ended March 31, 1998 from $92 during the year ended March 31, 1997. Our load factor decreased to 56.1% for the year ended March 31, 1998 from 59.2% the prior comparable period. We believe that our load factor for the year ended March 31, 1998 was adversely affected by increased competition from Western Pacific and the ramp-up effect from new routes we added during September, November and December 1997. Cargo revenues, consisting of revenues from freight and mail service, totaled $3,009,000 and $1,956,000 for the years ended March 31, 1998 and 1997, representing 2.1% and 1.7% of total operating revenues, respectively. Other revenues, comprised principally of interline handling fees, liquor sales and excess baggage fees, totaled $2,115,000 and $786,000 or 1.4% and .7% of total operating revenues for the years ended March 31, 1998 and 1997, respectively. The increase for the year ended March 31, 1998 over the prior comparable period is due to the increase in 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 our code share partner. We recognized approximately $1,007,000 in ticket handling fees associated with our code share agreement with Western Pacific during the year ended March 31, 1998. The costs which offset this revenue are included in sales and promotion expenses. Operating Expenses Total operating expenses increased to 112.6% of revenue for the year ended March 31, 1998 compared to 111.3% of revenue for the year ended March 31, 1997. Operating expenses increased as a percentage of revenue as our revenue was adversely effected by lower load factors caused by increased competition and we also experienced higher average aircraft lease expenses on our newer larger aircraft, higher maintenance expenses associated with our in-house maintenance operation which began in September 1996, and unusual general and administrative expenses associated with the Western Pacific merger. Flight Operations. Flight operations expenses of $66,288,000 and $52,650,000 were 45.1% and 45.2% of total revenue for years ended March 31, 1998 and 1997, respectively, or an increase of 25.9%. Aircraft fuel costs of $23,332,000 for 33,098,000 gallons used and $21,551,000 for 25,926,000 gallons used resulted in an average fuel cost of 70.5(cent) and 83.1(cent) per gallon and represented 35.2% and 40.9% of total flight operations expenses for the years ended March 31, 1998 and 1997, respectively. The average fuel cost per gallon decreased for the year ended March 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 we do not purchase supplies in advance for inventory. Fuel consumption for the years ended March 31, 1998 and 1997 averaged 774 and 799 gallons per block hour, respectively. Fuel consumption per block hour decreased as a result of more fuel efficient aircraft and an increase in the average length of haul. Aircraft lease expenses, excluding short-term aircraft lease expenses, totaled $24,330,000 (16.5% of total revenue) and $16,704,000 (14.3% of total revenue) for the years ended March 31, 1998 and 1997, respectively, or an increase of 45.7%. The increase is partially attributable to the increase in the average number of aircraft in service to 12.3 from 9.6, or 28.1%, for the years ended March 31, 1998 and 1997, respectively, and largely due to higher lease expenses for larger and newer Boeing 737-300 aircraft added to the fleet. In August 1996, we entered into short-term lease agreements in order to add a partial spare to our fleet to improve our on-time performance and completion factors and to substitute for aircraft in our fleet that were out of service for scheduled maintenance. Total expenses associated with the short-term lease agreements totaled $3,359,000 for the months of August 1996 through March 1997 and none during the year ended March 31, 1998. Because of the increase in our fleet size, we use at certain times up to one of our aircraft as a spare and schedule most of our major maintenance cycles to coincide with lesser traveled months. Aircraft insurance expenses totaled $2,989,000 (2.0% of total revenue) and $2,638,000 (2.3% of total revenue) for the years ended March 31, 1998 and 1997, respectively, or an increase of 13.3%. Aircraft insurance expenses decreased as a percentage of revenue as a result of competitive pricing in the aircraft insurance industry, our favorable experience rating since it began flight operations in July 1994 and economies of scale due to the increase in fleet size. Pilot and flight attendant salaries totaled $8,708,000 and $6,671,000 or 6.1% and 5.9% of passenger revenue for the years ended March 31, 1998 and 1997, respectively, or an increase of 30.5%. Pilot and flight attendant compensation increased principally as a result of a 28.1% increase in the average number of aircraft in service and an increase of 31.8% in block hours. During the years ended March 31, 1998, we added four leased aircraft to our fleet and during the year ended March 31, 1997, we added three leased aircraft to our fleet. We pay pilot and flight attendant salaries for training, consisting of approximately six and three weeks, respectively, prior to scheduled increases in service, causing the compensation expense for the years ended March 31, 1998 and 1997 to appear high in relationship to the average number of aircraft in service. When we are not in the process of adding aircraft to our system, we expect that pilot and flight attendant expense per aircraft will normalize. With a scheduled passenger operation, and with salaried rather than hourly crew compensation, our 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 $30,685,000 and $24,849,000 for the years ended March 31, 1998 and 1997, respectively, and represented 20.9% and 21.3% of total revenue. These include all expenses incurred at airports served by us, 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 year ended March 31, 1998 over the year ended March 31, 1997 as a result of our rental costs (in particular, gate rentals at DIA), which are largely fixed costs, remaining relatively constant as compared to the increase in revenue and more of our "above wing" (including passenger check-in at ticket counters, concourse gate operations and cabin cleaning) operations being performed by our personnel rather than by third party suppliers. We began our own "above wing" operations at Los Angeles International Airport in June 1996, Chicago (Midway) in July 1996, Seattle-Tacoma in August 1996, and El Paso, Texas effective October 1996. Aircraft and traffic servicing expenses will increase with the addition of new cities; however, the increased existing gate utilization at DIA is expected to reduce per unit expenses. Maintenance. Maintenance expenses of $31,791,000 and $24,946,000 were 21.6% and 21.4% of total revenue for the years ended March 31, 1998 and 1997, respectively. These include all maintenance, labor, parts and supplies expenses related to the upkeep of the aircraft. Routine maintenance is charged to maintenance expense as incurred while major engine overhauls and heavy maintenance checks are accrued each quarter. Maintenance cost per block hour was $743 and $769 for the years ended March 31, 1998 and 1997, respectively. Maintenance costs per block hour decreased as a result of lower maintenance costs associated with the four new aircraft we added to our fleet this year. Continental Airlines had been providing routine aircraft maintenance services for us at Denver but discontinued this service in September 1996. As a result, we hired our own aircraft mechanics to perform routine maintenance and subleased a portion of a hangar from Continental at DIA in which to perform this work. The performance of this work by us, together with the cost of leasing adequate hangar space, initially increased our maintenance cost per block hour. We believe that these costs will continue to normalize as we add additional aircraft to our fleet. During the years ended March 31, 1998 and 1997, we revised the timing of our scheduled maintenance and related estimates for our engine maintenance reserves. The revised estimate resulted in an additional reserve accrual of approximately $1,034,000 and $765,000, respectively, which approximates $24.17 and $23.57 of the total maintenance cost per block hour of $743 and $769 for the years ended March 31, 1998 and 1997, respectively. Promotion and Sales. Promotion and sales expenses totaled $29,329,000 and $21,526,000 and were 20.7% and 18.9% of passenger revenue for the years ended March 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 are included in these costs. The promotion and sales expenses per passenger were $21.63 and $18.24 for the years ended March 31, 1998 and 1997, respectively. Our promotion and sales expenses per passenger increased largely as a result of the code share agreement with Western Pacific, under which we incurred additional communications, computer reservation, credit card and interline handling fees, and increased advertising expenses. These expenses were offset, in part, by interline handling fees earned which are included in other revenues. We offer mileage credits on Continental Airlines OnePass mileage program. Our expense associated with the OnePass program has increased from $317,000 or 27(cent) per passenger for the year ended March 31, 1997 to $584,000 or 43(cent) per passenger for the year ended March 31, 1998. Our OnePass expense has increased as it has become more mature and more passengers have become aware of our participation in the OnePass program. Additionally, the increase in business travelers, who generally participate in mileage programs more than leisure travelers, has also caused an increase in the OnePass expense. Advertising expenses of $3,048,000 and $2,482,000 were 2.2% of passenger revenue for the years ended March 31, 1998 and 1997, respectively. General and Administrative. General and administrative expenses for the years ended March 31, 1998 and 1997 totaling $6,353,000 and $4,618,000 were 4.3% and 4.0% of total revenue, respectively. These expenses include the wages and benefits for our 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 year ended March 31, 1998 are unusual expenses of approximately $513,000 associated with the terminated merger agreement with Western Pacific. Depreciation and Amortization. Depreciation and amortization expense of $1,251,000 and $1,072,000 were approximately .9% of total revenue for each of the years ended March 31, 1998 and 1997, respectively. These expenses include depreciation of office equipment, ground station equipment, and other fixed assets. Amortization of start-up and route development costs are not included as these expenses have been expensed as incurred. Nonoperating Income (Expenses). Total net nonoperating income totaled $808,000 for the year ended March 31, 1998 compared to $975,000 for the year ended March 31, 1997, or a decrease of 17.1%. Interest income decreased from $1,034,000 to $722,000 from the prior comparable period as a result of a decrease in cash associated with the net loss incurred during the year ended March 31, 1998. In December 1997, we sold $5,000,000 of 10% senior notes. In connection with this transaction, we issued warrants to purchase 1,750,000 shares of our Common Stock. Total interest expense paid in cash and the accretion of the warrants and deferred loan expenses totaled $263,000 during the year ended March 31, 1998. We had $410,000 of other net income for the year ended March 31, 1998 which was comprised principally of $484,000 in insurance claims for our telephone switch which was subject to an electrical fire in October 1997, offset by other miscellaneous expenses. Expenses per ASM. Our expenses per ASM for the years ended March 31, 1998 and 1997 were 8.30(cent) and 9.13(cent), respectively, or a decrease of 9.1%. Expenses per ASM decreased from the prior comparable period as a result of the economies of scale as the fixed costs were spread across a larger base of operations and the average ASMs per aircraft have increased as we add planes with more seating capacity as compared to our earlier fleet additions. Our average seats per aircraft for the year ended March 31, 1998 were 122 as compared to 118 seats per aircraft for the year ended March 31, 1997. Liquidity and Capital Resources Our balance sheet reflected cash and cash equivalents of $47,289,000 and $3,641,000 at March 31, 1999 and 1998, respectively. At March 31, 1999, total current assets were $94,209,000 as compared to $68,721,000 of total current liabilities, resulting in working capital of $25,488,000. 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. Our present working capital is largely a result of the sale in April 1998 of 4,363,001 shares of our Common Stock with net proceeds to us totaling approximately $13,650,000, combined with cash flows from operating activities during the year ended March 31, 1999. Cash provided by operating activities for the year ended March 31, 1999 was $35,956,000. This is attributable to our net income for the period, increases in accounts payable, air traffic liability, other accrued expenses and accrued maintenance expense, offset by increases in restricted investments, trade receivables, security, maintenance and other deposits, prepaid expenses and inventories. Cash used by operating activities for year ended March 31, 1998 was $8,158,000. This was largely attributable to our 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 year ended March 31, 1999 was $6,801,000. We used $4,313,000 for capital expenditures for ground handling equipment, rotable aircraft components, maintenance equipment and aircraft leasehold costs and improvements. We used cash of $944,000 for initial lease acquisition security deposits for one aircraft delivered during the year ended March 31, 1999 and for three fiscal year 2000 deliveries. Additionally, we secured two aircraft delivered in December 1998 with letters of credit and for one aircraft delivered in April 1999 totaling $1,544,000. Our restricted investments increased $1,544,000 to collateralize the letters of credit. Cash used by investing activities for the year ended March 31, 1998 was $3,648,000, largely a result of capital expenditures for rotable aircraft components and aircraft leasehold costs and improvements for the aircraft delivered in May, August and September 1997 and February 1998. Additionally, we secured lease obligations for the aircraft delivered in August 1997 and February 1998 with letters of credit totaling $1,500,000. In turn, we received $650,000 during the year ended March 31, 1998 from the aircraft lessor that was previously on deposit to secure lease obligations for these aircraft. Our restricted investments increased $1,500,000 to collateralize the letter of credit. Cash provided by financing activities for the years ended March 31, 1999 and 1998 was $14,493,000 and $5,161,000, respectively. During the year ended March 31, 1999, we sold 4,363,001 shares of our Common Stock through a private placement to an institutional investor. Gross proceeds to us from the transaction were approximately $14,180,000, of which we received net proceeds of approximately $13,650,000. We issued a warrant to this investor to purchase 716,929 shares of our Common Stock at a purchase price of $3.75 per share. This warrant expires in April 2002. Additionally, during the year ended March 31, 1999, we received $1,900,000 from the exercise of Common Stock options and warrants. During the year ended March 31, 1998, we received $435,000 from the exercise of Common Stock options. In December 1997, we sold $5,000,000 of 10% senior secured notes. In connection with this transaction, we issued warrants to purchase 1,750,000 shares of Common Stock at $3.00 per share. We lease 20 Boeing 737 type aircraft under operating leases with expiration dates ranging from 1999 to 2006. Under these leases, we were required to make cash security deposits or issue letters of credit to secure the lease obligations. At March 31, 1999, we had made cash security deposits and outstanding letters of credit totaling $5,549,000 and $3,644,000, respectively. Accordingly, our restricted cash balance includes $5,549,000 which collateralize the outstanding letters of credit. Additionally, we make deposits for maintenance of these aircraft. At March 31, 1999 and 1998, we had made maintenance deposits of $18,673,000 and $11,466,000, respectively. We had issued to certain of our aircraft lessors warrants to purchase 395,000 shares of our Common Stock at an aggregate purchase price of $2,391,600. During May 1999 and June 1999, aircraft lessors exercised all of these warrants and we received $2,391,600. To the extent that the aircraft lessors were able to realize certain profit margins on their subsequent sale of our Common Stock, they were required to refund a portion of the cash security deposits they were holding. As a result of their sale of our Common Stock, $486,000 in cash security deposits were returned to us during the month of May 1999. Five of our leased aircraft are not compliant with FAA Stage 3 noise regulations. As their leases expire in 1999 we are replacing these aircraft with Stage 3 compliant aircraft. We have entered into lease agreements to lease a Boeing 737-300 aircraft and two Boeing 737-200 advanced aircraft to replace three of the non-Stage 3 compliant aircraft and have signed letters of intent for two Boeing 737-200 advanced aircraft to replace the remaining two non-Stage 3 compliant aircraft, however, delivery delays could cause us to temporarily reduce our fleet size and therefore adversely affect our revenues. We are exploring various means to increase revenues and reduce expenses. We have performed ad hoc charters and will consider them in the future depending on the availability of our fleet. We are considering revenue enhancement initiatives with new marketing alliances. We began our 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 us to perform these operations necessitated capital expenditures of approximately $800,000. Effective March 1, 1999, we began to conduct certain aircraft heavy maintenance checks in-house which we expect will 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 fully operational by the end of the fiscal year ending March 31, 2000, and an in-house revenue accounting system. We currently sublease from Continental Airlines, on a preferential-use basis, four departure gates on Concourse A at DIA. In addition, we use, on a non-preferential use basis, another three gates under the direct control of the City and County of Denver ("CCD"). Our sublease with Continental expires on February 29, 2000, as does Continental's lease with CCD for these four gates and an additional six gates it leases on Concourse A. Continental has an option to renew its lease for five years and reduce its lease obligation to three gates and related space. United Airlines, which occupies all of DIA's Concourse B gates, has a right of first refusal on any of the ten Continental gates for which Continental does not renew its lease. Continental's lease and lease renewal option for gates on Concourse A, as well as United's right of first refusal on Continental's Concourse A gates, are provided for in a 1995 agreement between CCD, Continental and United (the "1995 Agreement"). We have requested of CCD a lease, effective March 1, 2000, for the four gates we currently sublease from Continental and an additional four gates contiguous to those we now use. However, our request is contingent upon the implementation of a rate making methodology for DIA terminal facilities that remedies what we consider to be unfair and discriminatory aspects of the current methodology, as established by the 1995 Agreement. Under the present methodology costs related to a non-functioning Concourse A automated baggage system and associated equipment and space ("AABS") are allocated exclusively to Concourse A, causing rental rates on Concourse A to be higher than those on DIA's Concourse C. Our sublease for Concourse A gates with Continental, which expires in February 2000, provides that Continental pays, on our behalf, a significant portion of the AABS costs that would otherwise be payable by us under the current rate-making methodology. CCD has indicated that it is considering alternative means of treating AABS costs upon expiration of the Continental lease in February 2000. CCD and the signatory airlines at DIA, including us, are discussing possible changes to the rate-making methodology to deal with the AABS costs, although CCD has stated that absent an agreement with a majority-in-interest of the DIA signatory airlines, CCD will unilaterally impose a solution to the issue. Unless the issue is resolved by agreement of all or at least a majority in interest of the affected parties, there is a significant possibility that the 1995 Agreement, or any rate-making methodology unilaterally imposed by CCD, will be subject to litigation. In these circumstances, there is uncertainty with respect to the number and location of gate facilities at DIA that will be available to us, as well as the rates and charges that we will be required to pay for such facilities after February 2000. If we were required to operate at fewer gates than we have requested or if the rate-making methodology is not amended, it could have a material adverse effect on our business and results of operations. Our goal is to continue to lease additional aircraft to serve additional cities and to add flights on existing routes from Denver. We added routes to San Diego, California, Atlanta, Georgia, Dallas/Ft. Worth, Texas and Las Vegas, Nevada during the year ended March 31, 1999 and Portland, Oregon effective June 14, 1999. We believe that expanding our 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 our 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 our business, and competition within the airline industry which often requires quick reaction by management to changes in market conditions, we may require additional capital to further expand our 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 year ended March 31, 1999, we have incurred substantial operating losses since our inception. In addition, we have substantial contractual commitments for leasing and maintaining aircraft. We believe that our existing cash balances coupled with improved operating results are and will be adequate to fund our operations at least through March 31, 2000. Year 2000 Compliance We began operations in July 1994, and our operations depend predominantly on third party computer systems. Because of our limited resources during our start-up, the most cost effective way to establish our computer systems was to outsource or to use manual systems. Internal systems we developed and any software we acquired are limited and were designed or purchased with the Year 2000 taken into consideration. We have 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. We rely on third party business and government agencies to provide goods and services which are critical to our operations, including the FAA, the DOT, local airport authorities including DIA, utilities, communication providers, financial institutions including credit card companies and fuel suppliers. We are reviewing, and have initiated formal communications with, these third party service providers to determine their Year 2000 readiness, the extent to which we are vulnerable to any failure by such third parties to remediate their Year 2000 problems and to resolve such issues to the extent practicable. All internal systems are in the testing and remediation phases. The customer reservations and ticketing system and the credit card processing system, for example, have already been tested and remediated. These systems are outsourced and the costs of modifying and testing these systems are being absorbed by the third party provider. Our general accounting and payroll systems have been upgraded to new versions that are certified as being Year 2000 compliant at an insignificant cost to us. Our crew and dispatch training records, aircraft maintenance records and inventory control are in the final stages of being automated from manual systems to computer systems that are certified as being Year 2000 compliant. The Boeing Company has verified that the computer systems on the aircraft type operated by us are or will be Year 2000 compliant before the year 2000. We plan to complete the testing and remediation phases by September 30, 1999, and the contingency planning phase by October 31, 1999. We have utilized existing resources with the exception of four temporary personnel and have incurred $60,000 of expenses to implement our Year 2000 project as of March 31, 1999. The total remaining costs of the Year 2000 project are expected to be insignificant and will be funded through cash from operations. The costs and the dates on which we anticipate completion of the Year 2000 project are based on our best estimates. There can be no guarantee that these estimates will be achieved and actual results could differ materially from those anticipated. Despite our efforts to address Year 2000 issues, we could potentially experience disruptions to some of our operations, including those resulting from non-compliant systems used by third party businesses and governmental entities. Our business, financial condition or results of operations could be materially adversely affected by the failure of our systems or those operated by third parties upon which our business relies. Item 7A: Quantitative and Qualitative Disclosures About Market Risk The risk inherent in our market risk sensitive position is the potential loss arising from an adverse change in the price of fuel as described below. The sensitivity analysis presented does not consider either the effects that such an adverse change may have on overall economic activity or additional actions management may take to mitigate our exposure to such a change. Actual results may differ from the amounts disclosed. At the present time, we do not utilize fuel price hedging instruments to reduce our exposure to fluctuations in fuel prices. Our earnings are affected by changes in the price and availability of aircraft fuel. Market risk is estimated as a hypothetical 10 percent increase in the average cost per gallon of fuel for the fiscal year ended March 31, 1999. Based on fiscal year 1999 actual fuel usage, such an increase would have resulted in an increase to aircraft fuel expense of approximately $2,300,000 in fiscal year 1999. Comparatively, based on projected fiscal year 2000 fuel usage, such an increase would result in an increase to aircraft fuel expense of approximately $3,100,000 in fiscal year 2000. The increase in exposure to fuel price fluctuations in fiscal year 2000 is due to our plan to increase our average aircraft fleet size and related gallons purchased. Item 8: Financial Statements Our financial statements are filed as a part of this report immediately following the signature page. Item 9: Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. We have not, during the past three years and through the date of this report, had a change in our independent certified public accountants or had a disagreement with such accountants on any matter of accounting principles, practices or financial statement disclosure. PART III Item 10: Directors and Executive Officers of the Registrant. The information required by this Item is incorporated herein by reference to the data under the heading "Election of Directors" in the Proxy Statement to be used in connection with the solicitation of proxies for our annual meeting of shareholders to be held on September 9, 1999. We will file the definitive Proxy Statement with the Commission on or before July 29, 1999. Item 11. Executive Compensation. The information required by this Item is incorporated herein by reference to the data under the heading "Executive Compensation" in the Proxy Statement to be used in connection with the solicitation of proxies for our annual meeting of shareholders to be held on September 9, 1999. We will file the definitive Proxy Statement with the Commission on or before July 29, 1999. Item 12. Security Ownership of Certain Beneficial Owners and Management. The information required by this Item is incorporated herein by reference to the data under the heading "Voting Securities and Principal Holders Thereof" in the Proxy Statement to be used in connection with the solicitation of proxies for our annual meeting of shareholders to be held on September 9, 1999. We will file the definitive Proxy Statement with the Commission on or before July 29, 1999. Item 13. Certain Relationships and Related Transactions. The information required by this Item is incorporated herein by reference to the data under the heading "Related Transactions" in the Proxy Statement to be used in connection with the solicitation of proxies for our annual meeting of shareholders to be held on September 9, 1999. We will file the definitive Proxy Statement with the Commission on or before July 29, 1999. PART IV Item 14(a): Exhibits, Financial Statement Schedules, and Reports on Form 8-K. Exhibit Numbers Description of Exhibits 3.1 Amended and Restated Articles of Incorporation of the Company.(12) 3.2 Amended Bylaws of the Company (June 9, 1997). (5) 4.1 Specimen Common Stock certificate of the Company. (1) 4.2 The Amended and Restated Articles of Incorporation and Amended Bylaws of the Company are included as Exhibits 3.1 and 3.2. 4.3 Form of Warrant. (1) 4.4 Rights Agreement, dated as of February 20, 1997, between Frontier Airlines, Inc. and American Securities Transfer & Trust, Inc, including the form of Rights Certificate and the Summary of Rights attached thereto as Exhibits A and B, respectively, incorporated by reference to Frontier Airlines, Inc. Registration Statement on Form 8-A dated March 11, 1997. (6) 4.4(a) Amendment to Rights Agreement dated June 30, 1997. (5) 4.4(b) Amendment to Rights Agreement dated December 5, 1997. (13) 10.1 Office Lease. (1) 10.2 Office Lease Supplements and Amendments. (5) 10.2(a) Addendum to Office Lease (10) 10.2(b) Office Lease Supplements and Amendments (13) 10.3 1994 Stock Option Plan. (1) 10.4 Amendment No. 1 to 1994 Stock Option Plan. (2) 10.4(a) Amendment No. 2 to 1994 Stock Option Plan (5) 10.5 Registration Rights Agreement. (1) 10.6 Sales Agreement. (1) 10.7 Airport Use and Facilities Agreement, Denver International Airport (2) 10.8 Aircraft Lease Agreement dated as of July 26, 1994. (2) 10.8(a) Assignment and Assumption Agreements dated as of March 28, 1997 and March 20, 1997 between USAirways, Inc. and First Security Bank, National Association ("Trustee") and Frontier Airlines, Inc. (5) 10.8(b) Amendment No. 1, dated June 5, 1997, to Lease Agreement dated as of July 26, 1994 between Frontier Airlines, Inc. and First Security Bank, National Association. (5) 10.9 Code Sharing Agreement. (5) 10.10 Aircraft Lease Agreement dated as of October 20, 1995 (MSN 23177). (3) 10.11 Aircraft Lease Agreement dated as of October 20, 1995 (MSN 23257). (3) 10.12 Aircraft Lease Agreement dated as of May 1, 1996. (3) 10.13 Aircraft Lease Agreement dated as of June 3, 1996. (3) 10.13(a) Amendment No.1 to Aircraft Lease Agreement dated as of June 3, 1996.(10) 10.14 Aircraft Lease Agreement dated as of June 12, 1996. Portions of this Exhibit have been excluded from the publicly available document and an order granting confidential treatment of the excluded material has been received. (3) 10.15 Operating Lease Agreement dated November 1, 1996 between the Company and First Security Bank, National Association. Portions of this Exhibit have been excluded from the publicly available document and an order granting confidential treatment of the excluded material has been received. (4) 10.16 Aircraft Lease Agreement (MSN 28760) dated as of December 12, 1996 between the Company and Boullion Aircraft Holding Company, Inc. Portions of this Exhibit have been excluded from the publicly available document and an order granting confidential treatment of the excluded material has been received. (4) 10.16(a) Amendment No. 1 to Aircraft Lease Agreement (MSN 28760) dated May 20, 1997. Portions of this Exhibit have been excluded from the publicly available document and an application for an order granting confidential treatment of the excluded material has been made. (5) 10.17 Aircraft Lease Agreement (MSN 28662) dated as of December 12, 1996 between the Company and Boullion Aircraft Holding Company, Inc. Portions of this Exhibit have been excluded from the publicly available document and an order granting confidential treatment of the excluded material has been received. (4) 10.17(a) Amendment No. 1 to Aircraft Lease Agreement (MSN 28662) dated May 20, 1997. Portions of this Exhibit have been excluded from the publicly available document and an a pplication for an order granting confidential treatment of the excluded material has been made. (5) 10.18 Aircraft Lease Agreement (MSN 28563) dated as of March 25, 1997 between the Company and General Electric Capital Corporation. Portions of this Exhibit have been excluded from the publicly available document and an application for an order granting confidential treatment of the excluded material has been made. (5) 10.19 Space and Use Agreement with Continental Airlines, as amended. Portions of this Exhibit have been excluded from the publicly available document and an application for an order granting confidential treatment of the excluded material has been made. (5) 10.20 Letterof Understanding with Continental Airlines dated August 16, 1996. Portions of this Exhibit have been excluded from the publicly available document and an application for an order granting confidential treatment of the excluded material has been made. (5) 10.21 Service Agreement between Frontier Airlines, Inc and Greenwich Air Services, Inc. dated May 19, 1997. Portions of this Exhibit have been excluded from the publicly available document and an application for an order granting confidential treatment of the excluded material has been made. (5) 10.22 Agreement between Frontier Airlines, Inc. and Dallas Aerospace, Inc. dated April 17, 1997. Portions of this Exhibit have been excluded from the publicly available document and an application for an order granting confidential treatment of the excluded material has been made. (5) 10.23 General Services Agreement between Frontier Airlines, Inc. and Tramco, Inc. dated as of August 6, 1996. (5) 10.24 General Terms Engine Lease Agreement between Frontier Airlines, Inc. and Terandon Leasing Corporation dated as of August 15, 1996, as assigned to U.S. Bancorp Leasing and Financial on February 19, 1997. Portions of this Exhibit have been excluded from the publicly available document and an application for an order granting confidential treatment of the excluded material has been made. (5) 10.25 Lease Agreement between Frontier Airlines, Inc. and Aircraft Instrument and Radio Company, Inc, dated December 11, 1995. Portions of this Exhibit have been excluded from the publicly available document and an application for an order granting confidential treatment of the excluded material has been made. (5) 10.26 Agreement and Plan of Merger between Western Pacific Airlines, Inc. and Frontier Airlines, Inc. dated June 30, 1997. (5) 10.26(a) Agreement dated as of September 29, 1997 between Western Pacific Airlines, Inc. and Frontier Airlines, Inc. (7) 10.27 Security Agreement with Wexford Management LLC dated December 2, 1997. (8) 10.28 Amended and Restated Warrant Agreement with Wexford Management LLC dated as of February 27, 1998. (12) 10.29 Amended and Restated R egistration Rights Agreement with Wexford Management LLC dated as of February 27, 1998. (12) 10.30 Securties Purchase Agreement with B III Capital Partners, L.P. dated as of April 24, 1998. (9) 10.31 Registration Rights Agreement with B III Capital Partners, L.P. dated as of April 24, 1998. (12) 10.32 Warrant Agreement with The Seabury Group, LLC dated as of May 26, 1998. (12) 10.33 Registration Rights Agreement with The Seabury Group, LLC dated as of May 26, 1998. (12) 10.34 Aircraft Lease Agreement (MSN 21613) dated as of August 10, 1998 between the Company and Interlease Aviation Investors, L.L.C. (10) 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. (11). 10.36 Aircraft Sublease Agreement (MSN 28734) dated as of December 14, 1998 between Indigo pacific AB, Sublessor, and the Company, Sublessee. (11) 10.37 Aircraft Lease Agreement (MSN 23004) dated as of February 26, 1999 between First Security Bank, N.A., Lessor, and Frontier Airlines, Inc., Lessee. Portions of this exhibit have been excluded from the publicly available document and an application for an order granting confidential treatment of the excluded material has been made. (13) 10.38 Aircraft Lease Agreement (MSN 23007) dated as of February 26, 1999 between First Security Bank, N.A. Lessor and Frontier Airlines, Inc., Lessee. Portions of this exhibit have been excluded from the publicly available document and an application for an order granting confidential treatment of the excluded material has been made. (13) 10.39 Aircraft Lease Agreement (MSN 26440) dated as of March 15, 1999 between Indigo Aviation AB (publ), Lessor, and Frontier Airlines, Inc., Lessee. Portions of this exhibit have been excluded from the publicly available document and an application for an order granting confidential treatment of the excluded material has been made. (13) 10.40 Aircraft Lease Agreement (MSN 24569) dated as of April 16, 1999 between C.I.T. Leasing Corporation, Lessor, and Frontier Airlines, Inc., Lessee. Portions of this exhibit have been excluded from the publicly available document and an application for an order granting confidential treatment of the excluded material has been made. (13) 10.41 Aircraft Lease Agreement (MSN 24856) dated as of June 2, 1999 between Indigo Aviation AB (publ), Lessor and Frontier Airlines, Inc., Lessee. Portions of this exhibit have been excluded from the publicly available document and an application for an order granting confidential treatment of the excluded material has been made. (13) 10.42 Severance Agreement dated March 10, 1999 between the Company and Samuel D. Addoms. (13) 10.43 Space and Use Agreement between Continental Airlines, Inc. and the Company. (13) 23.1 Consent of KPMG LLP (13) 27.1 Financial Data Schedule (13) (1) Incorporated by reference from the Company's Registration Statement on Form SB-2, Commission File No. 33-77790-D, declared effective May 20, 1994. (2) Incorporated by reference from the Company's Annual Report on Form 10-KSB, Commission File No. 0-4877, filed on June 29, 1995. (3) Incorporated by reference from the Company's Annual Report on Form 10-KSB, Commission File No. 0-4877, filed on June 24, 1996. (4) Incorporated by reference from the Company's Quarterly Report on Form 10-QSB, Commission File No. 0-4877, filed on February 13, 1997. (5) Incorporated by reference from the Company's Annual Report on Form 10-KSB, Commission File No. 0-24126, filed July 14, 1997. (6) Incorporated by reference from the Company's Report on Form 8-K filed on March 12, 1997. (7) Incorporated by reference from the Company's Report on Form 8-K filed on October 1, 1997. (8) Incorporated by reference from the Company's Report on Form 8-K filed on December 12, 1997. (9) Incorporated by reference from the Company's Report on Form 8-K filed on May 4, 1998. (10) Incorporated by reference from the Company's Report on Form 10-Q, Commission File No. 0-24126, filed on November 13, 1998. (11) Incorporated by reference from the Company's Report on Form 10-Q, Commission File No. 0-24126, filed on February 12, 1999. (12) Incorporated by reference from the Company's Report on Form 10-K/A, Commission file No. 0-24126, filed July 9, 1998. (13) Filed herewith. Item 14(b): Reports on Form 8-K. No reports on Form 8-K were filed during the quarter ended March 31, 1999. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities 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: June 21, 1999 By: /s/ Samuel D. Addoms ------------------------------ Samuel D. Addoms, Principal Executive Officer and Principal Financial Officer Date: June 21, 1999 By: /s/ Elissa A. Potucek ------------------------------ Elissa A. Potucek, Vice President, Controller, Treasurer and Principal Accounting Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Date: June 21, 1999 /s/ Samuel D. Addoms, Director ---------------------------------- Samuel D. Addoms, Director Date: June 21, 1999 /s/ William B. McNamara, Director ---------------------------------- William B. McNamara, Director Date: June 21, 1999 /s/ Paul Stephen Dempsey, Director ---------------------------------- Paul Stephen Dempsey, Director Date: June 21, 1999 /s/ B. LaRae Orullian, Director ---------------------------------- B. LaRae Orullian, Director Date: June 21, 1999 /s/ D. Dale Browning, Director ---------------------------------- D. Dale Browning, Director Date: June 21, 1999 /s/ James B. Upchurch, Director ---------------------------------- James B. Upchurch, Director Date: June 21, 1999 /s/ B. Ben Baldanza, Director ---------------------------------- B. Ben Baldanza, Director Independent Auditors' Report The Board of Directors and Stockholders Frontier Airlines, Inc.: We have audited the accompanying balance sheets of Frontier Airlines, Inc. as of March 31, 1999 and 1998, and the related statements of operations, stockholders' equity, and cash flows for each of the years in the three-year period ended March 31, 1999. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Frontier Airlines, Inc., as of March 31, 1999 and 1998, and the results of its operations and its cash flows for each of the years in the three-year period ended March 31, 1999, in conformity with generally accepted accounting principles. KPMG LLP Denver, Colorado June 2, 1999, except as to Note 11, which is as of June 16, 1999
FRONTIER AIRLINES, INC. Balance Sheets March 31, 1999 and 1998 March 31, March 31, 1999 1998 --------------- -------------- Assets Current assets: Cash and cash equivalents $ 47,289,072 $ 3,641,395 Restricted investments 4,000,000 4,000,000 Trade receivables, net of allowance for doubtful accounts of $199,960 and $139,096 at March 31, 1999 and 1998, respectively 16,930,038 11,661,323 Maintenance deposits (note 3) 13,018,466 9,307,723 Prepaid expenses 5,439,834 3,843,694 Inventories 1,203,916 1,164,310 Deferred tax assets (note 5) 6,041,576 - Deferred lease and other expenses 285,636 380,975 --------------- -------------- Total current assets 94,208,538 33,999,420 Security, maintenance and other deposits (note 3) 11,834,457 7,633,143 Property and equipment, net (note 2) 8,733,778 5,579,019 Deferred lease and other expenses 267,762 780,429 Restricted investments 4,575,760 2,606,459 --------------- -------------- $ 119,620,295 $ 50,598,470 =============== ============== Liabilities and Stockholders' Equity Current liabilities: Accounts payable $ 14,011,238 $ 13,664,750 Air traffic liability 28,887,692 18,910,441 Other accrued expenses 10,781,509 5,157,640 Accrued maintenance expense (note 3) 14,933,568 12,537,228 Current portion of obligations under capital leases (note 3) 106,833 54,346 --------------- -------------- Total current liabilities 68,720,840 50,324,405 Senior secured notes payable (note 4) - 3,468,138 Accrued maintenance expense (note 3) 6,042,958 2,381,354 Deferred tax liability (note 5) 30,928 - Obligations under capital leases, excluding current portion (note 3) 434,920 97,757 --------------- -------------- Total liabilities 75,229,646 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; 16,141,172 and 9,253,563 shares issued and outstanding at March 31, 1999 and 1998, respectively 16,141 9,253 Additional paid-in capital 58,054,844 37,954,584 Unearned ESOP shares (note 8) (609,375) - Accumulated deficit (13,070,961) (43,637,021) --------------- -------------- 44,390,649 (5,673,184) --------------- -------------- Commitments and contingencies (notes 3, 6, 10 & 11) $ 119,620,295 $ 50,598,470 =============== ==============
See accompanying notes to financial statements.
FRONTIER AIRLINES, INC. Statements of Operations Years Ended March 31, 1999, 1998 and 1997 1999 1998 1997 ---- ---- ---- Revenues: Passenger $ 214,311,312 $ 142,018,392 $ 113,758,027 Cargo 4,881,066 3,008,919 1,956,150 Other 1,415,332 2,115,326 786,457 -------------- --------------- -------------- Total revenues 220,607,710 147,142,637 116,500,634 -------------- --------------- -------------- Operating expenses: Flight operations 79,247,347 66,288,125 52,650,575 Aircraft and traffic servicing 34,146,888 30,684,992 24,849,388 Maintenance 36,090,052 31,790,600 24,945,636 Promotion and sales 35,620,954 29,328,970 21,526,345 General and administrative 9,163,045 6,352,977 4,617,982 Depreciation and amortization 1,659,429 1,251,364 1,072,160 -------------- --------------- -------------- Total operating expenses 195,927,715 165,697,028 129,662,086 -------------- --------------- -------------- Operating income (loss) 24,679,995 (18,554,391) (13,161,452) -------------- --------------- -------------- Nonoperating income, net: Interest income 1,556,047 722,380 1,033,508 Interest expense (700,635) (324,167) (20,435) Other, net (448,917) 409,808 (37,953) -------------- --------------- -------------- Total nonoperating income, net 406,495 808,021 975,120 -------------- --------------- -------------- Net income (loss) before income tax 25,086,490 (17,746,370) (12,186,332) Income tax benefit (note 5) 5,479,570 - - -------------- --------------- -------------- Net income (loss) $ 30,566,060 $ (17,746,370) $ (12,186,332) ============== =============== ============== Earnings (loss) per share: Basic $2.14 ($1.95) ($1.49) ============== =============== ============== Diluted $1.98 ($1.95) ($1.49) ============== =============== ============== Weighted average shares of common stock outstanding 14,257,661 9,095,220 8,156,302 ============== =============== ============== Weighted average shares of common stock and common stock equivalents outstanding 15,401,435 9,095,220 8,156,302 ============== =============== ==============
See accompanying notes to financial statements. FRONTIER AIRLINES, INC. Statements of Stockholders' Equity Years Ended March 31, 1999, 1998 and 1997
Common Stock Additional Unearned Total Stated paid-in ESOP Accumulated stockholders' Shares value capital shares Deficit equity --------------- ------------ ------------ ------------ -------------- -------------- Balances, March 31, 1996 5,420,640 $ 5,421 $ 18,399,918 $ - $ (13,704,319) $ 4,701,020 Sale of common stock, net of offering costs of $279,385 678,733 679 2,720,615 - - 2,721,294 Exercise of common stock warrants, net of issuance costs of $55,518 2,666,133 2,666 13,275,145 - - 13,277,811 Contribution of common stock to employees stock ownership plan 78,869 78 499,922 - - 500,000 Issuance of warrants - - 869,110 - - 869,110 Net loss - - - - (12,186,332) (12,186,332) --------------- ------------ ------------ ------------ -------------- -------------- Balances, March 31, 1997 8,844,375 8,844 35,764,710 - (25,890,651) 9,882,903 Exercise of common stock options 409,188 409 434,948 - - 435,357 Warrants issued in conjunction with debt - - 1,754,926 - - 1,754,926 Net loss - - - - (17,746,370) (17,746,370) --------------- ------------ ------------ ------------ -------------- -------------- Balances, March 31, 1998 9,253,563 9,253 37,954,584 - (43,637,021) (5,673,184) Sale of common stock, net of offering costs of $525,059 4,363,001 4,363 13,650,331 - - 13,654,694 Contribution of common stock to employees stock ownership plan 275,000 275 1,457,975 (609,375) - 848,875 Exercise of common stock warrants 1,796,400 1,797 4,360,022 - - 4,361,819 Exercise of common stock options 453,208 453 631,932 - - 632,385 Net income - - - - 30,566,060 30,566,060 --------------- ------------ ------------ ------------ -------------- -------------- Balances, March 31, 1999 16,141,172 $ 16,141 $ 58,054,844 $ (609,375) $ (13,070,961) $ 44,390,649 =============== ============ ============ ============ ============== ==============
See accompanying notes to financial statements. FRONTIER AIRLINES, INC.
Statements of Cash Flows Years ended March 31, 1999, 1998, and 1997 - --------------------------------------------------------------------------------------------------------------- 1999 1998 1997 ---- ---- ---- Cash flows from operating activities: Net income (loss) $ 30,566,060 $ (17,746,370) $ (12,186,332) Adjustments to reconcile net income (loss) to net cash from operating activities: Employee stock ownership plan compensation expense 848,600 - 500,000 Depreciation and amortization 2,705,255 1,749,097 1,322,916 Loss on sale of equipment 3,867 10,334 4,708 Changes in operating assets and liabilities: Restricted investments (425,301) (2,372,326) 82,458 Trade receivables (5,268,715) (4,209,981) (1,579,184) Security, maintenance and other deposits (6,968,057) (3,583,327) (1,608,524) Prepaid expenses (1,596,140) (393,823) (562,954) Inventories (39,606) (167,208) (427,926) Note receivable - 11,740 10,950 Deferred tax benefit (6,010,648) - - Accounts payable 346,488 5,619,217 3,643,071 Air traffic liability 9,977,251 5,851,809 1,858,072 Other accrued expenses 5,758,840 1,839,597 1,323,037 Accrued maintenance expense 6,057,944 5,233,104 1,151,443 -------------- --------------- -------------- Net cash provided (used) by operating activities 35,955,838 (8,158,137) (6,468,265) -------------- --------------- -------------- Cash flows used by investing activities: Decrease in short-term investments - - 1,168,200 Aircraft lease deposits (944,000) 207,500 (2,682,250) Increase in restricted investments (1,544,000) (1,500,000) (600,000) Capital expenditures (4,313,065) (2,355,266) (3,434,789) -------------- --------------- -------------- Net cash used in investing activities (6,801,065) (3,647,766) (5,548,839) -------------- --------------- -------------- Cash flows from financing activities: Net proceeds from issuance of common stock and warrants 15,550,085 435,357 15,999,455 Proceeds from sale of senior secured notes - 5,000,000 - Principal payments on senior secured notes (941,841) - - Cash payments for debt issuance costs - (227,500) - Proceeds from short-term borrowings 179,664 202,810 95,911 Principal payments on short-term borrowings (179,664) (212,622) (96,540) Principal payments on obligations under capital leases (115,340) (37,200) (54,523) -------------- --------------- -------------- Net cash provided by financing activities 14,492,904 5,160,845 15,944,303 -------------- --------------- -------------- Net increase (decrease) in cash and cash equivalents 43,647,677 (6,645,058) 3,927,199 Cash and cash equivalents, beginning of period 3,641,395 10,286,453 6,359,254 -------------- --------------- -------------- Cash and cash equivalents, end of period $ 47,289,072 $ 3,641,395 $ 10,286,453 ============== =============== ==============
See accompanying notes to financial statements. FRONTIER AIRLINES, INC. Notes to Financial Statements March 31, 1999 (1) Nature of Business and Summary of Significant Accounting Policies Nature of Business Frontier Airlines, Inc. (the "Company") was incorporated in the State of Colorado on February 8, 1994 and is a scheduled airline based in Denver, Colorado which currently serves cities on the west and east coasts, as well as intermediate cities in relatively close proximity to Denver. The Company commenced airline operations on July 5, 1994. Airline operations have high fixed costs and are highly sensitive to various factors incuding the actions of competing airlines and general economic factors. Preparation of Financial Statements The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash and Cash Equivalents For financial statement purposes, the Company considers cash and short-term investments with an original maturity of three months or less to be cash equivalents. Supplemental Disclosure of Cash Flow Information Noncash Financing and Investment Activities: During the year ended March 31, 1998, the Company issued warrants to its lender in connection with its $5,000,000 senior secured notes with an estimated fair market value totaling $1,645,434, and issued warrants to its financial advisor in connection with debt and equity financing with an estimated fair market value totaling $109,492. Also during the years ended March 31, 1999 and 1998, the Company entered into capital lease agreements totaling $504,900 and $97,000, respectively. During the year ended March 31, 1998 the Company exchanged a note receivable for certain property and equipment totaling $47,000. In the years ended March 31, 1997 and 1996, the Company issued warrants to aircraft lessors with an estimated fair market value totaling $869,110 and $577,200, respectively. FRONTIER AIRLINES, INC. Notes to Financial Statements, continued - -------------------------------------------------------------------------------- (1) Nature of Business and Summary of Significant Accounting Policies (continued) Interest and Taxes Paid During the Year: Cash paid for interest totaled $302,503, $184,999, and $20,435, for the years ended March 31, 1999, 1998 and 1997, respectively. No income taxes were paid during the years ended March 31, 1999, 1998, and 1997. Restricted Investments Restricted investments include certificates of deposit which secure certain letters of credit issued primarily to companies which process credit card sale transactions, certain airport authorities and aircraft lessors. Restricted investments are carried at cost, which management believes approximates market value. Maturities are for one year or less and the Company intends to hold restricted investments until maturity. Valulation and Qualifying Accounts The allowance for doubtful accounts was $199,960 and $139,096 at March 31, 1999 and 1998, respectively. Provisions for bad debts net of recoveries totaled $386,000, $267,000, and $160,000 for the years ended March 31, 1999, 1998 and 1997. Deductions from the reserve totaled $330,000, $200,000, and $120,000 for the years ended March 31, 1999. 1998, and 1997, respectively. Inventories Inventories consist of expendable parts, supplies and aircraft fuel and are stated at the lower of cost or market. Inventories are accounted for on a first-in, first-out basis and are charged to expense as they are used. The Company has two aircraft parts agreements for its Boeing 737 aircraft as discussed in note 3, one with another air carrier and another with an aircraft parts supplier. The Company is required to pay a monthly consignment fee to each of these lessors, based on the value of the consigned parts, and to replenish any such parts when used with a like part. At March 31, 1999 and 1998, the Company held consigned parts and supplies in the amount of approximately $8,902,000 and $8,161,000, respectively, which are not included in the Company's balance sheet. (1) Nature of Business and Summary of Significant Accounting Policies (continued) Property and Equipment Property and equipment are carried at cost. Major additions, betterments and renewals are capitalized. Depreciation and amortization is provided for on a straight-line basis to estimated residual values over estimated depreciable lives as follows: Flight equipment 5-10 years Improvements to leased aircraft Life of improvements or term of lease, whichever is less Ground property, equipment, and leasehold improvements 3-5 years or term of lease Assets utilized under capital leases are amortized over the lesser of the lease term or the estimated useful life of the asset using the straight-line method. Amortization of capital leases is included in depreciation expense. Maintenance Routine maintenance and repairs are charged to operations as incurred. Under the terms of its aircraft lease agreements, the Company is required to make monthly maintenance deposits and a liability for accrued maintenance is established based on usage; the deposits are applied against the cost of major airframe maintenance checks, landing gear and engine overhauls. Deposit balances remaining at lease termination remain with the lessor and any remaining liability for maintenance checks is reversed against the deposit balance. Additionally, a provision is made for the estimated costs of scheduled major overhauls required to be performed on leased aircraft and components under the provisions of the aircraft lease agreements if the required monthly deposit amounts are not adequate to cover the entire cost of the scheduled maintenance. Accrued maintenance expense expected to be incurred beyond one year is classified as long-term. Revenue Recognition Passenger, cargo, and other revenues are recognized when the transportation is provided or after the tickets expire, and are net of excise taxes. Revenues which have been deferred are included in the accompanying balance sheet as air traffic liability. (1) Nature of Business and Summary of Significant Accounting Policies (continued) Passenger Traffic Commissions and Related Expenses Passenger traffic commissions and related expenses are expensed when the transportation is provided and the related revenue is recognized. Passenger traffic commissions and related expenses not yet recognized are included as a prepaid expense. Frequent Flyer Awards The Company allows its passengers to accumulate mileage on Continental Airlines' OnePass frequent flyer program. The cost of providing mileage on the OnePass program is based on an agreed upon rate per mileage credit, which is paid to Continental Airlines on a monthly basis. Income (Loss) Per Common Share Basic EPS excludes dilution and is computed by dividing income (loss) available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution of securities that could share in earnings. Common stock equivalents are excluded from the computation of diluted loss per share in 1998 and 1997 as their effect would have been anti-dilutive. Income Taxes The Company accounts for income taxes using the asset and liability method. Under that method, deferred income taxes are recognized for the tax consequences of "temporary differences" by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and tax bases of the existing assets and liabilities. A valuation allowance for net deferred tax assets is provided unless realizability is judged by management to be more likely than not. The effect on deferred taxes from a change in tax rates is recognized in income in the period that includes the enactment date. Fair Value of Financial Instruments The Company estimates the fair value of its monetary assets and liabilities based upon existing interest rates related to such assets and liabilities compared to current rates of interest for instruments with a similar nature and degree of risk. The Company estimates that the carrying value of all of its monetary assets and liabilities approximates fair value as of March 31, 1999. (1) Nature of Business and Summary of Significant Accounting Policies (continued) Stock Based Compensation The Company follows Accounting Principles Board Opinion No. 25 Accounting for Stock Issued to Employees ("APB 25") and related Interpretations in accounting for its employee stock options and follows the disclosure provisions of Statement of financial Accounting Standards No. 123 (SFAS No. 123). Under APB 25, because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. The Company has included the pro forma disclosures required by SFAS No. 123 in Note 7. Impairment of Long-Lived Assets The Company records impairment losses on long-lived assets used in operations when indicators of impairment are present and the undiscounted future cash flows estimated to be generated by those assets are less than the assets' carrying amount. (2) Property and Equipment, Net As of March 31, 1999 and 1998 property and equipment consisted of the following:
1999 1998 ---- ---- Flight equipment and improvements to leased aircraft $ 7,204,878 $ 4,932,024 Ground property, equipment and leasehold improvements 6,186,490 3,673,363 --------------- -------------- 13,391,368 8,605,387 Less accumulated depreciation and amortization 4,657,590 3,026,368 --------------- -------------- Property and equipment, net $ 8,733,778 $ 5,579,019 =============== ==============
Property and equipment includes certain office equipment under capital leases. At March 31, 1999 and 1998, office equipment recorded under capital leases was $785,847 and $280,857 and accumulated amortization was $154,942 and $113,364, respectively. (3) Lease Commitments Aircraft Leases At March 31, 1999, the Company operated 17 aircraft which are accounted for under operating lease agreements with initial terms ranging from 2 to 8 years with certain leases that allow for renewal options. Security deposits related to leased aircraft at March 31, 1999 and 1998 totaled $5,548,750 and $4,604,750 and are included in security, maintenance and other deposits on the balance sheet. Letters of credit issued to certain aircraft lessors in lieu of cash deposits and related restricted investments to secure these letters of credit at March 31, 1999 and 1998 totaled $3,644,000 and $2,100,000, respectively. In addition to scheduled future minimum lease payments, the Company is generally required to pay to each aircraft lessor monthly cash deposits based on flight hours and cycles operated to provide funding for certain scheduled maintenance costs of leased aircraft. The lease agreements provide that the Company shall pay taxes, maintenance, insurance, and other operating expenses applicable to the leased property. At March 31, 1999 and 1998, aircraft maintenance deposits totaled $18,672,825 and $11,466,033, respectively, and are reported as a component of security, maintenance and other deposits on the balance sheet. Any cash deposits paid to aircraft lessors for future scheduled maintenance costs to the extent not used during the lease term remain with the lessors, and any remaining liability for maintenance checks is reversed against the deposit balance. Maintenance deposits are unsecured and may be subject to the risk of loss in the event the lessors are not able to satisfy their obligations under the lease agreements. Other Leases The Company leases an office and hangar space, a spare engine and office equipment for its headquarters, airport facilities, and certain ground equipment. The Company also leases certain airport gate facilities on a month-to-month basis. (3) Lease Commitments (continued) At March 31, 1999, commitments under capital and noncancelable operating leases (excluding maintenance deposit requirements) with terms in excess of one year were as follows: Capital Operating Leases Leases Year ended March 31: 2000 $ 158,452 $ 45,978,116 2001 153,320 34,799,628 2002 153,320 30,256,397 2003 153,320 26,341,587 2004 44,322 25,856,040 Thereafter - 20,371,397 Total minimum lease payments $ 662,734 $183,603,165 Less amount representing interest (120,981) Present value of obligations under capital leases 541,753 Less current portion of obligations under capital leases 106,833 Obligations under capital leases, excluding current portion $ 434,920 The obligations under capital leases have been discounted at imputed interest rates ranging from 10% to 13%. Rental expense under operating leases, including month-to-month leases, for the years ended March 31, 1999, 1998 and 1997 was $46,099,140, $36,573,509 and $25,336,749, respectively. (4) Senior Secured Notes 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 a discount on notes payable and 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 During the year ended March 31, 1999, Wexford exercised all of the warrants described above. As permitted 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. The total amount of $5,250,000 from the exercise was comprised of the following: payment of accrued interest totaling $134,971, then to the outstanding principal balance totaling $4,058,159, and the remaining balance in cash to the Company totaling $1,056,870. 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. The value of the outstanding warrants amortized to interest expense prior to the pay-off of the notes totaled $199,975 and $113,454 for the years ended March 31, 1999 and 1998, respectively. Upon the exercise of the warrants by Wexford, $1,094,042 of unamortized discount was charged to additional paid-in capital. The deferred cost of the remaining warrants and other deferred loan costs totaled $485,846 at the repayment date and was charged to expense and is included in other, net non-operating income (expense). (5) Income Taxes Income tax expense (benefit) for the years ended March 31, 1999 consists of: Current Deferred Total Year ended March 31, 1999: U.S. Federal $ 531,077 $ (5,244,134) $ (4,713,057) State and local (766,513) (766,513) ---------------------------------------------- $ 531,077 $(6,010,647) $(5,479,570) ============================================== There was no income tax expense or benefit in 1998 or 1997. The differences between the Company's effective rate for income taxes and the federal statutory rate are comprised of the items shown in the following table: 1999 1998 1997 ---- ---- ---- Income tax benefit (expense) at the statutory rate (35%) 34% 34% (Increase) decrease in valuation allowance 60% (34%) (34%) State and local income tax, net of federal income tax benefit (3%) - - =========================================== 22% - - =========================================== (5) Income Taxes, continued The tax effects of temporary differences that give rise to significant portions of the deferred tax assets at March 31, 1999 and 1998 are presented below:
1999 1998 ---- ---- Deferred tax assets: Net operating loss carryforwards $4,548,000 $13,434,000 AMT credit carryforward 525,000 - Start-up cost deferred for tax purposes 55,000 108,000 Accrued maintenance not deductible for tax purposes 212,000 899,000 Accrued vacation and health insurance liability not deductible for tax purposes 654,000 527,000 Other 103,000 110,000 ------------------ ------------------- Total gross deferred tax assets 6,097,000 15,078,000 Less valuation allowance - (14,832,000) ------------------ ------------------- 6,097,000 246,000 ------------------ ------------------- Deferred tax liabilities: Equipment depreciation and amortization (86,000) (246,000) ================== =================== Net deferred taxes $6,011,000 $ - ================== ===================
(5) Income Taxes, continued The Company recognized an income tax benefit of $5,479,570 in 1999 attributable to the probable realization of its remaining income tax loss carryforwards for which a valuation allowance had previously been recorded. The valuation allowance for deferred tax assets as of March 31, 1998 and 1997 was $14,832,000 and $8,934,000, respectively. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the Company's profitibility in fiscal 1999 and projections for fiscal 2000 taxable income, management believes it is more likely than not that the Company will realize the benefits of these deductible differences; accordingly, a valuation allowance is no longer considered necessary. As a result of reversing its valuation allowance, the Company expects it will recognize income tax expense on future income based on statutory rates. The Company had net operating loss carryforwards of approximately $11,891,000 which expire in the years 2010 to 2012, and alternative minimum tax credits of approximately $525,000 which are available to reduce future federal regular income taxes, if any, over an indefinite period. (6) Warrants and Rights Dividend The Company issued 2,670,000 warrants to purchase common stock in conjunction with a private placement and its initial public offering. Each warrant entitled the warrant holder to purchase one share of common stock for $5.00. These warrants were subject to redemption at $.05 per warrant by the Company on 45 days written notice if certain conditions were met. The Company met these conditions in May 1996 and on May 14, 1996, the Company notified the warrant holders of the Company's intent to exercise its redemption rights with respect to the warrants not exercised on or before June 28, 1996. 2,666,133 warrants were exercised with net proceeds to the Company totaling $13,275,000. At completion of the Company's initial public offering in 1994, an underwriter acquired options to purchase up to 110,000 shares of common stock exercisable at a price equal to $5.525 per share. At March 31, 1999, 26,400 options were exercised with net proceeds to the Company totaling $145,860. (See note 11). The underwriters in a secondary public offering by the Company in 1995 received a warrant to purchase 119,211 shares of common stock at $5.55 per share. The options and warrants issued to underwriters in connection with the initial and secondary public offerings expire, respectively, on May 20, 1999 and September 18, 2000. (6) Warrants and Rights Dividend, continued In October 1995, the Company issued to each of two of its Boeing 737-300 aircraft lessors a warrant to purchase 100,000 shares of common stock for an aggregate purchase price of $500,000. In June 1996, the Company issued two warrants to a Boeing 737-200 lessor, each warrant entitling the lessor to purchase 70,000 shares of common stock at an aggregate exercise price of $503,300 per warrant. In connection with a Boeing 737-300 aircraft delivered in August 1997, the Company issued to the lessor a warrant to purchase 55,000 shares of Common Stock at an aggregate purchase price of $385,000. Warrants issued to aircraft lessors, to the extent not earlier exercised, expire upon expiration of the aircraft leases in March 2000, May 2001 and June 2002. (See note 11). In February 1998, in connection with the $5,000,000 senior notes as discussed in note 4, the Company issued a warrant to the lender to purchase 1,750,000 shares of the Company's common stock at a purchase price of $3.00 per share, which warrant expires in December 2001. During the year ended March 31, 1999, this warrant was exercised in its entirety as discussed in note 4. In May 1998, the Company issued to its financial advisor, in connection with debt and equity financings, a warrant to purchase 548,000 shares of the Company's common stock at a purchase price of $3.00 per share, which warrant expires in May 2003. (See note 11). Of the 548,000 shares, 116,450 were recognized as of March 31, 1998 as part of the sale of the senior secured notes discussed in note 4. The Company recorded a value of $109,492 for these warrants attributable to the debt and recorded the value as equity in additional paid in capital and deferred loan expenses. The amount was fully amortized during the year ended March 31, 1999 as discussed in note 4. In April 1998, in connection with a private placement of 4,363,001 shares of its common stock, the Company issued a warrant to an institutional investor to purchase 716,929 shares of its common stock at a purchase price of $3.75 per share, which warrant expires in April 2002. In February 1997, the Board of Directors declared a dividend distribution of one common stock purchase right for each share of the Company's common stock outstanding on March 15, 1997. Each right entitles a shareholder to purchase one share of the Company's common stock at a purchase price of $17.50 per full common share, subject to adjustment. The rights are not currently exercisable, but would become exercisable if certain events occurred relating to a person or group acquiring or attempting to acquire 20 percent or more of the outstanding shares of the Company's common stock. The rights expire on February 20, 2007, unless redeemed by the Company earlier. Once the rights become exercisable, each holder of a right will have the right to receive, upon exercise, common stock (or, in certain circumstances, cash, property or other securities of the Company) having a value equal to two times the exercise price of the right. (7) Stock Option Plan The Company has a stock option plan whereby the Board of Directors or its Compensation Committee may issue options to purchase shares of the Company's common stock to employees, officers, and directors of the Company. Under the plan, the Company has reserved an aggregate of 4,250,000 shares of common stock for issuance pursuant to the exercise of options. With certain exceptions, options issued through March 31, 1999 generally vest over a five year period from the date of grant and expire from March 9, 2004 to March 28, 2009. At March 31, 1999, 1,591,250 options are available for grant under the plan. A summary of the Plan's stock option activity and related information for the years ended March 31, 1999, 1998 and 1997 are as follows:
1999 1998 1997 -------------------------------------------------------------------------- Weighted- Weighted- Weighted- Average Average Average Exercise Exercise Exercise Options Price Options Price Options Price -------------------------------------------------------------------------- Outstanding-beginning of year 1,532,062 $1.56 1,911,250 $1.85 1,731,250 $1.27 Granted 717,500 $5.94 30,000 $2.77 180,000 $7.40 Exercised (453,208) $1.34 (409,188) $1.06 - - Surrendered - - (180,000) $7.40 - - Re-issued - - 180,000 $3.00 - - -------------------------------------------------------------------------- 1,796,354 $3.35 1,532,062 $1.56 1,911,250 $1.85 ========================================================================== Exercisable at end of year 1,103,020 $1.70 1,761,250 $1.39 1,671,250 $1.20
Exercise prices for options outstanding under the plan as of March 31, 1999 ranged from $1.00 to $9.00 per option share. The weighted-average remaining contractual life of those options is 7.1 years. A summary of the outstanding and exercisable options at March 31, 1999, segregated by exercise price ranges, is as follows:
--------------------------------------------------------------------------------------------------- Weighted- Average Weighted- Remaining Weighted- Exercise Price Options Average Contractual Exercisable Average Range Outstanding Exercise Price Life (in years) Options Exercise Price --------------------------------------------------------------------------------------------------- $ 1.00 - $ 2.50 800,937 $1.10 5.0 800,937 $1.10 $ 3.00 - $ 5.06 640,417 3.49 8.3 302,083 3.30 $ 8.13 - $ 9.00 355,000 8.20 10.0 ----------------------------------------------------------------------------------- 1,796,354 $3.35 7.1 1,103,020 $1.48 ===================================================================================
(6) Stock Option Plan, continued The Company applies APB Opinion 25 and related Interpretations in accounting for its plans. Accordingly, no compensation cost is recognized for options granted at a price equal to the fair market value of the common stock. Pro forma information regarding net income and earnings per share is required by SFAS No. 123, which also requires that the information be determined as if the Company has accounted for its employee stock options granted subsequent to March 31, 1995 under the fair value method of that Statement. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for 1999, 1998 and 1997, respectively: risk-free interest rates of 5.36%, 6.42% and 6.55%, dividend yields of 0%, 0% and 0%; volatility factors of the expected market price of the Company's common stock of 69.25%, 64.33% and 58.78%, and a weighted-average expected life of the options of 3.6 years for each year. Had compensation cost for the Company's stock-based compensation plan been determined using the fair value of the options at the grant date, the Company's pro forma net income (loss) and earnings (loss) per share is as follows:
1999 1998 1997 ---- ---- ---- Net Income: As reported $ 30,566,060 $(17,746,370) $(12,186,332) Pro forma $ 30,263,570 $(17,842,594) $(12,366,532) Earnings (loss) per share, basic: As reported $ 2.14 $ (1.95) $ (1.49) Proforma $ 2.12 $ (1.96) $ (1.52) Earnings (loss) per share, diluted: As reported $ 1.98 $ (1.95) $ (1.49) Proforma $ 1.96 $ (1.96) $ (1.52)
(8) Benefit Plans Employee Stock Ownership Plan The Company has established an Employee Stock Ownership Plan (ESOP) which inures to the benefit of each employee of the Company, except those employees covered by a collective bargaining agreement that does not provide for participation in the ESOP. Company contributions to the ESOP are discretionary and may vary from year to year. In order for an employee to receive an allocation of company common stock from the ESOP, the employee must be employed on the last day of the ESOP's plan year, with certain exceptions. The Company's annual contribution to the ESOP, if any, will be allocated among the eligible employees of the Company as of the end of each plan year in proportion to the relative compensation (as defined in the ESOP) earned that plan year by each of the eligible employees. The ESOP does not provide for contributions by participating employees. Employees will vest in contributions made to the ESOP based upon their years of service with the Company. A year of service is an ESOP plan year (8) Benefit Plans, continued during which an employee has at least 1,000 hours of service. Vesting generally occurs at the rate of 20% per year, beginning after the first year of service, so that a participating employee will be fully vested after five years of service. Distributions from the ESOP will not be made to employees during employment. However, upon termination of employment with the Company, each employee will be entitled to receive the vested portion of his or her account balance. The initial Company contribution to the ESOP was made on June 22, 1995 and consisted of 137,340 shares of Common Stock, of which 27,468 shares relate to the plan year ended March 31, 1995 and 109,872 shares relate to the period from April 1, 1995 to December 31, 1995. During the years ended March 31, 1999 and 1997, the Company contributed 275,000 and 78,869 shares to the plan and none during the year ended March 31, 1998. The Company recognized compensation expense during the year ended March 31, 1999 and 1997 of $848,600 and $500,000, respectively, related to its contribution to the ESOP and none during the year ended March 31, 1998. Retirement Savings Plan The Company has established a Retirement Savings Plan (401(k)). Participants may contribute from 1% to 15% of pre-tax annual compensation. Individual pre-tax participant contributions are limited annually (not to exceed $10,000 for calander year 1998 and $9,500 for calander years 1997 and 1996) under the Internal Revenue Code. Participants are immediately vested in their voluntary contributions, adjusted by any actual earnings and/or losses there on from the specific investments. Effective April 1999, for the plan year ending December 31, 1999, the Company's Board of Directors elected to match 25% of Participant contributions from April 1999 through December 1999. The Company has not matched any contributions made prior to this date. Future matching contributions, if any, will be determined annually by the Board of Directors. In order to receive the matching contribution, Participants must be employed on the last day of the plan year. Participants will vest in contributions made to the 401(k) upon their years of service with the Company. A year of service is a 401(k) plan year during which a participant has at least 1,000 hours of service. Vesting generally occurs at the rate of 20% per year, beginning after the first year of service, so that a Participant will be fully vested after five years of service. Upon termination of employment with the Company, each Participant will be entitled to receive the vested portion of his or her account balance. (9) Concentration of Credit Risk The Company does not believe it is subject to any significant concentration of credit risk relating to trade receivables. At March 31, 1999 and 1998, 70% and 60% of the Company's trade receivables relate to tickets sold to individual passengers through the use of major credit cards, travel agencies approved by the Airlines Reporting Corporation, tickets sold by other airlines and used by passengers on Company flights, or the United States Postal Service. These receivables are short-term, generally being settled shortly after sale or in the month following ticket usage. (10) Contingencies The Company is party to legal proceedings and claims which arise during the ordinary course of business. In the opinion of management, the ultimate outcome of these matters will not have a material adverse effect upon the Company's financial position or results of operations. The Company uses information systems in managing and conducting certain aspects of its business. The Company is taking measures to address Year 2000 compliance of its systems and processes. Failure by the company and its key business partners (e.g., the FAA, DOT, airport authorities, credit card companies, suppliers, and data providers) to achieve Year 2000 compliance on a timely basis could have a significant adverse impact on the Company's business financial condition and operating results. (11) Subsequent Events During April and June 1999, the Company entered into two aircraft leases for two aircraft with lease terms of 6 and 7 years, respectively. Annual rental expense for these two aircraft total $5,160,000. During April and May 1999, the underwriter of the Company's initial public offering in 1994, exercised the remaining 83,600 options with net proceeds to the Company totaling $461,890. During May and June 1999, aircraft lessors exercised 395,000 warrants with net proceeds to the Company totaling $2,391,600. To the extent that the aircraft lessors were able to realize certain profit margins on their subsequent sale of the stock, they were required to refund a portion of the cash security deposits they were holding. As a result of their sale of the Company's common stock, $486,000 in cash security deposits were returned to the Company during the month of May 1999. During June 1999, a financial consultant exercised its warrant to purchase 548,000 shares of the Company's common stock with net proceeds to the Company totaling $1,644,000. (11) Subsequent Events, continued Between April 1, 1999 and June 16, 1999, 65,000 options issued under the Company's Stock Option Plan were exercised with net proceeds to the Company totaling $65,000. As a result of these warrant and option exercises, the Company has 17,232,772 shares of its common stock outstanding as of June 16, 1999. EX-4 2 AMENDMENT TO RIGHTS AGREEMENT FURTHER RESOLVED, that the Notes and Warrants, when issued on such basis, shall constitute valid and binding obligations of the Corporation; FURTHER RESOLVED, that if and when any of the Warrants are exercised, the officers of the Corporation be and they hereby are authorized to issue the number of shares of Common Stock with respect to which any such Warrant is exercised, upon receipt of payment therefor and surrender of the certificate representing any such Warrant to the Corporation or its designated agent with the exercise form thereon duly completed; and, further that said shares of Common Stock, when paid for in accordance with the terms of said Warrant and when issued by the Corporation, shall be validly issued, fully paid and nonassessable shares of Common Stock; FURTHER RESOLVED, that pursuant to Section 27 of the Rights Agreement, the Rights Agreement is hereby amended as follows: 1. The second sentence of Section 1(a) is hereby amended in its entirety to read as follows: Notwithstanding the foregoing, no Person shall become an "Acquiring Person" as the result of the acquisition by such Person directly from the Company of newly-issued or treasury shares of Common Stock or warrants, options or other securities convertible into Common Stock of the Company ( it being understood that a purchase from an underwriter or other intermediary in connection with a public offering by the Company is deemed for purposes hereof to be a purchase directly from the Company); provided, however, that if a person shall become the Beneficial Owner of 20% or more of the shares of Common Stock of the Company then outstanding by reason of the receipt directly from the Company of newly-issued shares of Common Stock or warrants, options or other securities convertible into Common Stock of the Company and shall, after such direct issuance by the Company, become the Beneficial Owner of any additional shares of Common Stock of the Company other than pursuant to a Qualifying Offer (and thereafter remains a Beneficial Owner of 20% or more of the shares of Common Stock of the Company), then such Person shall be deemed to be an "Acquiring Person"; and provided, further, that any transferee from such Person who becomes the Beneficial Owner of 20% or more of the shares of Common Stock of the Company then outstanding shall nevertheless be deemed to be an "Acquiring Person." FURTHER RESOVLED, that the officers of the Company are hereby directed to take such other action, including further amendments to the Rights Agreement, as they deem necessary or appropriate in the sole discretion to effectuate the purposes and intent of the resolutions. EX-10 3 OFFICE LEASE SUPPLEMENTS AND AMENDMENTS OFFICE LEASE LEASE TERM SHEET BUILDING: Airport Plaza LEASE DATE: August 1st, 1998 LANDLORD: Pacific Rim Investments, a Colorado Limited Liability Partnership Address: 12015 E. 46th Ave. Suite #115 Denver, Colorado 80239 TENANT: Name: Frontier Airlines Address: 12015 E. 46th Avenue, Suite 200 Denver, Colorado 80239 (Address for Notice if different than above) BROKER OF RECORD: na TENANT'S BROKER(if any) na LEASED PREMISES: Suite Number: 120 Floor: 1st floor Address: 12015 E. 46th Avenue-Denver, Colorado 80239 Tenant's Rentable Area: 2,107 RSF (rentable square feet) Taken in as is/where is condition. LEASE TERM: Lease Commencement Date: August 1st, 1998 Lease Expiration Date: August 31, 1999 Lease Period: 1 year(s), plus 1 month(s) with 1 option for tenant to renew for a period of six to twelve months at tenants election and at current rental rate. An annual rental rate of $27,391.00 divided into 12 (twelve) equal monthly installments of $2,282.50 per month, due and payable on the first day of each month. This term sheet is part of the 2nd floor lease dated March 15th, 1994. "BUILDING OPERATING COST" REFERENCE (Article 5.02): BASE YEAR: Calendar Year 1994 TENANT'S PRO RATA SHARE(of Building for Building Operating Costs): 2,107/63,226 SECURITY DEPOSIT: (Equivalent to first months rent) PERMITTED USE: General Office PARKING: Number of parking Spaces: N/A Location of Parking Spaces: Adjacent to office building PACIFIC RIM INVESTMENTS FRONTIER AIRLINES LANDLORD TENANT OFFICE LEASE LEASE TERM SHEET BUILDING: Airport Plaza LEASE DATE: August 1st, 1998 LANDLORD: Pacific Rim Investments, a Colorado Limited Liability Partnership Address: 12015 E. 46th Ave. Suite #115 Denver, Colorado 80239 TENANT: Name: Frontier Airlines Address: 12015 E. 46th Avenue, Suite 200 Denver, Colorado 80239 (Address for Notice if different than above) BROKER OF RECORD: na TENANT'S BROKER(if any) na LEASED PREMISES: Suite Number: 400 Floor: 4th floor Address: 12015 E. 46th Avenue-Denver, Colorado 80239 Tenant's Rentable Area: 1,422 RSF (rentable square feet) Taken in as is/where is condition except for painting and patching of walls, carpet cleaned. LEASE TERM: Lease Commencement Date: August 1st, 1998 Lease Expiration Date: August 31, 1999 Lease Period: 1 year(s), plus 1 month(s) with 1 option for tenant to renew for a period of six to twelve months at tenants election and at current rental rate. An annual rental rate of $18,486.00 divided into 12 (twelve) equal monthly installments of $1,540.50 per month, due and payable on the first day of each month. This term sheet is part of the 2nd floor lease dated March 15th, 1994. "BUILDING OPERATING COST" REFERENCE (Article 5.02): BASE YEAR: Calendar Year 1994 TENANT'S PRO RATA SHARE(of Building for Building Operating Costs): 1,422/63,226 SECURITY DEPOSIT: (Equivalent to first months rent) PERMITTED USE: General Office PARKING: Number of parking Spaces: N/A Location of Parking Spaces: Adjacent to office building PACIFIC RIM INVESTMENTS FRONTIER AIRLINES LANDLORD TENANT OFFICE LEASE LEASE TERM SHEET BUILDING: Airport Plaza LEASE DATE: Sept. 14, 1998 LANDLORD: Pacific Rim Investments, a Colorado Limited Liability Partnership Address: 12015 E. 46th Ave. Suite #115 Denver, Colorado 80239 TENANT: Name: Frontier Airlines Address: 12015 E. 46th Avenue, Suite 200 Denver, Colorado 80239 (Address for Notice if different than above) BROKER OF RECORD: na TENANT'S BROKER(if any) na LEASED PREMISES: Suite Number: 360 Floor: 3rd floor Address: 12015 E. 46th Avenue-Denver, Colorado 80239 Tenant's Rentable Area: 1,140 RSF (rentable square feet) LEASE TERM: Lease Commencement Date: September 15, 1998 Lease Expiration Date: August 31, 1999 Lease Period: 0 year(s), plus 11.5 month(s) with 1 option for tenant to renew for a period of six to twelve months at tenants election and at current rental rate. An annual rental rate of $14,820(less 2 weeks of Sept.) divided into 12 (twelve) equal monthly installments of $1,235 per month, due and payable on the first day of each month. "BUILDING OPERATING COST" REFERENCE (Article 5): BASE YEAR: Calendar Year 1994 or EXPENSE STOP: Reference 1994 lease TENANT'S PRO RATA SHARE(of Building for Building Operating Costs): 1,140/63,226 SECURITY DEPOSIT: (Equivalent to first months rent) PERMITTED USE: General Office PARKING: Number of parking Spaces: N/A Location of Parking Spaces: Adjacent to office building PACIFIC RIM INVESTMENTS FRONTIER AIRLINES LANDLORD TENANT OFFICE LEASE LEASE TERM SHEET BUILDING: Airport Plaza LEASE DATE: January 1st, 1999 LANDLORD: Pacific Rim Investments, a Colorado Limited Liability Partnership Address: 12015 E. 46th Ave. Suite #115 Denver, Colorado 80239 TENANT: Name: Frontier Airlines Address: 12015 E. 46th Avenue, Suite 200 Denver, Colorado 80239 (Address for Notice if different than above) BROKER OF RECORD: na TENANT'S BROKER(if any) na LEASED PREMISES: Suite Number: 121 Floor: 1st floor Square Footage: 1,600 Suite Number: 190 Floor: 1st floor Square Footage: 700 Suite Number: 300 Floor: 3rd floor Square Footage: 3,031 Address: 12015 E. 46th Avenue-Denver, Colorado 80239 Tenant's Rentable Area: 5,331 RSF (rentable square feet) Taken in as is/where is condition except for painting, light fixtures, locks, as required. LEASE TERM: Lease Commencement Date: January 1st, 1999 Lease Expiration Date: January 31st, 2001 Lease Period: 2 year(s), plus 1 month(s) with 1 option for tenant to renew for a period of six to twelve months at tenants election and at current rental rate. An annual rental rate of $63,972.00 divided into 12 (twelve) equal monthly installments of $5,331.00 per month, due and payable on the first day of each month. This term sheet is part of the 2nd floor lease dated March 15th, 1994. "BUILDING OPERATING COST" REFERENCE (Article 5.02): BASE YEAR: Calendar Year 1999 TENANT'S PRO RATA SHARE(of Building for Building Operating Costs): 5,331/63,226 SECURITY DEPOSIT: (Equivalent to first months rent) PERMITTED USE: General Office PARKING: Number of parking Spaces: N/A Location of Parking Spaces: Adjacent to office building PACIFIC RIM INVESTMENTS FRONTIER AIRLINES LANDLORD TENANT OFFICE LEASE LEASE TERM SHEET BUILDING: Airport Plaza LEASE DATE: January 20th, 1999 LANDLORD: Pacific Rim Investments, a Colorado Limited Liability Partnership Address: 12015 E. 46th Ave. Suite #115 Denver, Colorado 80239 TENANT: Name: Frontier Airlines Address: 12015 E. 46th Avenue, Suite 200 Denver, Colorado 80239 (Address for Notice if different than above) BROKER OF RECORD: na TENANT'S BROKER(if any) na LEASED PREMISES: Suite Number: 450 Floor: 4th floor Square Footage: 846 Address: 12015 E. 46th Avenue-Denver, Colorado 80239 Tenant's Rentable Area: 846 RSF (rentable square feet) Taken in as is/where is condition as of 1/15/99 with no additional improvements. LEASE TERM: Lease Commencement Date: January 20th, 1999 Lease Expiration Date: January 31st, 2001 Lease Period: 2 year(s), plus 11 day(s) with 1 option for tenant to renew for a period of six to twelve months at tenants election and at current rental rate. An annual rental rate of $11,844.00 divided into 12 (twelve) equal monthly installments of $987.00 per month, due and payable on the first day of each month. This term sheet is part of, and shall be incorporated into and shall be an addendum to the 2nd floor lease dated March 15th, 1994. "BUILDING OPERATING COST" REFERENCE (Article 5.02): BASE YEAR: Calendar Year 1999 (Paragraph 6B(2), or EXPENSE STOP: $5.00 per square foot.[Paragraph 6B(3)] TENANT'S PRO RATA SHARE(of Building for Building Operating Costs): 846/63,226 SECURITY DEPOSIT: (Equivalent to first months rent) PERMITTED USE: General Office PARKING: Number of parking Spaces: N/A Location of Parking Spaces: Adjacent to office building PACIFIC RIM INVESTMENTS FRONTIER AIRLINES LANDLORD TENANT OFFICE LEASE LEASE TERM SHEET This Office Lease Term Sheet is part of, shall be incorporated into and shall constitute an addendum to the Lease Agreement, dated March 15, 1994, between Tenant and the predecessor owner of the building (the "Lease"). Building: Airport Plaza 12015 East 46th Avenue Denver, CO 80239 Term Sheet Date: May 16, 1999 Landlord: Highline Group, LLC, as reciever for 12015 East 46th Avenue, Denver, CO 80239 Address: 1425 Market Street, Suite 205 Denver, Colorado 80202 Tenant: Frontier Airlines Address: 12015 E. 46th Avenue, Suite 200 Denver, Colorado 80239 Broker of Record: n/a Tenant's Broker: n/a Leased Premises: Suite: 470 Floor: 4th Square Footage: 2,762 Lease Term: Commencement: May 17, 1999 Termination: January 31, 2001 Rental Rate: $3,222.33 per month during the term of this Amendment. Tenant Finish: None Building Operating Cost Reference (Article 5.02 of Lease): Base Year: Calendar Year 1999 Expense Stop: $5.00 per square foot Tenant's Pro Rata Share applicable to this Amendment: 2,762/63,226 Security Deposit applicable to this Amendment: none Permitted Use: General Office Parking: Number of parking spaces-n/a Location of Parking Spaces: Adjacent to building Highline Group LLC, Frontier Airlines, Inc. As receiver for 12015 East 46th Avenue EX-10 4 AIRCRAFT LEASE AGREEMENT - ------------------------------------------------------------------------------- AIRCRAFT LEASE AGREEMENT Dated as of February 26, 1999 Between FIRST SECURITY BANK, N.A., As Owner Trustee, Lessor and FRONTIER AIRLINES, INC. Lessee One Boeing Model 737-200A Aircraft Bearing Manufacturer's Serial Number 23004 - ------------------------------------------------------------------------------ Items marked with "*" have been omitted pursuant to a request for confidential treatment. CERTAIN PROCEEDS OF THIS LEASE ARE SUBJECT TO A SECURITY INTEREST IN FAVOR OF NATIONSBANK, N.A., AS AGENT, AND ANY SUCCESSOR AGENT, FOR ONE OR MORE FINANCIAL INSTITUTIONS AIRCRAFT LEASE AGREEMENT THIS AGREEMENT dated February 26, 1999 ("Lease"), between FIRST SECURITY BANK, N.A., not in its individual capacity but solely as owner trustee ("Lessor"), and FRONTIER AIRLINES, INC., a Colorado corporation ("Lessee"). Lessee desires to lease from Lessor and Lessor is willing to lease to Lessee the aircraft described herein upon and subject to the terms and conditions of this Lease. In consideration of the mutual promises herein, Lessor and Lessee agree as follows: SECTION 1 DEFINITIONS Terms used in this Lease have the respective meanings specified in Exhibit A. SECTION 2 LEASE AND CONDITIONS (1) Lessor hereby agrees, subject to satisfaction of the conditions set forth herein, to lease the Aircraft to Lessee, and Lessee hereby agrees to lease the Aircraft from Lessor, on the terms of this Lease. (2) Lessor's obligation to lease the Aircraft hereunder to Lessee shall be conditioned upon (i) the absence of any Default hereunder and the absence of any materially adverse change in Lessee's financial condition or prospects from the date hereof to the Delivery Date, and (ii) the receipt by Lessor of the following documents on or before the Delivery Date, all of which shall be reasonably satisfactory in form and substance to Lessor: (1) a Lease Supplement executed by Lessee, and effective as of the Delivery Date; (2) such officer's certificates and legal opinions relating to due authority to enter into, the enforceability of, and absence of Defaults under this Lease as Lessor shall require; (3) an Approved Insurance Broker's report as to the due compliance with the insurance provisions of Section 11 hereof; (4) a certificate of an Approved Insurance Broker evidencing the insurance as required by Section 11 hereof; (5) a certificate in the form of Exhibit D completed, executed and delivered by Lessee setting forth the status of the Aircraft and Engines on the Delivery Date; and (6) such other documents and matters incident to the foregoing as Lessor may reasonably request. (1) SECTION 3 DELIVERY AND ACCEPTANCE; TERM (3) Delivery; Place of Delivery and Acceptance. The Aircraft is expected to be available for delivery on or about the Estimated Delivery Date, and shall be delivered to and accepted by Lessee at the Delivery Location. (4) Casualty to the Aircraft Preceding Delivery; Excusable Delay. Upon a Casualty Occurrence taking place prior to delivery of the Aircraft to Lessee, this Lease shall terminate. If an Excusable Delay prevents the delivery of the Aircraft beyond April 15, 1999, Lessor shall notify Lessee in writing thereof, and at the option of Lessee, this Lease shall terminate. Lessor shall not be responsible for the failure to deliver the Aircraft hereunder due to an Excusable Delay. (5) Pre-Delivery Check Flight. Prior to the Delivery Date, Lessee shall be permitted to assign up to two representatives (one of whom may sit in the jump seat in the cockpit) to participate as observers in a functional check flight of not more than two (2) hour's duration, at Lessor's expense, to enable Lessee to verify that the Aircraft satisfies the conditions set forth in Exhibit E hereto. Lessor will provide the pilots and insurance for the functional check flight. (6) Correction of Deficiencies. If the pre-delivery check flight reveals that the Aircraft does not fulfill the conditions described in Exhibit E, Lessor and Lessee shall attempt in good faith to agree upon a list of deficiencies with respect to the Aircraft. If the parties are unable to agree upon such list, then this Lease shall terminate. If the parties are able to agree upon such list, then Lessor shall cure such deficiencies listed thereon during which time Lessee may have a reasonable number of representatives to observe such corrections being made. Upon correction of such deficiencies, Lessee shall promptly re-inspect the Aircraft and if the Aircraft is then in compliance with the conditions described in Exhibit E, Lessee shall accept delivery of the Aircraft. (7) Acceptance of Aircraft. Except as may otherwise be expressly provided pursuant to the terms of this Lease, the Aircraft is to be leased to Lessee "AS IS," "WHERE IS" and SUBJECT TO EACH AND EVERY DISCLAIMER OF WARRANTY AND REPRESENTATION AS SET FORTH IN SECTION 5(a) HEREOF. Upon tender of the Aircraft for delivery hereunder by Lessor, if the Aircraft is in the condition specified in Exhibit E, Lessee shall immediately accept delivery of the Aircraft. Upon acceptance of the Aircraft Lessee shall thereupon indicate and confirm its irrevocable acceptance of the Aircraft by delivery to Lessor of a duly executed Lease Supplement, dated the Delivery Date. (8) Term of Lease. The Term of this Lease shall commence on the Delivery Date and shall continue until the Expiration Date; provided that this Lease may be earlier terminated or renewed pursuant to the provisions hereof. Throughout the Term and until redelivery of the Aircraft in accordance with Section 12 hereof, Lessee shall bear all risks of loss, theft, damage and destruction of or to the Aircraft and every Part thereof, and no such loss, theft, damage or destruction nor any other event, circumstance or change in Law shall impair, discharge or frustrate any obligation of Lessee under this Lease (including, without limitation, as to Rent or other payments), so that all such obligations shall, save as expressly provided in Section 10 hereof, continue in full force and effect. SECTION 4 RENT AND RESERVES (9) Rent. Lessee covenants and agrees to pay to Lessor, or its assigns: (i) the Initial Basic Rent Payment Amount on the Delivery Date, (ii) Basic Rent in consecutive installments on each Basic Rent Payment Date; (iii) the Final Basic Rent Payment Amount on the Final Basic Payment Date; and (iv) Supplemental Rent as the same becomes due. If a Basic Rent Payment Date shall fall on a day which is not a Business Day, any payment due on such Basic Rent Payment Date shall be made on the next succeeding Business Day. All Rent and other amounts payable under this Lease shall be paid in immediately available funds, at the Payment Location or at such other location as Lessor shall designate in writing. (10) Reserves. Separate reserve accounts shall be established by Lessor for the Airframe, each Engine and each landing gear. On the tenth (10) calendar day of each month during the Term, Lessee shall pay Lessor an amount calculated as the product of the number of Flight Hours of operation during the prior calendar month, and the Airframe Reserve Rate, Landing Gear Reserve Rate and Engine Reserve Rate, as applicable. Subject to receipt of satisfactory invoices, Lessor shall use amounts deposited in each reserve account to reimburse Lessee for the actual out-of-pocket costs incurred by Lessee in completing a "C7"Check (or its equivalent) in the case of the Airframe, overhaul or replacement in the case of landing gear, and Engine Overhauls in the case of an Engine; provided, however, such reimbursable costs shall not include, without limitation, costs associated with the auxiliary power unit. Lessee shall provide Lessor with written evidence reasonably satisfactory to Lessor as to completion of such check or overhaul in accordance with the Maintenance Program. No portion of any reserve shall be applied to the cost of repairing damage resulting from any accident or incident, abuse or misuse, foreign object damage or to the cost of complying with any FAA airworthiness directive. Lessee shall bear the cost of any check or overhaul to the extent such cost exceeds the balance then available in the applicable reserve; provided, however, (A) in the event the Aircraft requires a "C7" Check within the first two and one-half (2 1/2) years of the Term, or (B) in the event an Engine is removed within the first fifteen (15) months following the Delivery Date due to a condition which would require such removal in accordance with the Engine Manufacturer's maintenance manual, Lessor shall bear the cost of any "C7" Check or the first Engine overhaul of such Engine, as the case may be, only to the extent that such cost exceeds the balance then available in the applicable reserve. Lessor shall be entitled to commingle money held in the reserve accounts from time to time with its other assets and Lessee shall not be entitled to any interest on such amounts. Any amounts remaining in the reserve accounts at the Return Occasion shall be applied first to reduce any payment obligation of Lessee pursuant to Exhibit C (with the balance of any reserve account available only to offset a payment obligation with respect to the check or overhaul for which such reserve was established), and then the balance shall be retained by Lessor. Lessee agrees that if Lessee Defaults have occurred or are occurring, Lessor shall be entitled, but not required, to apply any amounts held as reserves against such default. (11) Prohibition Against Setoff, Counterclaim, Etc. This Lease is a net lease, and Lessee, except as otherwise expressly provided herein, shall be responsible for the cost of delivery, possession, importation, registration, use, operation, management, return, maintenance, repair and modification of the Aircraft and compliance with applicable laws, regulations and airworthiness directives from the Delivery Date until the Aircraft is returned to Lessor in accordance with Section 12 hereof. Lessee's obligation to pay all Rent hereunder shall be absolute and unconditional and shall not be affected or reduced by any circumstances whatsoever (including, without limitation any right of setoff, counterclaim, recoupment, defense or other right which Lessee may have against Lessor, the Manufacturer, the Engine Manufacturer, any seller of or person providing services with respect to the Aircraft or any other Person, for any reason whatsoever), it being the express intention of Lessor and Lessee that all Rent payable hereunder shall be payable in all events, unless the obligation to pay the same shall be terminated pursuant to the express provisions of this Lease. Lessee hereby waives, to the extent permitted by applicable Law, any and all rights which it may now have or which at any time hereafter may be conferred upon it, by Law or otherwise, to terminate this Lease or any obligation imposed upon Lessee hereunder or in relation hereto except upon the terms expressly set forth in this Lease. Nothing contained in this Section shall be construed as a waiver of Lessee's right to seek a separate recovery of any payment of Rent which is not due and payable in accordance with the terms of this Lease or monies or payments which are due and payable by Lessor under the terms of this Lease. SECTION 5 REPRESENTATIONS AND WARRANTIES (12) Warranties and Disclaimer of Warranties. EXCEPT AS SET OUT IN SECTION 5(b)(i), LESSOR HAS NOT AND SHALL NOT BE DEEMED TO HAVE MADE OR GIVEN AND LESSOR HEREBY SPECIFICALLY DISCLAIMS, ANY TERM, CONDITION, COVENANT, REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, AS TO THE TITLE, AIRWORTHINESS, VALUE, QUALITY, DURABILITY, DESCRIPTION, CONDITION, DESIGN, OPERATION, MERCHANTABILITY, OR THE ABSENCE OF ANY INFRINGEMENT OF ANY PATENT, COPYRIGHT, DESIGN, OR OTHER PROPRIETARY RIGHT, OR FITNESS FOR USE FOR A PARTICULAR PURPOSE OF THE AIRCRAFT, THE ABSENCE THEREFROM OF LATENT, INHERENT OR OTHER DEFECTS, WHETHER OR NOT DISCOVERABLE, OR AS TO ANY OTHER REPRESENTATION OR WARRANTY WHATSOEVER, EXPRESS OR IMPLIED (INCLUDING ANY IMPLIED WARRANTY ARISING FROM A COURSE OF PERFORMANCE OR DEALING OR USAGE OF TRADE), WITH RESPECT TO THE AIRCRAFT; AND LESSEE HEREBY WAIVES, RELEASES, RENOUNCES AND DISCLAIMS EXPECTATION OF OR RELIANCE UPON ANY SUCH WARRANTY OR WARRANTIES, IT BEING UNDERSTOOD THAT ALL CONDITIONS, WARRANTIES AND REPRESENTATIONS (OR OBLIGATION OR LIABILITY IN CONTRACT OR IN TORT) IN RELATION TO ANY OF THOSE MATTERS, EXPRESSED OR IMPLIED, STATUTORY OR OTHERWISE, ARE, EXCEPT AS PROVIDED IN SECTION 5(b)(i), EXPRESSLY EXCLUDED. (13) LESSOR REPRESENTS AND WARRANTS (IN LIEU OF ALL OTHER EXPRESS OR IMPLIED WARRANTIES WHATSOEVER) THAT: (i) title to the Aircraft is vested in Lessor and the Aircraft is free and clear of any and all Lessor's Liens; (ii) Lessor is a corporation duly organized and validly existing under the Laws of the State of Utah and is a "citizen of the United States" as defined in section 40102 of the Transportation Code, and has the power and authority to perform its obligations under this Lease; (iii) the making and performance by Lessor of this Lease have been duly authorized by all necessary corporate action on the part of Lessor and will not violate any provision of Law or its charter documents; and (iv) this Lease has been duly entered into and delivered by Lessor, and that this Lease does, and the Lease Supplement when executed and delivered hereunder will, constitute legal, valid and binding obligations of Lessor, enforceable in accordance with their respective terms. (14) Manufacturers' Warranties. Lessor hereby authorizes Lessee to exercise for the account of Lessor such rights as Lessor may have under any warranty, express or implied, with respect to the Aircraft to the extent that the same may be assigned or otherwise made available to Lessee; provided, however, that upon an Event of Default all such rights shall immediately revert to Lessor including all claims thereunder whether or not perfected. (15) Lessee's Representations and Warranties. Lessee hereby makes the following representations and warranties, which representations and warranties shall survive the execution and delivery of this Lease and the delivery of the Aircraft: (i) Lessee is a corporation duly organized, existing and in good standing under the Laws of Colorado and has the corporate power and authority to carry on its business as presently conducted and to perform its obligations under this Lease; (ii) this Lease has been duly authorized by all necessary corporate action on the part of Lessee, and neither the execution and delivery hereof nor the consummation of the transactions contemplated hereby nor compliance by Lessee with any of the terms hereof will contravene any applicable Law or result in any breach of, or constitute any default under, or result in the creation of any Lien upon any property of Lessee under, any credit agreement or instrument, corporate charter or by-law or other agreement or instrument to which Lessee is a party or by which Lessee or its properties or assets are bound or affected; (iii) Lessee has received every consent, approval or authorization, and has given every notice, that is required for Lessee to execute and deliver this Lease, and to perform the transactions contemplated hereby and all of which remain valid and effective; (iv) this Lease has been duly executed and delivered by Lessee, and this Lease does, and the Lease Supplement when executed and delivered by Lessee will, constitute legal, valid and binding obligations of Lessee, enforceable in accordance with their respective terms, but subject to bankruptcy, insolvency, or other similar laws affecting creditors' rights generally; (v) the consolidated financial statements of Lessee, including the balance sheets and unaudited statements of income and retained earnings of Lessee, for the current year and if available, the immediately preceding fiscal year, copies of which have been furnished to Lessor, are prepared in accordance with generally accepted accounting principles, and present fairly the financial position and operations of Lessee, and subsequent to the conclusion of the last such period, there has been no material adverse change in such position or operations; (vi) the chief executive office or chief place of business (as such terms are used in Division 9 of the Uniform Commercial Code) of Lessee is located at 12015 E. 46th Avenue, #200, Denver, Colorado 80239; (vii) each of this Lease and any other document, certificate or statement furnished to Lessor by or on behalf of Lessee in connection with the transactions contemplated hereby or thereby does not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements contained herein and therein not misleading; and there is no fact, to the best knowledge of Lessee, which has not been disclosed to Lessor in writing on or before the date of execution of this Lease and which materially adversely affects or will materially adversely affect the ability of Lessee to carry on its business or to perform its obligations under this Lease; and (viii) Lessor shall be entitled to the benefits of a lessor under Title 11 U.S.C. Section 1110 as in effect on the date hereof. SECTION 6 POSSESSION, USE AND MAINTENANCE (16) Sublease, Assignment and Transfer. Without Lessor's prior written consent, Lessee will not assign this Lease or sublet or transfer possession of the Aircraft, Airframe or any Engine or install any Engine or permit any Engine to be installed on any airframe other than the Airframe, provided that so long as no Default shall have occurred and be continuing then Lessee, without the prior written consent of Lessor, may: (i) deliver possession of the Aircraft, the Airframe or any Engine to any organization for service, repair, maintenance, testing or overhaul work; (ii) install an Engine on an airframe (other than the Airframe) owned by Lessee free and clear of all Liens except Permitted Liens and those which by their terms would not attach to such Engine; and (iii) install an Engine on an airframe leased to Lessee or owned by Lessee subject to a conditional sale or other security agreement, provided, that: (A) such airframe is free and clear of all Liens except the rights of the parties to the lease or conditional sale or other security agreement covering such airframe and except Permitted Liens and the lien of any mortgage which by its terms would not apply to such Engine; and (B) the lessor or secured party of such airframe has made an agreement substantially similar in effect to the agreement of Lessor in Section 6(b) below whereby such lessor or secured party agrees that neither it nor its successors or assigns will acquire or claim any right, title or interest in any Engine by reason of such Engine being installed on such airframe. The rights of any transferee that receives possession by reason of a transfer permitted by this Section 6(a) shall be subject and subordinate to all the terms of this Lease; Lessee shall remain primarily liable hereunder for the performance of all of the terms of this Lease to the same extent as if such transfer had not occurred; and no relinquishment of possession pursuant to the terms of this Section 6(a) shall in any way discharge or diminish any of Lessee's obligations to Lessor hereunder. (17) Reciprocal Recognition of Rights. In the event Lessee shall have received from the lessor or secured party of any airframe leased to Lessee or owned by Lessee subject to a conditional sale or other security agreement a written agreement complying with Section (B) of Section 6(a)(iii) hereof, and such lease or conditional sale or other security agreement covering such airframe also covers an engine or engines owned by the lessor under such lease or subject to a security interest in favor of the secured party under such conditional sale or other security agreement, Lessor hereby agrees for the benefit of such lessor or secured party that Lessor will not acquire or claim, as against such lessor or secured party, any right, title or interest in any such engine as the result of such engine being installed on the Airframe at any time while such engine is subject to such lease or conditional sale or other security agreement and owned by such lessor or subject to a security interest in favor of such secured party. Lessor also hereby agrees for the benefit of the mortgagee under any mortgage complying with Section (A) of Section 6(a)(iii) hereof, that Lessor will not acquire or claim, as against such mortgagee, any right, title or interest in any engine subject to the lien of such mortgage as the result of such engine being installed on the Airframe at any time while such engine is subject to the lien of such mortgage. (18) Lawful Insured Operations. Lessee will not permit the Aircraft to be maintained, used or operated in violation of any Law of any Governmental Entity, or in violation of any airworthiness certificate, or license or registration issued by any such authority, or contrary to the Manufacturer's or Engine Manufacturer's operating manuals or instructions for the Aircraft or the Engines. In the event that any such Law requires alteration of the Aircraft, Lessee shall ensure compliance therewith and shall ensure that the Aircraft is maintained in proper condition for operation under such Laws. Lessee agrees not to operate the Aircraft or permit the Aircraft to be operated during the Term unless the Aircraft is covered by insurance as required by the provisions hereof. (19) Maintenance. Lessee shall, at its own expense: (i) perform all mandatory service, inspections, repair, maintenance, airworthiness directives, overhaul and testing, (A) as may be required under applicable FAA rules and regulations for compliance therewith during the Term and for a period of one hundred eighty (180) days thereafter and in compliance with the Maintenance Program, (B) in the same manner and with the same care as shall be the case with similar aircraft and engines owned by or operated by or on behalf of Lessee without discrimination and (C) so as to keep the Aircraft in as good operating condition as when delivered to Lessee, ordinary wear and tear excepted; provided, however, in the event the cost of performing, or causing the performance of, an inspection resulting in the modification or terminating action being performed pursuant to any Airworthiness Directive exceeds one hundred thousand dollars ($100,000), Lessor will reimburse Lessee for an amount equal to the AD Sharing Formula for such cost, provided that (A) no Event of Default has occurred and is continuing, and (B) Lessee provides evidence satisfactory to Lessor of payment and completion of the relevant work; (ii) keep the Aircraft in such condition as is necessary to maintain the airworthiness certification of the Aircraft in good standing; and (iii) maintain all records, logs and other materials required by, and in a manner acceptable to, the FAA. (20) Registration and Insignia. The Aircraft shall be and shall remain registered under the Transportation Code in the name of Lessor or such Person as Lessor may designate. Upon delivery of the Aircraft, Lessee agrees to place the Lease Identification in the cockpit in a prominent location and to place the Lease Identification on each Engine. Lessee agrees to make such changes to the Lease Identification as Lessor may request from time to time. Lessee will not exercise any control or dominion over the Aircraft or operate or permit to be operated the Aircraft until such Lease Identification has been so placed thereon. Lessee will promptly replace any such marking which has been removed, defaced or destroyed. (21) Replacement of Parts. Lessee will promptly replace all Parts which may from time to time become worn out, lost, stolen, seized, confiscated, damaged beyond repair or permanently rendered unfit for use for any reason whatsoever. In addition, Lessee may remove any Parts, whether or not worn out, damaged beyond repair or permanently rendered unfit for use, provided that Lessee replaces such Parts as promptly as practicable. All replacement Parts shall be free and clear of all Liens, other than Permitted Liens, and shall be in as good an operating condition as, and have a utility value and remaining warranty reasonably approximating, the Parts replaced (assuming such replaced Parts were in the condition and repair in which they were required to be maintained by the terms hereof). All Parts owned by Lessor which are at any time removed from the Aircraft shall remain the property of Lessor and subject to this Lease until such time as such Parts shall be replaced by Parts which have been incorporated or installed in to the Aircraft and which meet the requirements for replacement Parts specified above. Immediately upon any replacement Part becoming incorporated or installed into the Aircraft as above provided, (i) title to the removed Part shall thereupon vest in Lessee, free and clear of all rights of Lessor, (ii) title to such replacement Part shall thereupon vest solely in Lessor and (iii) such replacement Part shall become subject to this Lease and be deemed a Part for all purposes hereof to the same extent as the Part which it has replaced. (22) Alterations, Modifications and Additions. Lessee shall make such alterations and modifications and additions to the Aircraft as may be required from time to time to meet the applicable standards of the FAA or to comply with any Law, rule, directive, bulletin, regulation or order of any Governmental Entity or of the manufacturer of the Aircraft, Engines or Parts. Lessee may from time to time make alterations and modifications in and additions to the Aircraft, provided no such alteration, modification or addition diminishes the remaining warranty, value or utility, or impairs the condition or airworthiness, of the Aircraft. Title to all Parts incorporated or installed in or attached or added to the Aircraft as the result of such alteration, modification or addition shall vest immediately in Lessor and become subject to this Lease, without the necessity for any further act of transfer, document or notice. SECTION 7 INFORMATION AND INSPECTION Lessee agrees to furnish Lessor: (a) within one hundred twenty (120) days after the close of each fiscal year of Lessee, its audited balance sheet, profit and loss statement, and statement of stockholders' equity of Lessee (prepared on a consolidated basis), as of the close of such fiscal year; (b) within ten (10) calendar days following the end of each calendar month during the Term, an Airframe Usage Report; and (c) from time to time such other information as Lessor may reasonably request, including interim, unaudited financial information regarding Lessee and information concerning the location, condition, use and operation of the Aircraft. Lessee shall permit Lessor or its designee on three (3) days' prior written notice to visit and inspect the Aircraft, its condition, use and operation and the records maintained in connection therewith. During such inspection, Lessor may take copies of the Aircraft Documents and other operational records relating to the Aircraft. Lessor shall have no duty to make any such inspection. Lessor's failure to object to any condition or procedure observed or observable in the course of an inspection hereunder shall not be deemed to waive or modify any of the terms of this Lease with respect to such condition or procedure. SECTION 8 CERTAIN COVENANTS OF LESSEE (23) Maintenance of Existence, Status and Consents. Lessee will (i) preserve and maintain its corporate existence and such of its rights, privileges, licenses and franchises in any jurisdiction where failure to obtain such licensing or qualification would have a material adverse effect upon Lessee; (ii) maintain and operate the Aircraft at all times as a Certificated Air Carrier and be otherwise certificated and registered to the extent necessary to provide to Lessor the benefits contemplated by Section 1110 of Title 11 of the United States Code or any successor provision thereof; and (iii) maintain in full force and effect all governmental consents, licenses, authorizations, approvals, declarations, filings and registrations obtained or effected in connection with this Lease and take such additional action as may be proper or advisable in connection herewith. Lessee further undertakes to obtain or effect any new or additional governmental consents, licenses, authorizations, approvals, declarations, filings or registrations as may become necessary for the performance of any of the terms and conditions of this Lease. Without the prior written consent of Lessor, which consent shall not be unreasonably withheld, Lessee shall not consolidate with, merge with or merge into any other Person or convey, transfer or lease substantially all of its assets as an entirety to any other Person. Without prior written notice to Lessor, Lessee will not change its principal place of business or chief executive office. (24) Payment of Taxes. Lessee will pay or cause to be paid all Taxes which are payable by Lessee upon any property belonging to it, prior to the date on which penalties attach thereto and prior to the date on which any lawful claim, if not paid, would become a Lien upon any of the material property of Lessee. (25) Liens. Lessee shall not directly or indirectly create, incur, or suffer to exist any Lien on the Aircraft or any Engine or any interest therein, except: (a) the respective rights of Lessor and Lessee as herein provided; (b) Lessor's Liens; (c) Liens for Taxes either not yet due or being contested in good faith by appropriate proceedings and so long as adequate reserves are maintained with respect to such Liens; and (d) inchoate materialmen's, mechanics', workmen's, repairmen's, employees' or other like Liens arising in the ordinary course of business, which either are not delinquent or are being contested in good faith by Lessee, so long as the Aircraft or such Engine is not in danger of being lost, sold, confiscated, forfeited or seized as a result of any such Lien. Lessee shall promptly take such action as may be necessary to duly discharge any Lien (except for the Liens referred to in Sections (a) and (b) above) arising at any time with respect to the Aircraft or any Engine. Lessee shall promptly pay and discharge when due, or make adequate provision for all debts, claims, liabilities or obligations whatsoever created by it, or arising as a result of any matter concerning it, which may give rise to any Lien. (26) Perfection of Title and Further Assurances. If the filing or recording of this Lease or any other document or instrument is reasonably necessary to protect the interest of Lessor, Lessee, at its own cost and expense and upon request by Lessor, shall cause the same to occur. At the request of Lessor, Lessee shall furnish to Lessor an opinion of counsel or other evidence satisfactory to Lessor of each such filing or refiling and recordation or re-recordation. Lessee will promptly and duly execute and deliver to Lessor such further documents and assurances and take such further actions as it may from time to time reasonably request in order to more effectively carry out the intent and purpose of this Lease and to establish and protect the rights and remedies created or intended to be created in favor of Lessor hereunder. SECTION 9 INDEMNIFICATION (27) General Indemnity. Lessee agrees to defend, indemnify and hold harmless the Indemnitees on demand from and against any and all Expenses (regardless of when the same are made or incurred): (i) which may at any time be suffered or incurred directly or indirectly as a result of or connected with (A) the possession, performance, management, ownership, registration, control, maintenance, condition, service, repair, overhaul, leasing, use or operation of the Aircraft, any Engine or any Part, (B) the delivery or redelivery of the Aircraft, any Engine or Part, or (C) the occurrence of any Default, whether or not the Expenses 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 whether they arise out of or are attributable to any act or omission of any Indemnitee; and/or (ii) which 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 of any obligation of confidentiality owed to any Person in respect of any of the matters referred to in this paragraph; but excluding any Expenses in relation to a particular Indemnitee to the extent that such Expenses (A) are covered pursuant to another indemnity provision of this Lease or (B) arise solely as a result of the gross negligence or wilful misconduct of that Indemnitee or (C) arise solely as a result of a Lessor Lien. The foregoing indemnities will continue in full force following the Expiration Date notwithstanding any breach or repudiation by Lessor or Lessee of this Lease or any termination of the leasing of the Aircraft hereunder. (28) Tax Indemnity. (1) Indemnity. All payments by Lessee to or on behalf of any Indemnitee shall be free of withholdings of any nature whatsoever (including, without limitation, withholding taxes, monetary transfer fees, sales, use and excise taxes, VAT, income taxes (other than that, on the net income of Lessor) and any similar taxes and charges) and in the event any withholding is required, Lessee shall pay an additional amount such that the net amount actually received by the person entitled to receive such payment will under any circumstances and in any event, after such withholding, equal the full amount of the payment then due. Lessee shall pay when due and indemnify and hold each Indemnitee harmless from all Taxes, howsoever levied or imposed, whether levied or imposed upon or asserted against Lessor, Lessee, the Aircraft or any part thereof or interest therein, or otherwise, by any federal, state or local taxing authority in the United States of America or by any government or taxing authority of or in a foreign country or of or in a territory or possession of the United States or by any international taxing authority, upon or with respect to or based upon or measured by or as a result of or in connection with (i) the Aircraft or any part thereof or interest therein, (ii) the use, operation, maintenance, possession, condition, control, occupancy, servicing, installation, transportation, storage, substitution, sale, recording, documentation, importation, exportation, modification, location, repair, abandonment, replacement, delivery, registration, deregistration, repossession, improvement, ownership, leasing, subleasing, manufacture, rental, settlement of any insurance claim, return, transfer of title, transfer of possession, or other disposition of the Aircraft or any part thereof or interest therein, (iii) the rentals, receipts, earnings or gains arising from the Aircraft or any part thereof or interest therein, (iv) any amount payable pursuant to the Lease or any related agreement, (v) the Lease or any related agreement or any future amendment, supplement, waiver or consent with respect to any thereof, or the execution, delivery, recording or performance of any thereof or (vi) otherwise arising from, with respect to or in connection with the transactions contemplated by the Lease or any related agreement, except to the extent provided in Section 9(b)(ii) hereof. Each payment or indemnity payable hereunder shall include any amount necessary to hold the recipient of the payment or indemnity harmless on an after-tax basis from all Taxes required to be paid by such recipient with respect to such payment or indemnity. (2) Exclusions. Lessee shall not be required to pay any indemnity pursuant to Section 9(a) with respect to any of the following: (i) any Tax to the extent attributable solely to an event or circumstance occurring prior to the Delivery Date; (ii) any Tax imposed as a result of a voluntary transfer, assignment or other disposition by Lessor of the Aircraft or the Lease unless such transfer, assignment or other disposition shall occur (x) at any time when an Event of Default under the Lease shall have occurred and be continuing (or would be continuing but for the exercise of remedies), or (y) in connection or as a result of with any termination of the Lease; (iii) any Tax to the extent attributable solely to any event, circumstance or period of time that occurs after the Aircraft has been redelivered to Lessor pursuant to Section 12 hereof (under circumstances not involving a repossession pursuant to Section 13(b) hereof) unless any such act or event shall itself result from or be attributable to an act or omission of Lessee which occurred prior to or concurrently with the redelivery of the Aircraft and the discharge of Lessee's obligations under the Lease; and (iv) any Tax that is imposed by any state or local government or taxing authority in the United States and that is imposed on or measured by the gross or net income, gross or net receipts, capital or net worth of an Indemnitee; provided that the exclusion described in this subparagraph (iv) shall not apply to (A) Taxes that are or are in the nature of sales, use, rental, value-added, license, excise or property Taxes, or (B) any Tax to the extent incurred by such Indemnitee as a result of (1) the use or location of the Aircraft or any Engine or any part of any thereof in the jurisdiction imposing the Tax or (2) the situs of organization, any place of business or any activity of Lessee, any affiliate of Lessee or any Person having custody, possession or use of the Aircraft or any Engine or any part of any thereof through Lessee in the jurisdiction imposing the Tax or (3) the execution, delivery, filing, registration, recording or enforcement of the Lease, or any instrument, certificate or other document executed pursuant to the Lease, in the jurisdiction imposing the Tax. (3) Payment. All Taxes indemnified under this Section 9(b) shall be paid by Lessee (to the extent permitted by applicable Law, unless otherwise directed by the relevant Indemnitee) directly to the appropriate taxing authority on or before the time (and in the manner) prescribed by applicable Law. All other amounts shall be paid to the relevant Indemnitee within 30 days after receipt of a written demand therefor from such Indemnitee accompanied by a written statement describing in reasonable detail the Taxes that are the subject of such indemnity and the computation of the indemnity being demanded. (4) Miscellaneous. In case any report or return is required to be made with respect to any Tax for which Lessee would be required to indemnify an Indemnitee under this Section 9(b), Lessee will either make such report or return in such manner as will show the ownership of the Aircraft in Lessor and send a copy of such report or return to the affected Indemnitee or will notify the affected Indemnitee of such requirement and make such report or return in such manner as shall be reasonably satisfactory to such Indemnitee. If actual notice is given by any taxing authority to Lessor that a report or return is required to be filed with respect to any such Taxes referred to in this Section 9(b), Lessor shall promptly notify Lessee of such required report or return. Lessor agrees to respond to any reasonable request of Lessee for information within the control of Lessor with respect to the filing of any report or return, but Lessee agrees to pay any reasonable costs, fees or other charges of independent counsel or independent accountants incurred in connection with such request. Lessee agrees that within sixty (60) days after the close of each fiscal year of Lessor it shall provide Lessor with any information reasonably requested by Lessor, including information regarding the use and location of the Aircraft during such fiscal year. SECTION 10 CASUALTY OCCURRENCES (29) Casualty Occurrence with Respect to the Airframe. Within five (5) days after a Casualty Occurrence with respect to the Airframe and any Engine then installed thereon, Lessee shall give Lessor written notice of such occurrence. On or before thirty (30) days after the date of the Casualty Occurrence with respect to the Aircraft, Lessee shall pay to Lessor in immediately available funds the sum of (i) the Casualty Value of the Aircraft computed as of the date of payment less an amount equal to the daily equivalent of Basic Rent (computed on the basis of a 365-day year) for each day during the period commencing with the day after payment of such Casualty Value and extending to, but excluding, the Basic Rent Payment Date immediately following payment of such Casualty Value, and (ii) all Supplemental Rent, other than amounts paid pursuant to Section (i), computed as of the date of payment. Upon such payment (A) the obligation of Lessee to make further payments of Basic Rent hereunder shall terminate, (B) this Lease shall terminate with respect to the Aircraft and (C) Lessor will transfer to Lessee, without recourse or warranty, all of Lessor's right, title and interest, if any, in and to the Airframe and Engines (if any) suffering the Casualty Occurrence, as well as all of Lessor's right, title and interest in and to any Engine constituting part of the Aircraft but not installed thereon at the time of the Casualty Occurrence. (30) Casualty Occurrence with Respect to an Engine. Upon a Casualty Occurrence with respect to an Engine only, Lessee shall give Lessor prompt written notice thereof and shall, within forty-five (45) days after such occurrence, convey to Lessor, as replacement for the Engine suffering a Casualty Occurrence, title to a Replacement Engine. Each Replacement Engine shall be free of all Liens (except Permitted Liens). Upon full compliance by Lessee with the terms of this paragraph, Lessor will transfer to Lessee title to the Engine which suffered the Casualty Occurrence. Prior to or at the time of any such conveyance, Lessee, at its own expense, will promptly (i) furnish Lessor with a full warranty bill of sale, in form and substance reasonably satisfactory to Lessor, with respect to such Replacement Engine; (ii) cause a supplement hereto, in form and substance reasonably satisfactory to Lessor, subjecting such Replacement Engine to this Lease, to be duly executed by Lessee, and recorded pursuant to applicable Law; (iii) furnish Lessor with such legal opinions and other documents as Lessor may reasonably request in connection with the consummation of the transactions contemplated by this Section 10(b), in each case in form and substance satisfactory to Lessor. Upon full compliance by Lessee with the terms of this Section 10(b), Lessor will transfer to Lessee all of the right, title and interest in the Engine which suffered the Casualty Occurrence, and such Replacement Engine shall be deemed an "Engine" as defined herein. (31) Application of Proceeds and Payments. Any payments received at any time by Lessor or by Lessee from any insurer under any policy of insurance (other than liability insurance) shall be applied in the manner specified in Sections 11(m), 11(n) or 11(o) hereof as applicable. Any payments received at any time by Lessor or Lessee with respect to a Casualty Occurrence will be applied as follows: (i) if such payments are received as a result of a Casualty Occurrence with respect to the Aircraft, such payment up to the amount of the Casualty Value shall be paid to Lessor, or if Lessee has already paid Lessor the Casualty Value, such payment shall be applied by Lessor to reimburse Lessee; or (ii) if such payments are received as a result of a Casualty Occurrence with respect to an Engine which is being replaced pursuant to Section 10(b), such payments shall be paid over to, or retained by, Lessee if Lessee shall have fully performed the terms of Section 10(b) hereof. (32) Application in Default. Any amount referred to in Section (i) or (ii) of Section 11(c) which is otherwise payable to Lessee shall not be paid to Lessee, or, if it has been previously paid to Lessee, and not yet applied by Lessee as permitted or required hereunder, shall be delivered from Lessee to Lessor, if at the time of such payment a Default shall have occurred and be continuing. In such case, all such amounts shall be paid to and held by Lessor as security for the obligations of Lessee, or, at the option of Lessor, applied by Lessor toward payment of any of Lessee's obligations at the time due hereunder, as Lessor may elect. At such time as there shall not be continuing any such Default, all such amounts at the time held by Lessor in excess of the amount, if any, which Lessor has elected for application as provided above, shall be paid to Lessee. SECTION 11 INSURANCE (33) Obligation to Insure. From the Delivery Date until the termination of the Lease and redelivery of the Aircraft to Lessor, Lessee shall, at its own cost and expense, effect and maintain or cause to be effected and maintained in full force and effect insurances with respect to the Aircraft that comply with the provisions of this Section 11. Lessee agrees that such insurances shall be carried with Approved Insurers. Lessee further agrees that such insurances shall reflect prudent practices in the international aviation insurance market for air carriers operating the same type of aircraft as the Aircraft on similar routes. (34) Public Liability and Property Damage Insurance. Lessee will carry and maintain in effect, at its own expense, comprehensive public liability insurance covering aircraft liability including bodily injury and property damage, passenger, baggage, cargo and mail, and general liability (including products and completed operation) for a combined single limit on any one occurrence of not less than the amount applicable to similar passenger aircraft and engines which comprise Lessee's fleet, and in any event not less than the amount under "Public Liability and Property Damage Insurance" as set forth on Exhibit A hereto (or such higher amounts as Lessor may from time to time reasonably require). Lessee shall not discriminate against the Aircraft in providing such insurance. (35) Required Policy Designations Relating to Comprehensive Public Liability Insurance. The policies evidencing the insurance required under Section 11(b) shall be endorsed to include paragraph 2 of AVN67B with each Indemnitee and Lender named as a contract party in AVN67B, shall cover "war risks and allied perils" in accordance with extended coverage endorsement AVN52C and shall to the extent not in conflict with AVN67B: (1) provide that all the provisions thereof, except the limits of liability, shall operate to give each Additional Insured the same protection as if there were a separate policy covering each insured; and (2) be primary and without right of contribution from other insurance that may be available to any other Additional Insured or Lessee. (36) Insurance with Respect to the Aircraft. Lessee, at its own expense, will maintain in effect: (1) "hull all risks" insurance for loss of or damage to the Aircraft (including all flight and ground risks) on an agreed value basis in an amount not less than the Casualty Value; (2) "all risks" and "war risks and allied perils" insurance on the Engines and Parts while not installed on the Airframe on an agreed value basis in an amount not less than their full replacement value; and (3) "hull war and allied perils" insurance on the Aircraft covering risks excluded from the "hull all risks" policy to the fullest extent available from the leading international insurance markets, including confiscation or requisition by the state of registration, on an agreed value basis for an amount not less than the Casualty Value. (37) Required Policy Designations and Provisions Relating to Insurance Against Loss or Damage. Each and any policy of insurance obtained and maintained pursuant to Section 11(d), and each and any policy obtained in substitution or replacement for any such policies, shall be provided by policies that shall be endorsed to include paragraph 1 of AVN67B with Lessor and Lender as contract parties and shall to the extent not in conflict with AVN67B: (1) include a loss payable clause that provides that all insurance proceeds in the event of a Casualty Occurrence shall be payable to Lessor or its designee and that all other insurance proceeds shall be paid in accordance with the terms of this Lease to such parties as may be necessary to repair the Aircraft; (2) provide in the event of separate insurances being arranged to cover the "hull all-risks" insurance and the "hull war-risks" insurance that the underwriters subscribing to such insurance agree that in the event of any dispute as to whether a claim is covered by the "hull all-risks" or "hull war-risks" policy, such claim be settled on a 50/50 claim funding basis in accordance with AVS103 (or its equivalent) or under either the "hull all-risks" or "hull war-risks" policy; (3) be subject to such exclusions and deductibles as Lessor may reasonably approve, provided that in no event shall the deductible under the "hull all-risks" and "hull war-risks" insurance exceed the Deductible Amount; and (4) provide that all insurance proceeds shall be payable in Dollars. (38) Revised Policy Designations and Provisions Relating to All Insurance. The policies evidencing the insurance required under this Section 11 shall be endorsed to include paragraph 3 of AVN67B with Lessor and Lender with respect to hull insurance and each Additional Insured with respect to liability insurance be named as contract parties in AVN67B, shall name the Additional Insureds and shall, to the extent not in conflict with AVN67B: (1) designate the Additional Insureds as additional insureds and loss payees; (2) provide that the insurance shall not be invalidated, so far as concerns any Additional Insured, by any action or inaction or omission (including misrepresentation and nondisclosure) of any person or party that results in a breach of any term, condition or warranty of such policy; provided, that the Additional Insured so protected has not caused, contributed to or knowingly condoned the action, inaction or omission, as the case may be; (3) specifically reference this Lease; (4) provide for worldwide coverage (subject only to such exceptions as are customary in insurance coverage carried by air carriers operating aircraft of the same type as the Aircraft); (5) provide that upon payment of any loss or claim to or on behalf of any Additional Insured, the respective insurer shall to the extent and in respect of such payment be thereon subrogated to all legal and equitable rights of the Additional Insured indemnified hereby (but not against any other Additional Insured); provided, that such insurer shall not exercise such rights without the consent of the indemnified Additional Insured, such consent not to be reasonably withheld; (6) provide that neither Lessor nor Lender shall be liable for any premiums in respect thereof and that the insurers shall waive any right of set-off or counterclaim against Lessor or Lender except in respect of unpaid premiums in respect of the Aircraft; and (7) provide that the insurers shall promptly notify Lessor and Lender in the event of cancellation of, or any material change in, the insurance or any act or omission or any event that might invalidate or render unenforceable the insurances or in the event that any premium shall not have been paid when due and that the insurances shall continue unaltered for the benefit of each Additional Insured for at least thirty (30) days after written notice by registered mail of such cancellation, change, event or non-payment of premium thereof shall have been received by Lessor and Lender except in the case of war risks for which seven (7) day notice (or such period as may be customarily available in respect of war risks or allied perils) will be given. (39) Information. (1) On or before the Delivery Date and promptly after each renewal of the insurances, Lessee shall provide Lessor and Lender with certificates of insurance and a broker's letter of undertaking that (i) name each of Triton Aviation Services V LLC, First Security Bank, N.A., NationsBank, N.A., and their respective officers, directors, shareholders, agents and employees and their respective successors and assigns as "additional insureds", (ii) evidence to the satisfaction of Lessor that the insurances are and will continue in full force after the Delivery Date or the renewal date (as the case may be) for such period as shall then be stipulated and (iii) contain such other certifications and undertakings as are customarily provided to lessors and mortgagees by insurance brokers acting for air carriers. (2) Lessee shall from time to time upon request from Lessor (i) provide to it evidence reasonably satisfactory to it that any and all premiums payable in respect of the insurances have been paid in accordance with the terms of the relevant policy and (ii) provide or cause its broker to provide a list of the insurers with whom the insurances are carried and the coverages provided by each of them. (3) Lessee shall furnish such information regarding the status of renewal negotiations as may from time to time be reasonably requested by Lessor. In addition, Lessee shall arrange for its brokers (i) to confirm to Lessor not later than five (5) days prior to the renewal date of the insurances, that negotiations for such renewal are at an advanced state and that there is no reason to suppose that the insurances will not be renewed at the relevant date in terms that will comply with the provisions of this Lease and (ii) to furnish to Lessor on or prior to the renewal date, the renewal certificates of insurance, reinsurance (if applicable) and brokers' letters of undertaking, each in English and in form and substance satisfactory to Lessor. (4) Lessee shall furnish, or cause to be furnished, to Lessor and Lender on the Delivery Date and thereafter as and when required by Lessor and upon each transfer of the Aircraft or assignment of rights hereunder as permitted by this Lease, certificates and brokers letter of undertaking (and, if further requested, of its insurers) that confirm that the requirements of this Section 11 are being complied with. (5) Lessee shall, at the request of Lessor, make copies of the policies and endorsements and any amendments thereto with respect to the insurance available to Lessor (or its authorized representatives) for inspection by any representative of Lessor at the office of Lessee or its insurance brokers during normal business hours. (40) Additional Insurance; No Lien. (1) Lessee shall not, without the prior written consent of Lessor, maintain insurances with respect to the Aircraft or any Engine, other than as required under this Lease if it would prejudice recovery under the insurance required hereunder. (2) Lessor may from time to time require Lessee at no cost to Lessor to effect such other insurances, or such variations to the terms of the existing insurances, as Lessor may reasonably require in order to fully protect the interests of the Additional Insureds. (3) Lessee shall not create or permit to exist any Lien over the insurances required by this Lease, or its interest therein, save as constituted by this Lease. (41) Failure to Insure. If at any time Lessee fails to maintain in full force and effect insurances in compliance with any provision of this Section 11, Lessor shall be entitled but not obligated (without prejudice to any other rights that it may have or acquire under this Lease by reason of such failure): (1) to pay any premiums due or to effect or maintain insurances satisfactory to Lessor or otherwise remedy such failure in such manner as Lessor considers appropriate, and Lessee shall immediately reimburse Lessor in full for any amount so expended by Lessor; and/or (2) 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 Lessor until such failure is remedied. (42) Assignment. If Lessor transfers the Aircraft or assigns its rights hereunder as permitted by this Lease, Lessee will, upon request, promptly procure that the transferee or assignee (including, without limitation, any lender) shall be added as a further named insured to any of the insurances referred to in this Section 11 so as to enjoy the same rights and protection as Lessor may have from time to time under such insurances. In addition, if Lessor transfers the Aircraft or such rights and thereafter ceases to be Lessor (a "Transferor"), Lessee shall, at the request of such Transferor and at Lessees expense, effect and maintain for the benefit of such Transferor the insurance required by Section 11(c) for such period (not exceeding two years) as in Transferor may request and shall ensure that the Transferor shall be named as an additional insured thereunder. (43) Reinsurance. Any reinsurance will be maintained with reinsurers and brokers approved by Lessor. Such reinsurance will contain each of the following terms and will in all other respects (including amount) be satisfactory to Lessor. (1) the same terms as the original insurance; (2) a cut through and assignment clause satisfactory to Lessor; and (3) payment will be made notwithstanding (A) any bankruptcy, insolvency, liquidation or dissolution of any of the original insurers and/or (B) that the original insurers have made no payment under the original insurance policies. (44) Settlement of Claims. Lessee will not settle or permit settlement of any claims arising under any of the insurances referred to in Section 11 without the prior written consent of Lessor or its designee and will not settle or permit settlement of any claims under such insurance without such consent if an Event of Default has occurred and is continuing. (45) Application of Insurance Proceeds for a Casualty Occurrence. It is agreed that insurance payments which arise from any policy of insurance carried by Lessee and received as the result of the occurrence of a Casualty Occurrence shall be applied as follows: (i) if such payments are received with respect to a Casualty Occurrence relating to the Airframe and Engines or engines installed on the Airframe, so much of such payments as shall not exceed the amounts due under Section 10(a) hereof shall be paid to Lessor, and the balance to Lessee; and (ii) if such payments are received with respect to a Casualty Occurrence relating to an Engine under circumstances contemplated by Section 11(d) hereof, such payment shall be adjusted with Lessee (provided that Lessee has not breached any warranty, declaration or condition contained in the applicable insurance policy) and paid over to Lessee, provided that Lessee shall have fully performed the terms of Section 10(b) hereof. (46) Application of Insurance Proceeds for Other than a Casualty Occurrence. The insurance payments for any property damage loss to the Airframe or any Engine not constituting a Casualty Occurrence, or to any Part, will be held by Lessor until Lessee furnishes Lessor with satisfactory evidence that the repairs or replacement property Lessee is required to perform or obtain in accordance with the terms of Section 6(f) of this Lease have been made or obtained by Lessee. Upon receipt of such evidence of repair or replacement, Lessor shall pay Lessee the amount of the insurance payment received with respect to such loss. (47) Application in Default. Any amount referred to in Sections 11(e)(i), 11(m) or 11(n) which is otherwise payable to Lessee shall not be paid to Lessee, or, if it has been previously paid to Lessee, and not yet applied by Lessee as permitted or required hereunder, shall be delivered by Lessee to Lessor, if at the time of such payment, a Default shall have occurred and be continuing. In such case, all such amounts shall be held by Lessor as security for the obligations of Lessee, or, at the option of Lessor, applied by Lessor toward payment of any of Lessee's obligations at the time due hereunder. At such time as there shall not be continuing any such Default, all such amounts at the time held by Lessor in excess of the amount, if any, which Lessor has elected for application as provided above, shall be paid to Lessee. SECTION 12 RETURN OF AIRCRAFT AND RECORDS (48) Return. On the Expiration Date, Lessee, at its own expense, shall return the Aircraft to Lessor in the condition specified on Exhibit C hereto at the Return Location, fully equipped with all required Parts and Engines, duly installed thereon, together with the Aircraft Documents and records which are complete and acceptable to the FAA, and at no cost to Lessor, all service bulletin kits furnished without charge by a manufacturer for installation on the Aircraft which have not been so installed. (49) Records. Six months prior to the Expiration Date (and in an updated form upon the Return Occasion), Lessee will provide Lessor with a technical report in form and substance reasonably requested by Lessor, and, in addition, upon Lessor's request, will make copies of (i) drawings of the interior configuration of the Aircraft both as it presently exists and as it will exist at return, (ii) the airworthiness directive status list, (iii) service bulletin incorporation list, (iv) rotable controlled, hard-time and life limited component listings, (v) listing of Lessee-initiated modifications and alterations, (vi) interior material burn certificates, (vii) Maintenance Program, (viii) complete work scope for the checks, inspections and other work to be performed prior to return, (ix) current Engine disk sheets and (x) any other data which is reasonably requested by Lessor. In addition to the foregoing, upon the Return Occasion, Lessee shall deliver to Lessor all Aircraft Documentation. (50) Final Inspection. Upon the Return Occasion, Lessee shall make the Aircraft available to Lessor for a functional check flight and detailed inspection, at Lessee's expense, in order to verify that the condition of the Aircraft complies with the requirements set forth herein (the "Final Inspection"). Lessee shall give Lessor not less than ten (10) days prior written notice of the commencement date of the "C" Check required by Exhibit C. Lessor shall have the right to appoint a representative who may observe (i) the Final Inspection, (ii) any inspections conducted in accordance with Exhibit C, and/or (iii) the maintenance conducted in connection with or as a consequence of any such inspections. The functional test flight shall be conducted, at Lessee's expense, using a qualified pilot and not more than three (3) technical representatives selected by Lessor (one of whom may sit in the jump seat in the cockpit), in conjunction with Lessee's flight crew, shall be up to two (2) hours duration, shall conform with Lessee's standard operation check flight procedures, shall be covered by Lessee's insurance policy required pursuant to Section 11, and shall otherwise be of such scope as is necessary to demonstrate the airworthiness of the Aircraft and proper functioning of all systems and components. The Final Inspection shall commence on or before the Expiration Date and shall continue on consecutive days until all activity required above to be conducted during the Final Inspection has been concluded. To the extent that any portion of the Final Inspection extends beyond the Expiration Date, the Term shall be deemed to have been automatically extended, and the obligation to pay Rent hereunder continued on a daily basis until the Final Inspection shall have been concluded. (51) Corrections and Subsequent Corrections. If the Aircraft or any Engine fails upon the Return Occasion to conform to any requirement imposed by this Lease, Lessor, at its option, may continue the Lease in effect in the manner provided for in Section 12(c) above with regard to automatic extension until such time as the Aircraft is brought up to the condition required by this Lease, or accept the return of the Aircraft and thereafter have any such nonconformance corrected. Any expense incurred by Lessor for such correction shall become Supplemental Rent payable by Lessee upon demand. Lessee's obligations to pay such Supplemental Rent shall survive the passage of the Expiration Date or other termination of this Lease. SECTION 13 DEFAULT AND REMEDIES (52) Events of Default. Any one or more of the following occurrences or events shall constitute an Event of Default: (i) Lessee shall fail to make any payment of Rent to Lessor when due and such payment shall be overdue for a period of two (2) Business Days; (ii) Lessee shall fail to obtain and maintain any insurance required under the provisions of Section 11 hereof, or shall operate the Aircraft outside of the scope of the insurance coverage so maintained; (iii) any representation or warranty made by Lessee herein or in any document or certificate furnished Lessor in connection herewith or therewith or pursuant hereto is incorrect at the time given in any material respect; (iv) any bankruptcy, insolvency or similar proceeding is commenced by or against Lessee; or (v) Lessee shall fail to perform or observe any other covenant, condition or agreement hereunder and such failure shall continue for a period of five (5) Business Days after written notice thereof is given by Lessor to Lessee. (53) Remedies. Upon the occurrence of any Event of Default Lessor may, at its option and without notice to Lessee, exercise one or more of the following remedies as Lessor in its sole discretion shall elect: (i) demand that Lessee, and Lessee shall upon the written demand of Lessor and at Lessee's expense, immediately return the Aircraft to Lessor in the manner specified in such notice; (ii) enter upon the premises where the Aircraft is located and take immediate possession of and remove the same; (iii) cancel Lessee's leasehold interest in the Aircraft under this Lease effective upon dispatch of written notice to Lessee, and store, sell or lease to others the Aircraft, all free and clear of any rights of Lessee; (iv) demand that Lessee, and Lessee shall upon the written demand of Lessor, pay as damages for the breach hereof an amount equaling the sum of: (1) all Rent due and payable hereunder; (2) all Expenses incurred by Lessor as a result of Lessee's breach of this Lease; and (3) such additional amount as shall be sufficient to place Lessor in the same economic position, on an after-tax basis, as Lessor would have been in if Lessee had timely performed each of its obligations under this Lease; and/or (v) proceed by appropriate court action or actions, either at Law or in equity, to enforce performance by Lessee of the applicable covenants of this Lease and to obtain the benefit of any remedies available to Lessor hereunder or under applicable Law for breach hereof. In addition to the foregoing, Lessor shall be entitled to exercise such other rights and remedies as may be available under applicable Law and Lessee shall be liable on an after-tax basis for, and shall pay Lessor on demand: (1) interest on all unpaid amounts at the Interest Rate, from the due date until the date of payment in full; (2) all reasonable legal fees and other reasonable costs and expenses incurred by Lessor by reason of the occurrence of any Event of Default or the exercise of Lessor's remedies with respect thereto; and (3) all reasonable expenses, disbursements, costs and fees incurred in (A) repossessing, storing, preserving, shipping, maintaining, repairing and refurbishing the Aircraft, the Airframe, any Engine or Part to the condition required by Section 12 hereof and (B) preparing the Aircraft, the Airframe, an Engine or Part for sale or lease, advertising the sale or lease of the Aircraft, the Airframe, an Engine or Part and selling or releasing the Aircraft, the Airframe, an Engine or Part. No remedy referred to in this Section 13(b) is intended to be exclusive, but, to the extent permissible hereunder or under applicable Law, each shall be cumulative and in addition to any other remedy referred to above or otherwise available to Lessor at Law or in equity; and the exercise or beginning of exercise by Lessor of any one or more of such remedies shall not preclude the simultaneous or later exercise by Lessor of any or all of such other remedies. No express or implied waiver by Lessor of any Default or Event of Default shall in any way be, or be construed to be, a waiver of any future or subsequent Default or Event of Default. SECTION 14 ALIENATION Lessor shall have the right to assign, sell or encumber any interest of Lessor in the Aircraft or this Lease and/or the proceeds hereof subject to the rights of Lessee under the provisions of this Lease; provided, however, in the case of assignment for security, Lessee shall be reimbursed for any costs reasonably incurred by Lessee in connection therewith. To effect or facilitate any such assignment, sale or encumbrance, Lessee agrees to provide such agreements, consents, conveyances or documents as may be reasonably requested by Lessor, which in the case of an assignment other than for security shall include an unrestricted release of Lessor from its obligations hereunder. Lessee acknowledges that an assignment, sale or encumbrance of Lessor's interest hereunder would not have the effect of altering the terms of this Lease relating to the rights and obligations of Lessee. Lessee agrees that it will not assert against an assignee any claim or defense which it may have against Lessor. The agreements, covenants, obligations, and liabilities contained herein including, but not limited to, all obligations to pay Rent and indemnify each Indemnitee are made for the benefit of each Indemnitee and their respective successors and assigns. SECTION 15 MISCELLANEOUS (54) Severability and Construction. Any provision of this Lease which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof. To the extent permitted by Law, Lessee hereby waives any provisions of Law which renders any provisions hereof prohibited or unenforceable in any respect. This Lease shall constitute an agreement of lease, and nothing herein shall be construed as conveying to Lessee any right, title or interest in the Aircraft or any Engine or Part except as a lessee only. Lessor and Lessee agree that this Lease is to be treated as a lease for U.S. federal income tax purposes. (55) Governing Law; Jurisdiction. This Lease shall in all respects be governed by, and construed in accordance with, the Laws of the State of California. Lessee hereby irrevocably consents that any legal action or proceeding against it or any of its assets with respect to the Lease may be brought in any jurisdiction where Lessee or any of its assets may be found, or in any court of the State of California or any Federal court of the United States of America located in San Francisco, California, as Lessor may elect, and by execution and delivery of this Lease, 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. Lessee further irrevocably consents to the service of process out of any of the aforementioned courts in any such action or proceeding by the mailing of copies thereof by registered or certified airmail, postage prepaid, to Lessee at its address set forth on Exhibit A hereto. The foregoing, however, shall not limit the rights of Lessor to serve process in any other manner permitted by Law or to bring any legal action or proceeding or to obtain execution of judgment in any jurisdiction. Lessee hereby irrevocably waives, to the fullest extent permitted by Law, any objection which Lessee may now or hereafter have to the laying of venue of any suit, action or proceeding arising out of or relating to this Lease brought in the State of California, and hereby further irrevocably waives any claim that any such suit, action or proceeding brought in the State of California has been brought in an inconvenient forum. (56) Notices. All notices required under the terms and provisions hereof shall be in writing, shall be sent to Lessor or Lessee at their respective addresses set forth on Exhibit A hereto (or such other addresses as the parties may designate from time to time in writing) and, except as otherwise provided herein, shall become effective upon the earlier of actual receipt or (i) in the case of a letter, the fifth day following posting, and (ii) in the case of a facsimile transmission on the day immediately following the date of dispatch. (57) Lessor's Right to Perform for Lessee. If Lessee fails to perform or comply with any covenant, agreement or obligation contained herein, Lessor shall have the right but not the obligation to so perform or comply for Lessee, and the reasonable expenses of Lessor incurred in connection therewith, together with interest thereon at the Interest Rate, shall be payable by Lessee to Lessor (as Supplemental Rent) upon demand. The taking of any such action by Lessor shall not constitute a waiver or release of any obligation of Lessee under this Lease, 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 remedy or right available to Lessor hereunder. (58) Counterparts. This Lease may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. To the extent, if any, that this Lease 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 may be created through the transfer or possession of any counterpart other than the counterpart which has been marked "Original" on the signature page thereof. (59) Quiet Enjoyment. Lessor covenants that so long as an Event of Default shall not have occurred and be continuing, Lessee shall quietly enjoy the Aircraft and all rents, revenues, profits and income thereto, without interference by Lessor, or by any Person lawfully claiming by or through Lessor. (60) Brokers. Neither Lessor nor Lessee have utilized the services of any agent, broker or similar third party representation in connection with the transactions contemplated by this Lease and each party agrees to indemnify and hold the other harmless from and against any and all claims, suits, damages, costs and expenses (including, but not limited to reasonable attorneys' fees) asserted by any agent, broker or other third party for any commission or compensation based upon the lease of the Aircraft, if such claim, damage, cost or expense arises out of any action or alleged action by the indemnifying party, its employees or agents. (61) Time is of the Essence. Time and strict and punctual performance are of the essence with respect to each provision of this Lease. (62) DISCLAIMER OF CONSEQUENTIAL DAMAGES. LESSEE AGREES THAT IT SHALL NOT BE ENTITLED TO RECOVER, AND HEREBY DISCLAIMS AND WAIVES ANY RIGHT THAT IT MAY OTHERWISE HAVE TO RECOVER, CONSEQUENTIAL DAMAGES (AS SUCH TERM IS DEFINED IN SECTION 10520(B) OF THE CALIFORNIA UNIFORM COMMERCIAL CODE) AS A RESULT OF ANY BREACH OR ALLEGED BREACH BY LESSOR OF ANY OF THE AGREEMENTS, REPRESENTATIONS OR WARRANTIES OF LESSOR CONTAINED IN THIS LEASE OR THE OTHER RELATED AGREEMENTS. (63) Security Deposit. Lessor hereby acknowledges the receipt of an initial security deposit in the Initial Amount and Lessee hereby agrees to deposit with Lessor on or before thirty (30) days prior to the Estimated Delivery Date, a final installment of the security deposit in the Further Additional Amount (collectively, the "Security Deposit"). The Security Deposit shall be non-refundable during the Term hereof; provided that the Security Deposit shall be promptly refunded by Lessor to Lessee in the event that Lessor shall fail to tender the Aircraft for delivery in accordance with Section 3 of this Lease on or prior to May 30, 1999, despite Lessee's satisfaction of all conditions to such tender, and Lessee elects to terminate this Lease. Such sums are received by Lessor as security for the timely and faithful performance by Lessee of all of Lessee's obligations under this Lease, and Lessee hereby grants Lessor a security interest therein and in all other sums deposited under this Section 15(j). Lessor shall be entitled to commingle the Security Deposit with its other funds, and Lessee shall not be entitled to any interest or other earnings thereon. If Lessee is in Default hereunder, in addition to all other rights Lessor shall have under the California Uniform Commercial Code as a secured party, Lessor may use, apply or retain all or any portion of the Security Deposit in partial payment for sums due to Lessor by Lessee, to compensate Lessor for any sums it may in its discretion advance as a result of a Default by Lessee, or to apply toward losses or expenses Lessor may suffer or incur as a result of Lessee's Default. If Lessor uses or applies all or any portion of such Security Deposit, such application shall not be deemed a cure of any Defaults, and Lessee shall within five days after written demand therefore deposit with Lessor in cash an amount sufficient to restore the Security Deposit to its original sum and the failure of Lessee to do so shall be a material breach of this Lease by Lessee. Provided Lessee is not in Default under this Lease, the principal amount of such Security Deposit, without interest, and less any costs incurred by Lessor in connection with the termination of the Lease or return of the Aircraft and any amounts owed by Lessee to Lessor under this Lease or otherwise, shall be returned to Lessee on the Expiration Date, provided that Lessee shall have returned the Aircraft in compliance with Section 12 hereof. (64) Costs. Except as otherwise provided herein, Lessor and Lessee each shall pay its own costs and expenses incurred in connection with the negotiation, documentation and performance of its obligations under this Lease. (65) Entire Agreement; Modification or Revision. This Lease is intended to be a complete and exclusive statement of the terms of the agreement of the parties hereto, and this Lease supersedes any prior or contemporaneous agreements, whether oral or in writing. Neither this Lease nor any term of this Lease may be modified, rescinded, changed, waived, discharged or terminated except by a writing signed by the party to be charged. Lessor and Lessee acknowledge their agreement to the provisions of this Section 15(l) by their signatures below. IN WITNESS WHEREOF, Lessor and Lessee, each pursuant to due authority, have each caused this Lease to be executed by their duly authorized officers as of the day and year first above written. LESSOR: FIRST SECURITY BANK, N.A., not in its individual capacity but solely as owner trustee By:____________________________ Name:__________________________ Its:_____________________________ LESSEE: FRONTIER AIRLINES, INC. By:______________________________ Name:____________________________ Its:______________________________ CERTAIN PROCEEDS OF THIS LEASE ARE SUBJECT TO A SECURITY INTEREST IN FAVOR OF NATIONSBANK, N.A., AS AGENT, AND ANY SUCCESSOR AGENT, FOR ONE OR MORE FINANCIAL INSTITUTIONS EXHIBIT A to Aircraft Lease Agreement DEFINITIONS AND VALUES Part I -- General Additional Insureds shall mean Lessor, Beneficiary, Lender and their respective officers, directors, shareholders, agents and employers and their respective successors and assigns. Aircraft shall mean the Airframe together with (a) the Engines, whether or not installed on the Aircraft, (b) all Parts or components thereof, (c) spare parts or ancillary equipment or devices furnished with the Aircraft under this Lease, (d) all Aircraft Documents, and (e) all substitutions, replacements and renewals of any and all thereof. Aircraft Documents shall mean the items identified on Schedule 2 to Exhibit D, together with all additions and replacements. Airframe shall mean (a) the Boeing model 737-200A aircraft having Manufacturer's serial number 23004, but not including any engine installed thereon, and (b) any and all Parts so long as the same shall be incorporated or installed on or attached to the Airframe, or so long as title thereto shall remain vested in Lessor in accordance with the terms hereof, after removal from the Airframe. Airframe Usage Report shall mean a monthly report furnished to Lessor by Lessee in substantially the form attached hereto as Exhibit F showing the number of Flight Hours of operation for the Aircraft during the preceding month. Approved Insurance Broker shall mean any reputable aviation insurance broker of internationally recognized responsibility and standing approved by Lessor in its sole discretion. Approved Insurer shall mean any reputable aviation underwriter of internationally recognized responsibility and standing approved by Lessor in its sole discretion. Basic Rent Payment Date shall mean the 5th calendar day of each month during the Term commencing with the date of the first occurring calendar day of the Term but excluding the Final Basic Rent Payment Date. Beneficiary shall mean Triton Aviation Services V LLC, a California limited liability company, and its successors and assigns. Business Day shall mean any day other than a Saturday, Sunday or other day on which banking institutions in San Francisco, California are authorized or required by Law to be closed. "C" Check shall mean a "C" check in accordance with the Maintenance Program. "C7" Check shall mean the heaviest maintenance inspection, complete block overhaul, including the twenty thousand (20,000) hour structural inspection items. For purposes of this Lease, the "C7" Check shall be the equivalent of a "D" check. Casualty Occurrence shall mean any of the following events with respect to the Aircraft, Airframe or any Engine: (a) the actual or constructive total loss of such property (including any damage to such property which results in an insurance settlement on the basis of a total loss, or requisition for use or hire which results in an insurance settlement on the basis of a total loss); (b) such property being destroyed, damaged beyond repair or permanently rendered unfit for normal use for any reason whatsoever; (c) the requisition of title, or other compulsory acquisition, capture, seizure, deprivation, confiscation or detention for any reason of such property by any Governmental Entity or purported Governmental Entity (whether de jure or de facto); or (d) the hijacking, theft, condemnation, confiscation, seizure or requisition for use or hire of such property which deprives any Person permitted by this Lease to have possession and/or use of such property of such possession and/or use for more than 30 days. A Casualty Occurrence with respect to the Aircraft shall be deemed to have occurred if a Casualty Occurrence occurs with respect to the Airframe. A Casualty Occurrence with respect to any Engine shall not, without loss of the Airframe, be deemed a Casualty Occurrence with respect to the Aircraft. Certificated Air Carrier means any Person (except the United States Government) that is a citizen of the United States of America (as defined in Section 40102 of the Transportation Code) holding an air carrier operating certificate issued pursuant to Chapter 447 of the Transportation Code for the operation of aircraft capable of carrying ten or more individuals or 6,000 pounds or more of cargo. Component shall mean each time controlled, cycle controlled or calendar controlled component of the Aircraft. Default shall mean an Event of Default or event which would constitute an Event of Default but for the lapse of time or the giving of notice or both. Delivery Conditions shall mean the conditions in respect of the Aircraft set forth on Exhibit E. Delivery Date shall mean the date on which the Aircraft is delivered to and accepted by Lessee for purposes of this Lease. Delivery Location: Dalfort Aerospace in Dallas, Texas. Dollars shall mean lawful currency of the United States of America. Engine shall mean each of the two (2) Pratt & Whitney model JT8D-15A engines installed on or furnished with the Aircraft on the Delivery Date, bearing Engine Manufacturer's serial numbers 709066 and 717107, respectively, and any Replacement Engine which may from time to time be substituted therefor pursuant to Section 10; together in each case with any and all Parts incorporated or installed in or attached thereto or any and all Parts removed therefrom so long as title thereto remains vested in Lessor in accordance with the terms hereof after removal from such Engine. Except as otherwise set forth herein, at such time as a Replacement Engine shall be so substituted, such replaced Engine shall cease to be an Engine hereunder. The term "Engines" means, as of any date of determination, all Engines then leased hereunder. Engine Manufacturer: Pratt & Whitney. Engine Overhaul shall mean a complete overhaul (hot section or cold section refurbishment and life limited part replacement) of an Engine. Estimated Delivery Date: April 15, 1999. Event of Default shall have the meaning specified in any one or more clauses in Section 13(a). Excusable Delay shall mean any of the following causes: (a) act of God or the public enemy, (b) fires, floods, explosions, earthquakes, strikes, epidemics or quarantine restrictions, (c) inability of a maintenance facility to complete its maintenance activities, or (d) any other cause to the extent it is beyond the control of Lessor and not occasioned by its fault or negligence, but only for such length of time as the delivery of the Aircraft is reasonably prevented by such cause or causes. Expenses means any claims, proceedings, losses, liabilities, damages (whether direct, indirect, special, incidental or consequential), suits, judgments, costs, expenses, fees, penalties or fines (whether civil or criminal) of every nature and kind, including any of the foregoing arising or imposed with or without Indemnitee's fault or negligence, whether passive or active or under the doctrine of strict liability. Expiration Date shall mean the fifth (5th) anniversary of the Delivery Date. FAA shall mean the Federal Aviation Administration of the United States Department of Transportation or any successor. Final Basic Payment Date shall mean the last occurring 5th calendar day of the Term. Flight Hours shall mean (i) in the case of the Airframe and landing gear, the actual number of hours or fractions thereof that the Aircraft is in flight (from takeoff to landing) as recorded in the Aircraft's log book, and (ii) in the case of an Engine, the actual number of hours or fractions of thereof that such Engine is in operation (from takeoff to landing of the Airframe on which such Engine is installed) as recorded in the Aircraft's log book. Governmental Entity shall mean and include (a) any national government, or political subdivision thereof or local jurisdiction therein; (b) any board, commission, department, division, organ, instrumentality, court, or agency of any entity described in (a) above, however constituted; and (c) any association, organization, or institution of which any entity described in (a) or (b) above is a member or to whose jurisdiction any such entity is subject or in whose activities any such entity is a participant but only (except for purposes of defining Law below) to the extent that any of the preceding have jurisdiction over the Aircraft or its operations. Indemnitee shall mean Lessor, Beneficiary, each affiliate and Tax Affiliate of Lessor and Beneficiary, each successor and assign of each of the foregoing and each director, officer, employee and agent of each of the foregoing. Law shall mean and include (a) any statute, decree, constitution, regulation, order, judgment or other directive of any Governmental Entity; (b) any treaty, pact, compact or other agreement to which any Governmental Entity is a signatory or party; (c) any judicial or administrative interpretation or application of any Law described in (a) or (b) above; and (d) any amendment or revision of any Law described in (a), (b) or (c) above. Lease shall mean this Lease, each Lease Supplement, and any and all amendments, revisions, supplements and modifications thereto. Lease Identification: "OWNED BY AND LEASED FROM FIRST SECURITY BANK, N.A., AS OWNER TRUSTEE AT 79 SOUTH MAIN STREET, SALT LAKE CITY, UTAH 84111, U.S.A., AND SUBJECT TO SECURITY INTEREST IN FAVOR OF NATIONSBANK, N.A., AS AGENT, AND ANY SUCCESSOR AGENT, FOR ONE OR MORE FINANCIAL INSTITUTIONS." Lease Supplement shall mean the Lease Supplement, substantially in the form of Exhibit B hereto, entered into between Lessor and Lessee. Lender shall mean NationsBank, N.A., as agent, and any successor agent, for one or more financial institutions. Lessee's Address: Frontier Airlines, Inc. - ---------------- 12015 E. 46th Avenue, #200 Denver, Colorado 80239 Telephone: (303) 371-7400 Facsimile: (303) 371-7007 Attn: Director, Aircraft Mgmt. Lessor's Address: First Security Bank, N.A. - ---------------- 79 South Main Street Salt Lake City, Utah 84111 Telephone: (801) 246-5819 Facsimile: (801) 246-5053 Attn: Corporate Trust Department with a copy to: Triton Aviation Services V LLC c/o Triton Aviation Services Ltd. 55 Green Street, Suite 500 San Francisco, CA 94111 Telephone: (415) 956-6311 Facsimile: (415) 398-9184 Attn: Mr. John E. Flynn Lessor's Liens shall mean Liens arising as a result of (a) claims against Lessor not related to the transactions contemplated by this Lease; or (b) acts of Lessor, not contemplated and expressly permitted under this Lease; or (c) Taxes imposed against Lessor which are not indemnified against by Lessee pursuant to Section 9(b); or (d) claims against Lessor arising out of the voluntary transfer by Lessor of all or any part of its interests in the Aircraft or this Lease, other than a transfer pursuant to Sections 10 or 13(b) of this Lease. Lien shall mean any mortgage, pledge, lien, charge, encumbrance, lease, exercise of rights, security interest, claim or right of detention or sale. Maintenance Program shall mean Lessee's FAA approved maintenance program as in effect from time to time for the Aircraft. Manufacturer: The Boeing Company. Parts shall mean all appliances, components, parts, instruments, appurtenances, accessories, furnishings and other equipment of whatever nature (other than complete Engines or engines), which may now or from time to time be incorporated or installed in or attached to the Airframe or any Engine. Except as otherwise set forth herein, at such time as a replacement part shall be substituted for a Part in accordance with Section 10 hereof, the Part so replaced shall cease to be a Part hereunder. Payment Location: Bank of America Illinois, 231 South La Salle Street, Chicago, Illinois 60697, for the account of Triton Aviation Services V LLC, Account No. 79-51523, ABA 071-000039. Permitted Liens shall mean Liens which are permitted by Section 8(c) hereof. Person shall mean and include any individual person, corporation, limited liability company, partnership, trust, estate, unincorporated organization, association or Governmental Entity. Rent shall mean the Initial Rent Payment Amount, Basic Rent, the Final Basic Rent and Supplemental Rent collectively. Replacement Engine shall mean an engine of the same Engine Manufacturer and model, and having equivalent value, utility, modification and remaining warranty status as the Engine it is intended to replace under Section 10(b) hereof, or, at Lessee's option, an engine of the same Engine Manufacturer as such Engine but of an improved model, and otherwise of an equivalent value and utility and suitable for installation and use on the Airframe without impairing the value or utility of the Airframe. Return Location: such location as may be agreed to between Lessor and Lessee. Return Occasion shall mean the event that occurs when possession of the Aircraft is returned from Lessee to Lessor at the end of the Term of this Lease or upon Lessor taking possession pursuant to Section 13(b). Security Deposit has the meaning ascribed thereto in Section 15(j). Supplemental Rent shall mean any and all amounts, liabilities and obligations (other than Basic Rent) which Lessee assumes or agrees to pay hereunder to Lessor, including without limitation, (a) any payment of Casualty Value; (b) any payment of indemnity required by Section 9 hereof; (c) any payment of reserves pursuant to Section 4(b) hereof; and (d) to the extent permitted by applicable Law, interest accruing daily at the Interest Rate (all computations of interest under this Lease to be made on the basis of a 365-day year for the actual number of days elapsed, compounded monthly) calculated: (i) on any part of any installment of Basic Rent not paid on the due date thereof for the period the same remains unpaid and (ii) on any Supplemental Rent not paid when due hereunder until the same is paid. Tax Affiliate shall mean (a) in the case of the entity that is the Beneficiary on the Delivery Date and in the case of any successor or direct or indirect transferee thereof that is (or is treated as) a partnership for the United States Federal income tax purposes, each general partner, limited partner or member (as the case may be) of the Beneficiary and (b) in the case of any such general partner, limited partner or member which itself is (or is treated as) a partnership for United States Federal income tax purposes, each general partner, limited partner or member thereof (as the case may be). Taxes shall mean any and all present and future taxes, levies, assessments, duties, imposts, fees, withholdings and other government charges or of any nature, together with any penalties, additions to tax, fines, charges and/or interest thereon or computed by reference thereto. Term shall mean the term of this Lease specified in the Lease Supplement, commencing on the Delivery Date and ending on the Expiration Date. Transportation Code means Title 49 of the United States Code. Part II -- Certain Proprietary and Confidential Terms and Values. AD Sharing Formula shall be as follows: P=(C x (N-R))/N Where "N" equals the Term in months; "R" represents the remainder of the Term in months after completion of the modification/termination action; "C" equals the cost of the modification/termination action in excess of $* and "P" equals the Lessor's share of any cost. Airframe Reserve Rate: * per Airframe Flight Hour. Basic Rent Payment Amount: * per month in advance. Casualty Value: * Deductible Amount: * Engine Reserve Rate: * per Engine, per Engine Flight Hour. Final Basic Rent Payment Amount: The Dollar amount obtained by multiplying the Per Diem Rent Rate by the number of days from and including the Final Basic Rent Payment Date to and including the Expiration Date. Further Additional Amount: * payable in cash but as may be exchanged by Lessee at any time prior to the day immediately preceding the Delivery Date for a letter of credit of equal amount issued from a financial institution acceptable to Beneficiary. Initial Amount: * paid in cash, receipt of which is hereby acknowledged by Lessor, but as may be exchanged by Lessee at any time prior to the day immediately preceding the Delivery Date for a letter of credit of equal amount issued from a financial institution acceptable to Beneficiary. Initial Basic Rent Payment Amount: The Dollar amount obtained by multiplying the Per Diem Rent Rate by the number of days from Delivery Date to the first Basic Rent Payment Date. Interest Rate: Citibank, N.A.'s prime rate plus 3% per annum, but not to exceed the maximum amount permitted by Law. Landing Gear Reserve Rate: * per Airframe Flight Hour. Per Diem Rent Rate: * Public Liability and Property Damage Insurance: * EXHIBIT B to Aircraft Lease Agreement LEASE SUPPLEMENT NO. 1 LEASE SUPPLEMENT NO. 1, dated , 1999, between FIRST SECURITY BANK, N.A., not in its individual capacity but solely as Owner Trustee ("Lessor"), and FRONTIER AIRLINES, INC., a Colorado corporation ("Lessee"). Lessor and Lessee have previously entered into that certain Aircraft Lease Agreement dated as of February 26, 1999 (herein called the "Lease" and the defined terms therein being hereinafter used with the same meaning). The Lease provides for the execution and delivery from time to time of a Lease Supplement substantially in the form hereof for the purpose of leasing the aircraft described below under the Lease as and when delivered by Lessor to Lessee in accordance with the terms thereof. The Lease relates to the Aircraft, Parts and Engines as more precisely described below. A counterpart of the Lease is attached hereto and this Lease Supplement and the Lease shall form one document. In consideration of the premises and other good and sufficient consideration, Lessor and Lessee hereby agree as follows: 1. Lessor hereby delivers and leases to Lessee under the Lease and Lessee hereby accepts and leases from Lessor under the Lease, that certain Boeing model 737-200A commercial jet aircraft, comprised of the Airframe having Manufacturer's serial number 23004 and the two Pratt & Whitney JT8D-15A Engines having Engine Manufacturer's serial numbers 709066 and 717107, respectively (collectively, the "Delivered Aircraft"). 2. The Delivery Date of the Delivered Aircraft is the date of this Lease Supplement set forth in the opening paragraph hereof. 3. The Term for the Delivered Aircraft shall commence on the Delivery Date and shall end on the Expiration Date, which shall be , 2004. The Initial Basic Rent Payment Amount is due and payable on the date hereof and the Final Basic Rent Payment Date shall be _________________ 5, 2004. 4. Lessee hereby confirms to Lessor that (i) the Delivered Aircraft and each Engine installed thereon or belonging thereto have been duly marked in accordance with the terms of Section 6(e) of the Lease, (ii) Lessee has accepted the Delivered Aircraft for all purposes hereof and of the Lease, and (iii) Lessee has inspected the Delivered Aircraft and the Delivered Aircraft satisfies the conditions set forth in the Lease. 5. All of the terms and provisions of the Lease are hereby incorporated by reference in this Lease Supplement to the same extent as if fully set forth herein. 6. This Lease Supplement may be executed in any number of counterparts, each of such counterparts, except as provided in Section 15(e) of the Lease, shall for all purposes be deemed to be an original; and all such counterparts shall together constitute but one and the same Lease Supplement. IN WITNESS WHEREOF, Lessor and Lessee have caused this Lease Supplement No. 1 to be duly executed as of the day and year first above written. LESSOR, FIRST SECURITY BANK, N.A. not in its individual capacity but solely as owner trustee By:___________________________ Name:_________________________ Its:__________________________ LESSEE, FRONTIER AIRLINES, INC. By:___________________________ Name:_________________________ Its:__________________________ CERTAIN PROCEEDS OF THIS LEASE ARE SUBJECT TO A SECURITY INTEREST IN FAVOR OF NATIONSBANK, N.A., AS AGENT, AND ANY SUCCESSOR AGENT, FOR ONE OR MORE FINANCIAL INSTITUTIONS EXHIBIT C to Aircraft Lease Agreement RETURN CONDITION REQUIREMENTS A. Certificate of Airworthiness Matters. Upon the Return Occasion, the Aircraft shall possess a valid FAA Certificate of Airworthiness and meet the requirements for U.S. domestic operation under FAR Part 121, without restriction (including, without limitation, compliance with Stage III requirements). B. General Condition of Aircraft At Return. (1) All Aircraft documentation will have been maintained in English and in accordance with the rules and regulations of the FAA. (2) The Aircraft shall be in working order, with all pilot discrepancies and deferred maintenance items cleared. (3) The Aircraft interior will be clean by scheduled commercial airline standards and shall otherwise be returned in the same condition as at the Delivery Date. The cockpit shall be "touched up" in accordance with standard international airline practice and placards replaced as required. (4) The Aircraft will be airworthy and all airworthiness directives requiring compliance prior to return and for a period of one hundred eighty (180) days thereafter will have been performed on the Aircraft prior to the Expiration Date. (5) The Aircraft will be in full compliance with the Manufacturer's Corrosion Prevention and Control Program ("CPCP") specified for the model type by the Manufacturer. C. Checks Prior to Return. Immediately prior to the return of the Aircraft to Lessor, Lessee at its expense will: (1) At the option of Lessor, either (i) perform at an FAA-approved repair station, the next due full and complete zonal, systems and structural check ("C" or its equivalent) in accordance with the Maintenance Program, sufficient to clear the Aircraft for operation until the next scheduled full and complete zonal, systems and structural check under the Maintenance Program, or (ii) pay Lessor an amount in Dollars representing the average of two (2) bids given for the cost of conducting such check(s) from two (2) independent FAA repair stations. (2) Remove Lessee's exterior markings, including all exterior paint, by stripping (or, at Lessor's option, pneumatically scuff/sanding) the paint from the Airframe and properly strip, clean, reseal, refinish, prepare (including application of alodine or another corrosion inhibitor) and prime the surfaces to be painted, all in accordance with the Manufacturer's and paint manufacturer's recommendations. Lessee will then repaint the Airframe white. Such painting will be accomplished in such a manner as to result in a uniformly smooth and cosmetically acceptable aerodynamic surface. As an alternative to repainting the Airframe white as required hereunder, Lessee may instead elect to pay an amount equal to the cost of such repainting. All external placards, signs and markings will be properly attached, free from damage, clean and legible. (3) Clean the exterior and interior of the Aircraft. (4) Perform full and complete hot section and cold section video borescope on each Engine and its modules in accordance with the Engine Manufacturer's maintenance manual, with Lessor or its representatives entitled to be present. Lessee will provide evidence (photographic or video) to Lessor's satisfaction that such inspection does not reveal any condition which would cause the Engine or any module to be unserviceable. Lessee will, at its expense, correct any discrepancies which may be discovered during such inspection in accordance with the guidelines set out by the Engine Manufacturer. No Engine will be on watch for any reason. (5) If the Engine historical and technical records and/or condition trend monitoring data, of any Engine (including the auxiliary power unit), indicate an acceleration in the rate of deterioration in the performance of an Engine or an increase in oil consumption, Lessee will correct, to Lessor's satisfaction, such conditions which are determined to have exceeded Engine Manufacturer's maintenance manual tolerances or otherwise be causing such accelerated rate of deterioration. (6) In accordance with Manufacturer's maintenance manual, accomplish a maximum power assurance run on the Engines and accomplish condition, acceleration and bleed valve scheduling checks on the Engines. Lessee will record and evaluate the Engine performance with Lessor and/or its representative entitled to be present. The performance and all operating parameters of each Engine will be within the limits specified in the Manufacturer's maintenance manual so as to ensure that the Engine can be operated on-wing for a period of at least as great a duration as that shown with respect to such Engine on the Delivery Status Certificate as of the Delivery Date, regardless of the operating environment of the Engine. (7) In the event the Engine historical and technical records, borescope inspection, trend monitoring and other checks specified in paragraphs (5), (6) and (7) above result in a dispute with respect to whether an Engine meets the requirements of this Lease, Lessee and Lessor will consult with the Engine Manufacturer and follow the Engine Manufacturer's recommendations (including the accomplishment of an Engine test cell operational check) with regard to determining if such Engine complies with the requirements of this Lease and the manner in which any discrepancies from the requirements of this Lease will be rectified. D. Part Lives. The condition of the Aircraft and installed systems will be as follows: (1) The Aircraft shall be returned with no more time since the last "C7" Check including the 20,000 hour structural inspection items or the equivalent heaviest maintenance inspection (complete block overhaul) as provided at the Delivery Date. Lessee may return the Aircraft with more time since last "C7" Check provided Lessee pays Lessor the difference between the time since the last "C7" Check upon delivery and the actual time since "C7" Check upon return, times the Airframe Maintenance Reserve Amount. However, in no event shall the Aircraft have less than one "C" Check interval remaining until the next "C7" Check. Airframe Maintenance Reserves may be used to offset this amount. (2) Each Engine shall be returned with the same time remaining or more time remaining until the next restriction as at the Delivery Date. Each Engine shall have no more time since last heavy shop visit, last hot section refurbishment and last cold section refurbishment as at the Delivery Date. Engine disk sheets shall be used for reference. (3) Each landing gear will be serviceable. Each landing gear shall be returned with the same amount of time remaining or more time remaining until the next restriction as at the Delivery Date. Lessee may return a landing gear with less time remaining until the next restriction provided Lessee pays Lessor the difference between the time remaining until the next restriction upon delivery and the time remaining until the next restriction upon return times the Landing Gear Reserve Rate. Landing Gear Reserves may be used to offset this amount. However, in no event shall any single landing gear have less than one (1) "C" Check interval remaining. (4) Each APU will be returned in serviceable condition and shall pass borescope. (5) Each Component (excluding the Engines but including any components thereon) will be returned in serviceable condition with at least 3,000 hours or cycles or twelve (12) months remaining, whichever is more limiting. EXHIBIT D to Aircraft Lease Agreement CERTIFICATE AS TO STATUS OF AIRCRAFT FIRST SECURITY BANK, N.A., not in its individual capacity, but solely as owner trustee ("Lessor"), and FRONTIER AIRLINES, INC., a Colorado corporation ("Lessee"), hereby certify as follows: 1. Lessor and Lessee are parties to that certain Aircraft Lease Agreement dated February 26, 1999 (the "Lease"), with respect to the Boeing 737-200A commercial jet aircraft bearing manufacturer's serial number 23004 and current Federal Aviation Administration registration number N234TR. Capitalized term not otherwise defined herein shall have the meanings assigned to them in the Lease. 2. Lessor and Lessee acknowledge and agree that the status of the Airframe and the Engines on the Delivery Date are as set forth in Schedule 1 hereto, that the Aircraft, together with the Aircraft Documents described on Schedule 2 hereto, are delivered by Lessor to Lessee in accordance with the Lease on the date of this Certificate and that the Aircraft and Aircraft Documents have been technically accepted by Lessee in accordance with the provisions of the Lease. INWITNESS WHEREOF, Lessor and Lessee have caused this Certificate to be duly executed as of this day of , 1999. LESSOR, FIRST SECURITY BANK, N.A., not in its individual capacity but solely as owner trustee By:__________________________ Name:________________________ Its:_________________________ LESSEE, FRONTIER AIRLINES, INC. By:__________________________ Name:________________________ Its:_________________________ SCHEDULE 1 TO CERTIFICATE AS TO STATUS OF AIRCRAFT Aircraft Status on The Delivery Date Airframe Heaviest Check ("C7" Check or Equivalent): Interval: _____ Hrs. (____ months) Time Remaining: _________ Hrs. Airframe "C" Check (or Equivalent): Interval: ______ Hrs. Time Remaining: ______ Hrs. Landing Gear Overhaul: Interval: ______ cycles Left Gear ______ cycles Right Gear ______ cycles Nose Gear ______ cycles Center Gear Time Remaining: _____ cycles Left Gear _____ cycles Right Gear _____ cycles Nose Gear _____ cycles Center Gear Engines Time Remaining to First Restriction: See attached engine disk sheets attached as Schedule 3 for Engines delivered on the Delivery Date. APU TT TC TSO SN P_____ _____ hr _____ cy ____ hrs CSO Limiter ----- ---------------- ---------------- Fuel on Board at Delivery: _____ Gal. U.S. SCHEDULE 2 TO CERTIFICATE AS TO STATUS OF AIRCRAFT AIRCRAFT DOCUMENTS (Estimated) A. CERTIFICATES o FAA Certificate of Airworthiness B. AIRCRAFT STATUS RECORDS o Log Books o Airframe Maintenance Status Report o Supplemental Structural Inspection Document Status (if applicable) o Manufacturer's Service Bulletin Status Report o Airworthiness Directive Compliance Report (terminated and repetitive) o Modification Status Report List (documents will be provided upon request) o Last Weighing Report o List of Life Limited Components with remaining hours/cycles C. AIRCRAFT MAINTENANCE RECORDS (last heavy maintenance visits) o Test Flight Reports o X-ray pictures o Last annual check and heaviest maintenance check Work Cards D. AIRCRAFT HISTORY RECORDS o Aircraft Maintenance History Cards o Service Difficulty Report o Accident or Incident Report (Major Structural Repair) E. ENGINE RECORDS (for each engine) o Engine time and cycle records o Last overhaul and repair documents (including FAA Forms 337) o Airworthiness Directive Compliance Report (terminated and repetitive) o Manufacturer's Service Bulletin Status Report o List of Time Controlled Components with remaining hours and cycles o Modification Status Report o Engine Disc Sheets o Engine Build Specifications F. APU RECORDS o Last Overhaul and Repair Documents (including modification status) o Airworthiness Directive Compliance Report (terminated and repetitive) o Manufacturer's Service Bulletin Status Report o List of Time Controlled Components with remaining hours/cycles o Modification Status Report G. COMPONENT RECORDS o Time Controlled Component Historical Records with Installation and Serviceability Tags H. MANUALS o Airplane Flight Manual (Manufacturer Approved, FAA Approved) o Flight Crew Operating Manual o Weight and Balance Manual o Wiring Diagram Manual (microfilm and hard copy if available) o Illustrated Parts Catalog (microfilm) o Aircraft Maintenance Manual (microfilm) o Manufacturer's Engine Maintenance Manual and any approved engineering changes, as applicable I. MISCELLANEOUS TECHNICAL DOCUMENTS o Maintenance Program Specifications o Interior Configuration Drawings o Original Delivery Documents o Loose Equipment Inventory SCHEDULE 3 TO CERTIFICATE AS TO STATUS OF AIRCRAFT EXHIBIT E to Aircraft Lease Agreement DELIVERY CONDITION REQUIREMENTS On the Delivery Date, the Aircraft shall be delivered in "as is" condition; provided, however, the Aircraft shall meet the following conditions: (1) The Aircraft shall be in compliance with the requirements for domestic operation in the United States, will meet the requirements of FAA Part 121, shall have a current and valid FAA Certificate of Airworthiness, will have LGW Stage III (Nordam hushkit) installed thereon, and will have flight data recorder systems installed which conform to the requirements of FAR 121.344(b)(1) or (b)(2), as applicable. (2) The records required for Lessee to operate the Aircraft and bridge the Aircraft onto Lessee's maintenance program will be in English. (3) The Aircraft will be in working order with all pilot discrepancies and deferred maintenance items cleared. (4) The Aircraft will be airworthy and all AD's requiring compliance on the Delivery Date and for a period of one hundred eighty (180) days thereafter, will be accomplished. The Aircraft will be in full compliance with the CPCP program. (5) The Aircraft shall be clean by scheduled commercial airline standards. The interior will be delivered in a one hundred nineteen (119) seat standard class passenger configuration with a minimum seat pitch of 31 inches. Lessor will install galleys recommended by Lessee subject to timing and availability thereof. (6) The Aircraft shall have next scheduled "C" Check performed in accordance with the Boeing MPD maintenance program. The Aircraft will be bridged onto the Boeing MPD maintenance program. (7) Each Engine shall be delivered in serviceable condition. Each Engine shall have at least three thousand (3,000) hours or cycles (whichever is more limiting) of life remaining as described on the engine disk sheets. (8) Each Engine shall have had a full and complete hot section and cold section video borescope performed on such Engine and its modules in accordance with the Engine Manufacturer's maintenance manual. Lessor will provide evidence (photographic or video) to Lessee's satisfaction that such inspection does not reveal any condition which would cause the Engine or any module to be unserviceable. Lessor will, at its expense, correct any discrepancies which may be discovered during such inspection in accordance with the guidelines set out by the Engine Manufacturer. No Engine will be on watch for any reason. (9) If the Engine historical and technical records and/or condition trend monitoring data, of any Engine (including the auxiliary power unit), indicate an acceleration in the rate of deterioration in the performance of an Engine or an increase in oil consumption, Lessor will correct, to Lessee's satisfaction, such conditions which are determined to have exceeded Engine Manufacturer's maintenance manual tolerances or otherwise be causing such accelerated rate of deterioration. (10) In accordance with Manufacturer's maintenance manual, accomplish a maximum power assurance run on the Engines and accomplish condition, acceleration and bleed valve scheduling checks on the Engines. Lessor will record and evaluate the Engine performance with Lessee and/or its representative entitled to be present. The performance and all operating parameters of each Engine will be within the limits specified in the Manufacturer's maintenance manual so as to ensure that the Engine can be operated on-wing for a period of at least as great a duration as that shown with respect to such Engine on the Delivery Status Certificate as of the Delivery Date, regardless of the operating environment of the Engine. (11) In the event the Engine historical and technical records, borescope inspection, trend monitoring and other checks specified in paragraphs (8), (9) and (10) above result in a dispute with respect to whether an Engine meets the requirements of this Lease, Lessee and Lessor will consult with the Engine Manufacturer and follow the Engine Manufacturer's recommendations (including the accomplishment of an Engine test cell operational check) with regard to determining if such Engine complies with the requirements of this Lease and the manner in which any discrepancies from the requirements of this Lease will be rectified. (12) Each landing gear shall have no less than three thousand (3,000) hours remaining to the next scheduled overhaul and no landing gear component shall have less than fifteen thousand (15,000) cycles remaining life. (13) Each APU will be delivered in serviceable condition and shall pass borescope inspection. (14) Each Component (excluding the engines but including any components thereon) will be delivered in serviceable condition with at least three thousand (3,000) hours or cycles or twelve (12) months remaining, whichever is more limiting. (15) The Aircraft shall be delivered painted in Lessee's livery. (16) Lessor will increase the MTOW to one hundred twenty thousand (120,000) pounds and the MLW to one hundred seven thousand (107,000) pounds (the "Weight Increases"). It is understood the Weight Increases are produced by Manufacturer and may not be available on the Delivery Dates. Lessor will use best efforts to obtain the Weight Increases (which were ordered by Lessee in November, 1998) in a timely fashion. EXHIBIT F to AIRCRAFT LEASE AGREEMENT AIRFRAME USAGE REPORT dated __/__/__ in respect of the period from __/__/__ to __/__/__ Number of Hours Operated Number of Cycles Operated Airframe Engine # 1 Serial Number:___________ Engine #2 Serial Number:___________ Landing Gear TABLE OF CONTENTS SECTION 1 DEFINITIONS...............................................1 SECTION 2 LEASE AND CONDITIONS......................................1 SECTION 3 DELIVERY AND ACCEPTANCE; TERM ............................2 SECTION 4 RENT AND RESERVES.........................................3 SECTION 5 REPRESENTATIONS AND WARRANTIES............................4 SECTION 6 POSSESSION, USE AND MAINTENANCE...........................6 SECTION 7 INFORMATION AND INSPECTION ...............................9 SECTION 8 CERTAIN COVENANTS OF LESSEE ..............................9 SECTION 9 INDEMNIFICATION .........................................10 SECTION 10 CASUALTY OCCURRENCES.....................................13 SECTION 11 INSURANCE................................................15 SECTION 12 RETURN OF AIRCRAFT AND RECORDS...........................21 SECTION 13 DEFAULT AND REMEDIES.....................................22 SECTION 14 ALIENATION...............................................23 SECTION 15 MISCELLANEOUS............................................24 EXHIBIT A...................................................................A-1 EXHIBIT B...................................................................B-1 EXHIBIT C...................................................................C-1 EXHIBIT D...................................................................D-1 EXHIBIT E...................................................................E-1 EXHIBIT F...................................................................F-1 EX-10 5 AIRCRAFT LEASE AGREEMENT AIRCRAFT LEASE AGREEMENT Dated as of February 26, 1999 Between FIRST SECURITY BANK, N.A., As Owner Trustee, Lessor and FRONTIER AIRLINES, INC. Lessee One Boeing Model 737-200A Aircraft Bearing Manufacturer's Serial Number 23007 Items marked with "*" have been omitted pursuant to a request for confidential treatment. AIRCRAFT LEASE AGREEMENT THIS AGREEMENT dated February 26, 1999 ("Lease"), between FIRST SECURITY BANK, N.A., not in its individual capacity but solely as owner trustee ("Lessor"), and FRONTIER AIRLINES, INC., a Colorado corporation ("Lessee"). Lessee desires to lease from Lessor and Lessor is willing to lease to Lessee the aircraft described herein upon and subject to the terms and conditions of this Lease. In consideration of the mutual promises herein, Lessor and Lessee agree as follows: SECTION 1 DEFINITIONS Terms used in this Lease have the respective meanings specified in Exhibit A. SECTION 2 LEASE AND CONDITIONS (1) Lessor hereby agrees, subject to satisfaction of the conditions set forth herein, to lease the Aircraft to Lessee, and Lessee hereby agrees to lease the Aircraft from Lessor, on the terms of this Lease. (2) Lessor's obligation to lease the Aircraft hereunder to Lessee shall be conditioned upon (i) the absence of any Default hereunder and the absence of any materially adverse change in Lessee's financial condition or prospects from the date hereof to the Delivery Date, and (ii) the receipt by Lessor of the following documents on or before the Delivery Date, all of which shall be reasonably satisfactory in form and substance to Lessor: (1) a Lease Supplement executed by Lessee, and effective as of the Delivery Date; (2) such officer's certificates and legal opinions relating to due authority to enter into, the enforceability of, and absence of Defaults under this Lease as Lessor shall require; (3) an Approved Insurance Broker's report as to the due compliance with the insurance provisions of Section 11 hereof; (4) a certificate of an Approved Insurance Broker evidencing the insurance as required by Section 11 hereof; (5) a certificate in the form of Exhibit D completed, executed and delivered by Lessee setting forth the status of the Aircraft and Engines on the Delivery Date; and (6) such other documents and matters incident to the foregoing as Lessor may reasonably request. (1) SECTION 3 DELIVERY AND ACCEPTANCE; TERM (3) Delivery; Place of Delivery and Acceptance. The Aircraft is expected to be available for delivery on or about the Estimated Delivery Date, and shall be delivered to and accepted by Lessee at the Delivery Location. (4) Casualty to the Aircraft Preceding Delivery; Excusable Delay. Upon a Casualty Occurrence taking place prior to delivery of the Aircraft to Lessee, this Lease shall terminate. If an Excusable Delay prevents the delivery of the Aircraft beyond April 15, 1999, Lessor shall notify Lessee in writing thereof, and at the option of Lessee, this Lease shall terminate. Lessor shall not be responsible for the failure to deliver the Aircraft hereunder due to an Excusable Delay. (5) Pre-Delivery Check Flight. Prior to the Delivery Date, Lessee shall be permitted to assign up to two representatives (one of whom may sit in the jump seat in the cockpit) to participate as observers in a functional check flight of not more than two (2) hour's duration, at Lessor's expense, to enable Lessee to verify that the Aircraft satisfies the conditions set forth in Exhibit E hereto. Lessor will provide the pilots and insurance for the functional check flight. (6) Correction of Deficiencies. If the pre-delivery check flight reveals that the Aircraft does not fulfill the conditions described in Exhibit E, Lessor and Lessee shall attempt in good faith to agree upon a list of deficiencies with respect to the Aircraft. If the parties are unable to agree upon such list, then this Lease shall terminate. If the parties are able to agree upon such list, then Lessor shall cure such deficiencies listed thereon during which time Lessee may have a reasonable number of representatives to observe such corrections being made. Upon correction of such deficiencies, Lessee shall promptly re-inspect the Aircraft and if the Aircraft is then in compliance with the conditions described in Exhibit E, Lessee shall accept delivery of the Aircraft. (7) Acceptance of Aircraft. Except as may otherwise be expressly provided pursuant to the terms of this Lease, the Aircraft is to be leased to Lessee "AS IS," "WHERE IS" and SUBJECT TO EACH AND EVERY DISCLAIMER OF WARRANTY AND REPRESENTATION AS SET FORTH IN SECTION 5(a) HEREOF. Upon tender of the Aircraft for delivery hereunder by Lessor, if the Aircraft is in the condition specified in Exhibit E, Lessee shall immediately accept delivery of the Aircraft. Upon acceptance of the Aircraft Lessee shall thereupon indicate and confirm its irrevocable acceptance of the Aircraft by delivery to Lessor of a duly executed Lease Supplement, dated the Delivery Date. (8) Term of Lease. The Term of this Lease shall commence on the Delivery Date and shall continue until the Expiration Date; provided that this Lease may be earlier terminated or renewed pursuant to the provisions hereof. Throughout the Term and until redelivery of the Aircraft in accordance with Section 12 hereof, Lessee shall bear all risks of loss, theft, damage and destruction of or to the Aircraft and every Part thereof, and no such loss, theft, damage or destruction nor any other event, circumstance or change in Law shall impair, discharge or frustrate any obligation of Lessee under this Lease (including, without limitation, as to Rent or other payments), so that all such obligations shall, save as expressly provided in Section 10 hereof, continue in full force and effect. SECTION 4 RENT AND RESERVES (9) Rent. Lessee covenants and agrees to pay to Lessor, or its assigns: (i) the Initial Basic Rent Payment Amount on the Delivery Date, (ii) Basic Rent in consecutive installments on each Basic Rent Payment Date; (iii) the Final Basic Rent Payment Amount on the Final Basic Payment Date; and (iv) Supplemental Rent as the same becomes due. If a Basic Rent Payment Date shall fall on a day which is not a Business Day, any payment due on such Basic Rent Payment Date shall be made on the next succeeding Business Day. All Rent and other amounts payable under this Lease shall be paid in immediately available funds, at the Payment Location or at such other location as Lessor shall designate in writing. (10) Reserves. Separate reserve accounts shall be established by Lessor for the Airframe, each Engine and each landing gear. On the tenth (10) calendar day of each month during the Term, Lessee shall pay Lessor an amount calculated as the product of the number of Flight Hours of operation during the prior calendar month, and the Airframe Reserve Rate, Landing Gear Reserve Rate and Engine Reserve Rate, as applicable. Subject to receipt of satisfactory invoices, Lessor shall use amounts deposited in each reserve account to reimburse Lessee for the actual out-of-pocket costs incurred by Lessee in completing a "C7"Check (or its equivalent) in the case of the Airframe, overhaul or replacement in the case of landing gear, and Engine Overhauls in the case of an Engine; provided, however, such reimbursable costs shall not include, without limitation, costs associated with the auxiliary power unit. Lessee shall provide Lessor with written evidence reasonably satisfactory to Lessor as to completion of such check or overhaul in accordance with the Maintenance Program. No portion of any reserve shall be applied to the cost of repairing damage resulting from any accident or incident, abuse or misuse, foreign object damage or to the cost of complying with any FAA airworthiness directive. Lessee shall bear the cost of any check or overhaul to the extent such cost exceeds the balance then available in the applicable reserve; provided, however, (A) in the event the Aircraft requires a "C7" Check within the first two and one-half (2 1/2) years of the Term, or (B) in the event an Engine is removed within the first fifteen (15) months following the Delivery Date due to a condition which would require such removal in accordance with the Engine Manufacturer's maintenance manual, Lessor shall bear the cost of any "C7" Check or the first Engine overhaul of such Engine, as the case may be, only to the extent that such cost exceeds the balance then available in the applicable reserve. Lessor shall be entitled to commingle money held in the reserve accounts from time to time with its other assets and Lessee shall not be entitled to any interest on such amounts. Any amounts remaining in the reserve accounts at the Return Occasion shall be applied first to reduce any payment obligation of Lessee pursuant to Exhibit C (with the balance of any reserve account available only to offset a payment obligation with respect to the check or overhaul for which such reserve was established), and then the balance shall be retained by Lessor. Lessee agrees that if Lessee Defaults have occurred or are occurring, Lessor shall be entitled, but not required, to apply any amounts held as reserves against such default. (11) Prohibition Against Setoff, Counterclaim, Etc. This Lease is a net lease, and Lessee, except as otherwise expressly provided herein, shall be responsible for the cost of delivery, possession, importation, registration, use, operation, management, return, maintenance, repair and modification of the Aircraft and compliance with applicable laws, regulations and airworthiness directives from the Delivery Date until the Aircraft is returned to Lessor in accordance with Section 12 hereof. Lessee's obligation to pay all Rent hereunder shall be absolute and unconditional and shall not be affected or reduced by any circumstances whatsoever (including, without limitation any right of setoff, counterclaim, recoupment, defense or other right which Lessee may have against Lessor, the Manufacturer, the Engine Manufacturer, any seller of or person providing services with respect to the Aircraft or any other Person, for any reason whatsoever), it being the express intention of Lessor and Lessee that all Rent payable hereunder shall be payable in all events, unless the obligation to pay the same shall be terminated pursuant to the express provisions of this Lease. Lessee hereby waives, to the extent permitted by applicable Law, any and all rights which it may now have or which at any time hereafter may be conferred upon it, by Law or otherwise, to terminate this Lease or any obligation imposed upon Lessee hereunder or in relation hereto except upon the terms expressly set forth in this Lease. Nothing contained in this Section shall be construed as a waiver of Lessee's right to seek a separate recovery of any payment of Rent which is not due and payable in accordance with the terms of this Lease or monies or payments which are due and payable by Lessor under the terms of this Lease. SECTION 5 REPRESENTATIONS AND WARRANTIES (12) Warranties and Disclaimer of Warranties. EXCEPT AS SET OUT IN SECTION 5(b)(i), LESSOR HAS NOT AND SHALL NOT BE DEEMED TO HAVE MADE OR GIVEN AND LESSOR HEREBY SPECIFICALLY DISCLAIMS, ANY TERM, CONDITION, COVENANT, REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, AS TO THE TITLE, AIRWORTHINESS, VALUE, QUALITY, DURABILITY, DESCRIPTION, CONDITION, DESIGN, OPERATION, MERCHANTABILITY, OR THE ABSENCE OF ANY INFRINGEMENT OF ANY PATENT, COPYRIGHT, DESIGN, OR OTHER PROPRIETARY RIGHT, OR FITNESS FOR USE FOR A PARTICULAR PURPOSE OF THE AIRCRAFT, THE ABSENCE THEREFROM OF LATENT, INHERENT OR OTHER DEFECTS, WHETHER OR NOT DISCOVERABLE, OR AS TO ANY OTHER REPRESENTATION OR WARRANTY WHATSOEVER, EXPRESS OR IMPLIED (INCLUDING ANY IMPLIED WARRANTY ARISING FROM A COURSE OF PERFORMANCE OR DEALING OR USAGE OF TRADE), WITH RESPECT TO THE AIRCRAFT; AND LESSEE HEREBY WAIVES, RELEASES, RENOUNCES AND DISCLAIMS EXPECTATION OF OR RELIANCE UPON ANY SUCH WARRANTY OR WARRANTIES, IT BEING UNDERSTOOD THAT ALL CONDITIONS, WARRANTIES AND REPRESENTATIONS (OR OBLIGATION OR LIABILITY IN CONTRACT OR IN TORT) IN RELATION TO ANY OF THOSE MATTERS, EXPRESSED OR IMPLIED, STATUTORY OR OTHERWISE, ARE, EXCEPT AS PROVIDED IN SECTION 5(b)(i), EXPRESSLY EXCLUDED. (13) LESSOR REPRESENTS AND WARRANTS (IN LIEU OF ALL OTHER EXPRESS OR IMPLIED WARRANTIES WHATSOEVER) THAT: (i) title to the Aircraft is vested in Lessor and the Aircraft is free and clear of any and all Lessor's Liens; (ii) Lessor is a corporation duly organized and validly existing under the Laws of the State of Utah and is a "citizen of the United States" as defined in section 40102 of the Transportation Code, and has the power and authority to perform its obligations under this Lease; (iii) the making and performance by Lessor of this Lease have been duly authorized by all necessary corporate action on the part of Lessor and will not violate any provision of Law or its charter documents; and (iv) this Lease has been duly entered into and delivered by Lessor, and that this Lease does, and the Lease Supplement when executed and delivered hereunder will, constitute legal, valid and binding obligations of Lessor, enforceable in accordance with their respective terms. (14) Manufacturers' Warranties. Lessor hereby authorizes Lessee to exercise for the account of Lessor such rights as Lessor may have under any warranty, express or implied, with respect to the Aircraft to the extent that the same may be assigned or otherwise made available to Lessee; provided, however, that upon an Event of Default all such rights shall immediately revert to Lessor including all claims thereunder whether or not perfected. (15) Lessee's Representations and Warranties. Lessee hereby makes the following representations and warranties, which representations and warranties shall survive the execution and delivery of this Lease and the delivery of the Aircraft: (i) Lessee is a corporation duly organized, existing and in good standing under the Laws of Colorado and has the corporate power and authority to carry on its business as presently conducted and to perform its obligations under this Lease; (ii) this Lease has been duly authorized by all necessary corporate action on the part of Lessee, and neither the execution and delivery hereof nor the consummation of the transactions contemplated hereby nor compliance by Lessee with any of the terms hereof will contravene any applicable Law or result in any breach of, or constitute any default under, or result in the creation of any Lien upon any property of Lessee under, any credit agreement or instrument, corporate charter or by-law or other agreement or instrument to which Lessee is a party or by which Lessee or its properties or assets are bound or affected; (iii) Lessee has received every consent, approval or authorization, and has given every notice, that is required for Lessee to execute and deliver this Lease, and to perform the transactions contemplated hereby and all of which remain valid and effective; (iv) this Lease has been duly executed and delivered by Lessee, and this Lease does, and the Lease Supplement when executed and delivered by Lessee will, constitute legal, valid and binding obligations of Lessee, enforceable in accordance with their respective terms, but subject to bankruptcy, insolvency, or other similar laws affecting creditors' rights generally; (v) the consolidated financial statements of Lessee, including the balance sheets and unaudited statements of income and retained earnings of Lessee, for the current year and if available, the immediately preceding fiscal year, copies of which have been furnished to Lessor, are prepared in accordance with generally accepted accounting principles, and present fairly the financial position and operations of Lessee, and subsequent to the conclusion of the last such period, there has been no material adverse change in such position or operations; (vi) the chief executive office or chief place of business (as such terms are used in Division 9 of the Uniform Commercial Code) of Lessee is located at 12015 E. 46th Avenue, #200, Denver, Colorado 80239; (vii) each of this Lease and any other document, certificate or statement furnished to Lessor by or on behalf of Lessee in connection with the transactions contemplated hereby or thereby does not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements contained herein and therein not misleading; and there is no fact, to the best knowledge of Lessee, which has not been disclosed to Lessor in writing on or before the date of execution of this Lease and which materially adversely affects or will materially adversely affect the ability of Lessee to carry on its business or to perform its obligations under this Lease; and (viii) Lessor shall be entitled to the benefits of a lessor under Title 11 U.S.C. Section 1110 as in effect on the date hereof SECTION 6 POSSESSION, USE AND MAINTENANCE (16) Sublease, Assignment and Transfer. Without Lessor's prior written consent, Lessee will not assign this Lease or sublet or transfer possession of the Aircraft, Airframe or any Engine or install any Engine or permit any Engine to be installed on any airframe other than the Airframe, provided that so long as no Default shall have occurred and be continuing then Lessee, without the prior written consent of Lessor, may: (i) deliver possession of the Aircraft, the Airframe or any Engine to any organization for service, repair, maintenance, testing or overhaul work; (ii) install an Engine on an airframe (other than the Airframe) owned by Lessee free and clear of all Liens except Permitted Liens and those which by their terms would not attach to such Engine; and (iii) install an Engine on an airframe leased to Lessee or owned by Lessee subject to a conditional sale or other security agreement, provided, that: (A) such airframe is free and clear of all Liens except the rights of the parties to the lease or conditional sale or other security agreement covering such airframe and except Permitted Liens and the lien of any mortgage which by its terms would not apply to such Engine; and (B) the lessor or secured party of such airframe has made an agreement substantially similar in effect to the agreement of Lessor in Section 6(b) below whereby such lessor or secured party agrees that neither it nor its successors or assigns will acquire or claim any right, title or interest in any Engine by reason of such Engine being installed on such airframe. The rights of any transferee that receives possession by reason of a transfer permitted by this Section 6(a) shall be subject and subordinate to all the terms of this Lease; Lessee shall remain primarily liable hereunder for the performance of all of the terms of this Lease to the same extent as if such transfer had not occurred; and no relinquishment of possession pursuant to the terms of this Section 6(a) shall in any way discharge or diminish any of Lessee's obligations to Lessor hereunder. (17) Reciprocal Recognition of Rights. In the event Lessee shall have received from the lessor or secured party of any airframe leased to Lessee or owned by Lessee subject to a conditional sale or other security agreement a written agreement complying with Section (B) of Section 6(a)(iii) hereof, and such lease or conditional sale or other security agreement covering such airframe also covers an engine or engines owned by the lessor under such lease or subject to a security interest in favor of the secured party under such conditional sale or other security agreement, Lessor hereby agrees for the benefit of such lessor or secured party that Lessor will not acquire or claim, as against such lessor or secured party, any right, title or interest in any such engine as the result of such engine being installed on the Airframe at any time while such engine is subject to such lease or conditional sale or other security agreement and owned by such lessor or subject to a security interest in favor of such secured party. Lessor also hereby agrees for the benefit of the mortgagee under any mortgage complying with Section (A) of Section 6(a)(iii) hereof, that Lessor will not acquire or claim, as against such mortgagee, any right, title or interest in any engine subject to the lien of such mortgage as the result of such engine being installed on the Airframe at any time while such engine is subject to the lien of such mortgage. (18) Lawful Insured Operations. Lessee will not permit the Aircraft to be maintained, used or operated in violation of any Law of any Governmental Entity, or in violation of any airworthiness certificate, or license or registration issued by any such authority, or contrary to the Manufacturer's or Engine Manufacturer's operating manuals or instructions for the Aircraft or the Engines. In the event that any such Law requires alteration of the Aircraft, Lessee shall ensure compliance therewith and shall ensure that the Aircraft is maintained in proper condition for operation under such Laws. Lessee agrees not to operate the Aircraft or permit the Aircraft to be operated during the Term unless the Aircraft is covered by insurance as required by the provisions hereof. (19) Maintenance. Lessee shall, at its own expense: (i) perform all mandatory service, inspections, repair, maintenance, airworthiness directives, overhaul and testing, (A) as may be required under applicable FAA rules and regulations for compliance therewith during the Term and for a period of one hundred eighty (180) days thereafter and in compliance with the Maintenance Program, (B) in the same manner and with the same care as shall be the case with similar aircraft and engines owned by or operated by or on behalf of Lessee without discrimination and (C) so as to keep the Aircraft in as good operating condition as when delivered to Lessee, ordinary wear and tear excepted; provided, however, in the event the cost of performing, or causing the performance of, an inspection resulting in the modification or terminating action being performed pursuant to any Airworthiness Directive exceeds one hundred thousand dollars ($100,000), Lessor will reimburse Lessee for an amount equal to the AD Sharing Formula for such cost, provided that (A) no Event of Default has occurred and is continuing, and (B) Lessee provides evidence satisfactory to Lessor of payment and completion of the relevant work; (ii) keep the Aircraft in such condition as is necessary to maintain the airworthiness certification of the Aircraft in good standing; and (iii) maintain all records, logs and other materials required by, and in a manner acceptable to, the FAA. (20) Registration and Insignia. The Aircraft shall be and shall remain registered under the Transportation Code in the name of Lessor or such Person as Lessor may designate. Upon delivery of the Aircraft, Lessee agrees to place the Lease Identification in the cockpit in a prominent location and to place the Lease Identification on each Engine. Lessee agrees to make such changes to the Lease Identification as Lessor may request from time to time. Lessee will not exercise any control or dominion over the Aircraft or operate or permit to be operated the Aircraft until such Lease Identification has been so placed thereon. Lessee will promptly replace any such marking which has been removed, defaced or destroyed. (21) Replacement of Parts. Lessee will promptly replace all Parts which may from time to time become worn out, lost, stolen, seized, confiscated, damaged beyond repair or permanently rendered unfit for use for any reason whatsoever. In addition, Lessee may remove any Parts, whether or not worn out, damaged beyond repair or permanently rendered unfit for use, provided that Lessee replaces such Parts as promptly as practicable. All replacement Parts shall be free and clear of all Liens, other than Permitted Liens, and shall be in as good an operating condition as, and have a utility value and remaining warranty reasonably approximating, the Parts replaced (assuming such replaced Parts were in the condition and repair in which they were required to be maintained by the terms hereof). All Parts owned by Lessor which are at any time removed from the Aircraft shall remain the property of Lessor and subject to this Lease until such time as such Parts shall be replaced by Parts which have been incorporated or installed in to the Aircraft and which meet the requirements for replacement Parts specified above. Immediately upon any replacement Part becoming incorporated or installed into the Aircraft as above provided, (i) title to the removed Part shall thereupon vest in Lessee, free and clear of all rights of Lessor, (ii) title to such replacement Part shall thereupon vest solely in Lessor and (iii) such replacement Part shall become subject to this Lease and be deemed a Part for all purposes hereof to the same extent as the Part which it has replaced. (22) Alterations, Modifications and Additions. Lessee shall make such alterations and modifications and additions to the Aircraft as may be required from time to time to meet the applicable standards of the FAA or to comply with any Law, rule, directive, bulletin, regulation or order of any Governmental Entity or of the manufacturer of the Aircraft, Engines or Parts. Lessee may from time to time make alterations and modifications in and additions to the Aircraft, provided no such alteration, modification or addition diminishes the remaining warranty, value or utility, or impairs the condition or airworthiness, of the Aircraft. Title to all Parts incorporated or installed in or attached or added to the Aircraft as the result of such alteration, modification or addition shall vest immediately in Lessor and become subject to this Lease, without the necessity for any further act of transfer, document or notice. SECTION 7 INFORMATION AND INSPECTION Lessee agrees to furnish Lessor: (a) within one hundred twenty (120) days after the close of each fiscal year of Lessee, its audited balance sheet, profit and loss statement, and statement of stockholders' equity of Lessee (prepared on a consolidated basis), as of the close of such fiscal year; (b) within ten (10) calendar days following the end of each calendar month during the Term, an Airframe Usage Report; and (c) from time to time such other information as Lessor may reasonably request, including interim, unaudited financial information regarding Lessee and information concerning the location, condition, use and operation of the Aircraft. Lessee shall permit Lessor or its designee on three (3) days' prior written notice to visit and inspect the Aircraft, its condition, use and operation and the records maintained in connection therewith. During such inspection, Lessor may take copies of the Aircraft Documents and other operational records relating to the Aircraft. Lessor shall have no duty to make any such inspection. Lessor's failure to object to any condition or procedure observed or observable in the course of an inspection hereunder shall not be deemed to waive or modify any of the terms of this Lease with respect to such condition or procedure. SECTION 8 CERTAIN COVENANTS OF LESSEE (23) Maintenance of Existence, Status and Consents. Lessee will (i) preserve and maintain its corporate existence and such of its rights, privileges, licenses and franchises in any jurisdiction where failure to obtain such licensing or qualification would have a material adverse effect upon Lessee; (ii) maintain and operate the Aircraft at all times as a Certificated Air Carrier and be otherwise certificated and registered to the extent necessary to provide to Lessor the benefits contemplated by Section 1110 of Title 11 of the United States Code or any successor provision thereof; and (iii) maintain in full force and effect all governmental consents, licenses, authorizations, approvals, declarations, filings and registrations obtained or effected in connection with this Lease and take such additional action as may be proper or advisable in connection herewith. Lessee further undertakes to obtain or effect any new or additional governmental consents, licenses, authorizations, approvals, declarations, filings or registrations as may become necessary for the performance of any of the terms and conditions of this Lease. Without the prior written consent of Lessor, which consent shall not be unreasonably withheld, Lessee shall not consolidate with, merge with or merge into any other Person or convey, transfer or lease substantially all of its assets as an entirety to any other Person. Without prior written notice to Lessor, Lessee will not change its principal place of business or chief executive office. (24) Payment of Taxes. Lessee will pay or cause to be paid all Taxes which are payable by Lessee upon any property belonging to it, prior to the date on which penalties attach thereto and prior to the date on which any lawful claim, if not paid, would become a Lien upon any of the material property of Lessee. (25) Liens. Lessee shall not directly or indirectly create, incur, or suffer to exist any Lien on the Aircraft or any Engine or any interest therein, except: (a) the respective rights of Lessor and Lessee as herein provided; (b) Lessor's Liens; (c) Liens for Taxes either not yet due or being contested in good faith by appropriate proceedings and so long as adequate reserves are maintained with respect to such Liens; and (d) inchoate materialmen's, mechanics', workmen's, repairmen's, employees' or other like Liens arising in the ordinary course of business, which either are not delinquent or are being contested in good faith by Lessee, so long as the Aircraft or such Engine is not in danger of being lost, sold, confiscated, forfeited or seized as a result of any such Lien. Lessee shall promptly take such action as may be necessary to duly discharge any Lien (except for the Liens referred to in Sections (a) and (b) above) arising at any time with respect to the Aircraft or any Engine. Lessee shall promptly pay and discharge when due, or make adequate provision for all debts, claims, liabilities or obligations whatsoever created by it, or arising as a result of any matter concerning it, which may give rise to any Lien. (26) Perfection of Title and Further Assurances. If the filing or recording of this Lease or any other document or instrument is reasonably necessary to protect the interest of Lessor, Lessee, at its own cost and expense and upon request by Lessor, shall cause the same to occur. At the request of Lessor, Lessee shall furnish to Lessor an opinion of counsel or other evidence satisfactory to Lessor of each such filing or refiling and recordation or re-recordation. Lessee will promptly and duly execute and deliver to Lessor such further documents and assurances and take such further actions as it may from time to time reasonably request in order to more effectively carry out the intent and purpose of this Lease and to establish and protect the rights and remedies created or intended to be created in favor of Lessor hereunder. SECTION 9 INDEMNIFICATION (27) General Indemnity. Lessee agrees to defend, indemnify and hold harmless the Indemnitees on demand from and against any and all Expenses (regardless of when the same are made or incurred): (i) which may at any time be suffered or incurred directly or indirectly as a result of or connected with (A) the possession, performance, management, ownership, registration, control, maintenance, condition, service, repair, overhaul, leasing, use or operation of the Aircraft, any Engine or any Part, (B) the delivery or redelivery of the Aircraft, any Engine or Part, or (C) the occurrence of any Default, whether or not the Expenses 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 whether they arise out of or are attributable to any act or omission of any Indemnitee; and/or (ii) which 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 of any obligation of confidentiality owed to any Person in respect of any of the matters referred to in this paragraph; but excluding any Expenses in relation to a particular Indemnitee to the extent that such Expenses (A) are covered pursuant to another indemnity provision of this Lease or (B) arise solely as a result of the gross negligence or wilful misconduct of that Indemnitee or (C) arise solely as a result of a Lessor Lien. The foregoing indemnities will continue in full force following the Expiration Date notwithstanding any breach or repudiation by Lessor or Lessee of this Lease or any termination of the leasing of the Aircraft hereunder. (28) Tax Indemnity. (1) Indemnity. All payments by Lessee to or on behalf of any Indemnitee shall be free of withholdings of any nature whatsoever(including, without limitation, withholding taxes, monetary transfer fees, sales, use and excise taxes, VAT, income taxes (other than that, on the net income of Lessor) and any similar taxes and charges) and in the event any withholding is required, Lessee shall pay an additional amount such that the net amount actually received by the person entitled to receive such payment will under any circumstances and in any event, after such withholding, equal the full amount of the payment then due. Lessee shall pay when due and indemnify and hold each Indemnitee harmless from all Taxes, howsoever levied or imposed, whether levied or imposed upon or asserted against Lessor, Lessee, the Aircraft or any part thereof or interest therein, or otherwise, by any federal, state or local taxing authority in the United States of America or by any government or taxing authority of or in a foreign country or of or in a territory or possession of the United States or by any international taxing authority, upon or with respect to or based upon or measured by or as a result of or in connection with (i) the Aircraft or any part thereof or interest therein, (ii) the use, operation, maintenance, possession, condition, control, occupancy, servicing, installation, transportation, storage, substitution, sale, recording, documentation, importation, exportation, modification, location, repair, abandonment, replacement, delivery, registration, deregistration, repossession, improvement, ownership, leasing, subleasing, manufacture, rental, settlement of any insurance claim, return, transfer of title, transfer of possession, or other disposition of the Aircraft or any part thereof or interest therein, (iii) the rentals, receipts, earnings or gains arising from the Aircraft or any part thereof or interest therein, (iv) any amount payable pursuant to the Lease or any related agreement, (v) the Lease or any related agreement or any future amendment, supplement, waiver or consent with respect to any thereof, or the execution, delivery, recording or performance of any thereof or (vi) otherwise arising from, with respect to or in connection with the transactions contemplated by the Lease or any related agreement, except to the extent provided in Section 9(b)(ii) hereof. Each payment or indemnity payable hereunder shall include any amount necessary to hold the recipient of the payment or indemnity harmless on an after-tax basis from all Taxes required to be paid by such recipient with respect to such payment or indemnity. (2) Exclusions. Lessee shall not be required to pay any indemnity pursuant to Section 9(a) with respect to any of the following: (i) any Tax to the extent attributable solely to an event or circumstance occurring prior to the Delivery Date; (ii) any Tax imposed as a result of a voluntary transfer, assignment or other disposition by Lessor of the Aircraft or the Lease unless such transfer, assignment or other disposition shall occur (x) at any time when an Event of Default under the Lease shall have occurred and be continuing (or would be continuing but for the exercise of remedies), or (y) in connection or as a result of with any termination of the Lease; (iii) any Tax to the extent attributable solely to any event, circumstance or period of time that occurs after the Aircraft has been redelivered to Lessor pursuant to Section 12 hereof (under circumstances not involving a repossession pursuant to Section 13(b) hereof) unless any such act or event shall itself result from or be attributable to an act or omission of Lessee which occurred prior to or concurrently with the redelivery of the Aircraft and the discharge of Lessee's obligations under the Lease; and (iv) any Tax that is imposed by any state or local government or taxing authority in the United States and that is imposed on or measured by the gross or net income, gross or net receipts, capital or net worth of an Indemnitee; provided that the exclusion described in this subparagraph (iv) shall not apply to (A) Taxes that are or are in the nature of sales, use, rental, value-added, license, excise or property Taxes, or (B) any Tax to the extent incurred by such Indemnitee as a result of (1) the use or location of the Aircraft or any Engine or any part of any thereof in the jurisdiction imposing the Tax or (2) the situs of organization, any place of business or any activity of Lessee, any affiliate of Lessee or any Person having custody, possession or use of the Aircraft or any Engine or any part of any thereof through Lessee in the jurisdiction imposing the Tax or (3) the execution, delivery, filing, registration, recording or enforcement of the Lease, or any instrument, certificate or other document executed pursuant to the Lease, in the jurisdiction imposing the Tax. (3) Payment. All Taxes indemnified under this Section 9(b) shall be paid by Lessee (to the extent permitted by applicable Law, unless otherwise directed by the relevant Indemnitee) directly to the appropriate taxing authority on or before the time (and in the manner) prescribed by applicable Law. All other amounts shall be paid to the relevant Indemnitee within 30 days after receipt of a written demand therefor from such Indemnitee accompanied by a written statement describing in reasonable detail the Taxes that are the subject of such indemnity and the computation of the indemnity being demanded. (4) Miscellaneous. In case any report or return is required to be made with respect to any Tax for which Lessee would be required to indemnify an Indemnitee under this Section 9(b), Lessee will either make such report or return in such manner as will show the ownership of the Aircraft in Lessor and send a copy of such report or return to the affected Indemnitee or will notify the affected Indemnitee of such requirement and make such report or return in such manner as shall be reasonably satisfactory to such Indemnitee. If actual notice is given by any taxing authority to Lessor that a report or return is required to be filed with respect to any such Taxes referred to in this Section 9(b), Lessor shall promptly notify Lessee of such required report or return. Lessor agrees to respond to any reasonable request of Lessee for information within the control of Lessor with respect to the filing of any report or return, but Lessee agrees to pay any reasonable costs, fees or other charges of independent counsel or independent accountants incurred in connection with such request. Lessee agrees that within sixty (60) days after the close of each fiscal year of Lessor it shall provide Lessor with any information reasonably requested by Lessor, including information regarding the use and location of the Aircraft during such fiscal year. SECTION 10 CASUALTY OCCURRENCES (29) Casualty Occurrence with Respect to the Airframe. Within five (5) days after a Casualty Occurrence with respect to the Airframe and any Engine then installed thereon, Lessee shall give Lessor written notice of such occurrence. On or before thirty (30) days after the date of the Casualty Occurrence with respect to the Aircraft, Lessee shall pay to Lessor in immediately available funds the sum of (i) the Casualty Value of the Aircraft computed as of the date of payment less an amount equal to the daily equivalent of Basic Rent (computed on the basis of a 365-day year) for each day during the period commencing with the day after payment of such Casualty Value and extending to, but excluding, the Basic Rent Payment Date immediately following payment of such Casualty Value, and (ii) all Supplemental Rent, other than amounts paid pursuant to Section (i), computed as of the date of payment. Upon such payment (A) the obligation of Lessee to make further payments of Basic Rent hereunder shall terminate, (B) this Lease shall terminate with respect to the Aircraft and (C) Lessor will transfer to Lessee, without recourse or warranty, all of Lessor's right, title and interest, if any, in and to the Airframe and Engines (if any) suffering the Casualty Occurrence, as well as all of Lessor's right, title and interest in and to any Engine constituting part of the Aircraft but not installed thereon at the time of the Casualty Occurrence. (30) Casualty Occurrence with Respect to an Engine. Upon a Casualty Occurrence with respect to an Engine only, Lessee shall give Lessor prompt written notice thereof and shall, within forty-five (45) days after such occurrence, convey to Lessor, as replacement for the Engine suffering a Casualty Occurrence, title to a Replacement Engine. Each Replacement Engine shall be free of all Liens (except Permitted Liens). Upon full compliance by Lessee with the terms of this paragraph, Lessor will transfer to Lessee title to the Engine which suffered the Casualty Occurrence. Prior to or at the time of any such conveyance, Lessee, at its own expense, will promptly (i) furnish Lessor with a full warranty bill of sale, in form and substance reasonably satisfactory to Lessor, with respect to such Replacement Engine; (ii) cause a supplement hereto, in form and substance reasonably satisfactory to Lessor, subjecting such Replacement Engine to this Lease, to be duly executed by Lessee, and recorded pursuant to applicable Law; (iii) furnish Lessor with such legal opinions and other documents as Lessor may reasonably request in connection with the consummation of the transactions contemplated by this Section 10(b), in each case in form and substance satisfactory to Lessor. Upon full compliance by Lessee with the terms of this Section 10(b), Lessor will transfer to Lessee all of the right, title and interest in the Engine which suffered the Casualty Occurrence, and such Replacement Engine shall be deemed an "Engine" as defined herein. (31) Application of Proceeds and Payments. Any payments received at any time by Lessor or by Lessee from any insurer under any policy of insurance (other than liability insurance) shall be applied in the manner specified in Sections 11(m), 11(n) or 11(o) hereof as applicable. Any payments received at any time by Lessor or Lessee with respect to a Casualty Occurrence will be applied as follows: (i) if such payments are received as a result of a Casualty Occurrence with respect to the Aircraft, such payment up to the amount of the Casualty Value shall be paid to Lessor, or if Lessee has already paid Lessor the Casualty Value, such payment shall be applied by Lessor to reimburse Lessee; or (ii) if such payments are received as a result of a Casualty Occurrence with respect to an Engine which is being replaced pursuant to Section 10(b), such payments shall be paid over to, or retained by, Lessee if Lessee shall have fully performed the terms of Section 10(b) hereof. (32) Application in Default. Any amount referred to in Section (i) or (ii) of Section 11(c) which is otherwise payable to Lessee shall not be paid to Lessee, or, if it has been previously paid to Lessee, and not yet applied by Lessee as permitted or required hereunder, shall be delivered from Lessee to Lessor, if at the time of such payment a Default shall have occurred and be continuing. In such case, all such amounts shall be paid to and held by Lessor as security for the obligations of Lessee, or, at the option of Lessor, applied by Lessor toward payment of any of Lessee's obligations at the time due hereunder, as Lessor may elect. At such time as there shall not be continuing any such Default, all such amounts at the time held by Lessor in excess of the amount, if any, which Lessor has elected for application as provided above, shall be paid to Lessee. SECTION 11 INSURANCE (33) Obligation to Insure. From the Delivery Date until the termination of the Lease and redelivery of the Aircraft to Lessor, Lessee shall, at its own cost and expense, effect and maintain or cause to be effected and maintained in full force and effect insurances with respect to the Aircraft that comply with the provisions of this Section 11. Lessee agrees that such insurances shall be carried with Approved Insurers. Lessee further agrees that such insurances shall reflect prudent practices in the international aviation insurance market for air carriers operating the same type of aircraft as the Aircraft on similar routes. (34) Public Liability and Property Damage Insurance. Lessee will carry and maintain in effect, at its own expense, comprehensive public liability insurance covering aircraft liability including bodily injury and property damage, passenger, baggage, cargo and mail, and general liability (including products and completed operation) for a combined single limit on any one occurrence of not less than the amount applicable to similar passenger aircraft and engines which comprise Lessee's fleet, and in any event not less than the amount under "Public Liability and Property Damage Insurance" as set forth on Exhibit A hereto (or such higher amounts as Lessor may from time to time reasonably require). Lessee shall not discriminate against the Aircraft in providing such insurance. (35) Required Policy Designations Relating to Comprehensive Public Liability Insurance. The policies evidencing the insurance required under Section 11(b) shall be endorsed to include paragraph 2 of AVN67B with each Indemnitee and Lender named as a contract party in AVN67B, shall cover "war risks and allied perils" in accordance with extended coverage endorsement AVN52C and shall to the extent not in conflict with AVN67B: (1) provide that all the provisions thereof, except the limits of liability, shall operate to give each Additional Insured the same protection as if there were a separate policy covering each insured; and (2) be primary and without right of contribution from other insurance that may be available to any other Additional Insured or Lessee. (36) Insurance with Respect to the Aircraft. Lessee, at its own expense, will maintain in effect: (1) "hull all risks" insurance for loss of or damage to the Aircraft (including all flight and ground risks) on an agreed value basis in an amount not less than the Casualty Value; (2) "all risks" and "war risks and allied perils" insurance on the Engines and Parts while not installed on the Airframe on an agreed value basis in an amount not less than their full replacement value; and (3) "hull war and allied perils" insurance on the Aircraft covering risks excluded from the "hull all risks" policy to the fullest extent available from the leading international insurance markets, including confiscation or requisition by the state of registration, on an agreed value basis for an amount not less than the Casualty Value. (37) Required Policy Designations and Provisions Relating to Insurance Against Loss or Damage. Each and any policy of insurance obtained and maintained pursuant to Section 11(d), and each and any policy obtained in substitution or replacement for any such policies, shall be provided by policies that shall be endorsed to include paragraph 1 of AVN67B with Lessor and Lender as contract parties and shall to the extent not in conflict with AVN67B: (1) include a loss payable clause that provides that all insurance proceeds in the event of a Casualty Occurrence shall be payable to Lessor or its designee and that all other insurance proceeds shall be paid in accordance with the terms of this Lease to such parties as may be necessary to repair the Aircraft; (2) provide in the event of separate insurances being arranged to cover the "hull all-risks" insurance and the "hull war-risks" insurance that the underwriters subscribing to such insurance agree that in the event of any dispute as to whether a claim is covered by the "hull all-risks" or "hull war-risks" policy, such claim be settled on a 50/50 claim funding basis in accordance with AVS103 (or its equivalent) or under either the "hull all-risks" or "hull war-risks" policy; (3) be subject to such exclusions and deductibles as Lessor may reasonably approve, provided that in no event shall the deductible under the "hull all-risks" and "hull war-risks" insurance exceed the Deductible Amount; and (4) provide that all insurance proceeds shall be payable in Dollars. (38) Revised Policy Designations and Provisions Relating to All Insurance. The policies evidencing the insurance required under this Section 11 shall be endorsed to include paragraph 3 of AVN67B with Lessor and Lender with respect to hull insurance and each Additional Insured with respect to liability insurance be named as contract parties in AVN67B, shall name the Additional Insureds and shall, to the extent not in conflict with AVN67B: (1) designate the Additional Insureds as additional insureds and loss payees; (2) provide that the insurance shall not be invalidated, so far as concerns any Additional Insured, by any action or inaction or omission (including misrepresentation and nondisclosure) of any person or party that results in a breach of any term, condition or warranty of such policy; provided, that the Additional Insured so protected has not caused, contributed to or knowingly condoned the action, inaction or omission, as the case may be; (3) specifically reference this Lease; (4) provide for worldwide coverage (subject only to such exceptions as are customary in insurance coverage carried by air carriers operating aircraft of the same type as the Aircraft); (5) provide that upon payment of any loss or claim to or on behalf of any Additional Insured, the respective insurer shall to the extent and in respect of such payment be thereon subrogated to all legal and equitable rights of the Additional Insured indemnified hereby (but not against any other Additional Insured); provided, that such insurer shall not exercise such rights without the consent of the indemnified Additional Insured, such consent not to be reasonably withheld; (6) provide that neither Lessor nor Lender shall be liable for any premiums in respect thereof and that the insurers shall waive any right of set-off or counterclaim against Lessor or Lender except in respect of unpaid premiums in respect of the Aircraft; and (7) provide that the insurers shall promptly notify Lessor and Lender in the event of cancellation of, or any material change in, the insurance or any act or omission or any event that might invalidate or render unenforceable the insurances or in the event that any premium shall not have been paid when due and that the insurances shall continue unaltered for the benefit of each Additional Insured for at least thirty (30) days after written notice by registered mail of such cancellation, change, event or non-payment of premium thereof shall have been received by Lessor and Lender except in the case of war risks for which seven (7) day notice (or such period as may be customarily available in respect of war risks or allied perils) will be given. (39) Information. (1) On or before the Delivery Date and promptly after each renewal of the insurances, Lessee shall provide Lessor and Lender with certificates of insurance and a broker's letter of undertaking that (i) name each of Triton Aviation Services V LLC, First Security Bank, N.A., NationsBank, N.A., and their respective officers, directors, shareholders, agents and employees and their respective successors and assigns as "additional insureds", (ii) evidence to the satisfaction of Lessor that the insurances are and will continue in full force after the Delivery Date or the renewal date (as the case may be) for such period as shall then be stipulated and (iii) contain such other certifications and undertakings as are customarily provided to lessors and mortgagees by insurance brokers acting for air carriers. (2) Lessee shall from time to time upon request from Lessor (i) provide to it evidence reasonably satisfactory to it that any and all premiums payable in respect of the insurances have been paid in accordance with the terms of the relevant policy and (ii) provide or cause its broker to provide a list of the insurers with whom the insurances are carried and the coverages provided by each of them. (3) Lessee shall furnish such information regarding the status of renewal negotiations as may from time to time be reasonably requested by Lessor. In addition, Lessee shall arrange for its brokers (i) to confirm to Lessor not later than five (5) days prior to the renewal date of the insurances, that negotiations for such renewal are at an advanced state and that there is no reason to suppose that the insurances will not be renewed at the relevant date in terms that will comply with the provisions of this Lease and (ii) to furnish to Lessor on or prior to the renewal date, the renewal certificates of insurance, reinsurance (if applicable) and brokers' letters of undertaking, each in English and in form and substance satisfactory to Lessor. (4) Lessee shall furnish, or cause to be furnished, to Lessor and Lender on the Delivery Date and thereafter as and when required by Lessor and upon each transfer of the Aircraft or assignment of rights hereunder as permitted by this Lease, certificates and brokers letter of undertaking (and, if further requested, of its insurers) that confirm that the requirements of this Section 11 are being complied with. (5) Lessee shall, at the request of Lessor, make copies of the policies and endorsements and any amendments thereto with respect to the insurance available to Lessor (or its authorized representatives) for inspection by any representative of Lessor at the office of Lessee or its insurance brokers during normal business hours. (40) Additional Insurance; No Lien. (1) Lessee shall not, without the prior written consent of Lessor, maintain insurances with respect to the Aircraft or any Engine, other than as required under this Lease if it would prejudice recovery under the insurance required hereunder. (2) Lessor may from time to time require Lessee at no cost to Lessor to effect such other insurances, or such variations to the terms of the existing insurances, as Lessor may reasonably require in order to fully protect the interests of the Additional Insureds. (3) Lessee shall not create or permit to exist any Lien over the insurances required by this Lease, or its interest therein, save as constituted by this Lease. (41) Failure to Insure. If at any time Lessee fails to maintain in full force and effect insurances in compliance with any provision of this Section 11, Lessor shall be entitled but not obligated (without prejudice to any other rights that it may have or acquire under this Lease by reason of such failure): (1) to pay any premiums due or to effect or maintain insurances satisfactory to Lessor or otherwise remedy such failure in such manner as Lessor considers appropriate, and Lessee shall immediately reimburse Lessor in full for any amount so expended by Lessor; and/or (2) 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 Lessor until such failure is remedied. (42) Assignment. If Lessor transfers the Aircraft or assigns its rights hereunder as permitted by this Lease, Lessee will, upon request, promptly procure that the transferee or assignee (including, without limitation, any lender) shall be added as a further named insured to any of the insurances referred to in this Section 11 so as to enjoy the same rights and protection as Lessor may have from time to time under such insurances. In addition, if Lessor transfers the Aircraft or such rights and thereafter ceases to be Lessor (a "Transferor"), Lessee shall, at the request of such Transferor and at Lessees expense, effect and maintain for the benefit of such Transferor the insurance required by Section 11(c) for such period (not exceeding two years) as in Transferor may request and shall ensure that the Transferor shall be named as an additional insured thereunder. (43) Reinsurance. Any reinsurance will be maintained with reinsurers and brokers approved by Lessor. Such reinsurance will contain each of the following terms and will in all other respects (including amount) be satisfactory to Lessor. (1) the same terms as the original insurance; (2) a cut through and assignment clause satisfactory to Lessor; and (3) payment will be made notwithstanding (A) any bankruptcy, insolvency, liquidation or dissolution of any of the original insurers and/or (B) that the original insurers have made no payment under the original insurance policies. (44) Settlement of Claims. Lessee will not settle or permit settlement of any claims arising under any of the insurances referred to in Section 11 without the prior written consent of Lessor or its designee and will not settle or permit settlement of any claims under such insurance without such consent if an Event of Default has occurred and is continuing. (45) Application of Insurance Proceeds for a Casualty Occurrence. It is agreed that insurance payments which arise from any policy of insurance carried by Lessee and received as the result of the occurrence of a Casualty Occurrence shall be applied as follows: (i) if such payments are received with respect to a Casualty Occurrence relating to the Airframe and Engines or engines installed on the Airframe, so much of such payments as shall not exceed the amounts due under Section 10(a) hereof shall be paid to Lessor, and the balance to Lessee; and (ii) if such payments are received with respect to a Casualty Occurrence relating to an Engine under circumstances contemplated by Section 11(d) hereof, such payment shall be adjusted with Lessee (provided that Lessee has not breached any warranty, declaration or condition contained in the applicable insurance policy) and paid over to Lessee, provided that Lessee shall have fully performed the terms of Section 10(b) hereof. (46) Application of Insurance Proceeds for Other than a Casualty Occurrence. The insurance payments for any property damage loss to the Airframe or any Engine not constituting a Casualty Occurrence, or to any Part, will be held by Lessor until Lessee furnishes Lessor with satisfactory evidence that the repairs or replacement property Lessee is required to perform or obtain in accordance with the terms of Section 6(f) of this Lease have been made or obtained by Lessee. Upon receipt of such evidence of repair or replacement, Lessor shall pay Lessee the amount of the insurance payment received with respect to such loss. (47) Application in Default. Any amount referred to in Sections 11(e)(i), 11(m) or 11(n) which is otherwise payable to Lessee shall not be paid to Lessee, or, if it has been previously paid to Lessee, and not yet applied by Lessee as permitted or required hereunder, shall be delivered by Lessee to Lessor, if at the time of such payment, a Default shall have occurred and be continuing. In such case, all such amounts shall be held by Lessor as security for the obligations of Lessee, or, at the option of Lessor, applied by Lessor toward payment of any of Lessee's obligations at the time due hereunder. At such time as there shall not be continuing any such Default, all such amounts at the time held by Lessor in excess of the amount, if any, which Lessor has elected for application as provided above, shall be paid to Lessee. SECTION 12 RETURN OF AIRCRAFT AND RECORDS (48) Return. On the Expiration Date, Lessee, at its own expense, shall return the Aircraft to Lessor in the condition specified on Exhibit C hereto at the Return Location, fully equipped with all required Parts and Engines, duly installed thereon, together with the Aircraft Documents and records which are complete and acceptable to the FAA, and at no cost to Lessor, all service bulletin kits furnished without charge by a manufacturer for installation on the Aircraft which have not been so installed. (49) Records. Six months prior to the Expiration Date (and in an updated form upon the Return Occasion), Lessee will provide Lessor with a technical report in form and substance reasonably requested by Lessor, and, in addition, upon Lessor's request, will make copies of (i) drawings of the interior configuration of the Aircraft both as it presently exists and as it will exist at return, (ii) the airworthiness directive status list, (iii) service bulletin incorporation list, (iv) rotable controlled, hard-time and life limited component listings, (v) listing of Lessee-initiated modifications and alterations, (vi) interior material burn certificates, (vii) Maintenance Program, (viii) complete work scope for the checks, inspections and other work to be performed prior to return, (ix) current Engine disk sheets and (x) any other data which is reasonably requested by Lessor. In addition to the foregoing, upon the Return Occasion, Lessee shall deliver to Lessor all Aircraft Documentation. (50) Final Inspection. Upon the Return Occasion, Lessee shall make the Aircraft available to Lessor for a functional check flight and detailed inspection, at Lessee's expense, in order to verify that the condition of the Aircraft complies with the requirements set forth herein (the "Final Inspection"). Lessee shall give Lessor not less than ten (10) days prior written notice of the commencement date of the "C" Check required by Exhibit C. Lessor shall have the right to appoint a representative who may observe (i) the Final Inspection, (ii) any inspections conducted in accordance with Exhibit C, and/or (iii) the maintenance conducted in connection with or as a consequence of any such inspections. The functional test flight shall be conducted, at Lessee's expense, using a qualified pilot and not more than three (3) technical representatives selected by Lessor (one of whom may sit in the jump seat in the cockpit), in conjunction with Lessee's flight crew, shall be up to two (2) hours duration, shall conform with Lessee's standard operation check flight procedures, shall be covered by Lessee's insurance policy required pursuant to Section 11, and shall otherwise be of such scope as is necessary to demonstrate the airworthiness of the Aircraft and proper functioning of all systems and components. The Final Inspection shall commence on or before the Expiration Date and shall continue on consecutive days until all activity required above to be conducted during the Final Inspection has been concluded. To the extent that any portion of the Final Inspection extends beyond the Expiration Date, the Term shall be deemed to have been automatically extended, and the obligation to pay Rent hereunder continued on a daily basis until the Final Inspection shall have been concluded. (51) Corrections and Subsequent Corrections. If the Aircraft or any Engine fails upon the Return Occasion to conform to any requirement imposed by this Lease, Lessor, at its option, may continue the Lease in effect in the manner provided for in Section 12(c) above with regard to automatic extension until such time as the Aircraft is brought up to the condition required by this Lease, or accept the return of the Aircraft and thereafter have any such nonconformance corrected. Any expense incurred by Lessor for such correction shall become Supplemental Rent payable by Lessee upon demand. Lessee's obligations to pay such Supplemental Rent shall survive the passage of the Expiration Date or other termination of this Lease. SECTION 13 DEFAULT AND REMEDIES (52) Events of Default. Any one or more of the following occurrences or events shall constitute an Event of Default: (i) Lessee shall fail to make any payment of Rent to Lessor when due and such payment shall be overdue for a period of two (2) Business Days; (ii) Lessee shall fail to obtain and maintain any insurance required under the provisions of Section 11 hereof, or shall operate the Aircraft outside of the scope of the insurance coverage so maintained; (iii) any representation or warranty made by Lessee herein or in any document or certificate furnished Lessor in connection herewith or therewith or pursuant hereto is incorrect at the time given in any material respect; (iv) any bankruptcy, insolvency or similar proceeding is commenced by or against Lessee; or (v) Lessee shall fail to perform or observe any other covenant, condition or agreement hereunder and such failure shall continue for a period of five (5) Business Days after written notice thereof is given by Lessor to Lessee. (53) Remedies. Upon the occurrence of any Event of Default Lessor may, at its option and without notice to Lessee, exercise one or more of the following remedies as Lessor in its sole discretion shall elect: (i) demand that Lessee, and Lessee shall upon the written demand of Lessor and at Lessee's expense, immediately return the Aircraft to Lessor in the manner specified in such notice; (ii) enter upon the premises where the Aircraft is located and take immediate possession of and remove the same; (iii) cancel Lessee's leasehold interest in the Aircraft under this Lease effective upon dispatch of written notice to Lessee, and store, sell or lease to others the Aircraft, all free and clear of any rights of Lessee; (iv) demand that Lessee, and Lessee shall upon the written demand of Lessor, pay as damages for the breach hereof an amount equaling the sum of: (1) all Rent due and payable hereunder; (2) all Expenses incurred by Lessor as a result of Lessee's breach of this Lease; and (3) such additional amount as shall be sufficient to place Lessor in the same economic position, on an after-tax basis, as Lessor would have been in if Lessee had timely performed each of its obligations under this Lease; and/or (v) proceed by appropriate court action or actions, either at Law or in equity, to enforce performance by Lessee of the applicable covenants of this Lease and to obtain the benefit of any remedies available to Lessor hereunder or under applicable Law for breach hereof. In addition to the foregoing, Lessor shall be entitled to exercise such other rights and remedies as may be available under applicable Law and Lessee shall be liable on an after-tax basis for, and shall pay Lessor on demand: (1) interest on all unpaid amounts at the Interest Rate, from the due date until the date of payment in full; (2) all reasonable legal fees and other reasonable costs and expenses incurred by Lessor by reason of the occurrence of any Event of Default or the exercise of Lessor's remedies with respect thereto; and (3) all reasonable expenses, disbursements, costs and fees incurred in (A) repossessing, storing, preserving, shipping, maintaining, repairing and refurbishing the Aircraft, the Airframe, any Engine or Part to the condition required by Section 12 hereof and (B) preparing the Aircraft, the Airframe, an Engine or Part for sale or lease, advertising the sale or lease of the Aircraft, the Airframe, an Engine or Part and selling or releasing the Aircraft, the Airframe, an Engine or Part. No remedy referred to in this Section 13(b) is intended to be exclusive, but, to the extent permissible hereunder or under applicable Law, each shall be cumulative and in addition to any other remedy referred to above or otherwise available to Lessor at Law or in equity; and the exercise or beginning of exercise by Lessor of any one or more of such remedies shall not preclude the simultaneous or later exercise by Lessor of any or all of such other remedies. No express or implied waiver by Lessor of any Default or Event of Default shall in any way be, or be construed to be, a waiver of any future or subsequent Default or Event of Default. SECTION 14 ALIENATION Lessor shall have the right to assign, sell or encumber any interest of Lessor in the Aircraft or this Lease and/or the proceeds hereof subject to the rights of Lessee under the provisions of this Lease; provided, however, in the case of assignment for security, Lessee shall be reimbursed for any costs reasonably incurred by Lessee in connection therewith. To effect or facilitate any such assignment, sale or encumbrance, Lessee agrees to provide such agreements, consents, conveyances or documents as may be reasonably requested by Lessor, which in the case of an assignment other than for security shall include an unrestricted release of Lessor from its obligations hereunder. Lessee acknowledges that an assignment, sale or encumbrance of Lessor's interest hereunder would not have the effect of altering the terms of this Lease relating to the rights and obligations of Lessee. Lessee agrees that it will not assert against an assignee any claim or defense which it may have against Lessor. The agreements, covenants, obligations, and liabilities contained herein including, but not limited to, all obligations to pay Rent and indemnify each Indemnitee are made for the benefit of each Indemnitee and their respective successors and assigns. SECTION 15 MISCELLANEOUS (54) Severability and Construction. Any provision of this Lease which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof. To the extent permitted by Law, Lessee hereby waives any provisions of Law which renders any provisions hereof prohibited or unenforceable in any respect. This Lease shall constitute an agreement of lease, and nothing herein shall be construed as conveying to Lessee any right, title or interest in the Aircraft or any Engine or Part except as a lessee only. Lessor and Lessee agree that this Lease is to be treated as a lease for U.S. federal income tax purposes. (55) Governing Law; Jurisdiction. This Lease shall in all respects be governed by, and construed in accordance with, the Laws of the State of California. Lessee hereby irrevocably consents that any legal action or proceeding against it or any of its assets with respect to the Lease may be brought in any jurisdiction where Lessee or any of its assets may be found, or in any court of the State of California or any Federal court of the United States of America located in San Francisco, California, as Lessor may elect, and by execution and delivery of this Lease, 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. Lessee further irrevocably consents to the service of process out of any of the aforementioned courts in any such action or proceeding by the mailing of copies thereof by registered or certified airmail, postage prepaid, to Lessee at its address set forth on Exhibit A hereto. The foregoing, however, shall not limit the rights of Lessor to serve process in any other manner permitted by Law or to bring any legal action or proceeding or to obtain execution of judgment in any jurisdiction. Lessee hereby irrevocably waives, to the fullest extent permitted by Law, any objection which Lessee may now or hereafter have to the laying of venue of any suit, action or proceeding arising out of or relating to this Lease brought in the State of California, and hereby further irrevocably waives any claim that any such suit, action or proceeding brought in the State of California has been brought in an inconvenient forum. (56) Notices. All notices required under the terms and provisions hereof shall be in writing, shall be sent to Lessor or Lessee at their respective addresses set forth on Exhibit A hereto (or such other addresses as the parties may designate from time to time in writing) and, except as otherwise provided herein, shall become effective upon the earlier of actual receipt or (i) in the case of a letter, the fifth day following posting, and (ii) in the case of a facsimile transmission on the day immediately following the date of dispatch. (57) Lessor's Right to Perform for Lessee. If Lessee fails to perform or comply with any covenant, agreement or obligation contained herein, Lessor shall have the right but not the obligation to so perform or comply for Lessee, and the reasonable expenses of Lessor incurred in connection therewith, together with interest thereon at the Interest Rate, shall be payable by Lessee to Lessor (as Supplemental Rent) upon demand. The taking of any such action by Lessor shall not constitute a waiver or release of any obligation of Lessee under this Lease, 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 remedy or right available to Lessor hereunder. (58) Counterparts. This Lease may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. To the extent, if any, that this Lease 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 may be created through the transfer or possession of any counterpart other than the counterpart which has been marked "Original" on the signature page thereof. (59) Quiet Enjoyment. Lessor covenants that so long as an Event of Default shall not have occurred and be continuing, Lessee shall quietly enjoy the Aircraft and all rents, revenues, profits and income thereto, without interference by Lessor, or by any Person lawfully claiming by or through Lessor. (60) Brokers. Neither Lessor nor Lessee have utilized the services of any agent, broker or similar third party representation in connection with the transactions contemplated by this Lease and each party agrees to indemnify and hold the other harmless from and against any and all claims, suits, damages, costs and expenses (including, but not limited to reasonable attorneys' fees) asserted by any agent, broker or other third party for any commission or compensation based upon the lease of the Aircraft, if such claim, damage, cost or expense arises out of any action or alleged action by the indemnifying party, its employees or agents. (61) Time is of the Essence. Time and strict and punctual performance are of the essence with respect to each provision of this Lease. (62) DISCLAIMER OF CONSEQUENTIAL DAMAGES. LESSEE AGREES THAT IT SHALL NOT BE ENTITLED TO RECOVER, AND HEREBY DISCLAIMS AND WAIVES ANY RIGHT THAT IT MAY OTHERWISE HAVE TO RECOVER, CONSEQUENTIAL DAMAGES (AS SUCH TERM IS DEFINED IN SECTION 10520(B) OF THE CALIFORNIA UNIFORM COMMERCIAL CODE) AS A RESULT OF ANY BREACH OR ALLEGED BREACH BY LESSOR OF ANY OF THE AGREEMENTS, REPRESENTATIONS OR WARRANTIES OF LESSOR CONTAINED IN THIS LEASE OR THE OTHER RELATED AGREEMENTS. (63) Security Deposit. Lessor hereby acknowledges the receipt of an initial security deposit in the Initial Amount and Lessee hereby agrees to deposit with Lessor on or before thirty (30) days prior to the Estimated Delivery Date, a final installment of the security deposit in the Further Additional Amount (collectively, the "Security Deposit"). The Security Deposit shall be non-refundable during the Term hereof; provided that the Security Deposit shall be promptly refunded by Lessor to Lessee in the event that Lessor shall fail to tender the Aircraft for delivery in accordance with Section 3 of this Lease on or prior to May 30, 1999, despite Lessee's satisfaction of all conditions to such tender, and Lessee elects to terminate this Lease. Such sums are received by Lessor as security for the timely and faithful performance by Lessee of all of Lessee's obligations under this Lease, and Lessee hereby grants Lessor a security interest therein and in all other sums deposited under this Section 15(j). Lessor shall be entitled to commingle the Security Deposit with its other funds, and Lessee shall not be entitled to any interest or other earnings thereon. If Lessee is in Default hereunder, in addition to all other rights Lessor shall have under the California Uniform Commercial Code as a secured party, Lessor may use, apply or retain all or any portion of the Security Deposit in partial payment for sums due to Lessor by Lessee, to compensate Lessor for any sums it may in its discretion advance as a result of a Default by Lessee, or to apply toward losses or expenses Lessor may suffer or incur as a result of Lessee's Default. If Lessor uses or applies all or any portion of such Security Deposit, such application shall not be deemed a cure of any Defaults, and Lessee shall within five days after written demand therefore deposit with Lessor in cash an amount sufficient to restore the Security Deposit to its original sum and the failure of Lessee to do so shall be a material breach of this Lease by Lessee. Provided Lessee is not in Default under this Lease, the principal amount of such Security Deposit, without interest, and less any costs incurred by Lessor in connection with the termination of the Lease or return of the Aircraft and any amounts owed by Lessee to Lessor under this Lease or otherwise, shall be returned to Lessee on the Expiration Date, provided that Lessee shall have returned the Aircraft in compliance with Section 12 hereof. (64) Costs. Except as otherwise provided herein, Lessor and Lessee each shall pay its own costs and expenses incurred in connection with the negotiation, documentation and performance of its obligations under this Lease. (65) Entire Agreement; Modification or Revision. This Lease is intended to be a complete and exclusive statement of the terms of the agreement of the parties hereto, and this Lease supersedes any prior or contemporaneous agreements, whether oral or in writing. Neither this Lease nor any term of this Lease may be modified, rescinded, changed, waived, discharged or terminated except by a writing signed by the party to be charged. Lessor and Lessee acknowledge their agreement to the provisions of this Section 15(l) by their signatures below. IN WITNESS WHEREOF, Lessor and Lessee, each pursuant to due authority, have each caused this Lease to be executed by their duly authorized officers as of the day and year first above written. LESSOR: FIRST SECURITY BANK, N.A., not in its individual capacity but solely as owner trustee By:______________________________ Name:____________________________ Its:_____________________________ LESSEE: FRONTIER AIRLINES, INC. By:______________________________ Name:____________________________ Its:_____________________________ CERTAIN PROCEEDS OF THIS LEASE ARE SUBJECT TO A SECURITY INTEREST IN FAVOR OF NATIONSBANK, N.A., AS AGENT, AND ANY SUCCESSOR AGENT, FOR ONE OR MORE FINANCIAL INSTITUTIONS EXHIBIT A to Aircraft Lease Agreement DEFINITIONS AND VALUES Part I -- General Additional Insureds shall mean Lessor, Beneficiary, Lender and their respective officers, directors, shareholders, agents and employers and their respective successors and assigns. Aircraft shall mean the Airframe together with (a) the Engines, whether or not installed on the Aircraft, (b) all Parts or components thereof, (c) spare parts or ancillary equipment or devices furnished with the Aircraft under this Lease, (d) all Aircraft Documents, and (e) all substitutions, replacements and renewals of any and all thereof. Aircraft Documents shall mean the items identified on Schedule 2 to Exhibit D, together with all additions and replacements. Airframe shall mean (a) the Boeing model 737-200A aircraft having Manufacturer's serial number 23007, but not including any engine installed thereon, and (b) any and all Parts so long as the same shall be incorporated or installed on or attached to the Airframe, or so long as title thereto shall remain vested in Lessor in accordance with the terms hereof, after removal from the Airframe. Airframe Usage Report shall mean a monthly report furnished to Lessor by Lessee in substantially the form attached hereto as Exhibit F showing the number of Flight Hours of operation for the Aircraft during the preceding month. Approved Insurance Broker shall mean any reputable aviation insurance broker of internationally recognized responsibility and standing approved by Lessor in its sole discretion. Approved Insurer shall mean any reputable aviation underwriter of internationally recognized responsibility and standing approved by Lessor in its sole discretion. Basic Rent Payment Date shall mean the 5th calendar day of each month during the Term commencing with the date of the first occurring calendar day of the Term but excluding the Final Basic Rent Payment Date. Beneficiary shall mean Triton Aviation Services V LLC, a California limited liability company, and its successors and assigns. Business Day shall mean any day other than a Saturday, Sunday or other day on which banking institutions in San Francisco, California are authorized or required by Law to be closed. "C" Check shall mean a "C" check in accordance with the Maintenance Program. "C7" Check shall mean the heaviest maintenance inspection, complete block overhaul, including the twenty thousand (20,000) hour structural inspection items. For purposes of this Lease, the "C7" Check shall be the equivalent of a "D" check. Casualty Occurrence shall mean any of the following events with respect to the Aircraft, Airframe or any Engine: (a) the actual or constructive total loss of such property (including any damage to such property which results in an insurance settlement on the basis of a total loss, or requisition for use or hire which results in an insurance settlement on the basis of a total loss); (b) such property being destroyed, damaged beyond repair or permanently rendered unfit for normal use for any reason whatsoever; (c) the requisition of title, or other compulsory acquisition, capture, seizure, deprivation, confiscation or detention for any reason of such property by any Governmental Entity or purported Governmental Entity (whether de jure or de facto); or (d) the hijacking, theft, condemnation, confiscation, seizure or requisition for use or hire of such property which deprives any Person permitted by this Lease to have possession and/or use of such property of such possession and/or use for more than 30 days. A Casualty Occurrence with respect to the Aircraft shall be deemed to have occurred if a Casualty Occurrence occurs with respect to the Airframe. A Casualty Occurrence with respect to any Engine shall not, without loss of the Airframe, be deemed a Casualty Occurrence with respect to the Aircraft. Certificated Air Carrier means any Person (except the United States Government) that is a citizen of the United States of America (as defined in Section 40102 of the Transportation Code) holding an air carrier operating certificate issued pursuant to Chapter 447 of the Transportation Code for the operation of aircraft capable of carrying ten or more individuals or 6,000 pounds or more of cargo. Component shall mean each time controlled, cycle controlled or calendar controlled component of the Aircraft. Default shall mean an Event of Default or event which would constitute an Event of Default but for the lapse of time or the giving of notice or both. Delivery Conditions shall mean the conditions in respect of the Aircraft set forth on Exhibit E. Delivery Date shall mean the date on which the Aircraft is delivered to and accepted by Lessee for purposes of this Lease. Delivery Location: Dalfort Aerospace in Dallas, Texas. Dollars shall mean lawful currency of the United States of America. Engine shall mean each of the two (2) Pratt & Whitney model JT8D-15A engines installed on or furnished with the Aircraft on the Delivery Date, bearing Engine Manufacturer's serial numbers 717108 and 709092, respectively, and any Replacement Engine which may from time to time be substituted therefor pursuant to Section 10; together in each case with any and all Parts incorporated or installed in or attached thereto or any and all Parts removed therefrom so long as title thereto remains vested in Lessor in accordance with the terms hereof after removal from such Engine. Except as otherwise set forth herein, at such time as a Replacement Engine shall be so substituted, such replaced Engine shall cease to be an Engine hereunder. The term "Engines" means, as of any date of determination, all Engines then leased hereunder. Engine Manufacturer: Pratt & Whitney. Engine Overhaul shall mean a complete overhaul (hot section or cold section refurbishment and life limited part replacement) of an Engine. Estimated Delivery Date: April 15, 1999. Event of Default shall have the meaning specified in any one or more clauses in Section 13(a). Excusable Delay shall mean any of the following causes: (a) act of God or the public enemy, (b) fires, floods, explosions, earthquakes, strikes, epidemics or quarantine restrictions, (c) inability of a maintenance facility to complete its maintenance activities, or (d) any other cause to the extent it is beyond the control of Lessor and not occasioned by its fault or negligence, but only for such length of time as the delivery of the Aircraft is reasonably prevented by such cause or causes. Expenses means any claims, proceedings, losses, liabilities, damages (whether direct, indirect, special, incidental or consequential), suits, judgments, costs, expenses, fees, penalties or fines (whether civil or criminal) of every nature and kind, including any of the foregoing arising or imposed with or without Indemnitee's fault or negligence, whether passive or active or under the doctrine of strict liability. Expiration Date shall mean the fifth (5th) anniversary of the Delivery Date. FAA shall mean the Federal Aviation Administration of the United States Department of Transportation or any successor. Final Basic Payment Date shall mean the last occurring 5th calendar day of the Term. Flight Hours shall mean (i) in the case of the Airframe and landing gear, the actual number of hours or fractions thereof that the Aircraft is in flight (from takeoff to landing) as recorded in the Aircraft's log book, and (ii) in the case of an Engine, the actual number of hours or fractions of thereof that such Engine is in operation (from takeoff to landing of the Airframe on which such Engine is installed) as recorded in the Aircraft's log book. Governmental Entity shall mean and include (a) any national government, or political subdivision thereof or local jurisdiction therein; (b) any board, commission, department, division, organ, instrumentality, court, or agency of any entity described in (a) above, however constituted; and (c) any association, organization, or institution of which any entity described in (a) or (b) above is a member or to whose jurisdiction any such entity is subject or in whose activities any such entity is a participant but only (except for purposes of defining Law below) to the extent that any of the preceding have jurisdiction over the Aircraft or its operations. Indemnitee shall mean Lessor, Beneficiary, each affiliate and Tax Affiliate of Lessor and Beneficiary, each successor and assign of each of the foregoing and each director, officer, employee and agent of each of the foregoing. Law shall mean and include (a) any statute, decree, constitution, regulation, order, judgment or other directive of any Governmental Entity; (b) any treaty, pact, compact or other agreement to which any Governmental Entity is a signatory or party; (c) any judicial or administrative interpretation or application of any Law described in (a) or (b) above; and (d) any amendment or revision of any Law described in (a), (b) or (c) above. Lease shall mean this Lease, each Lease Supplement, and any and all amendments, revisions, supplements and modifications thereto. Lease Identification: "OWNED BY AND LEASED FROM FIRST SECURITY BANK, N.A., AS OWNER TRUSTEE AT 79 SOUTH MAIN STREET, SALT LAKE CITY, UTAH 84111, U.S.A., AND SUBJECT TO SECURITY INTEREST IN FAVOR OF NATIONSBANK, N.A., AS AGENT, AND ANY SUCCESSOR AGENT, FOR ONE OR MORE FINANCIAL INSTITUTIONS." Lease Supplement shall mean the Lease Supplement, substantially in the form of Exhibit B hereto, entered into between Lessor and Lessee. Lender shall mean NationsBank, N.A., as agent, and any successor agent, for one or more financial institutions. Lessee's Address: Frontier Airlines, Inc. - ---------------- 12015 E. 46th Avenue, #200 Denver, Colorado 80239 Telephone: (303) 371-7400 Facsimile: (303) 371-7007 Attn: Director, Aircraft Mngmt Lessor's Address: First Security Bank, N.A. - ---------------- 79 South Main Street Salt Lake City, Utah 84111 Telephone: (801) 246-5819 Facsimile: (801) 246-5053 Attn: Corporate Trust Department with a copy to: Triton Aviation Services V LLC c/o Triton Aviation Services Ltd 55 Green Street, Suite 500 San Francisco, CA 94111 Telephone: (415) 956-6311 Facsimile: (415) 398-9184 Attn: Mr. John E. Flynn Lessor's Liens shall mean Liens arising as a result of (a) claims against Lessor not related to the transactions contemplated by this Lease; or (b) acts of Lessor, not contemplated and expressly permitted under this Lease; or (c) Taxes imposed against Lessor which are not indemnified against by Lessee pursuant to Section 9(b); or (d) claims against Lessor arising out of the voluntary transfer by Lessor of all or any part of its interests in the Aircraft or this Lease, other than a transfer pursuant to Sections 10 or 13(b) of this Lease. Lien shall mean any mortgage, pledge, lien, charge, encumbrance, lease, exercise of rights, security interest, claim or right of detention or sale. Maintenance Program shall mean Lessee's FAA approved maintenance program as in effect from time to time for the Aircraft. Manufacturer: The Boeing Company. Parts shall mean all appliances, components, parts, instruments, appurtenances, accessories, furnishings and other equipment of whatever nature (other than complete Engines or engines), which may now or from time to time be incorporated or installed in or attached to the Airframe or any Engine. Except as otherwise set forth herein, at such time as a replacement part shall be substituted for a Part in accordance with Section 10 hereof, the Part so replaced shall cease to be a Part hereunder. Payment Location: Bank of America Illinois, 231 South La Salle Street, Chicago, Illinois 60697, for the account of Triton Aviation Services V LLC, Account No. 79-51523, ABA 071-000039. Permitted Liens shall mean Liens which are permitted by Section 8(c) hereof. Person shall mean and include any individual person, corporation, limited liability company, partnership, trust, estate, unincorporated organization, association or Governmental Entity. Rent shall mean the Initial Rent Payment Amount, Basic Rent, the Final Basic Rent and Supplemental Rent collectively. Replacement Engine shall mean an engine of the same Engine Manufacturer and model, and having equivalent value, utility, modification and remaining warranty status as the Engine it is intended to replace under Section 10(b) hereof, or, at Lessee's option, an engine of the same Engine Manufacturer as such Engine but of an improved model, and otherwise of an equivalent value and utility and suitable for installation and use on the Airframe without impairing the value or utility of the Airframe. Return Location: such location as may be agreed to between Lessor and Lessee. Return Occasion shall mean the event that occurs when possession of the Aircraft is returned from Lessee to Lessor at the end of the Term of this Lease or upon Lessor taking possession pursuant to Section 13(b). Security Deposit has the meaning ascribed thereto in Section 15(j). Supplemental Rent shall mean any and all amounts, liabilities and obligations (other than Basic Rent) which Lessee assumes or agrees to pay hereunder to Lessor, including without limitation, (a) any payment of Casualty Value; (b) any payment of indemnity required by Section 9 hereof; (c) any payment of reserves pursuant to Section 4(b) hereof; and (d) to the extent permitted by applicable Law, interest accruing daily at the Interest Rate (all computations of interest under this Lease to be made on the basis of a 365-day year for the actual number of days elapsed, compounded monthly) calculated: (i) on any part of any installment of Basic Rent not paid on the due date thereof for the period the same remains unpaid and (ii) on any Supplemental Rent not paid when due hereunder until the same is paid. Tax Affiliate shall mean (a) in the case of the entity that is the Beneficiary on the Delivery Date and in the case of any successor or direct or indirect transferee thereof that is (or is treated as) a partnership for the United States Federal income tax purposes, each general partner, limited partner or member (as the case may be) of the Beneficiary and (b) in the case of any such general partner, limited partner or member which itself is (or is treated as) a partnership for United States Federal income tax purposes, each general partner, limited partner or member thereof (as the case may be). Taxes shall mean any and all present and future taxes, levies, assessments, duties, imposts, fees, withholdings and other government charges or of any nature, together with any penalties, additions to tax, fines, charges and/or interest thereon or computed by reference thereto. Term shall mean the term of this Lease specified in the Lease Supplement, commencing on the Delivery Date and ending on the Expiration Date. Transportation Code means Title 49 of the United States Code. Part II -- Certain Proprietary and Confidential Terms and Values. AD Sharing Formula shall be as follows: P= C x (N-R) N Where "N" equals the Term in months; "R" represents the remainder of the Term in months after completion of the modification/termination action; "C" equals the cost of the modification/termination action in excess of * and "P" equals the Lessor's share of any cost. Airframe Reserve Rate: * Airframe Flight Hour. Basic Rent Payment Amount: * per month in advance. Casualty Value: * Deductible Amount: * Engine Reserve Rate: * per Engine, per Engine Flight Hour. Final Basic Rent Payment Amount: The Dollar amount obtained by multiplying the Per Diem Rent Rate by the number of days from and including the Final Basic Rent Payment Date to and including the Expiration Date. Further Additional Amount: * payable in cash but as may be exchanged by Lesse at any time prior to the day immediately preceding the Delivery Date for a letter of credit of equal amount issued from a financial institution acceptable to Beneficiary. Initial Amount: * paid in cash, receipt of which is hereby acknowledged by Lessor, but as may be exchanged by Lessee at any time prior to the day immediately preceding the Delivery Date for a letter of credit of equal amount issued from a financial institution acceptable to Beneficiary. Initial Basic Rent Payment Amount: The Dollar amount obtained by multiplying the Per Diem Rent Rate by the number of days from Delivery Date to the first Basic Rent Payment Date. Interest Rate: Citibank, N.A.'s prime rate plus 3% per annum, but not to exceed the maximum amount permitted by Law. Landing Gear Reserve Rate: * per Airframe Flight Hour. Per Diem Rent Rate: * Public Liability and Property Damage Insurance: * EXHIBIT B to Aircraft Lease Agreement LEASE SUPPLEMENT NO. 1 LEASE SUPPLEMENT NO. 1, dated , 1999, between FIRST SECURITY BANK, N.A., not in its individual capacity but solely as Owner Trustee ("Lessor"), and FRONTIER AIRLINES, INC., a Colorado corporation ("Lessee"). Lessor and Lessee have previously entered into that certain Aircraft Lease Agreement dated as of February 26, 1999 (herein called the "Lease" and the defined terms therein being hereinafter used with the same meaning). The Lease provides for the execution and delivery from time to time of a Lease Supplement substantially in the form hereof for the purpose of leasing the aircraft described below under the Lease as and when delivered by Lessor to Lessee in accordance with the terms thereof. The Lease relates to the Aircraft, Parts and Engines as more precisely described below. A counterpart of the Lease is attached hereto and this Lease Supplement and the Lease shall form one document. In consideration of the premises and other good and sufficient consideration, Lessor and Lessee hereby agree as follows: 1. Lessor hereby delivers and leases to Lessee under the Lease and Lessee hereby accepts and leases from Lessor under the Lease, that certain Boeing model 737-200A commercial jet aircraft, comprised of the Airframe having Manufacturer's serial number 23007 and the two Pratt & Whitney JT8D-15A Engines having Engine Manufacturer's serial numbers 717108 and 709092, respectively (collectively, the "Delivered Aircraft"). 2. The Delivery Date of the Delivered Aircraft is the date of this Lease Supplement set forth in the opening paragraph hereof. 3. The Term for the Delivered Aircraft shall commence on the Delivery Date and shall end on the Expiration Date, which shall be , 2004. The Initial Basic Rent Payment Amount is due and payable on the date hereof and the Final Basic Rent Payment Date shall be _________________ 5, 2004. 4. Lessee hereby confirms to Lessor that (i) the Delivered Aircraft and each Engine installed thereon or belonging thereto have been duly marked in accordance with the terms of Section 6(e) of the Lease, (ii) Lessee has accepted the Delivered Aircraft for all purposes hereof and of the Lease, and (iii) Lessee has inspected the Delivered Aircraft and the Delivered Aircraft satisfies the conditions set forth in the Lease. 5. All of the terms and provisions of the Lease are hereby incorporated by reference in this Lease Supplement to the same extent as if fully set forth herein. 6. This Lease Supplement may be executed in any number of counterparts, each of such counterparts, except as provided in Section 15(e) of the Lease, shall for all purposes be deemed to be an original; and all such counterparts shall together constitute but one and the same Lease Supplement. IN WITNESS WHEREOF, Lessor and Lessee have caused this Lease Supplement No. 1 to be duly executed as of the day and year first above written. LESSOR, FIRST SECURITY BANK, N.A. not in its individual capacity but solely as owner trustee By:_______________________________ Name:_____________________________ Its:______________________________ LESSEE, FRONTIER AIRLINES, INC. By:_______________________________ Name:_____________________________ Its:______________________________ CERTAIN PROCEEDS OF THIS LEASE ARE SUBJECT TO A SECURITY INTEREST IN FAVOR OF NATIONSBANK, N.A., AS AGENT, AND ANY SUCCESSOR AGENT, FOR ONE OR MORE FINANCIAL INSTITUTIONS EXHIBIT C to Aircraft Lease Agreement RETURN CONDITION REQUIREMENTS A. Certificate of Airworthiness Matters. Upon the Return Occasion, the Aircraft shall possess a valid FAA Certificate of Airworthiness and meet the requirements for U.S. domestic operation under FAR Part 121, without restriction (including, without limitation, compliance with Stage III requirements). B. General Condition of Aircraft At Return. (1) All Aircraft documentation will have been maintained in English and in accordance with the rules and regulations of the FAA. (2) The Aircraft shall be in working order, with all pilot discrepancies and deferred maintenance items cleared. (3) The Aircraft interior will be clean by scheduled commercial airline standards and shall otherwise be returned in the same condition as at the Delivery Date. The cockpit shall be "touched up" in accordance with standard international airline practice and placards replaced as required. (4) The Aircraft will be airworthy and all airworthiness directives requiring compliance prior to return and for a period of one hundred eighty (180) days thereafter will have been performed on the Aircraft prior to the Expiration Date. (5) The Aircraft will be in full compliance with the Manufacturer's Corrosion Prevention and Control Program ("CPCP") specified for the model type by the Manufacturer. C. Checks Prior to Return. Immediately prior to the return of the Aircraft to Lessor, Lessee at its expense will: (1) At the option of Lessor, either (i) perform at an FAA-approved repair station, the next due full and complete zonal, systems and structural check ("C" or its equivalent) in accordance with the Maintenance Program, sufficient to clear the Aircraft for operation until the next scheduled full and complete zonal, systems and structural check under the Maintenance Program, or (ii) pay Lessor an amount in Dollars representing the average of two (2) bids given for the cost of conducting such check(s) from two (2) independent FAA repair stations. (2) Remove Lessee's exterior markings, including all exterior paint, by stripping (or, at Lessor's option, pneumatically scuff/sanding) the paint from the Airframe and properly strip, clean, reseal, refinish, prepare (including application of alodine or another corrosion inhibitor) and prime the surfaces to be painted, all in accordance with the Manufacturer's and paint manufacturer's recommendations. Lessee will then repaint the Airframe white. Such painting will be accomplished in such a manner as to result in a uniformly smooth and cosmetically acceptable aerodynamic surface. As an alternative to repainting the Airframe white as required hereunder, Lessee may instead elect to pay an amount equal to the cost of such repainting. All external placards, signs and markings will be properly attached, free from damage, clean and legible. (3) Clean the exterior and interior of the Aircraft. (4) Perform full and complete hot section and cold section video borescope on each Engine and its modules in accordance with the Engine Manufacturer's maintenance manual, with Lessor or its representatives entitled to be present. Lessee will provide evidence (photographic or video) to Lessor's satisfaction that such inspection does not reveal any condition which would cause the Engine or any module to be unserviceable. Lessee will, at its expense, correct any discrepancies which may be discovered during such inspection in accordance with the guidelines set out by the Engine Manufacturer. No Engine will be on watch for any reason. (5) If the Engine historical and technical records and/or condition trend monitoring data, of any Engine (including the auxiliary power unit), indicate an acceleration in the rate of deterioration in the performance of an Engine or an increase in oil consumption, Lessee will correct, to Lessor's satisfaction, such conditions which are determined to have exceeded Engine Manufacturer's maintenance manual tolerances or otherwise be causing such accelerated rate of deterioration. (6) In accordance with Manufacturer's maintenance manual, accomplish a maximum power assurance run on the Engines and accomplish condition, acceleration and bleed valve scheduling checks on the Engines. Lessee will record and evaluate the Engine performance with Lessor and/or its representative entitled to be present. The performance and all operating parameters of each Engine will be within the limits specified in the Manufacturer's maintenance manual so as to ensure that the Engine can be operated on-wing for a period of at least as great a duration as that shown with respect to such Engine on the Delivery Status Certificate as of the Delivery Date, regardless of the operating environment of the Engine. (7) In the event the Engine historical and technical records, borescope inspection, trend monitoring and other checks specified in paragraphs (5), (6) and (7) above result in a dispute with respect to whether an Engine meets the requirements of this Lease, Lessee and Lessor will consult with the Engine Manufacturer and follow the Engine Manufacturer's recommendations (including the accomplishment of an Engine test cell operational check) with regard to determining if such Engine complies with the requirements of this Lease and the manner in which any discrepancies from the requirements of this Lease will be rectified. D. Part Lives. The condition of the Aircraft and installed systems will be as follows: (1) The Aircraft shall be returned with no more time since the last "C7" Check including the 20,000 hour structural inspection items or the equivalent heaviest maintenance inspection (complete block overhaul) as provided at the Delivery Date. Lessee may return the Aircraft with more time since last "C7" Check provided Lessee pays Lessor the difference between the time since the last "C7" Check upon delivery and the actual time since "C7" Check upon return, times the Airframe Maintenance Reserve Amount. However, in no event shall the Aircraft have less than one "C" Check interval remaining until the next "C7" Check. Airframe Maintenance Reserves may be used to offset this amount. (2) Each Engine shall be returned with the same time remaining or more time remaining until the next restriction as at the Delivery Date. Each Engine shall have no more time since last heavy shop visit, last hot section refurbishment and last cold section refurbishment as at the Delivery Date. Engine disk sheets shall be used for reference. (3) Each landing gear will be serviceable. Each landing gear shall be returned with the same amount of time remaining or more time remaining until the next restriction as at the Delivery Date. Lessee may return a landing gear with less time remaining until the next restriction provided Lessee pays Lessor the difference between the time remaining until the next restriction upon delivery and the time remaining until the next restriction upon return times the Landing Gear Reserve Rate. Landing Gear Reserves may be used to offset this amount. However, in no event shall any single landing gear have less than one (1) "C" Check interval remaining. (4) Each APU will be returned in serviceable condition and shall pass borescope. (5) Each Component (excluding the Engines but including any components thereon) will be returned in serviceable condition with at least 3,000 hours or cycles or twelve (12) months remaining, whichever is more limiting. EXHIBIT D to Aircraft Lease Agreement CERTIFICATE AS TO STATUS OF AIRCRAFT FIRST SECURITY BANK, N.A., not in its individual capacity, but solely as owner trustee ("Lessor"), and FRONTIER AIRLINES, INC., a Colorado corporation ("Lessee"), hereby certify as follows: 1. Lessor and Lessee are parties to that certain Aircraft Lease Agreement dated February 26, 1999 (the "Lease"), with respect to the Boeing 737-200A commercial jet aircraft bearing manufacturer's serial number 23007 and current Federal Aviation Administration registration number N237TR. Capitalized term not otherwise defined herein shall have the meanings assigned to them in the Lease. 2. Lessor and Lessee acknowledge and agree that the status of the Airframe and the Engines on the Delivery Date are as set forth in Schedule 1 hereto, that the Aircraft, together with the Aircraft Documents described on Schedule 2 hereto, are delivered by Lessor to Lessee in accordance with the Lease on the date of this Certificate and that the Aircraft and Aircraft Documents have been technically accepted by Lessee in accordance with the provisions of the Lease. INWITNESS WHEREOF, Lessor and Lessee have caused this Certificate to be duly executed as of this day of , 1999. LESSOR, FIRST SECURITY BANK, N.A., not in its individual capacity but solely as owner trustee By:__________________________ Name:________________________ Its:___________________________ LESSEE, FRONTIER AIRLINES, INC. By:___________________________ Name:_________________________ Its:____________________________ SCHEDULE 1 TO CERTIFICATE AS TO STATUS OF AIRCRAFT Aircraft Status on The Delivery Date Airframe Heaviest Check ("C7" Check or Equivalent): Interval: _____ Hrs. (____ months) Time Remaining: _________ Hrs. Airframe "C" Check (or Equivalent): Interval: ______ Hrs. Time Remaining: ______ Hrs. Landing Gear Overhaul: Interval: ______ cycles Left Gear ______ cycles Right Gear ______ cycles Nose Gear ______ cycles Center Gear Time Remaining: _____ cycles Left Gear _____ cycles Right Gear _____ cycles Nose Gear _____ cycles Center Gear Engines Time Remaining to First Restriction: See attached engine disk sheets attached as Schedule 3 for Engines delivered on the Delivery Date. APU TT TC TSO SN P_____ _____ hr _____ cy ____ hrs CSO Limiter Fuel on Board at Delivery: _____ Gal. U.S. SCHEDULE 2 TO CERTIFICATE AS TO STATUS OF AIRCRAFT AIRCRAFT DOCUMENTS (Estimated) A. CERTIFICATES o FAA Certificate of Airworthiness B. AIRCRAFT STATUS RECORDS o Log Books o Airframe Maintenance Status Report o Supplemental Structural Inspection Document Status (if applicable) o Manufacturer's Service Bulletin Status Report o Airworthiness Directive Compliance Report (terminated and repetitive) o Modification Status Report List (documents will be provided upon request) o Last Weighing Report o List of Life Limited Components with remaining hours/cycles C. AIRCRAFT MAINTENANCE RECORDS (last heavy maintenance visits) o Test Flight Reports o X-ray pictures o Last annual check and heaviest maintenance check Work Cards D. AIRCRAFT HISTORY RECORDS o Aircraft Maintenance History Cards o Service Difficulty Report o Accident or Incident Report (Major Structural Repair) E. ENGINE RECORDS (for each engine) o Engine time and cycle records o Last overhaul and repair documents (including FAA Forms 337) o Airworthiness Directive Compliance Report (terminated and repetitive) o Manufacturer's Service Bulletin Status Report o List of Time Controlled Components with remaining hours and cycles o Modification Status Report o Engine Disc Sheets o Engine Build Specifications F. APU RECORDS o Last Overhaul and Repair Documents (including modification status) o Airworthiness Directive Compliance Report (terminated and repetitive) o Manufacturer's Service Bulletin Status Report o List of Time Controlled Components with remaining hours/cycles o Modification Status Report G. COMPONENT RECORDS o Time Controlled Component Historical Records with Installation and Serviceability Tags H. MANUALS o Airplane Flight Manual (Manufacturer Approved, FAA Approved) o Flight Crew Operating Manual o Weight and Balance Manual o Wiring Diagram Manual (microfilm and hard copy if available) o Illustrated Parts Catalog (microfilm) o Aircraft Maintenance Manual (microfilm) o Manufacturer's Engine Maintenance Manual and any approved engineering changes, as applicable I. MISCELLANEOUS TECHNICAL DOCUMENTS o Maintenance Program Specifications o Interior Configuration Drawings o Original Delivery Documents o Loose Equipment Inventory SCHEDULE 3 TO CERTIFICATE AS TO STATUS OF AIRCRAFT EXHIBIT E to Aircraft Lease Agreement DELIVERY CONDITION REQUIREMENTS On the Delivery Date, the Aircraft shall be delivered in "as is" condition; provided, however, the Aircraft shall meet the following conditions: (1) The Aircraft shall be in compliance with the requirements for domestic operation in the United States, will meet the requirements of FAA Part 121, shall have a current and valid FAA Certificate of Airworthiness, will have LGW Stage III (Nordam hushkit) installed thereon, and will have flight data recorder systems installed which conform to the requirements of FAR 121.344(b)(1) or (b)(2), as applicable. (2) The records required for Lessee to operate the Aircraft and bridge the Aircraft onto Lessee's maintenance program will be in English. (3) The Aircraft will be in working order with all pilot discrepancies and deferred maintenance items cleared. (4) The Aircraft will be airworthy and all AD's requiring compliance on the Delivery Date and for a period of one hundred eighty (180) days thereafter, will be accomplished. The Aircraft will be in full compliance with the CPCP program. (5) The Aircraft shall be clean by scheduled commercial airline standards. The interior will be delivered in a one hundred nineteen (119) seat standard class passenger configuration with a minimum seat pitch of 31 inches. Lessor will install galleys recommended by Lessee subject to timing and availability thereof. (6) The Aircraft shall have next scheduled "C" Check performed in accordance with the Boeing MPD maintenance program. The Aircraft will be bridged onto the Boeing MPD maintenance program. (7) Each Engine shall be delivered in serviceable condition. Each Engine shall have at least three thousand (3,000) hours or cycles (whichever is more limiting) of life remaining as described on the engine disk sheets. (8) Each Engine shall have had a full and complete hot section and cold section video borescope performed on such Engine and its modules in accordance with the Engine Manufacturer's maintenance manual. Lessor will provide evidence (photographic or video) to Lessee's satisfaction that such inspection does not reveal any condition which would cause the Engine or any module to be unserviceable. Lessor will, at its expense, correct any discrepancies which may be discovered during such inspection in accordance with the guidelines set out by the Engine Manufacturer. No Engine will be on watch for any reason. (9) If the Engine historical and technical records and/or condition trend monitoring data, of any Engine (including the auxiliary power unit), indicate an acceleration in the rate of deterioration in the performance of an Engine or an increase in oil consumption, Lessor will correct, to Lessee's satisfaction, such conditions which are determined to have exceeded Engine Manufacturer's maintenance manual tolerances or otherwise be causing such accelerated rate of deterioration. (10) In accordance with Manufacturer's maintenance manual, accomplish a maximum power assurance run on the Engines and accomplish condition, acceleration and bleed valve scheduling checks on the Engines. Lessor will record and evaluate the Engine performance with Lessee and/or its representative entitled to be present. The performance and all operating parameters of each Engine will be within the limits specified in the Manufacturer's maintenance manual so as to ensure that the Engine can be operated on-wing for a period of at least as great a duration as that shown with respect to such Engine on the Delivery Status Certificate as of the Delivery Date, regardless of the operating environment of the Engine. (11) In the event the Engine historical and technical records, borescope inspection, trend monitoring and other checks specified in paragraphs (8), (9) and (10) above result in a dispute with respect to whether an Engine meets the requirements of this Lease, Lessee and Lessor will consult with the Engine Manufacturer and follow the Engine Manufacturer's recommendations (including the accomplishment of an Engine test cell operational check) with regard to determining if such Engine complies with the requirements of this Lease and the manner in which any discrepancies from the requirements of this Lease will be rectified. (12) Each landing gear shall have no less than three thousand (3,000) hours remaining to the next scheduled overhaul and no landing gear component shall have less than fifteen thousand (15,000) cycles remaining life. (13) Each APU will be delivered in serviceable condition and shall pass borescope inspection. (14) Each Component (excluding the engines but including any components thereon) will be delivered in serviceable condition with at least three thousand (3,000) hours or cycles or twelve (12) months remaining, whichever is more limiting. (15) The Aircraft shall be delivered painted in Lessee's livery. (16) Lessor will increase the MTOW to one hundred twenty thousand (120,000) pounds and the MLW to one hundred seven thousand (107,000) pounds (the "Weight Increases"). It is understood the Weight Increases are produced by Manufacturer and may not be available on the Delivery Dates. Lessor will use best efforts to obtain the Weight Increases (which were ordered by Lessee in November, 1998) in a timely fashion. EXHIBIT F to AIRCRAFT LEASE AGREEMENT AIRFRAME USAGE REPORT dated __/__/__ in respect of the period from __/__/__ to __/__/__ Number of Hours Operated Number of Cycles Operated Airframe Engine # 1 Serial Number:___________ Engine #2 Serial Number:___________ Landing Gear TABLE OF CONTENTS SECTION 1 DEFINITIONS.....................................................1 SECTION 2 LEASE AND CONDITIONS............................................1 SECTION 3 DELIVERY AND ACCEPTANCE; TERM ..................................2 SECTION 4 RENT AND RESERVES...............................................3 SECTION 5 REPRESENTATIONS AND WARRANTIES..................................4 SECTION 6 POSSESSION, USE AND MAINTENANCE.................................6 SECTION 7 INFORMATION AND INSPECTION .....................................9 SECTION 8 CERTAIN COVENANTS OF LESSEE ....................................9 SECTION 9 INDEMNIFICATION ...............................................10 SECTION 10 CASUALTY OCCURRENCES...........................................13 SECTION 11 INSURANCE......................................................15 SECTION 12 RETURN OF AIRCRAFT AND RECORDS.................................21 SECTION 13 DEFAULT AND REMEDIES...........................................22 SECTION 14 ALIENATION.....................................................23 SECTION 15 MISCELLANEOUS..................................................24 EXHIBIT A..................................................................A-1 EXHIBIT B..................................................................B-1 EXHIBIT C..................................................................C-1 EXHIBIT D..................................................................D-1 EXHIBIT E..................................................................E-1 EXHIBIT F..................................................................F-1 EX-10 6 AIRCRAFT LEASE AGREEMENT AIRCRAFT LEASE AGREEMENT between Indigo Aviation AB (publ) as Lessor and Frontier Airlines, Inc as Lessee Dated as of 15 March 1999 Aircraft Make and Model: One Boeing 737-3L9 Aircraft Manufacturer's Serial Number: 26440 Aircraft Registration Mark: N310FL Engines Make and Model: CFM56-3B2 Engines Serial Numbers: 726422 and 726492 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 Lender on the receipt set forth on the signature page of such original counterpart. Items marked with "*" have been omitted pursuant to a request for confidential treatment. TABLE OF CONTENTS 1. DEFINITIONS................................................................2 1.1 Definitions............................................................2 1.2 Construction..........................................................12 2. REPRESENTATIONS AND WARRANTIES............................................14 2.1 Lessee's Representations and Warranties...............................14 2.2 Lessor's Representations and Warranties...............................17 2.3 Survival of Representations and Warranties............................18 3. CONDITIONS PRECEDENT......................................................18 3.1 Lessor's Conditions Precedent.........................................18 3.2 Waiver................................................................20 3.3 Lessee's Conditions Precedent.........................................20 3.4 Waiver................................................................22 4. DELIVERY CONDITION AND INSPECTION OF AIRCRAFT.............................22 4.1 Lessee Selection of Aircraft..........................................22 4.2 Condition at Delivery.................................................22 4.3 Lessee Inspection and Acceptance Flight...............................22 4.4 Delivery of Aircraft to Lessee........................................22 4.5 Lessee's Failure to take Delivery.....................................23 5. LEASE TERM................................................................23 5.1 Initial Lease Term and Base Lease Term................................23 5.2 Extension Lease Option................................................23 5.3 Expiry Date...........................................................23 5.4 Survival of Certain Lessee Obligations................................24 5.5 Risk..................................................................25 6. DELIVERY..................................................................25 6.1 Location and Time of Delivery.........................................25 6.2 Delay or Failure in Delivery..........................................25 7. RENT......................................................................27 7.1 Initial Rent Dates....................................................27 7.2 Amount of Initial Rent................................................27 7.3 Basic Rent Period.....................................................27 7.4 Time of Payment of Basic Rent.........................................27 7.5 Amount of Basic Rent..................................................27 7.6 Maintenance Reserves..................................................28 7.7 Supplemental Rent for Excess Cycles...................................28 8. SECURITY DEPOSIT..........................................................28 8.1 Security Deposit......................................................28 8.2 Letter of Credit......................................................28 8.3 Lessor's Rights.......................................................28 9. MAINTENANCE RESERVES......................................................29 9.1 Amount................................................................29 9.2 Payments..............................................................29 9.3 Adjustment............................................................29 9.4 Release of Maintenance Reserves.......................................30 9.5 Costs in Excess of Maintenance Reserves...............................31 9.6 Reimbursement after Expiry Date.......................................31 10. PAYMENTS.................................................................32 10.1 Account for Lessee Payments..........................................32 10.2 Default Interest.....................................................32 10.3 Absolute Obligations.................................................32 10.4 Application of Payments to Lessor....................................33 10.5 Currency Indemnity...................................................33 10.6 Set-off..............................................................34 10.7 Time for Payments....................................................34 11. LESSOR'S COVENANTS.......................................................34 11.1 Quiet Enjoyment......................................................34 11.2 Lessor Obligations Following Expiry Date.............................34 12. LESSEE'S COVENANTS.......................................................35 12.1 Duration.............................................................35 12.2 Information..........................................................35 12.3 Lessor Visits........................................................37 12.4 Periodic Estoppel Certificates.......................................37 12.5 Airport and Navigation Charges.......................................37 12.6 Operation of Aircraft................................................38 12.7 Areas of Operation...................................................38 12.8 Non-Prejudicial Action...............................................39 12.9 Non-Representation of Lessor.........................................39 12.10 Inspection..........................................................39 12.11 Registration........................................................41 12.12 Name Plates.........................................................41 12.13 Geneva Convention...................................................42 12.14 Merger and Shareholding.............................................42 12.15 Ownership...........................................................42 12.16 Maintenance of Principal Business Place.............................43 12.17 Maintenance of Flight Records.......................................43 13. POSSESSION...............................................................43 13.1 No Relinquishment of Possession......................................43 13.2 Copy of Sublease.....................................................46 13.3 Lessee Primarily Liable..............................................46 13.4 Recognition of Rights................................................47 14. SECURITY INTERESTS.......................................................47 14.1 Title................................................................47 14.2 No Security Interests................................................47 14.3 Base of Aircraft.....................................................47 14.4 Notice to Lessor.....................................................47 14.5 Procure Release......................................................48 15. MAINTENANCE AND REPAIR...................................................48 15.1 General Obligations..................................................48 15.2 Specific Obligations.................................................49 16. REPLACEMENT OF PARTS.....................................................50 16.1 Replacement of Parts.................................................51 16.2 Title to Replacement Parts...........................................51 16.3 Pooling of Parts.....................................................51 16.4 Alterations..........................................................52 16.5 Removal of Parts.....................................................53 16.6 Substitution of Engine...............................................53 16.7 Temporary Removal of Parts...........................................54 16.8 Parts Incapable of Transfer..........................................56 17. MANUFACTURER'S WARRANTIES................................................56 17.1 Authorization........................................................56 17.2 Proceeds.............................................................57 17.3 Agreements with Manufacturers........................................57 17.4 No Operation Contrary to Warranties..................................57 18. DISCLAIMERS..............................................................58 18.1 General..............................................................58 18.2 As Is, Where Is......................................................58 18.3 Waiver of Warranty of Description....................................59 18.4 Lessee Acknowledgement...............................................59 18.5 Lessee Waiver........................................................59 18.6 Lessee Examination of Aircraft.......................................59 18.7 No Lessor Liability for Losses.......................................60 18.8 Exclusion............................................................60 18.9 Waiver...............................................................60 18.10 No Waiver...........................................................61 18.11 Confirmation........................................................61 19. INDEMNITIES..............................................................61 19.1 General Indemnity....................................................61 19.2 Exception to General Indemnity.......................................62 19.3 Time of Payment......................................................62 19.4 Survival of General Indemnity........................................62 19.5 Notice to Lessee.....................................................62 20. TAXATION.................................................................63 20.1 Gross-up.............................................................63 20.2 Tax Indemnity........................................................63 20.3 Value Added Taxes....................................................65 20.4 Taxation of Indemnity Payments.......................................65 20.5 Benefit of Indemnities...............................................65 20.6 Lessor Indemnification...............................................65 20.7 Survival of Tax Indemnities..........................................66 20.8 Mitigation and Co-operation..........................................66 20.9 Furnishing Forms.....................................................66 21. INSURANCE................................................................66 21.1 Insurances...........................................................66 21.2 Reinsurance..........................................................68 21.3 Requirements.........................................................68 21.4 Insurance Covenants..................................................68 21.5 Renewal of Insurances................................................70 21.6 Failure to Insure....................................................70 21.7 Continuation of Insurances...........................................71 21.8 Application of Insurance Proceeds....................................71 21.9 Pursuit of Claims....................................................72 22. TOTAL LOSS AND REQUISITION...............................................72 22.1 Total Loss Prior to Delivery.........................................72 22.2 Total Loss After Delivery............................................72 22.3 Total Loss of Engines................................................73 22.4 Requisition..........................................................73 23. REDELIVERY...............................................................75 23.1 Redelivery of Aircraft...............................................75 23.2 Final Inspection.....................................................76 23.3 Discrepancies........................................................76 23.4 Non-compliance.......................................................76 23.5 Acknowledgement......................................................77 23.6 Storage etc..........................................................77 24. EVENTS OF DEFAULT........................................................77 24.1 Notice...............................................................77 24.2 Events...............................................................78 24.3 Lessor's Rights......................................................81 24.4 Default Payments.....................................................82 24.5 Cumulative Rights....................................................83 25. ASSIGNMENT AND TRANSFER..................................................83 25.1 By Lessee............................................................83 25.2 By Lessor............................................................83 25.3 Assignment to Lender.................................................84 25.4 Lessee Co-operation..................................................84 25.5 Lessor Includes Lessor's Assignee and Lender.........................84 26. MISCELLANEOUS PROVISIONS.................................................85 26.1 Rights Cumulative, Waivers...........................................85 26.2 Delegation...........................................................85 26.3 Expenses.............................................................85 26.4 Time of Essence......................................................86 26.5 Entire Agreement.....................................................86 26.6 Further Assurances...................................................86 26.7 Language.............................................................86 26.8 Variation............................................................86 26.9 Invalidity of any Provision..........................................86 26.10 Survival............................................................87 26.11 Reimbursement.......................................................87 26.12 Press Releases......................................................87 26.13 Power of Attorney...................................................87 26.14 Usury Laws..........................................................87 26.15 Confidentiality.....................................................88 26.16 Counterparts........................................................88 26.17 Bankruptcy..........................................................88 27. NOTICES..................................................................89 28. GOVERNING LAW AND JURISDICTION...........................................90 28.1 New York Law.........................................................90 28.2 Non-exclusive Jurisdiction in New York...............................90 28.3 Service of Process Agent.............................................90 28.4 Waiver...............................................................90 SCHEDULES Schedule 1 Aircraft Specification 102 Annexure 1Aircraft Documents 104 Schedule 2 Certain Business Terms 107 Schedule 3 Insurance Requirements 110 Schedule 4 Delivery Conditions 115 Schedule 5 Acceptance Certificate 123 Schedule 6 Officer's Certificate 126 Schedule 7 Letter of Authority 128 Schedule 8 Power of Attorney 129 Schedule 9 Opinion of Lessee Counsel 130 Schedule 10 Monthly Aircraft Utilisation and Status Report 135 Schedule 11 Letter of Quiet Enjoyment 137 Schedule 12 Return Conditions 138 Schedule 13 Return Acceptance Certificate 145 Annexure 1Aircraft Documents 148 Annexure 2Discrepancies 151 Schedule 14 Lease Supplement 152 THIS AGREEMENT is made as of 15 March 1999. BETWEEN: (1) INDIGO AVIATION AB (publ), a Swedish limited liability company whose address and principal place of business is at Sodra Forstadsgatan 4, S-211 43 Malmo, Sweden, ("Lessor"); and (2) FRONTIER AIRLINES, INC. a Colorado corporation whose address and principal place of business is at 12015 E. 46th Avenue, Denver, Colorado, United States of America ("Lessee"). WHEREAS Owner Trustee holds title to the Aircraft for the benefit of Lessor; Owner Trustee, as headlessor, leases the Aircraft to Lessor under the terms of the Headlease Agreement; In consideration of and subject to the mutual covenants, terms and conditions contained in this Agreement, Lessor hereby agrees to lease to Lessee and Lessee hereby agrees to lease from Lessor the Aircraft for the Lease Term and the parties further agrees as follows: 1. DEFINITIONS 1.1 Definitions In this Agreement the following words and expressions have the following meanings unless the context otherwise requires: Acceptance Certificate means a certificate of acceptance substantially in the form set out in Schedule 5; Agreed Value has the meaning ascribed to it in Schedule 2; Aircraft means the Airframe, the Engines, the Parts and the Aircraft Documents, collectively. As the context requires, the Aircraft may also mean the Airframe, any Engine, any Part, the Aircraft Documents or any part thereof individually; Aircraft Documents means the documents, data and records referred to in Annexure 1 to Schedule 1 of this Agreement and, at Delivery, more closely identified in Annexure 1 to the Acceptance Certificate and all additions, renewals, revisions and replacements from time to time made to any of the foregoing in accordance with this Agreement; Airframe means the airframe described in Schedule 1 together with all Parts relating thereto (except Engines or engines); 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 Lessee to Lessor, or at the request of Lessor, to Lender, of all of Lessee'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 favour of Lessor, Owner Trustee or 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; Base Lease Expire Date means the date falling 65 months from the Initial Lease Expiry Date.; Base Lease Term means the period commencing on the day following the Initial Lease Term and ending on Base Lease Expiry Date.; Basic Rent means all amounts payable pursuant to Clause 7.5; Basic Rent Period means each period ascertained in accordance with Clause 7.3; 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 London, New York and Stockholm; "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 the Maintenance Program; Conditions Precedent means the conditions specified in Clause 3; CPCP means corrosion prevention 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; "D" Check means a "C7" Check plus structural items (a complete "block" system, zonal, corrosion and structural inspection in accordance with the MPD); Damage Notification Threshold has the meaning ascribed to it in Schedule 2; Default means any Event of Default or any event which with the lapse of time or giving of notice or making of any determination, would constitute an Event of Default; Default Rate means, for the relevant period, 3% percent above the rate of interest at the start of that relevant period publicly quoted by Chase Manhattan Bank N.A as its prime rate; Delivery means delivery of the Aircraft by Lessor to Lessee pursuant to Clause 6 Delivery Date means the date on which Delivery occurs; Delivery Location means Munich, Germany or such other location as the parties may agree; 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 Lessor elects to tender to Lessee, whether or not installed on the Airframe on the Delivery Date, such engines being described as to serial numbers on the Acceptance Certificate; 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 Lessee pursuant to this Agreement; Engine Agreed Value has the meaning ascribed to it in Schedule 2; Engine Manufacturer means CFM International; 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 24.2; Expiry Date means the date determined in accordance with Clause 5.3; Extension Lease Expiry Date has the meaning ascribed to it in Schedule 2; Extension Lease Option means the option set out in Clause 5.2; Extension Lease Term means the period commencing on the day following the Base Lease Expiry Date and ending on the Extension Lease Expiry Date; FAA means the Federal Aviation Administration of the Department of Transportation of the United States of America and any successor thereof; 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 and any successor regulation thereto; Federal Aviation Act means Title 49 Subtitle VII of the U.S. Code, as amended, modified or replaced from time to time; Final Inspection has the meaning given to it in Clause 23.2; Financial Indebtedness means any indebtedness in respect of: (a) moneys 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 leave the ground at take off until the wheels of the Aircraft next touch the ground at landing; Geneva Convention means the Convention on the International Recognition of Rights in Aircraft signed in 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, state or local 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; Headlease Agreement means the aircraft headlease agreement entered into between Owner Trustee and Lessor dated as of even date hereof and which is being filed with FAA simultaneously herewith; Indemnitees means Lessor, Owner Trustee, Lender or any other person identified by Lessor 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 Term means the period commencing on the Delivery Date and ending on the Initial Lease Expiry Date; Initial Lease Expiry Date has the meaning ascribed to it in Schedule 2; Initial Rent means all amounts payable pursuant to Clause 7.2 ; Initial Rent Dates means the dates pursuant to Clause 7.1; Insurances has the meaning ascribed to it in Clause 21.1; Landing Gear means the landing gear assembly of the Aircraft, including all life limited parts; Lease Term means the Initial Lease Term, the Base Lease Term and, upon exercise of the Lease Extension Option, the Extension Lease Term; Lender means any person or persons notified by Lessor to Lessee as providing financing to Owner Trustee or Lessor 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); Lessor Lien means: (a) any Security Interest from time to time created by or through Lessor 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 Lessor not related to the transactions contemplated by or permitted under this Agreement; (c) any Security Interest in respect of the Aircraft for Lessor Taxes; (d) any Security Interest in respect of the Aircraft existing prior to Delivery; (e) any Security Interest arising as a result of any act or omission of Lessor that constitutes a breach by Lessor of this Agreement; or (f) any Security Interest that results from any indebtedness, liability or other obligation arising by, through or under Lessor or any of the Indemnitees and that is not indemnified against by Lessee under this Agreement; Lessor Taxes means Taxes: (a) imposed as a result of activities of Lessor in the jurisdiction imposing the liability unrelated to this Agreement or the operation of the Aircraft by Lessee; (b) imposed on the net income, profits or gains of Lessor (but excluding for the avoidance of doubt, taxes directly related to payment made under this Agreement); 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; Letter of Credit has the meaning ascribed to it in Clause 8.2; LIBOR means the rate per annum which is the offered rate (if any) appearing on page 3750 of the Telerate screen (or any replacement page) which displays British Bankers Association Interest Settlement Rates for deposits in Dollars equal, or as close as practicable, to the period for which such rate is to be determined at 11:00 a.m. (London time) on the relevant date; LLP means life limited part; Loss means any and all loss, liability, obligation, action, claim, suits, proceeding, judgement, penalty, fine, damages, fee, cost, disbursement and expense and Losses shall be construed accordingly; Maintenance Facility means a FAA approved maintenance facility or such other maintenance facility as Lessor may, in its absolute descretion, from time to time approve in writing; Maintenance Program means Lessee's maintenance program as approved by the Aviation Authority provided in compliance with the MPD or such other maintenance program as Lessor may, in its absolute discretion, approve in writing; Maintenance Reserves means all amounts payable pursuant to Clause 9.1; Manufacturer means the Boeing Company, a Delaware Corporation with its principal office in Seattle, State of Washington, United States of America; Minimum Liability Coverage has the meaning ascribed to it in Schedule 2; Monthly Report means a report substantially in the form of Schedule 10; Mortgage means a mortgage over the Aircraft created for the benefit of Lender; MPD mean the Maintenance Planning Document 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 Lessor (or any parent company, subsidiary, associate or affiliate of Lessor) and Lessee (or any subsidiary, associate or affiliate of Lessee); Overhaul means the full refurbishment of the Aircraft, an Engine, the APU, a Landing Gear, a module or a Part, as the case may be, in which such equipment has been disassembled, cleaned, thoroughly inspected, repaired, reworked or had a replacement of parts, reassembled, and tested to the tolerances and standards specified by the applicable manufacturer's overhaul procedures manual or equivalent; Owner Trustee means First Security Bank, National Association; Part means, whether or not for the time being installed in or attached to the Airframe or any Engine: (a) any component, furnishing or equipment (other than a complete Engine) installed or attached to the Airframe or any Engine 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 Lessee pursuant to this Agreement; Permitted Air Carrier has the meaning ascribed to it in Clause13.1.1; Permitted Lien means: (a) any lien for Lessee 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) any Lessee liens arising out of judgements 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 Lessor Lien; and (e) any Security Interest over the Aircraft created by Lessee with the written consent of Lessor, 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 Lessor or Lender) of the sale, forfeiture or other loss of the Aircraft or any interest therein; Present Lessee means Maersk Air; 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; Redelivery Location means a location in the continental US reasonably requested by Lessor or such other location as Lessor and Lessee may agree; Rent means Initial Rent or Basic Rent, as the case may be, and Supplemental Rent; Rent Date means the Initial Rent Dates and the day preceding each Basic Rent Period; Replacement Engine means an engine complying with Clause 16.6; Return Conditions means the conditions specified in Schedule 12; Scheduled Delivery Date has the meaning ascribed to it in Schedule 2; Security Deposit has the meaning ascribed to it in Schedule 2; Security Interest means any encumbrance or security interest, however and wherever created or arising, including without limitation, any right of ownership, security, mortgage, charge, pledge, lien, encumbrance, assignment, hypothecation or any other agreement or arrangement conferring security; Side Letter means the Side Letter No. 1 to this Agreement between Lessor and Lessee (a copy of which has not been included in the FAA counterpart of this Agreement); State of Incorporation means the State of 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; Supplemental Rent means any and all amounts, liabilities and obligations (other than Initial Rent and Basic Rent) which Lessee assumes, agrees or is otherwise obligated to pay Lessor hereunder including Maintenance 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; 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 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 Lessee and/or operation thereof for a period of thirty (30) consecutive days or longer; (e) any sale of the Aircraft in connection with a Lessee bankruptcy whether by an administrator, trustee or court; (f) any other occurrence not permitted under this Agreement that deprives Lessee of use and possession for a period of thirty (30) 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 paragraph (c) in the definition of Total Loss, the date on which the referred to therein takes effect; (d) in the case of paragraph (d) in the definition of Total Loss, the final day of the said period of thirty (30) consecutive days; (e) in the case of paragraph (e) in the definition of Total Loss, the date on which the Aircraft is sold; and (f) in case of paragraph (f) above the definition of Total Loss, the final day of the said period of thirty (30) consecutive days; Total Loss Proceeds means the proceeds of any insurance or any other compensation or similar payment arising in respect of a Total Loss; Transaction Documents means (a) this Aircraft Lease Agreement; (b) the Acceptance Certificate; (c) the Assignment of Insurances; (d) the acknowledgement by Lessee of the security assignment or the pledge of, inter alia, this Agreement in favour of the Lender and any documents duly executed pursuant to any of the foregoing by Lessee or Lessor; (e) the Lease Supplement; and (f) the Side Letter; 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; 1.2 Construction 1.2.1 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) Lessor or Lessee include any assignee or successor in title to the Lessor or the Lessee respectively (subject to the provisions of Clause 25); (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). (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". 1.2.2 Headings are for ease of reference only. 1.2.3 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. 2. REPRESENTATIONS AND WARRANTIES 2.1 Lessee's Representations and Warranties Lessee represents and warrants to Lessor as of execution of this Agreement and each other Transaction Document, as of the Delivery Date and as of each date on which Rent is paid hereunder each of the following representations and warranties. (i) Corporate Status: Lessee 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. (ii) 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 Lessee 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. (iii) Binding: Lessee's Board of Directors has authorized Lessee 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 Lessee and represent the valid, enforceable and binding obligations of Lessee 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 Lessee at Delivery, the same will apply to the Acceptance Certificate. (iv) No Breach: The execution and delivery of the Transaction Documents, the consummation by Lessee of the transactions contemplated herein and by the other Transaction Documents and compliance by Lessee with the terms and provisions hereof do not and will not contravene any law applicable to Lessee, or result in any breach of or constitute any default under or result in the creation of any Security Interest upon any property of Lessee, pursuant to any 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 Lessee is a party or by which Lessee or its properties or assets may be bound or affected. When executed by Lessee at Delivery, the same will apply to the Acceptance Certificate. (v) Filings: Except for the filing or recording of this Agreement with the FAA, 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 Registration to evidence the interests of Owner Trustee, Lessor and Lender in the Aircraft or any Transaction Document. (vi) Licenses: Lessee holds, all licenses, certificates and permits from all applicable Government Entities for the conduct of its business as a certified air carrier and performance of its obligations under the Transaction Document. (vii) No Suits: There are no suits, arbitrations or other proceedings pending or threatened against Lessee before any court or administrative agency against or affecting Lessee that, if adversely determined, would have a material adverse effect on the financial condition or business of Lessee or its ability to perform its obligations under this Agreement or any other Transaction Document. (viii) No Withholding: Under the laws of the State of Incorporation or the State of Registration, Lessee will not be required to deduct any withholding or other Tax from any payment it may make under this Agreement. (ix) No restrictions on Payments: As of the date of execution of this Agreement, there are under the laws of the State of Incorporation no present restrictions on Lessee to make the payments required by this Agreement. (x) General Obligations: The obligations of Lessee under this Agreement are direct, general and unconditional obligations of Lessee and rank or will 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. (xi) Tax Returns: All necessary returns have been delivered by Lessee to all relevant taxation authorities in the State of Incorporation and Lessee is not in default in the payment of any taxes due and payable. (xii) No Material Adverse Effect: Lessee 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 Lessee threatened against it or its assets that would have a material adverse effect on the business, assets or condition (financial or otherwise) of Lessee. (xiii) No Default under this Agreement: At the time of execution of this Agreement, no Default has occurred and is continuing. (xiv) Financial Statements: The balance sheet and other financial statements for Lessee for the financial year which ended 31st of March 1998 were prepared in accordance with accounting principles consistently applied and generally accepted in the State of Incorporation. (xv) 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 Lessee or any of its assets. (xvi) Continuation of Business: Lessee 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. (xvii) 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. (xviii) Information: All information furnished by or on behalf of the Lessee 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 Lessee have been disclosed to the Lessor. (xix) 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 duly certified US Air Carrier. (xx) Principal Place of Business: Lessee's principal place of business and chief executive office are located at the address specified in the preamble of this Agreement. (xxi) Flight Records: Lessee's flight records are located at Lessee's principal place of business on the address stated in Clause 27. (xxii) Year 2000 Compliance: Lessee has (i) initiated a review and assessment of all areas within its business and operations (including those affected by suppliers and vendors) that could be adversely affected by the "Year 2000 Problem" (this is, the risk that computer applications used by Lessee, or its suppliers, customers and vendors, may be unable to recognise and perform properly date-sensitive functions involving certain dates prior to, on and any date after December 31, 1999), (ii) developed a plan for addressing the Year 2000 Problem on a time basis, and (iii) is in the process of implementing such plan. 2.2 Lessor's Representations and Warranties Lessor represents and warrants to Lessee as of the Delivery Date each of the following representations and warranties. (i) Title to Aircraft: Lessor 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 Interest except for the Security Interests of Owner Trustee and Lessor under the Headlease Agreement and of Lender. (ii) Organisational Status: Lessor is a company created and validly existing under the laws of Sweden, and has the organisational 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 a party. (iii) Trust Agreement: The Trust Agreement dated as of even date herwith, by and between Owner Trustee and Lessor (the "Trust Agreement") has been duly authorized, validly executed and delivered on the part of Lessor, is legally binding upon Lessor, and creates a legally enforceable trust (as hereinafter defined 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. (iv) 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 Lessor of this Agreement, except as will have been duly effected as of the Delivery Date. (v) Binding: This Agreement and the other Transaction Documents to which Lessor is a party have been duly executed and delivered by Lessor and represent the valid, enforceable and binding obligations of Lessor except as enforceability may be limited by bankruptcy, insolvency, reorganization or other laws of general application affecting the enforcement of creditors' rights. (vi) No Breach: The execution and delivery of the Transaction Documents, the consummation by Lessor of the transactions contemplated herein and compliance by Lessor with the terms and provisions hereof do not and will not contravene any law applicable to Lessor, or result in any breach of or constitute any default under or result in the creation of any Security Interest upon any property of Lessor, 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 Lessor is a party or by which Lessor or its properties or assets may be bound or affected. 2.3 Survival of Representations and Warranties All of the foregoing Lessee's and Lessor's representations and warranties shall survive the execution and delivery of this Agreement and the Delivery of the Aircraft. 3. CONDITIONS PRECEDENT 3.1 Lessor's Conditions Precedent Lessor's obligation to deliver and lease the Aircraft to Lessee under this Agreement is subject to satisfaction of each of the following conditions. 3.1.1 Receipt by Lessor from Lessee on or prior to the Delivery Date of the following, each in form and substance reasonably satisfactory to Lessor: (i) Officer's Certificate: A certificate of an officer of Lessee substantially in the form of Schedule 6; (ii) Consents: Evidence that all governmental or other consents, licenses, approvals and authorizations required for the execution, delivery and performance by Lessee of the Transaction Documents have been obtained or made and are in full force and effect; (iii) Accounts: The balance sheet and other financial statements of Lessee for the financial year ended March 31 1998; (iv) Licences: Copies of Lessee's air transport license and air operator's certificate issued by the US Department of Transportation and FAA, respectively; (v) Transaction Documents: Originals of the Transaction Documents (duly executed by all parties other than Lessor); (vi) Insurances: Evidence that the Insurances are in place together with an insurance broker's letter of undertaking (in a form acceptable to Owner Trustee, Lessor and Lender) addressed to Owner Trustee, Lessor and Lender; (vii) Opinions: Legal opinions from: (a) Counsel to Lessee addressed to Owner Trustee, Lessor and Lender substantially in the form of Schedule 9 and otherwise in a form and substance acceptable to Owner Trustee, Lessor and Lender; and (b) Special FAA counsel to Lessee addressed to Owner Trustee, Lessor and Lender confirming that this Agreement and other appropriate documents have been filed with the FAA; (viii) Security: Receipt by Lessor of the Security Deposit and the Letter of Credit; (ix) Authority: A letter of authority substantially in the form of Schedule 7 duly executed by Lessee to such addressees as requested by Lessor; (x) Power of Attorney: A power of attorney in the form of Schedule 8 duly executed by Lessee; and (xi) Others: Any other documents, approvals, consents, certificates that Lessor or Lender may reasonably require. 3.1.2 The representations and warranties of Lessee under Clause 2.1 shall be correct and would be correct if repeated on Delivery. 3.1.3 No Default shall have occurred and be continuing. 3.2 Waiver The Lessor's Conditions Precedent are for the sole benefit of Lessor and may be waived or deferred by Lessor in whole or in part and with or without conditions. If any of the Conditions Precedent are not satisfied on the Delivery Date and Lessor (in its absolute discretion) nonetheless agrees to deliver the Aircraft to Lessee, Lessee shall ensure that such Conditions Precedent are fulfilled within fifteen (15) days after the Delivery Date, and Lessor may treat the failure of Lessee to do so as an Event of Default. 3.3 Lessee's Conditions Precedent Lessee's obligation to accept and lease the Aircraft from Lessor under this Agreement is subject to satisfaction of each of the following conditions. 3.3.1 The Aircraft is substantially and materially in the condition set forth in Schedule 4. 3.3.2 The receipt by Lessee from Lessor on or prior to the Delivery Date of the following, each in form and substance reasonably satisfactory to Lessee: (i) Evidence of Authority: Certified copies of evidence of appropriate action approving the execution, delivery and performance of the Transaction Documents by Lessor and of the person or persons authorized to sign the Transaction Documents on behalf of Lessor or any other documents to be delivered to Lessee by Lessor; (ii) Specimen signatures: A certificate of an officer of Lessor setting out the names and signatures of the persons authorized to sign on behalf of Lessor the Transaction Documents and any documents to be delivered by Lessor pursuant hereto contemporaneously herewith; and (iii) Transaction Documents: Originals of this Agreement and the Side Letter (duly executed by Lessor). 3.3.3 The representations and warranties of Lessor under Clause 2.2 shall be correct and would be correct if repeated on Delivery. 3.4 Waiver The Lessee's Conditions Precedent are for the sole benefit of Lessee and may be waived or deferred by Lessee in whole or in part and with or without conditions. 4. DELIVERY CONDITION AND INSPECTION OF AIRCRAFT 4.1 Lessee Selection of Aircraft IN ADDITION TO THE DISCLAIMERS IN CLAUSE 18, LESSEE REPRESENTS AND WARRANTS TO LESSOR THAT LESSEE HAS USED ITS OWN JUDGEMENT IN SELECTING THE AIRCRAFT AND HAS DONE SO BASED ON ITS SIZE, DESIGN AND TYPE. LESSEE ACKNOWLEDGES THAT LESSOR IS NEITHER A MANUFACTURER OF THE AIRCRAFT NOR A DEALER IN THE AIRCRAFT. 4.2 Condition at Delivery In addition to the disclaimers in Clause 18, Lessor has advised Lessee that at Delivery the Aircraft will be substantially and materially in the condition set forth in Schedule 4, provided that this confirmation expires as at Delivery. 4.3 Lessee Inspection and Acceptance Flight Lessor will arrange with Present Lessee for Lessee to perform such ground inspection of the Aircraft prior to the Scheduled Delivery Date as is reasonable. Lessor will procure that Lessee may have up to two (2) observers on board the Aircraft during the redeliver acceptance flight from the Present Lessee. Lessee acknowledges that, as between it and Lessor, 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. 4.4 Delivery of Aircraft to Lessee Subject to Lessee having complied with the conditions set out in Clause 4.2, or the waiver thereof by Lessor, Lessor will deliver the Aircraft to Lessee at the Delivery Location. Provided that the Aircraft is in the condition required by Clause 4.2, upon the tender of the Aircraft by Lessor to Lessee, Lessee will accept the Aircraft and the date of tender by Lessor to Lessee will be deemed to be the Delivery Date for all purposes under this Agreement, including, but not limited to, the commencement of Lessee's obligation to pay Rent hereunder. Lessee shall execute and deliver the Acceptance Certificate to Lessor on the Delivery Date. 4.5 Lessee's Failure to take Delivery If Lessee fails to (i) comply with the conditions contained in Clauses 3.1 so as to allow Delivery to take place upon tender or (ii) take delivery of the Aircraft when properly tendered for Delivery by Lessor in the condition required hereunder, Lessee will indemnify Lessor for all costs and expenses, directly or indirectly, incurred by Lessor as a result thereof. 5. LEASE TERM 5.1 Initial Lease Term and Base Lease Term Lessor shall lease the Aircraft to Lessee and Lessee shall take the Aircraft on lease in accordance with this Agreement for the duration of the Initial Lease Term and the Base Lease Term and, subject to Clause 5.2, the Extension Lease Term. 5.2 Extension Lease Option So long as no Default has occurred and is continuing hereunder both on the date of exercise of the option and from such date to the commencement date of the Extension Lease Term, Lessee will have the option (the Extension Lease Option) to extend the Base Lease Term under this Agreement for the period of the Extension Lease Term. In order to exercise such option, Lessee must give written notice to Lessor not less than nine (9) months prior to the Base Lease Expiry Date. 5.3 Expiry Date The Expiry Date shall be the Base Lease Expiry Date or, if Lessee has exercised the Lease Extension Option, the Extension Lease Expiry Date subject to the following provisions: (i) If Lessor, acting in accordance with Clause 3.2, notifies Lessee that it is terminating this Agreement, Lessee shall immediately redeliver the Aircraft in accordance with Clause 23 and the Expiry Date shall be the date upon which the Aircraft has been redelivered in accordance with the terms hereof and Lessee has complied with all its obligations hereunder; (ii) If Lessor, upon an Event of Default, exercises its rights in accordance with Clause 24.3 and terminates the leasing of the Aircraft to Lessee under this Agreement, Lessee shall immediately redeliver the Aircraft in accordance with Clause 23 and the Expiry Date shall be the date upon which the Aircraft has been redelivered in accordance with the terms hereof and Lessee has complied with all its obligations hereunder; (iii) If the Aircraft or the Airframe suffers a Total Loss prior to Delivery, the Expiry Date shall be the Total Loss Date; (iv) If the Aircraft or the Airframe suffers a Total Loss after Delivery, the Expiry Date shall be the date upon which Lessee has paid to Lessor the Agreed Value and all other sums due from Lessee to Lessor hereunder; (v) If Clause 23.4 becomes applicable, the Expiry Date shall be the date when any non-compliance referred to in Clause 23.4 has been fully rectified and Lessor shall have accepted redelivery of the Aircraft and Lessee shall have complied with all its obligations hereunder; and (vi) Under any other circumstances, the Expiry Date shall be the date upon which the Aircraft is redelivered in accordance with Clause 23 and the Return Acceptance Receipt has been duly executed and delivered by Lessor in accordance with that clause. 5.4 Survival of Certain Lessee Obligations 5.4.1 For the avoidance of doubt, in respect of Clauses 5.3 (i), (ii), (v) and (vi) the obligations of Lessee in respect of payment of Rent and all other obligations shall continue to be payable and valid in respect of those days prior to the redelivery to Lessor of the Aircraft in the condition required under Clause 23.1, and in respect of Clause 5.3 (iv) such obligations shall continue until payment of the Total Loss Proceeds. 5.4.2 The obligations of Lessee set forth in Clauses 12.5, 12.17, 19, 20 and 21.7 and any other obligations of Lessee that were due to have been performed but have not been fully performed prior to the termination of the Agreement pursuant to this Clause 5.4, will survive the Expiry Date. 5.5 Risk 5.5.1 Throughout the Lease Term and until redelivery of the Aircraft in the condition required under Clause 23.1, Lessee shall bear all risks of loss, theft, damage, confiscation and destruction of or to the Aircraft and every part thereof. 5.5.2 If the Aircraft is lost, stolen, confiscated, damaged, destroyed or otherwise rendered unfit and unavailable for use, Lessor 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 Lessor, its employees or agents. 6. DELIVERY 6.1 Location and Time of Delivery Lessor will deliver the Aircraft to Lessee at the Delivery Location on or about the Scheduled Delivery Date, which is the date when Present Lessee shall redeliver the Aircraft to Lessor. Lessor will notify Lessee from time to time and in a as timely manner as is possible of any changes to the Scheduled Delivery Date. 6.2 Delay or Failure in Delivery 6.2.1 Lessee and Lessor expressly acknowledge that Delivery of the Aircraft to Lessee is subject to and conditioned upon delivery of the Aircraft by Present Lessee to Lessor. Lessor will not be liable for any loss or expense, or any loss of profit, arising from any delay or failure in Delivery to Lessee unless such delay or failure arises as a direct consequence of the gross negligence or wilful default of Lessor, and in no event will Lessor be liable for any delay or failure that is caused by any failure, breach or delay on the part of Present Lessee. 6.2.2 If a delay, not caused by Lessor's or Lessee's breach of this Agreement, causes Delivery to be delayed beyond seventy-five (75) days after the Scheduled Delivery Date either party will have the right to terminate this Agreement by giving the other party written notice within ten (10) Business Days after such date and this Agreement will terminate on the date of receipt of such notice. In the event of such termination, neither party will have any further obligation or liability to the other under this Agreement, except that Lessor will repay to Lessee under this Agreement any prepaid Rent the amount of Security Deposit, if paid, and return the Letter of Credit. If either party does not give notice of termination within such ten (10) Business Days, both parties lose all rights to terminate under this Clause 6.2.2, unless otherwise agreed by the parties. 7. RENT 7.1 Initial Rent Dates Shall be the Initial Rent Dates (first and second) determined in accordance with Schedule 2. 7.2 Amount of Initial Rent The Initial Rent shall be the amounts set out as Initial Rent in Schedule 2. 7.3 Basic Rent Period The first Basic Rent Period shall commence on the day following the Initial Lease Expiry Date and each subsequent Basic Rent Period shall commence on the date succeeding the last day of the previous Rent Period within the Base Lease Term (and Extension Lease Term, if applicable). Each Basic Rent Period shall end on the date immediately preceding the numerically corresponding day one (1) month thereafter, except that: (i) if there is no such numerically corresponding day in that month, it shall end on the last day of that month; and (ii) if a Basic Rent Period would otherwise end after the Expiry Date, it shall end on the Expiry Date and the Rent for such Basic Rent Period will be prorated on the basis of a thirty (30) day month. 7.4 Time of Payment of Basic Rent Lessee shall pay Basic Rent to Lessor or to its order in advance on each Rent Date. Lessee shall initiate payment adequately in advance of each Rent Date to ensure that Lessor 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. 7.5 Amount of Basic Rent The Basic Rent payable on each Rent Date during the Base Lease Term and the Extension Lease Term, if applicable, shall be the amount set out as Basic Rent in Schedule 2. 7.6 Maintenance Reserves Lessee will pay to Lessor Maintenance Reserves in accordance with Clause 9 as Supplemental Rent, based on Lessee's use of the Aircraft during the Lease Term. 7.7 Supplemental Rent for Excess Cycles Lessee shall pay to Lessor Supplemental Rent based on Lessee's operation of the Aircraft in the amount and at the times set forth in Schedule 2. 8. SECURITY DEPOSIT 8.1 Security Deposit Lessee shall pay to Lessor a Security Deposit in the amount and at the times set forth in Schedule 2. The Security Deposit will serve as security for the performance by Lessee of its obligations under the Transaction Documents and the Other Agreements. Upon Lessor's receipt of the additional Security Deposit set forth in Clause 8.2 the initial deposit set forth in this Clause 8.1 will be credited to the payment of Rent payable during the Initial Lease Term and, if applicable, during the Base Lease Term. 8.2 Letter of Credit Lessee shall provide Lessor with an additional Security Deposit in the form of an irrevocable, assignable, standby letter of credit in favour of Lessor in the amount and issued by a major US Bank and in the form and substance acceptable by Lessor. The Letter of Credit will serve as security for the performance by Lessee of its obligations under the Transaction Documents and the Other Agreements. 8.3 Lessor's Rights 8.3.1 If an Event of Default shall have occurred and be continuing, in addition to all rights and remedies accorded to Lessor elsewhere in this Agreement or under applicable law in respect of the Security Deposit or Letter of Credit, Lessor may immediately, or at any time thereafter, without prior notice to Lessee, apply all or part of the Security Deposit or Letter of Credit in or towards the payment or discharge of any matured obligation owed by Lessee under the Transaction Documents or the Other Agreements, in such order as Lessor sees fit, and/or exercise any of the rights of set-off described in Clause 10.6 against all or part of the Security Deposit or Letter of Credit. 8.3.2 If Lessor exercises the rights described in Clause 8.3.1, Lessee shall, following a demand in writing from Lessor, immediately restore the Security Deposit (if applicable) or Letter of Credit to the level at which it stood immediately prior to such exercise. 8.3.3 Lessee acknowledges that Lessor may commingle all or any part of the Security Deposit with its general funds and that no interest shall accrue in favour of Lessee in respect of the Security Deposit. 8.3.4 Lessor's obligations in respect of return of the Security Deposit and Letter of Credit shall be those of debtor and not those of a trustee or other fiduciary. 9. Maintenance reserves 9.1 Amount Lessee shall during the Lease Term pay Maintenance Reserves to Lessor in the amount set forth in Schedule 2. 9.2 Payments 9.2.1 Lessee shall pay the Maintenance Reserves in respect of each calendar month during which the Maintenance 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. 9.2.2 Lessee acknowledges that Lessor may commingle all or any part of the Maintenance Reserves with its general funds and that no interest shall accrue in favour of Lessee in respect of the Maintenance Reserves. 9.2.3 Lessor's obligations to release the Maintenance Reserves as set out hereinafter shall be those of debtor and not those of a trustee or other fiduciary. 9.3 Adjustment The amount payable by Lessee to the Maintenance Reserves shall be subject to escalation in accordance with the terms set forth in Schedule 2. 9.4 Release of Maintenance Reserves 9.4.1 Airframe Maintenance Reserves Lessor will reimburse Lessee from the actual Airframe Maintenance Reserves, if paid by Lessee, provided that no Default has occurred and is continuing, for the actual cost of the structural inspection portion of completed scheduled "D" Checks 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 Clause 9.4.5 below. 9.4.2 Engine Maintenance Reserves Lessor will reimburse Lessee from the actual Engine Maintenance Reserves, if paid by Lessee, provided that no Default has occurred and is continuing, for the actual cost of completed Engine Performance Restoration Visits to the extent the work performed during such Engine Performance Restoration Visits 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 9.4.5 below. Reimbursement will be made up to the amount in the Engine Maintenance Reserve applicable to such Engine. 9.4.3 Landing Gear Maintenance Reserves Lessor will reimburse Lessee from the actual Landing Gear Maintenance Reserves, if paid by Lessee, provided that no Default has occurred and is continuing, 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 9.4.5. Reimbursement will be made up to the amount in the Landing Gear Maintenance Reserve at the time for the Landing Gear Overhaul. 9.4.4 APU Maintenance Reserves Lessor will reimburse Lessee from the actual APU Maintenance Reserves, if paid by Lessee, provided that no Default has occurred and is continuing, 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 9.4.5 Reimbursement will be made up to the amount in the APU Maintenance Reserve at the time for the APU performance restoration. 9.4.5 Exclusion Each of the following causes shall be excluded from this Clause 9.4: 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). 9.4.6 Remaining balance For the avoidance of doubt, Lessee has no right to payment of any amount from the Maintenance Reserves not paid in cash by Lessee and, subject to Clause 9.6, any remaining balances of the Maintenance Reserves on the Expiry Date, after application of the foregoing provisions, shall be retained by Lessor as its sole property. 9.5 Costs in Excess of Maintenance Reserves Lessee 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. 9.6 Reimbursement after Expiry Date Lessee may not submit any invoice for reimbursement from the Maintenance Reserves after the Expiry Date unless on or prior to such date Lessee has notified Lessor in writing that such outstanding invoice will be submitted after the Expiry Date and the anticipated amount of such invoice. So long as Lessee has provided such notice to Lessor, Lessee may then submit such outstanding invoice at any time within three (3) months after the Expiry Date; provided, however, if Lessee contests any such invoice and provides Lessor 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. Payments 10.1 Account for Lessee Payments All payments by Lessee to Lessor under this Agreement will be made for value on the due date in dollars and in same day funds to: Cooperatieve Centrale Raiffeisen-Boerenleenbank B.A.'s account ABA reference 021000238, account number 65830747 with Morgan Guaranty Trust Company of New York 23 Wall Street New York, New York United States of America Att. Mr Richard Polkerman, reference Corporate Finance Reference Maersk-Indigo or to such other account as Lessor may from time to time notify to Lessee in writing. 10.2 Default Interest If Lessee fails to pay any amount payable under this Agreement on the due date, Lessee shall pay to Lessor on demand from time to time interest both before and after judgement 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 Lessee to Lessor, at the Default Rate. All such interest will accrue on a day-to-day basis and be compounded weekly and calculated on the basis of a 360 day year. 10.3 Absolute Obligations This Agreement is a net lease and Lessee's obligations under this Agreement are absolute and unconditional, irrespective of any contingency or circumstance whatsoever, including (but not limited to): (i) any right of set-off, counterclaim, recoupment, reimbursement, defense or other right which Lessor or Lessee may have against the other or against any other person; (ii) 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 Lessee's use, operation or possession of the Aircraft; (iii) 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; (iv) any insolvency, bankruptcy, reorganisation, arrangement, readjustment of debt, dissolution, liquidation or similar proceedings by or against Lessor or Lessee or any other person; (v) any invalidity, illegality, unenforceability or lack of due authorization of, or other defect in, this Agreement; and (vi) 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 Lessee under this Agreement. 10.4 Application of Payments to Lessor If any sum paid to Lessor or recovered by Lessor in respect of the liabilities of Lessee under this Agreement is less than the amount then due, Lessor may apply that sum to amounts due under this Agreement in such proportions and order and generally in such manner as Lessor may determine. 10.5 Currency Indemnity If under any applicable law, whether as a result of judgement against Lessee or the liquidation of Lessee 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 the currency in which it is payable pursuant to this Agreement ("contractual currency"), Lessee shall, 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, as a separate and independent obligation, fully indemnify Lessor against the amount of the shortfall. For the purposes of this sub-Clause "rate of exchange" means the rate at which the Lessor is able on the relevant date to purchase the contractual currency in London or any other place Lessor may reasonably choose with the other currency. 10.6 Set-off Lessor may set-off any matured obligation owed by Lessee under the Transaction Documents or any Other Agreements against any obligation, whether or not matured, owed by Lessor to Lessee. 10.7 Time for Payments If any payment due under this Agreement other than a payment of Rent (see Clause 7.4) would otherwise be due on a day that is not a Business Day, it shall be due on the next succeeding Business Day. 11. Lessor's covenants 11.1 Quiet Enjoyment Provided no Default has occurred and is continuing, Lessor shall not, and no one claiming by or through the acts or omissions of Lessor or Owner Trustee shall, interfere with the quiet use, possession and enjoyment of the Aircraft by Lessee during the Lease Term. Lessor will cause Lender to confirm, substantially in the form of Schedule 11 or such other form as Lender may reasonably require, that it will not interfere with the quiet use, possession and enjoyment of the Aircraft by Lessee during the Lease Term, provided no Default has occurred and is continuing. 11.2 Lessor Obligations Following Expiry Date Within five (5) Business Days after: (i) redelivery of the Aircraft to Lessor in accordance with and in the condition required by this Agreement; or (ii) payment received by Lessor of the Agreed Value following a Total Loss after the Delivery Date; or in each case such later time as Lessor is reasonably satisfied that Lessee has irrevocably paid to Lessor all amounts that may then be outstanding or become payable under the Transaction Documents and the Other Agreements, Lessor shall (provided that no Default has occurred and is continuing): (a) pay to Lessee an amount equal to the balance of the Security Deposit, if any, paid by Lessee under this Agreement and then held by Lessor; and (b) pay to Lessee the amount of any Rent received in respect of any period falling after the Redelivery Date or the date of payment of the Agreed Value, as the case may be; provided, however, if there is a dispute between Lessor and Lessee as to the amount due to Lessee, Lessor shall nevertheless pay to Lessee such amount as in Lessor's reasonable judgement is not in dispute or is in excess of the amount Lessor's claim is due; and (c) return the Letter of Credit. 12. lessee's covenants 12.1 Duration Lessee 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 Lessee. 12.2 Information 12.2.1 Lessee shall notify Lessor 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. 12.2.2 Lessee shall furnish to Lessor: (i) as soon as available, but not in any event later than ninety (90) days after the last day of each financial year of Lessee, 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 Lessee, 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 Lessor 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 end of each month a Monthly Report in the form of Schedule 10, detailed technical reports following completion of each "C" Check and other information reasonably requested by Lessor concerning the location, condition, use and operation of the Aircraft; and (v) such other information and documents regarding Lessee's business and financial condition as Lessor may from time to time reasonably request. 12.2.3 Lessee shall promptly notify Lessor in writing: (i) 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; (ii) of any suit, arbitration or proceeding before any court, administrative agency or Government Entity which, if adversely determined, would materially adversely affect Lessee's financial condition, affairs, operations or its ability to perform under this Agreement; (iii) 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; (iv) 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; (v) 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 Lessor or to a loss or liability in excess of the Damage Notification Threshold; and (vi) of any other event in respect of the Aircraft which in the reasonable opinion of the Lessee might reasonably be expected to involve the Lessor in any loss or liability. (vii) promptly notify Lessor in the event Lessee 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 Lessee will not be year 2000 compliant (as described in Clause 2.1 (xxii)) on a timely basis, except to the extent that such failure could not reasonably be expected to have a materially adverse effect. 12.3 Lessor Visits Lessor may visit, upon reasonable notice, Lessee's premises to discuss Lessee's general affairs and finances with Lessee's principal officers. 12.4 Periodic Estoppel Certificates Lessee will, within ten (10) Business Days after receipt of written notice from Lessor (which will not occur more often than four (4) times in any calendar year), execute, acknowledge and deliver to Lessor a written statement as to each of the following: (i) 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; (ii) acknowledging that there are not, to Lessee's knowledge, any uncured defaults on the part of Lessor hereunder, or specifying such defaults if there are any claimed by Lessee; and (iii) acknowledging that Lessee has no claims against Lessor by reason of the condition of the Aircraft as of the Delivery Date or arising subsequent thereto to the date of such statement. If Lessee does not deliver such statement within such time-limit, the statements set forth in this Clause 12.4 will be deemed correct and binding upon Lessee. 12.5 Airport and Navigation Charges 12.5.1 Lessee 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, and will indemnify and holdharmless Lessor in respect of the same. This indemnity will continue in full force and effect notwithstanding the termination or expiration of this Agreement. Lessee 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. 12.5.2 If requested by Lessor, Lessee will provide Lessor with a list of the airports to which the Aircraft or Lessee's other aircraft are regularly operated. Lessee hereby authorises any Aviation Authority, any airport or any other creditor claiming rights on the Aircraft or Lessee's other aircraft to confirm the status of Lessee's payments to such creditor for the Aircraft and its other aircraft, as and when requested by Lessor. To evidence this authority, Lessee will at Lessor's request execute one or more authorities substantially in the form of Schedule 7. 12.6 Operation of Aircraft Lessee 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, Lessee 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 Lessee 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 Lessor or its interest in the Aircraft. In particular, Lessee 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 Lessee's own employees and for experimental flights; provided, however, prior to any such flights Lessee shall notify Lessor and shall deliver to Lessor evidence that insurance coverage is in effect for such flights. 12.7 Areas of Operation Lessee 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 the Insurances or (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. 12.8 Non-Prejudicial Action Lessee shall not do anything that, or omit to do anything the omission of which, prejudices any right Lessor may have against either the Manufacturer or the manufacturer or supplier of any part of the Aircraft in respect of the Aircraft or any part thereof. 12.9 Non-Representation of Lessor Lessee shall not at any time represent Lessor, Owner Trustee or Lender as carrying goods or passengers in the Aircraft or as being in any way connected or associated with any operation or carriage being undertaken by Lessee or as having any operational interest in or responsibility for the Aircraft. 12.10 Inspection Lessor may at all reasonable times on reasonable notice inspect, or appoint an inspector (including Lender) 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 Lessee 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 Lessee as an airline. Lessee agrees to reimburse the out-of-pocket expenses of Lessor 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 Lessee shall in all cases pay or reimburse Lessor for the costs of such inspection or survey if Lessor is required by law or change of law to make an inspection or survey. Lessor 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. Lessee shall provide Lessor with such information regarding the present and anticipated location and regarding the condition of the Aircraft as Lessor may reasonably require. For the purposes mentioned in this Clause 12.10 and subject to the limitations herein contained, Lessor and any inspector may gain access to the Aircraft, including the Aircraft Documents. Lessee 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 Lessor, Lessor may at the cost and expense of Lessee, itself arrange for such repairs to be carried out. Lessee shall on demand reimburse the costs and expenses incurred by Lessor in effecting such repairs. 12.11 Registration 12.11.1 Lessee shall at its own expense procure 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 Lender (iii) Lessor's interest, by filing the Lease Supplement according to Schedule 14; (iv) Lessee as operator of the Aircraft and maintain or provide the maintenance of such registration throughout the Lease Term. Lessee 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. Lessee will not take any action or omit to take any action that will invalidate any such registration or recordation. Lessee shall provide Lessor as soon as available with evidence of such registration. 12.11.2 Lessee shall at its own expense provide that at all times during the Lease Term, the Aircraft possesses a valid current FAA Certificate of Airworthiness, 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. 12.12 Name Plates On the Delivery Date or as soon thereafter as is reasonably practicable, Lessee 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 Lessor stating the Aircraft type, manufacturer's serial number and current registration letters of the Aircraft and denoting the name of (i) Lessor as lessor (ii) Owner Trustee as owner trustee and (iii) Lender as mortgagee. Except as above provided Lessee 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 Lessee (or any person to which possession of the Airframe or any Engine is delivered or transferred in accordance with Clauses 13 and 14) from placing its customary colours and insignia on the Airframe. 12.13 Geneva Convention Whenever the State of Registration is a signatory state that has ratified the Geneva Convention, Lessee 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, Lessor and Lender to the Aircraft by every other signatory state that has ratified the Geneva Convention. 12.14 Merger and Shareholding Lessee 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 federal state thereof, if applicable, and the new entity has executed and delivered to Lessor an agreement in form and substance acceptable to Lessor 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 Lessee and the creditworthiness of such new entity does not, in Lessor'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. Lessee will give Lessor prior written notice of any such proposed sale or change in operation together with a non-refundable processing fee in the amount as set forth in Schedule 2 and a request of Lessor's approval. Lessee shall reimburse Lessor within ten (10) days of Lessor's invoice for all out-of-pocket expenses incurred by Lessor as a result of such proposed merger whether or not Lessor approves and whether or not it actually occurs. 12.15 Ownership Title to the Aircraft will be and remain vested in Owner Trustee. Lessee will have no right, title or interest in the Aircraft except as provided for in this Agreement. Lessee 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. 12.16 Maintenance of Principal Business Place Lessee 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 Clause 27. Lessee shall hold and preserve such records and files concerning the Transaction Documents and shall permit representatives of Lessor at any time during normal business hours to inspect and make abstracts from such records and files. Lessee shall give Lessor at least thirty (30) days prior written notice of any change in Lessee's principal place of business and chief executive office, and shall co-operate with Lessor in executing and delivering all such documents as Lessor may reasonably request which are required or desirable as a result of such change of principal place of business of Lessee. 12.17 Maintenance of Flight Records Lessee 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 27 and shall hold and preserve such records at such address and permit inspection of such records by the FAA, Lessor, Owner Trustee and Lender. Lessee shall give Lessor at least thirty (30) days prior written notice of change in location of the flight records of the Aircraft. 13. Possession 13.1 No Relinquishment of Possession Lessee 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) Lessee continues to be fully responsible to Lessor for all its obligations hereunder and (iii) Lessee in advance, obtains written acknowledgement(s) of 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 Lessor, Lessee may: 13.1.1 subject any Engine to normal interchange or pooling agreements or arrangements in each case customary in the airline industry and entered into by Lessee in the ordinary course of its business with a commercial air operator which is approved by Lessor in writing and on terms and conditions that Lessor 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, Lessee shall forthwith substitute, or procure the substitution of, a Replacement Engine therefor in accordance with and which satisfies the conditions of Clause 16.6; 13.1.2 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 16.4 and 16.5; 13.1.3 install an Engine on an airframe owned by Lessee and operated by and under the operating control of flight crew engaged by Lessee 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; 13.1.4 install an Engine on an airframe operated by Lessee that is owned by or leased or subleased to Lessee 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 13.1.3 and (ii) Lessee 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 Lessor (it being understood that an agreement from such sublessor or secured party to substantially the same effect as the agreement of Lessor set forth in the final sentence of Clause 13.4 shall be deemed to be satisfactory to Lessor), whereby such Lessor 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; 13.1.5 install an Engine on an airframe owned by Lessee, leased or subleased to Lessee, or purchased by Lessee, subject to any security agreement under circumstances where neither Clause 13.1.1 nor 13.1.2 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 Lessee and in such event Lessee shall, as promptly as possible and in any event within fifteen (15) days substitute a Replacement Engine therefor in accordance with Clause 16.6 and which satisfies the conditions specified in Clause 16.6; 13.1.6 sublease the Aircraft or Airframe to any person provided that the Aircraft or Airframe is operated by, and remains throughout the term of such sublease under the operational control of, flight crew engaged by Lessee, 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 the Expiry Date; (iv) the relevant sublessee shall acknowledge that its rights are subordinate to Lessor's rights under this Agreement and the rights of Lender under any finance document or security document entered into between Owner Trustee or Lessor in relation to the Aircraft; 13.1.7 sublease the Aircraft or Airframe to any wholly-owned subsidiary of Lessee on terms that the Aircraft or Airframe is not operated by, and does not remain under the operational control of, flight crew engaged by Lessee provided that the following conditions are satisfied in relation to any such sublease hereunder: (i) no Default has occurred and is continuing; (ii) the proposed sublessee and the proposed form of the sublease is approved by Lessor and Lender in writing, which approval will not be unreasonably withheld or delayed provided all the following conditions set out in this Clause 13.1.7 are satisfied; (iii) 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 Lessor and/or Owner Trustee and/or Lender and the sublessee shall acknowledge that its rights are subordinate to Owner Trustee's, Lessor's and Lender's rights under this Agreement (provided that the sublease shall not permit further subleasing); (iv) the Insurances are in full force and effect in accordance with the terms of this Agreement and, if the sublessee is to maintain such insurances during the term of such sublease, it shall have furnished to Lessor all such documents, evidence and information relating to such insurances which Lessee is required to furnish or cause to be provided to Lessor under this Agreement; (v) if the Aviation Authority for the duration of the sublease is to be other than the FAA, Lessor and Lender approves the change of registration and Lessor receives (x) an opinion of counsel in the State of Registration in form and substance reasonably satisfactory to Lessor and the Lender which opinion must, at least, address the satisfactory recognition of Owner Trustee's ownership of, and Lender's Security Interest in the Aircraft and (y) evidence that all actions recommended in such opinion have been or will be duly taken. 13.2 Copy of Sublease No less than three (3) Business Days after the execution of any sublease entered into by Lessee under Clause 13.1.6 or Clause 13.1.7 Lessee shall provide Lessor with a copy of such executed sublease. 13.3 Lessee Primarily Liable Notwithstanding anything contained in Clause 13.1, Lessee shall remain primarily liable hereunder for the performance of all of the terms of this Agreement to the same extent as if such transfer or sublease had not occurred. No interchange agreement, sublease or other relinquishment of possession of the Airframe or any Engine permitted by this Clause 13 shall in any way discharge or diminish any of Lessee's obligations hereunder. 13.4 Recognition of Rights If Lessee shall have obtained from the sublessor or secured party of any engine subleased to Lessee or owned by Lessee subject to any Security Interest, a written agreement complying with the terms of sub-paragraph (ii) of Clause 13.1.4, Lessor hereby agrees for the benefit of such sublessor or secured party that Lessor 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 Lessor shall, at the request of Lessee, confirm such agreement in writing for any such sublessor or secured party. 14. Security Interests 14.1 Title Lessee shall not do, or permit to be done, any act, which might reasonably be expected to jeopardise the interest of Owner Trustee, Lessor or Lender. Lessee shall make clear to all third parties that legal title to the Aircraft is owned by Owner Trustee or the relevant title holder advised by Owner Trustee. 14.2 No Security Interests Lessee shall not create, incur or permit to subsist over the Aircraft or any part thereof or over the Transaction Documents any Security Interest other than Permitted Liens. 14.3 Base of Aircraft Lessee shall not keep or habitually base the Aircraft or any part thereof outside the State of Registration for any continuous period exceeding ten (10) days. 14.4 Notice to Lessor Lessee shall notify Lessor: (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 Lessor, of the location of the Airframe and each Engine including an Engine that is not for the time being installed on the Airframe. 14.5 Procure Release Lessee 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. 15. maintenance and repair 15.1 General Obligations 15.1.1 Lessee shall, or procure that any sublessee will, at its own expense at all times during the Lease Term: (i) maintain, service, repair, Overhaul and test the Aircraft and all Parts thereon and equipment thereon and the Engines and all Parts and equipment therein (whether or not such Parts and equipment are the property of Lessor), or procure the same, in accordance with the applicable requirements of the FAA 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 FAA's requirements, in which case the FAA'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 (a) the airworthiness certification of the Aircraft with the Aviation Authority to be maintained in good standing at all times during the Lease Term (b) the issuance of a standard certificate of airworthiness for transport category aircraft issued by the FAA in accordance FAR Part 21 and, (c) the Aircraft to be placed on the operations specifications of a U.S. airline in accordance with Part 121 of the FAR's; (ii) maintain, service, repair, Overhaul and test the Aircraft and the Engines, in the same manner and with the same care as used by Lessee with respect to similar aircraft and engines operated by Lessee and without in any way adversely discriminating against the Aircraft and the Engines; and (iii) 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 Lessor to examine such records, logs and other materials at any reasonable time upon reasonable notice. 15.1.2 The performer of such maintenance and repairs as stated in this Clause 15.1 shall be approved by the Lessor with such approval not to be unreasonably withheld. 15.2 Specific Obligations Without limiting Clause 15.1, Lessee agrees that the performance by Lessee or any sublessee of such maintenance and repairs as stated therein 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 Lessee schedules to adopt within the Lease Term for the major part of its fleet of aircraft of the same make as the Aircraft. It is the intent of the parties that the Aircraft will not be discriminated from the rest of Lessee's fleet in service bulletin compliance (including method of compliance) or other maintenance matters. Lessee 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 CPCP 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 Documents. 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; and (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. 16. replacement of parts 16.1 Replacement of Parts Lessee 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 16.4 or 16.5 In addition, Lessee 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 Lessee shall, except as otherwise provided in Clause 16.7, 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 16.7, be in as good operating condition as, and shall have a value, age, configuration and utility at least equal to, the replaced Parts, 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 Lessee. 16.2 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 Lessee, 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 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. 16.3 Pooling of Parts Any Part removed from the Airframe or any Engine as provided in Clause 16.1 or 16.2 may be subjected to a normal pooling arrangement customary in the airline industry entered into in the ordinary course of Lessee'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 16.1 and 16.2 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 Lessee, 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 16.1 and 16.2 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 16) 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 16.1 and 16.2 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. 16.4 Alterations Lessee 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 or recommended service bulletins of the Manufacturer. In addition, Lessee 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 Lessee may deem desirable in the proper conduct of its business, including, removal of Parts (for purposes of this Clause 16.4, Obsolete Parts) which Lessee 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, Lender nor Lessor shall be required under any circumstances to pay directly for any alteration, modification or addition to the Aircraft or to reimburse Lessee for the cost thereof. Any other alterations other than those permitted according to Clause 16.5 require Lessor's prior written consent, which consent shall not be unreasonably withheld or delayed. 16.5 Removal of Parts Notwithstanding the foregoing, so long as no Default shall have occurred and be continuing, Lessee 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 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 16.4 or 16.5, 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 Lessee, free and clear of all rights of Owner Trustee, Lender and Lessor 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. 16.6 Substitution of Engine In addition to its rights under Clause 13, Lessee shall have the right at its option at any time, on at least thirty (30) days prior written notice to Owner Trustee, Lender and Lessor, to substitute or procure the substitution of an engine of the same make and model as the Engine specified in Schedule 1 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 substitute engine, the substitution of which is in accordance with the provisions of this Clause 16.6 and which complies with the requirements of this Clause 16.6 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 Lessor, assuming that such Engine was in the condition and repair required to be maintained by the terms of this Agreement and Lessee shall deliver such documents including a bill of sale and opinion of counsel as to title and recordation with the FAA, as Lessor 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: (i) title to the replaced Engine shall thereupon vest in Lessee free and clear of all rights of Owner Trustee, Lender and Lessor, and the replaced Engine shall cease to be subject to this Agreement and shall no longer be deemed an Engine hereunder; and (ii) 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. 16.7 Temporary Removal of Parts Lessee shall be entitled, so long as no Default shall have occurred which has not been remedied or waived to the reasonable satisfaction of Lessor, to substitute, replace or renew any Part with a part that does not satisfy the requirements of Clause 16.1 or 16.2 provided that: (i) there shall not have been available to Lessee, 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 16.1 and 16.2; (ii) it would have resulted in an unreasonable disruption of the operation of the Aircraft or the business of Lessee as an airline to have grounded the Aircraft until such time as a substitute or replacement part complying with the requirements of Clause 16.1 and 16.2 became available for installation in or on the Aircraft; (iii) Lessee shall have notified Lessor 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; and (iv) 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) Lessee shall remove any such part not complying with the requirements of Clause 16.1 and 16.2 and replace or substitute the same with a Part complying with such requirements. 16.8 Parts Incapable of Transfer If any replacement Part is incapable of becoming the property of Owner Trustee free of all Security Interests (other than Permitted Liens) as required by Clause 16 the part which it has replaced shall, unless Lessor shall otherwise agree in writing, be kept and maintained by the Lessee or any sublessee, as the case may be, until the Expiry Date and be placed on the Aircraft in good working order before the Aircraft is redelivered to the Lessor on the Expiry Date. 17. Manufacturer's warranties 17.1 Authorization 17.1.1 With effect from Delivery, Lessor authorises Lessee to exercise such rights as Lessor 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 or supplier subject to Lessee notifying Lessor in writing of any warranty claim of a material nature and keeping Lessor continuously informed of the development of such warranty claim. To the extent that the same may not be available to Lessee, Lessor agrees to, at the sole cost and expense of Lessee, enforce such rights as Lessor may have with respect thereto for the benefit of Lessee. Lessor shall also have the right, rather than enforcing or making such claim on behalf of Lessee under such warranties, to appoint Lessee as its agent for such purpose, and in such instance, Lessee 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. Lessee shall not be entitled to exercise its authorisation hereunder while a Default is continuing (during which time all such rights shall revert to Lessor and Lessor hereby agrees to exercise and enforce such rights during such period). 17.1.2 Lessee shall give Lessor prompt written notice of any warranty claim that is settled with Lessee 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 Lessor otherwise consents in writing. Any cash payments to Lessee in respect of warranty claims that (either with Lessor'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 Lessee 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 Lessor's account. 17.2 Proceeds So long as no Default has occurred and is continuing, Lessor agrees, subject to Clause 17.1, to co-operate with Lessee to cause any proceeds from any warranty referred to in Clause 17.1 to be paid directly to Lessee, and, if any such proceeds are nonetheless paid to Lessor, Lessor agrees to remit promptly such proceeds to Lessee. However, while a Default is continuing, Lessor may immediately: (i) retain for its own account any such proceeds previously paid to Lessor which would have been remitted to Lessee under this Clause 17.2 in the absence of such Default or Event of Default; and (ii) cause any proceeds of any pending claims to be paid to Lessor, rather than to Lessee. Once the Default is cured, Lessor shall reimburse Lessee to the extent that it would have been obliged to under this Clause 17.2 had no such Default occurred. 17.3 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 Lessee, Lessee will: (i) apply the proceeds of any claim under such agreement in accordance with Clause 17.2; and (ii) 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 Lessor. 17.4 No Operation Contrary to Warranties Lessee shall not operate the Aircraft contrary to the terms of any warranty referred to in Clause 17.1.1, provided that Lessor has advised Lessee of the terms of such warranties. 18. Disclaimers 18.1 General LESSOR AND LESSEE AGREE THAT THE DISCLAIMERS, WAIVERS AND CONFIRMATIONS SET FORTH IN CLAUSES 18.2 THROUGH 18.11 BELOW SHALL APPLY AS BETWEEN LESSOR AND LESSEE AT ALL TIMES DURING THE LEASE TERM WITH EFFECT FROM LESSEE'S ACCEPTANCE OF THE AIRCRAFT BY EXECUTION OF THE ACCEPTANCE CERTIFICATE, WHICH SHALL BE CONCLUSIVE EVIDENCE THAT LESSEE 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 LESSEE (SAVE AS EXPRESSLY NOTED ON THE ACCEPTANCE CERTIFICATE) AND ARE IN SUITABLE CONDITION FOR DELIVERY TO AND ACCEPTANCE BY LESSEE. 18.2 As Is, Where Is PRIOR TO DELIVERY HEREUNDER, LESSEE HAD THE OPPORTUNITY TO INSPECT THE AIRCRAFT, ACCORDINGLY, LESSEE UNCONDITIONALLY ACKNOWLEDGES AND AGREES THAT NEITHER OWNER TRUSTEE, LENDER OR LESSOR, NOR ANY OF THEIR RESPECTIVE OFFICERS, DIRECTORS, EMPLOYEES 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 DOCUMENTS), DESIGN, WORKMANSHIP, MATERIALS, MANUFACTURE, CONSTRUCTION, OPERATION, STATE, MERCHANTABILITY, PERFORMANCE, FITNESS FOR ANY PARTICULAR USE OR PURPOSE (INCLUDING THE ABILITY TO OPERATE OR REGISTER THE AIRCRAFT OR USE THE AIRCRAFT DOCUMENTS 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, (iii) ANY IMPLIED WARRANTY ARISING FROM COURSE OF PERFORMANCE, COURSE OF DEALING OR USAGE OF TRADE, OR (iv) 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. 18.3 Waiver of Warranty of Description LESSEE 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 LENDER OR LESSOR 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, LENDER OR LESSOR FOR DAMAGES OR RELIEF ARISING OUT OF THE FAILURE OF THE AIRCRAFT TO CONFORM TO SUCH DESCRIPTIONS OR SPECIFICATIONS, NOTWITHSTANDING ANY ASSURANCES FROM LESSOR, THE DIFFICULTY OF DISCOVERING ANY DEFECT OR ITS ASSUMPTION THAT ANY NONCONFORMITY WOULD BE CURED. 18.4 Lessee Acknowledgement LESSEE AGREES THAT IT IS LEASING THE AIRCRAFT "AS IS, WHERE IS AND WITH ALL FAULTS". 18.5 Lessee Waiver Lessee hereby waives as between itself and Lessor and agrees not to seek to establish or enforce any rights and remedies, express or implied (whether statutory or otherwise) against Lessor, Owner Trustee, Lender or the Aircraft relating to any of the matters mentioned in Clause 18.1 through 18.6 and the leasing thereof by Lessor to Lessee. 18.6 Lessee Examination of Aircraft DELIVERY BY LESSEE TO LESSOR OF THE ACCEPTANCE CERTIFICATE IS CONCLUSIVE PROOF AS BETWEEN LESSOR AND LESSEE THAT LESSEE'S TECHNICAL EXPERTS HAD EXAMINED AND INVESTIGATED THE AIRCRAFT, ENGINES AND EACH PART THEREOF AND DETERMINED THAT (i) EACH WAS AIRWORTHY AND IN GOOD WORKING ORDER AND REPAIR AND (ii) THE AIRCRAFT, ENGINES, EACH PART THEREOF AND THE AIRCRAFT DOCUMENTS WERE WITHOUT DEFECT (WHETHER OR NOT DISCOVERABLE AT DELIVERY) AND IN EVERY WAY SATISFACTORY TO LESSEE. 18.7 No Lessor Liability for Losses Lessee agrees that Lessor will not be liable to Lessee, any sublessee or any person, whether in contract, 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 Lessor or Owner Trustee or their agents or representatives excepting only Lessor's or Owner Trustee or their respective agents' or representatives' gross negligence or wilful misconduct. 18.8 Exclusion Neither Owner Trustee, Lender, nor Lessor shall have any obligation or liability whatsoever to Lessee, any sublessee or any other person whether arising in contract, tort or otherwise and whether arising by reference to negligence or strict liability of Lessor, Owner Trustee or Lender or otherwise for: (i) 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; (ii) the use, operation or performance of the Aircraft or any risks relating thereto; (iii) any interruption of service, loss of business or anticipated profits or any other direct, indirect or consequential loss or damage; or (iv) 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. 18.9 Waiver Lessee hereby waives, as between itself and Owner Trustee, Lender and Lessor, all its rights in respect of any warranty or representation, express or implied, on the part of Owner Trustee, Lender or Lessor and all claims against Owner Trustee, Lender or Lessor howsoever and whenever arising at any time in respect of or out of the matters referred to in Clause 18. 18.10 No Waiver Nothing in this Clause 18 or elsewhere in this Agreement will be deemed to be an waiver by Lessee of any rights it may have against the Manufacturer, the Engine Manufacturer or any other person. 18.11 Confirmation Lessee confirms that the foregoing provisions of this Clause 18 and the following provisions in Clause 19 have been taken into account by both parties in negotiating the rent and other amounts payable under this Agreement. 19. Indemnities 19.1 General Indemnity Lessee 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: (i) 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 not such Losses may be attributable to any defect in the Aircraft, any Engine or any Part or to their respective design, testing or use or otherwise, and regardless of when the same arises (but excluding any injuries or claims which arise prior to Delivery) 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); (ii) that may at any time be suffered or incurred as a consequence of any breach of the Transaction Documents by the Lessee or by misrepresentation of or breach of warranty by Lessee; and (iii) 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 Lessee, or anyone acting by or through Lessee, of any obligation of confidentiality owed to any person in respect of any of the matters referred to in this Clause 19.1 (iii), 19.2 Exception to General Indemnity The indemnity provided for in Clause 19.1 will not extend to 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 Lessor Taxes, a Lessor Lien or a wilful breach by Lessor of its obligations under any of the Transaction Documents; or (iii) constitutes a Tax or liability for Taxes. 19.3 Time of Payment Lessee will pay an Indemnitee for Losses within ten (10) Business Days after receipt of a written demand therefor from such Indemnitee accompanied by a written statement describing in reasonable detail the basis for such indemnity. 19.4 Survival of General Indemnity Notwithstanding anything in this Agreement to the contrary, the provisions of Clause 19.1 shall survive the Expiry Date for two (2) years and continue in full force and effect notwithstanding any breach by Lessor or Lessee of the terms of this Agreement, the termination of the lease of the Aircraft to Lessee under this Agreement or the repudiation by Lessor or Lessee of this Agreement. 19.5 Notice to Lessee Lessor shall promptly after obtaining actual knowledge thereof notify the Lessee of any claim as to which indemnification is sought; provided that a failure to so notify will not diminish or relieve Lessee of any obligations hereunder, unless such failure materially adversely affects Lessee's defence of such claim and directly results in a material increase in liability of the Lessee in respect of such claim or prevents it from materially reducing liability therefor, in which case the Lessee shall not be required to indemnify such Indemnitee for the amount by which such liability was increased or not reduced. 20. Taxation 20.1 Gross-up 20.1.1 All payments by Lessee under or in connection with this Agreement shall be made in full without any set-off or counterclaim, free and clear of and without deduction or withholding for or on account of all Taxes, except Lessor Taxes, unless Lessee is required by law to make any such deduction or withholding. 20.1.2 If any Taxes, except Lessor Taxes, are required to be deducted or withheld from any amount payable hereunder, Lessee shall pay to Lessor 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 the net payment received by Lessor on the date of such payment, after deduction or withholding for all such Taxes, will be equal to the amount that Lessor would have received if such Taxes had not been deducted or withheld. 20.1.3 If any payment is made by Lessee under Clause 19.2 and Lessor 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 Lessor in respect of or calculated with reference to the deduction or withholding giving rise to such payment, Lessor 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 Lessor 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 Lessee such amount as Lessor shall reasonably have determined to be attributable to the relevant deduction or withholding. 20.2 Tax Indemnity 20.2.1 Lessee shall indemnify Lessor on demand against all Taxes (other than Lessor Taxes) levied or imposed against or upon Lessor, Lessee or the Aircraft directly or indirectly in connection with the importation, exportation, registration, ownership, leasing, subleasing, 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 Lessor Lien; or (ii) arises in respect of the period ending prior to Delivery and commencing immediately after the Expiry Date; or (iii) is directly attributable to Lessor's gross negligence or wilful misconduct; or (iv) relates to any deduction or withholding on any payment to be made to Lessor that is covered by Clause 20.1; or (v) imposed as a direct result of the sale, transfer or assignment or other disposition of the Aircraft or this Agreement by Lessor, other than by Lessor to Lessee, or by any party claiming by or through Lessor and except (a) 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 (b) any Taxes imposed by the State of Registration. 20.2.2 If Lessor becomes aware of any claim against Lessor for any Loss that Lessee is required to pay or indemnify against pursuant to this Clause 20.2, Lessor shall as soon as is reasonably practicable notify Lessee in writing of such claim. If requested in writing by Lessee that it wishes Lessor to contest such claim, Lessor will consult with Lessee with a view to determining whether there are grounds for contesting such claim. Lessor will consider in good faith any representation made by Lessee in this respect. Lessor 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 Lessor shall bring such proceedings in the event that tax counsel reasonably acceptable to Lessor in the relevant jurisdiction provides Lessor 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 Lessee. Further Lessor 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 20.2 shall be paid to or on behalf of Lessor or, if so directed by Lessor, directly to the relevant taxing authority, promptly after receipt by Lessee of a written demand therefor. 20.3 Value Added Taxes The Rent and other amounts payable by Lessee 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, Lessee will pay all such tax or duty and indemnify Lessor against any claims for the same and any related claims, losses or liabilities. 20.4 Taxation of Indemnity Payments 20.4.1 Notwithstanding any other provision of this Agreement, if and to the extent that any sums payable to any Indemnitee by Lessee 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) Lessee 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. 20.4.2 If and to the extent that any sums constituting (directly or indirectly) an indemnity to an Indemnitee but paid by Lessee to any person other than such Indemnitee are treated as taxable in the hands of such Indemnitee, Lessee 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. 20.5 Benefit of Indemnities All rights expressed to be granted to each Indemnitee (other than Lessor) under this Agreement are given to Lessor on behalf of that Indemnitee. 20.6 Lessor Indemnification Without prejudice to Clause 20.5, Lessor shall be entitled (but not obliged) to indemnify Indemnitees (other than Lessor) on terms equivalent to the indemnities given by Lessee under this Agreement and the obligations of Lessee to Lessor shall extend to reimbursement of Lessor of any amount properly paid by Lessor to such other Indemnitee provided always that nothing in this Clause 20.6 shall operate to increase the obligations or liabilities of Lessee. 20.7 Survival of Tax Indemnities Notwithstanding anything in this Agreement to the contrary, the provisions of Clause 19 shall survive the Expiry Date and continue in full force and effect notwithstanding any breach by Lessor or Lessee of the terms of this Agreement, the termination of the lease of the Aircraft to Lessee under this Agreement or the repudiation by Lessor or Lessee of this Agreement. 20.8 Mitigation and Co-operation In any case where Lessee 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, Lessor shall at the written request of Lessee, without limiting, reducing or otherwise qualifying the rights of Lessor and the Security Interest of Lender, consult with Lessee in good faith as to such steps which Lessor and Lessee can mutually accept and agree upon in order to mitigate or avoid the effects of such circumstances. In case Lessor and Lessee can not agree within a period of thirty (30) days after Lessee has made a written request, Lessor shall not have any further obligation towards Lessee. 20.9 Furnishing Forms Lessor agrees to furnish, and to procure that any other Indemnitee furnishes to Lessee, or to such other person as Lessee may designate, at Lessee's 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 Lessee may be required to indemnify against hereunder, unless such Indemnitee reasonable determines that furnishing such forms may have an adverse effect on either the business, tax status, tax liability or operations of such Indemnitee. 21. Insurance 21.1 Insurances 21.1.1 Lessee shall, at its own expense, maintain in full force and effect during the Lease Term insurances in respect of the Aircraft that, subject to this Clause 21, comply with the requirements set out in Schedule 3 (the Insurances). 21.1.2 The Insurances shall be effected through brokers of international standing and repute in the London or New York aviation insurance markets as may be approved by Lessor, such approval not to be unreasonably withheld. 21.1.3 For the avoidance of doubt it is understood that the Insurances to be provided for by Lessee are not Lessor's sole remedy and protection under this Agreement as the obligations of Lessee are in excess of the requirements of the Insurances. 21.2 Reinsurance Any reinsurance will be maintained with reinsurers and brokers approved by Lessor, such approval not to be unreasonably withheld. Such reinsurance will contain each of the following terms and will in all other respects (including amount) be satisfactory to Lessor: (i) The same terms as the original insurance; (ii) A cut-through and assignment clause satisfactory to Lessor; (iii) Payment will be made notwithstanding (a) any bankruptcy, insolvency, liquidation or dissolution of any of the original insurers and/or (b) that the original insurers have made no payment under the original insurance policies. 21.3 Requirements The current requirements as to the Insurances are as specified in this Clause 21 and in Schedule 3. Lessor and 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 international airline practice, and (b) the interests of Lessor and Lender continue to be protected. Lessee shall procure that such changes are effected. 21.4 Insurance Covenants Lessee shall: (i) 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; (ii) comply with the terms and conditions of each policy of the Insurances and not do, consent or agree to any act or omission which: (a) invalidates or may invalidate the Insurances; or (b) renders or may render void or voidable the whole or any part of any of the Insurances; or (c) brings any particular insured liability within the scope of an exclusion or exception to the Insurances; (iii) not make any modification or alteration to the Insurances material and adverse to the interests of any of the Indemnitees; (iv) be responsible for any deductible under the Insurances; (v) provide any other information and assistance in respect of the Insurances that Lessor 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; and (vi) not create any Security Interests over the Insurances except pursuant to the Assignment of Insurances; (vii) 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; (viii) 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; (ix) 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 (x) furnish to Lessor: (a) not later than seven (7) days prior to the Scheduled Delivery Date 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 and a letter of undertaking by the insurance broker providing evidence of insurance coverage pursuant to this Agreement; (b) on request, confirmation of payment by, or at the direction of the Lessor of each sum payable under or in connection with any required policy; (c) on request, such evidence as the Lessor may require of the Lessee's compliance with its obligations under this Agreement; and (d) any notice received from the insurers or the insurance brokers (within three (3) Business Days of receipt) relating to or in connection with any cancellation of the Insurances or any material alteration of the Insurances. 21.5 Renewal of Insurances Lessee shall commence renewal procedures at least thirty (30) days prior to expiry of any of the Insurances, and provide to Lessor: (i) confirmation of completion of renewal at least fifteen (15) days prior to each expiry date of any of the Insurances; (ii) certificates of insurance and a brokers' letter of undertaking in a form acceptable to Lessor 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 (iii) any other information as Lessor may reasonable request be provided by the insurance broker at least fifteen (15) days before such expiry. 21.6 Failure to Insure If Lessee fails to maintain the Insurances in compliance with this Agreement, Lessee shall: (i) 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 (ii) immediately notify Lessor of the non-compliance of the Insurances and provide Lessor with full details of any steps which Lessee 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 Lessor under this Agreement: (a) to pay the premiums due or to effect and maintain insurances satisfactory to Lessor and substantially the same as the Insurances required hereunder or otherwise remedy Lessee's failure in such manner, including to effect and maintain an "owner's interest" policy, as Lessor considers appropriate. Any sums so expended by Lessor will become immediately due and payable by Lessee to Lessor together with interest thereon at the Default Rate, from the date of expenditure by Lessor up to the date of reimbursement by Lessee; and (b) 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 Lessor until the failure is remedied to Lessor's satisfaction. 21.7 Continuation of Insurances Lessee agrees to effect and maintain at Lessee'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 Lessee or Lessor continues to have any interest in the Aircraft. 21.8 Application of Insurance Proceeds As between Lessor and Lessee: (i) all insurance payments received as the result of a Total Loss occurring during the Lease Term will be paid to Lessor or to Lender pursuant to the terms of any security given by Owner Trustee and Lessor; (ii) 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 Lessor and applied in payment (or to reimburse Lessee) for repairs or replacement property, upon Lessor being satisfied that the repairs or replacement have been effected in accordance with this Agreement; and (iii) notwithstanding Clauses 21.8 (i) or 21.8 (ii) 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 Lessor to be applied toward payment of any amounts which may be or become payable by Lessee in such order as Lessor sees fit or as Lessor may elect. 21.9 Pursuit of Claims The parties shall co-operate 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 Lessor shall be paramount. 22. Total loss and requisition 22.1 Total Loss Prior to Delivery If a Total Loss occurs prior to Delivery, 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 Lessor will repay to Lessee any prepaid Rent, the amount of Security Deposit, if paid, and return the Letter of Credit under this Agreement. 22.2 Total Loss After Delivery 22.2.1 If a Total Loss occurs after Delivery, Lessee shall pay the Lessor on or prior to the earlier of: (i) thirty (30) days after the Total Loss Date; and (ii) the date of receipt of insurance proceeds in respect of such Total Loss, the aggregate of (x) the Agreed Value and (y) Rent and all other amounts accrued under this Agreement to the date of payment and (z) interest on the Agreed Value accruing on a daily basis at the Default Rate for the period, if any, from the Total Loss Date to the date of payment. 22.2.2 Subject to the rights of any insurers or other third parties, upon irrevocable payment in full to Lessor of the Agreed Value and all other amounts which may be or become payable to Lessor under this Agreement, Lessor shall direct Owner Trustee to transfer to Lessee all of Owner Trustee's and Lessor'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 Lessor Liens), and Lessor shall procure the execution and delivery of such bills of sale and other instruments as Lessee may reasonably request to evidence such transfer, free and clear of all rights of Owner Trustee and Lessor and (y) any other rights in respect of the Aircraft or any part thereof or any further requisition or insurance proceeds in respect thereof. Lessee shall indemnify Owner Trustee and Lessor for all fees, expenses and Taxes incurred by Owner Trustee and Lessor in connection with any such transfer. 22.2.3 If a Total Loss of the Aircraft or the Airframe occurs during the Lease Term, Lessee's obligation to pay Rent shall continue in full force and effect until the date of payment of the Agreed Value and all other amounts due under this Agreement 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 Lessee (as to indemnity or otherwise) under this Agreement; and Lessor and, if not already recovered, Lessee shall proceed diligently and co-operate fully with each other in the recovery of the Total Loss Proceeds. 22.3 Total Loss of Engines 22.3.1 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), Lessee shall give Lessor prompt written notice thereof and Lessee shall replace the Destroyed Engine as soon as reasonably possible by procuring that Owner Trustee acquires, at Lessee's expense, title to another engine complying with the requirements of Clause 16.6. Such Replacement Engine shall upon acquisition by Owner Trustee be an Engine as defined herein. 22.3.2 Lessee agrees to take such action as Lessor may reasonably request in order that any such Replacement Engine shall be the property of Owner Trustee, and leased hereunder on the same terms as the Destroyed Engine. Lessee's obligation to pay Rent shall continue in full force and effect, but an amount equal to the Total Loss Proceeds received by Lessor or Lender, as the case may be, with respect to the Destroyed Engine, less any cost, expenses, Taxes or duties incurred in connection with the collection thereof, shall, subject to Lessor's right to deduct therefrom any amounts then due and payable by Lessee under this Agreement, be paid to Lessee. 22.3.3 Immediately upon the effectiveness of such substitution, and without further act, title to the replaced Engine shall thereupon vest in Lessee, in an as-is, where-is condition, free and clear of all rights and Security Interests of Owner Trustee, Lender and Lessor and shall no longer be deemed an Engine hereunder. 22.4 Requisition 22.4.1 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 Lessee will not be released from any of its other obligations under the Agreement (other than operational obligations with which Lessee 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, Lessee shall be entitled to any hire paid by the requisitioning authority in respect of the Lease Term; (iii) Lessee 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. 22.4.2 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 Lessor 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 Lessee satisfies the Return Conditions provided that: (i) the obligations of Lessee including in respect of payment of Rent including Maintenance Reserves, if any, 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, Lessee 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 22.2 shall apply), Lessee shall be obliged to redeliver the Aircraft to Lessor in accordance with Clause 23; (iii) provided no Default or Event of Default is continuing, Lessee shall be entitled to receive and retain any requisition payments made in respect of the Aircraft; and (iv) Lessee shall indemnify Lessor for any Losses which Lessor suffers (Lessor undertakes to use its reasonable best efforts to mitigate such Losses) as a result of Lessee returning the Aircraft to Lessor after the Expiry Date. 23. Redelivery 23.1 Redelivery of Aircraft On the Redelivery Date, Lessee shall, unless a Total Loss has occurred, redeliver the Aircraft and the Aircraft Documents to Lessor at Lessee's cost and expense at the Redelivery Location. If the Aircraft has been damaged and is being repaired in a timely manner, then the term of the lease will be extended and Lessee'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 Lessor will make insurance proceeds available to accomplish such repairs as provided in Clause 22. When the repairs are completed, the Aircraft shall be redelivered to Lessor. At the time of the redelivery of the Aircraft: (i) the Aircraft shall be free and clear of all Security Interests other than Lessor Liens; (ii) all maintenance to the Aircraft due for performance on or before the Redelivery Date shall have been completed in accordance with this Agreement; (iii) the Aircraft shall be in compliance with the Return Conditions; (iv) the Aircraft shall comply with such other reasonable requirements as Lessor may request that Lessee has had timely notice of and that Lessor has agreed to pay for; provided, however, that if compliance with Lessor'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 Lessee's compliance with Lessor's request; and (v) any service bulletin kits which are allocated to the Aircraft at no charge by the Manufacturer and not delivered to Lessor as at the Redelivery Date will be shipped to a location specified by Lessor at Lessee's cost. For the avoidance of doubt, Lessee will not be responsible for any inaccuracy or incompleteness in the Aircraft Documents that pertains to any period prior to Delivery, provided always that the foregoing shall not in any way be construed as a waiver by Lessor of Lessee's obligations to keep, maintain and update the Aircraft Documents during the Lease Term in accordance with the other provisions of this Agreement. 23.2 Final Inspection Immediately prior to redelivery of the Aircraft, Lessee shall make the Aircraft available to Lessor for inspection (Final Inspection) at the 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 Lessor 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. 23.3 Discrepancies Lessee 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. When Lessee has complied with the provisions of this Clause 23.3, Lessee shall redeliver the Aircraft to Lessor at Lessee's cost and expense at the Redelivery Location. 23.4 Non-compliance 23.4.1 To the extent that, at the time of Final Inspection, the condition of the Aircraft does not comply with this Agreement (except Clause 23.1 (iv)), Lessee shall at Lessor's option: (i) 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 Lessee shall be required to pay Rent to Lessor during that period at the rate equal to two (2) times the daily Basic Rent (Basic Rent per month divided by thirty (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 Lessor; or (ii) redeliver the Aircraft to Lessor and indemnify Lessor, and provide cash to Lessor in an amount reasonably satisfactory to Lessor as security for that indemnity, against the cost of putting the Aircraft into the condition required by this Agreement. 23.4.2 Lessor's option in Clause 23.4 is not available to Lessor provided that (i) Lessee has notified Lessor of its intent to rectify the non-compliance prior to the Redelivery Date and (ii) Lessee will in the reasonable opinion of Lessor be able to rectify such non-compliance on or before Redelivery Date. 23.4.3 For the avoidance of doubt, Lessor shall not be entitled to exercise its option under Clause 23.4.1 and Lessee shall suffer no loss or penalty to the extent that the Aircraft does not, on Final Inspection, comply with Clause 23.1 (iv) but is otherwise in compliance with the Return Conditions. 23.5 Acknowledgement Provided Lessee has complied with its obligations under this Agreement, following redelivery of the Aircraft by Lessee to Lessor at the Redelivery Location, the parties shall execute an acknowledgement confirming that Lessee has redelivered the Aircraft to Lessor in accordance with this Agreement substantially in the form of Schedule 13. 23.6 Storage etc. Notwithstanding the performance in full by Lessee of all its obligations under this Clause 23, Lessor may require Lessee to continue to lease the Aircraft from Lessor for a period of up to thirty (30) days from the Expiry Date. During this period, Lessee will have no obligations under this Agreement except to park and store the Aircraft in accordance with Manufacturer's recommended short term storage program at one of Lessee's storage facilities and to continue insurances in respect of the Aircraft at Lessee's cost. Such parking and storage is being made at the risk of Lessor and Lessee shall have no liability for Losses except for any Losses arising out of Lessee's gross negligence or wilful misconduct arising during such period. Lessee also agrees during this period to ferry/fly the Aircraft to such location as Lessor may require. Lessee will not otherwise utilise the Aircraft during this period. Any out of pocket costs or expenses incurred by Lessee during this period with respect to the Aircraft for storage, insurance or such ferry/flight shall be reimbursed by Lessor to Lessee promptly after demand and upon receipt by Lessor of an invoice and documentation, reasonably satisfactory to Lessor, of such costs and expenses. 24. Events of default 24.1 Notice Lessee will promptly notify Lessor if Lessee becomes aware of the occurrence of any Default. 24.2 Events Each of the following events will constitute an Event of Default and a material breach of this Agreement: (i) Non-payment: Lessee fails to pay any amount payable by it under the Transaction Documents or the Other Agreements in the currency in which such sum fell due in respect of payments of Rent or Maintenance Reserves, if any, 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; (ii) Insurance: Insurance cover on or with respect to the Aircraft for the benefit of Lessor (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 (iii) Delivery: Lessee fails to take Delivery of the Aircraft when obligated to do so under the terms of this Agreement; or (iv) Redelivery: Lessee fails to return the Aircraft to Lessor on the Redelivery Date in accordance with Clause 23; or (v) Breach: Lessee defaults in the due performance and observance of any other obligations contained in the Transaction Documents and such default is not remedied within fourteen (14) days of becoming aware of such default; or (vi) Representation: Any representation, warranty or statement made or deemed to be made by Lessee 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 Lessor considers material when made or deemed to be made or if the effects or consequences of the incorrect, inaccurate or misleading representation, warranty or statement are capable of cure and Lessee fails to cure such effects or consequences within twenty (20) days after becoming aware of such default; or (vii) 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 Lessor) 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 Lessor may prejudice the rights of Lessor under this Agreement or in the reasonable opinion of Lessor may have a material adverse effect on Lessee's obligation to perform its obligations under this Agreement; or (viii) Registration: (a) the Registration of the Aircraft is cancelled other than as a result of an act or omission of Lessor or another Indemnitee including Owner Trustee and Lessor or an affiliate of the Owner Trustee and Lessor; (b) Lessee ceases to be an US Air Carrier authorised to transport passengers in common carrier; or (c) the Aircraft ceases to be "based and primarily used in the United States" within the meaning of the 14 Code of Federal Regulations 47.9: or (ix) Possession: Lessee abandons the Aircraft or the Engines, or Lessee 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 (x) Discontinuation: Lessee threatens to or temporarily or permanently discontinues business or sells or otherwise disposes of all or substantially all of its assets; or (xi) Adverse Change: A material adverse change occurs in the financial condition of Lessee which in the reasonable opinion of Lessor may have a material negative impact on Lessee's ability to perform its obligations hereunder; or (xii) Cross Default: Any Financial Indebtedness of Lessee (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 Lessee (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 (xiii) Insolvency: Lessee 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 (xiv) Proceedings: Any proceedings, resolutions, filings or other steps are instituted or threatened with respect to the Lessee or a substantial part of Lessee's property relating to the bankruptcy, liquidation, reorganisation or protection from creditors of Lessee. If instituted by Lessee or done by the Lessee, 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 (xv) Judgements: Any order, judgement or decree is entered by any court of competent jurisdiction appointing a receiver, trustee or liquidator of Lessee or a substantial part of its property or if a substantial part of its property is to be sequestered. If instituted by Lessee or done by the Lessee, 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 (xvi) Air Navigation Charges: Any competent authority has unpaid Air Navigation Charges due from Lessee (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 ten (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 (xvii) Airport Charges: Any airport has unpaid Airport Charges due from Lessee (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 ten (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; (xviii) Other Default: An Event of Default is continuing unremedied under any Other Agreement between Lessee and Lessor or another lessor or sublessor that either (i) shares the same general partner or controlling shareholder with Lessor or (ii) whose beneficiary shares the same general partner or controlling shareholder with Lessor; or (xix) Sublessee: Any approved sublessee acts so as to prevent present or future performance by Lessee of its obligations under this Agreement. 24.3 Lessor's Rights 24.3.1 Upon the occurrence of any Event of Default, all rights of Lessee under this Agreement and with respect to the Aircraft will immediately cease and terminate, but without prejudice to the continuing obligations of Lessee under this Agreement. Without prejudice and in all cases in addition to any other rights of Lessor under this Agreement or under applicable law, Lessor may upon the occurrence of any Event of Default exercise all or any of the following rights at its option: (i) require that Lessee immediately move the Aircraft to a location specified by Lessor; (ii) for Lessee's account do anything that may reasonably be required to cure any default and recover from Lessee all reasonable costs, including reasonable legal fees and expenses incurred in doing so and interest thereon at the Default Rate; or (iii) proceed by appropriate court action or actions to enforce performance of this Agreement or to recover damages for the breach of this Agreement; or (iv) enter upon the premises where the Airframe or any or all Engines or any or all Parts are located or believed to be located and take immediate possession of and remove such Airframe, Engine or Parts without the necessity for first instituting proceedings, or by summary proceedings or otherwise, and Lessee shall comply therewith, all without liability to Lessor for or by reason of such entry or taking possession, whether for the restoration or damage to property caused by such taking or otherwise; (v) apply all or any portion of the Security Deposit, the Letter of Credit and any other security deposit held by Lessor pursuant to any Other Agreements to any amounts due. 24.3.2 Whether or not Lessor shall have exercised, or shall thereafter any timer exercise, any of its rights under Clause 24.3.1 (i) or (iv) above with respect to all or any part of the Aircraft, Lessor, by written notice to Lessee specifying payment date not earlier than ten (10) days from the date of such notice, may demand that Lessee pay to Lessor, and Lessee shall pay Lessor, 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 payment date specified in such notice plus the present value of the remaining instalments of Rent during the Lease 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, Lessee shall be liable for the amounts set forth in Clause 24.4 (ii ) and (iii) 24.3.3 If an Event of Default occurs, Lessor may sell or re-lease or otherwise deal with the Aircraft at such time and in such manner as Lessor considers appropriate in a commercially reasonable manner, free and clear of any interest of Lessee as if this Agreement had never been entered into and as if Lessee had never made any payments hereunder. While an Event of Default is continuing, Lessee will not operate the Aircraft without the consent of Lessor. 24.3.4 If an Event of Default has occurred and is continuing, Lessor may take all steps necessary to de-register the Aircraft in and export the Aircraft from the State of Registration. 24.4 Default Payments Lessee 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 attorney's fees and disbursements) incurred by Lessor 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 23.1 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 Lessor for any loss of or damage to Lessor's residual interest in the Aircraft. All costs and expenses referred to in the preceding sentence shall be payable by Lessee upon demand by Lessor 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. 24.5 Cumulative Rights Except as otherwise expressly provided above, no remedy referred to in this Clause 24 is intended to be exclusive, but each shall be cumulative and in addition to any other remedy referred to above or otherwise available to Lessor at law or in equity. The exercise or beginning of exercise by Lessor of any one or more of such remedies shall not preclude the simultaneous or later exercise by Lessor of any or all such other remedies. No express or implied waiver by Lessor 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. 25. Assignment and transfer 25.1 By Lessee No assignment, novation, transfer or Security Interest may be made by Lessee in any of its rights with respect to the Aircraft, Engine, Parts, this Agreement or the other Transaction Documents (other than Permitted Liens). 25.2 By Lessor Subject to Lessee's rights pursuant to this Agreement, Lessor may at any time and without Lessee's consent sell, assign or transfer its rights and interest hereunder and under the other Transaction Documents to a third party, (Lessor's Assignee). Lessor will in good faith co-operate with Lessee to ensure minimum practical disturbance or cost in connection with such assignment or transfer of rights and interest hereunder. Lessee agrees to co-operate in good faith with Lessor in such sale, assignment or transfer and provide Lessor and Lessor's Assignee with such reasonable assistance as Lessor may require, including but not limited to assisting in any of Lessor's and Lessor's Assignee's efforts to minimise 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 Lessee's cost, Lessee will continue to name Owner Trustee, Lessor and Lender as additional insureds in accordance with the insurance requirements set out in Clause 21. 25.3 Assignment to Lender Subject to Lessee's rights under this Agreement, Owner Trustee may at any time grant Security Interests over the Aircraft and the benefit of this Agreement, the other Transaction Documents and any other agreement related to the Aircraft to any Lender as security for Owner Trustee's obligations to such Lender. Owner Trustee's rights to grant any such Security Interests shall be subject only to receipt by Lessee of an acknowledgement from or on behalf of Lender relating to quiet enjoyment by Lessee of the Aircraft as referred to in Clause 25.4.2. 25.4 Lessee Co-operation 25.4.1 On request by Lessor, Lessor's Assignee, Owner Trustee or Lender, Lessee will, at Lessee's sole expense, promptly execute all such documents as Lessor, Lessor's Assignee, Owner Trustee or Lender may reasonably require (including such estoppel certificate as referred to in Clause 12.4 to confirm Lessee's obligations under this Agreement and the other Transaction Documents), to obtain Lessee's confirmation that no Default is outstanding and for the purpose of perfecting and ensuring and maintaining the perfection of any Security Interest granted by Owner Trustee over the Aircraft, this Agreement, the other Transaction Documents or any other agreement related to the Aircraft. Lessee will promptly provide all other reasonable assistance and co-operation at Lessor's expense to Lessor, Lessor's Assignee, Owner Trustee or Lender in connection with any of the matters referred to in this Clause 25 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 State of Registration or the provision of any appropriate counsel's opinions in relation to Lessee's obligations. 25.4.2 Lessor will obtain for the benefit of Lessee an acknowledgement from any Lessor's Assignee or Lender, so long as no Default has occurred and is continuing hereunder, such person will not interfere with Lessee's quiet, peaceful use and enjoyment of the Aircraft, substantially in the form of Schedule 11 or such other form as Lessor's Assignee or Lender may reasonably require. 25.5 Lessor Includes Lessor's Assignee and Lender Wherever the term "Lessor" is used in this Agreement in relation to any of the provisions relating to registration, title, disclaimer, indemnity and insurance respectively, the term "Lessor" will be deemed to include Lessor's Assignee and Lender. 26. Miscellaneous Provisions 26.1 Rights Cumulative, Waivers The rights of Lessor under this Agreement are cumulative, may be exercised as often as Lessor considers appropriate and are in addition to Lessor's rights under the general law. The rights of Lessor against Lessee 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 Lessor'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. 26.2 Delegation Lessor 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 Lessor in its absolute discretion thinks fit. 26.3 Expenses So long as the Aircraft is tendered for Delivery to Lessee pursuant to this Agreement, Lessee shall pay to Lessor on demand: (i) all reasonable expenses including legal, professional, and out-of-pocket expenses incurred or payable by Lessor in connection with any amendment to or extension of or other documentation requested by Lessee in connection with, or the granting of any waiver or consent under this Agreement or the monitoring of compliance by Lessee with this Agreement, but in the case of such monitoring of compliance, only if upon such monitoring Lessee is found to be in Default under this Agreement; and (ii) all expenses including legal, survey and other costs payable or incurred by Lessor following a Default in connection with the enforcement of or preservation of any of Lessor's rights under this Agreement, or in respect of the repossession of the Aircraft. All expenses payable pursuant to this Clause 26.3 shall be paid in the currency in which they are incurred by Lessor. 26.4 Time of Essence The time stipulated in this Agreement for all payments by Lessee to Lessor and for the prompt performance of Lessee's other obligations under this Agreement will be of the essence for this Agreement. 26.5 Entire Agreement The Transaction Documents are the sole and entire agreements between Lessor and Lessee in relation to the leasing of the Aircraft, and supersede all previous agreements in relation to that leasing. 26.6 Further Assurances The parties shall take such action as Lessor and Lessee 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. 26.7 Language All notices to be given under this Agreement will be in English. All documents delivered to Lessor 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. 26.8 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 Lessor and Lessee. 26.9 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. 26.10 Survival All indemnities and other obligations of Lessee 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. 26.11 Reimbursement If Lessee defaults in the performance of any of its obligations under this Agreement that can be rectified by the spending of money, Lessor shall be entitled (but not obliged) to expend money to rectify such matter and Lessee shall reimburse Lessor on demand the money so expended. Any expenditure by Lessor pursuant to this Clause 26.11 shall not prejudice the rights of Lessor in respect of any Default or Event of Default. 26.12 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. 26.13 Power of Attorney Lessee hereby irrevocably appoints Lessor as its attorney for the purpose of putting into effect the intent of this Agreement following an Event of Default, including without limitation, the return, repossession, deregistration and exportation of the Aircraft. To evidence this appointment, Lessee has executed the power of attorney in the form of Schedule 8. Lessee will take all steps required under the laws of the State of Registration to provide such power of attorney to Lessor. 26.14 Usury Laws Notwithstanding anything to the contrary in the Transaction Documents, Lessee 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 Lessor in connection with the Transaction Documents. During any period of time in which the then applicable highest lawful rate is lower than the Default Interest rate, Default Interest will accrue and be payable at such highest lawful rate; however, if at later times such highest lawful rate is greater than the Default Interest rate, then Lessee will pay Default Interest at the highest lawful rate until the Default Interest which is paid by Lessee equals the amount of interest which would have been payable in accordance with the interest rate set forth in Schedule 2. 26.15 Confidentiality The Transaction Documents and all non-public information obtained by either party about the other are confidential and are between Lessor and Lessee only and the commercial terms and other material provisions of this Agreement 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, Lessee and Lessor will co-operate with one another to obtain confidential treatment as to the commercial terms and other material provisions of this Agreement; 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. 26.16 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 facsimile will be deemed effective as delivery of an originally executed counterpart. Any party delivering an executed counterpart of this Agreement by facsimile 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. 26.17 Bankruptcy It is the intention of the parties that the Lessor 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 Lessor 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. 27. 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: Lessor: INDIGO AVIATION AB (publ) Address: Sodra Forstadsgatan 4, SE-211 43 Malmo, Sweden Attention: Legal Department Facsimile: +46 40 302350 Lessee: FRONTIER AIRLINES, INC. Address: 12015 e. 46th Avenue, Denver Colorado, United States of America Attention: General Counsel Facsimile: (303) 371 9669 28. Governing law and jurisdiction 28.1 New York Law This Agreement 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). 28.2 Non-exclusive Jurisdiction in New York 28.2.1 Each of Lessor and Lessee (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 Districts Court for the Southern District of New York for the purposes of any suit, action, or other proceeding arising out of this agreement of 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 defence or otherwise any claim that it is not personally subject to the jurisdiction of the abovenamed courts; that the suit, action or proceedings 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. 28.3 Service of Process 28.3.1 With respect to actions, suits and proceedings brought in the courts named in Clause 28.2. each of Lessor and Lessee hereby waives personal service of process and agrees that service of process may be made upon certified or registered mail, return receipt requested, at the address specified in Clause 27 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. 28.4 Waiver Lessee and Lessor hereby waive the right to a trial by jury. SIGNATURE PAGE IN WITNESS whereof the parties hereto have executed this Agreement on the date showed at the beginning of this Agreement. SIGNED on behalf of INDIGO AVIATION AB (publ) 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 737-3L9 Serial Numbers 26440 Current Registration D - ADBB New Registration Mark N310FL Line Number 2234 Date of Manufacture March, 1992 Engines CFM56-3B2 (22K) APU Garrett GTCP85-129H Present Operator Deutsche BA WEIGHTS Lbs. Max Taxi Weight 140,000 Max Take Off Weight 139,500 Max Landing Weight 114,000 Max Zero Fuel Weight 106,500 Basic Empty Weight 71,989 Max Fuel capacity 5,311 US Gallons (Provisioning for Aft Body Aux Fuel Tank installed - 500 US Gallons) INTERIOR CONFIGURATION Seating 136 Y Recaro 3230 Galleys G1, G2, G3, G4B Henshall Stowages G7 Henshall Lavatories Three 1 Forward, 2 Aft Boeing Standard AIRFRAME AND ENGINE STATUS (As of March 2, 1999) AIRFRAME Total Hours 17,231 Total Cycles 16,044 Time to D Check (7C+SI) 5,169 AIRFRAME MAINTENANCE PROGRAM CHECK SCHEDULE A Check 250 hours I Check 500 hours C Check 3,600 hours or 15 months D Check 22,400 hours ENGINES Serial Number 726422 726492 Total Hours 16,837 16,837 Total Cycles 15,616 15,616 Next Limiter LPT Con Support LPT Con Support Cycles Remaining 8,185 8,185 Hours Since Shop Visit 2 2 LANDING GEAR Right/Left Main 16,044 Cycles/17,231 hours Nose 16,044 Cycles/17,231 hours Overhaul limit 22,400 hours NAVIGATIONAL, COMMUNICATION, ELECTRONIC SYSTEMS, FURNISHING & EQUIPMENT LIST DESCRIPTION MANUFACTURER MODEL OR PART NUMBER QTY Dual Flight Control System (CATIIIa) Honeywell SP300 1 Autothrottle System Smiths Industries 735SUE 1 VHF Communication Collins VHF700 2 HF Communication Collins 628T-2A 1 (Provisions for HF-2) Selcal Motorola NA1401C 1 Passenger Address Collins 346D-2B 1 Announcement System Matsushita RDAX7308 1 CVR Fairchild A 100A 1 Flight Data Recorder Sundstrand DXUS 1 DFDAU SFIM ED44B 1 Printer Bendix PTA-45B 1 Air Data Computer Smiths 501FAD1 2 IRU Honeywell HG1050 2 EADI Colour Collins EDU-766D 2 EHSI Colour Collins EDU-776D 2 Marker Collins 51 Z4 1 VHF Nav Collins 51RV4B 2 Symbol Generator Collins EFIP-701D 2 WX-Radar Collins WRT701X 1 GPWS Sundstrand MK V 1 Radar Altimeter Collins 860 F-4 2 DME Collins 860 E-5 2 ATC (Mode S) Collins TPR720 2 ADF Collins 51 Y7 2 FMC Smiths U5.0 1 FMCS CDU Smiths - 2 Primary Engine Display Smiths EIS 1 Secondary Engine Display Smiths EIS 1 All data and information included herein are subject to change without notice. No warranty is made or implied as to the accuracy of the information contained herein which is subject to independent verification upon inspection. Annexure 1 AIRCRAFT DOCUMENTATION Note: This Annexure 1 is to be used for reference purposes only. The Aircraft Documents will be more closely identified in Annexure 1 to the Acceptance Certificate. A. Certificates - - Certificate of Airworthiness - - Certificate of Registration - - Noise Certificate - - Radio License B. Aircraft Status Records - - Technical Log Book - - Airframe Maintenance Status Report - - Manufacturer's Service Bulletin Status Report - - Airworthiness Directive Compliance Report (terminated and repetitive) - - Local Modification Status Report List with Substantiating Data - - Last Weighing Report - - Repair Datas Structural Repairs C. Aircraft Maintenance Records - - Test Flight Reports - - Last Boeing "C" check and maintenance check Work Cards for each "C" check multiple (or segment) D. Aircraft History Records - - Aircraft Structural Repair History (if applicable) - - Service Difficulty Report (if applicable) - - Accident or Incident Report (if applicable) E. Engine Records (for each engine) - - Log Books - - Last overhaul and repair documents for each module - - Airworthiness Directive Compliance Report (terminated and repetitive) - - Manufacturer's Service Bulletin Status Report - - Engine Disk Sheet - - Engine Data Submittal Sheet - - Condition Monitoring Status Report F. APU Records - - Log Book - - Last overhaul and repair documents - - Manufacturer's Service Bulletin Status Report G. Component Records (including components installed engines and APU) - - Time Controlled Component Status Report with remaining hours and cycles (if applicable) - - Serviceability tags or back-up documentation for components replace since delivery from Boeing H. Manuals 1. Airplane Flight Manual 2. Quick Reference Handbook 1. Aircraft Operating Manual 1. Weight and Balance Manual Supplement 1. Wiring Diagram Manual (microfilm) 1. Illustrated Parts Catalog (microfilm) 1. Aircraft Maintenance Manual (microfilm) 1. CFMI Illustrated Parts Catalog 1. Vendor Manual Seats 1. Vendor Manual Galleys 1. Vendor Manual Ovens 1. Vendor Manual Coffeemakers I. Miscellaneous Technical Documents - - Maintenance Program Specifications/Requirements - - Interior Configuration Drawings - - Loose Equipment Inventory List - - Delivery documentation ex Boeing - Export Certificate of Aircraft - Aircraft Readiness Log - Rigging Record Brochure - Miscellaneous Delivery Record Brochure - Fuel Measuring Stick Calibration Brochure - FAA Airworthiness Directive Compliance Record SCHEDULE 2 CERTAIN BUSINESS TERMS 1. Agreed Value Agreed Value means * 2. Basic Rent The Basic Rent payable on each Rent Date during the Base Lease Term and the Extension Lease Term shall be * . 3. Damage Notification Threshold Damage Notification Threshold means * . 4. Engine Agreed Value Engine Agreed Value means for each engine * . 5. Extension Lease Expiry Date Extension Lease Expiry Date means, upon exercise of the Extension Option, the date falling twelve (12) months from the Base Lease Expiry Date or such other date as Lessor and Lessee may agree in writing. 6. Initial Lease Expiry Date Initial Lease Expiry Date means the 14th of May 1999. 7. Initial Rent and Initial Rent Dates o From Delivery until 14th of April 1999, the Initial Rent shall be * payable on the 15th of April 1999 (First Initial Rent Date); and o from 15th of April 1999 until Initial Lease Expiry Date, the Initial Rent shall be the lesser of: (a) * per flight hour for each hour flown during the period commencing on the 15th of April and ending on Initial Lease Expiry Date; and (b) * payable as follows: (i)on the First Initial Rent Date: * (ii) on the date falling ten (10) days after the Initial Lease Expiry Date (Second Initial Rent Date); the remaining amount. 8. Letter of Credit The Lessee shall provide the Lessor with an additional Security Deposit in form of an irrevocable, assignable standby letter of credit in the amount of issued at least three days prior to Scheduled Delivery Date by a major US Bank in a form and substance acceptable by Lessor (the Letter of Credit). 9. Maintenance Reserves Lessee shall during the Lease Term pay the following Maintenance Reserves to Lessor: (i) Airframe Maintenance Reserve * for each Flight Hour that the Airframe is operated; (ii) Engine Maintenance Reserve * for each Flight Hour that each Engine is operated; (iii) Landing Gear Maintenance Reserve * for each Flight Hour that the Aircraft is operated; (iv) APU Maintenance Reserve * for each Flight Hour that the APU is operated. The amounts payable by Lessee to the Maintenance Reserves as set out herein shall be subject to escalation on each of the anniversary dates of the first day of the Base Lease Term with * per year. 10. Minimum Liability Coverage Minimum Liability Coverage means * on each occurrence. 11. Scheduled Delivery Date Scheduled Delivery Date means 31st of March 1999 or such other date as the parties may mutually agree and Lessor may be able to deliver the Aircraft to Lessee. 12. Security Deposit Lessee has paid to Lessor a cash Security Deposit in the amount of * and shall provide Lessor with additional Security Deposit according to Clause 8 of this Schedule 2. The cash Security Deposit of * will be credited to the payment of Rent payable by Lessee during the Initial Lease Term, and, if applicable, during the Base Lease Term. The Security Deposit will be non-refundable in the event of failure by Lessee to take delivery of the Aircraft in accordance with this Agreement. 13. Supplemental Rent for Excess Cycles If on each of the anniversary dates of the first day of the Base Lease Term, based on the previous twelve (12) months period (or portion thereof) of the Base Lease Term the Aircraft has been operated more Cycles than the number of Cycles which would result from an average Flight Hour/Cycle ratio of one point five (1.5) Flight Hours to one (1) Cycle, Lessee will pay Lessor as Supplemental Rent * for each Cycle the Aircraft actually operated during such twelve (12) months period (or portion thereof) in excess of the number of Cycles which result from an average Flight Hour/Cycle ratio of one point five (1.5) Flight Hours to one (1) Cycle. A calculation will be made as of the last day of each anniversary of the first day of the Base Lease Term each year and such Supplemental Rent will be due and payable by Lessee on the date on which the next Maintenance Reserve payment is due (in accordance with Clause 9.2) following such Flight Hour/Cycle calculation period. SCHEDULE 3 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; (b) an All Risk Hull Insurance Policy on each Engine when not installed on the Aircraft on an agreed value basis not less than the Engine Agreed Value; (c) 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; (d) 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; (e) 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 Lessor on the basis of advice received from an independent insurance adviser believe that the relevant liabilities shall be unlimited or that such limit should be revised upwards, it shall be replaced by unlimited liability or 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 Lessor shall not be obliged by this Clause to effect and maintain insurance in respect of any inability to recover from any manufacturer of the Airline, 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 Lender, if none, to Lessor or at the request of Lessor to 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 Lender, the Owner Trustee, the Lessor and the Lessee. The relevant policy shall provide that such payments shall only 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. 103 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$500,000 (or the minimum deductible amount carried under the airline's insurance policy if less than US$500,000). (d) Customary Risks: cover at least such risks as are customarily insured against in the airline industry for any amount not less than 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 additional assured; (g) provides that non 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 the 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 Lender; and (k) specifically refers to any security document entered into in favour of the Lender or any loan agreement. 1.4 Terms of All Insurances All Insurances will: (a) Dollars: provide cover denominated in dollars; (b) World-wide: operate on a world-wide basis subject to such limitations and exclusions as the parties and the insurance market may agree; (c) Acknowledgement: 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 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 Lessee, or any other person provided that such additional assureds regardless of any breach or violation by Lessee, 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 Lessor, 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; (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 Lender as loss payee in the case of a Total Loss; (ii) the 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 Lessor 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 Lender notifies the insurance brokers or the insurers that an Event of Default has occurred, in which event the loss payee shall be the Lender; (j) specifically refer to each loan agreement or charge between the Lessor and any Lender. 1.5 Deductibles Lessee shall be responsible for any and all deductibles under the Insurances. 1.6 AVN 67B Notwithstanding the foregoing, if Lessee 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 4 DELIVERY CONDITIONS The Aircraft will be delivered "AS IS, WHERE IS" at the Delivery Location and will conform to the conditions outlined in this Schedule 4. The actual condition of the Aircraft at Delivery will be documented on the Acceptance Certificate as noted in Schedule 5 of the Aircraft Lease Agreement. Certification: A United States Standard Certificate of Airworthiness suitable for Part 121 operations. The Aircraft will be airworthy (conform to type design and be in a condition for safe operation), with all Aircraft equipment, components and systems operating in accordance with their intended use and within limits established by the Aircraft Maintenance Manual. Configuration: An all economy 136 seat interior with a 31" minimum seat pitch. Paint: The exterior will be sanded or stripped as needed and painted in Frontier's white base color and green lettering. Frontier will provide the tail decals. Airframe: Fresh from next Block C Check, excluding hours and cycles used on the Demonstration/Ferry Flights, with a minimum of 3,000 hours remaining until the next C7 Check/Structural Inspection. A. The Aircraft will have no deferred maintenance items, unique inspection or temporary repairs at Delivery. B. Modifications and Repairs installed on the Aircraft at Delivery will have been accomplished in accordance with FAA approved data. C. The Aircraft will be in compliance with the Manufacturer's CPC program. D. If available, any No Charge Service Bulletin Kits not installed by Present Lessee will be loaded onboard the Aircraft as cargo. F. Fuel tanks will be free from contamination. Engines: Each Engine will have at least 5,000 hours remaining until next anticipated performance restoration shop visit and have at least a minimum of 8,000 hours and 8,000 cycles remaining until the next LLP limiter at 3B2 Power (22,000 Lbs Thrust). Each Engine will pass a Performance Engine Run in accordance with the Aircraft Maintenance Manual. Each Engine will pass a hot and cold section borescope inspection. APU: Serviceable and passing a borescope inspection. Components: Each component that is time controlled will have at least 2,250 flight hours or cycles remaining until next inspection/overhaul. Each component that is calendar controlled will have 12 months remaining until its next inspection/overhaul. Condition Monitored/On Condition components will be serviceable. Landing Gear: Each Landing Gear will have at least 3,000 hours remaining until the next inspection or overhaul. Airworthiness Directives (AD's): Airworthiness Directives requiring compliance within 90 days after delivery will be in compliance. Airworthiness Directives that require inspection or repetitive inspection will be cleared for 3,000 hours or the maximum inspection interval if less than 3,000 hours. Demonstration Flight: Present Lessee will perform a one and one half hour flight demonstrating the satisfactory operation of the Aircraft with no more than two Lesseeobservers, as designated by Lessor, on board during such Demonstration Flight. Records: Documentation required to receive a United States Standard Certificate of Airworthiness will be in English or translated into English prior to delivery. TCAS: TCAS will be installed prior to Delivery, subject to the Side Letter. Aircraft Documentation: The Aircraft Documents will be identified in Annexure 1 to the Acceptance Certificate. SCHEDULE 5 ACCEPTANCE CERTIFICATE This Acceptance Certificate is delivered, on the date set out below by FRONTIER AIRLINES, INC. (Lessee), to INDIGO AVIATION AB (publ) (Lessor), pursuant to the Aircraft Lease Agreement dated 15 March 1999 between Lessor and Lessee (the Lease). Capitalized terms used in this Certificate shall have the meanings given to such terms in the Lease. 1. Details of acceptance Lessee hereby confirms to Lessor that Lessee has at _____o'clock on this ___ day of ______, at _____ accepted the following, in accordance with the provisions of the Lease: (a) Airframe Type: _____ Reg.: _____ S/N: _____ (b) Engines Type: _____ S/N No.1: _____ S/N No. 2: _____ (c) APU: MSN Total Flight Flight Hours/ Cycles Flight Hours/Cycles Hours remaining until next HSI remaining on turbine and inspection 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 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) Equipment Check List: as per list signed by Lessor and Lessee and attached hereto; and (f) Aircraft Documents List: as per list signed by Lessor and Lessee and attached hereto; and (g) Place of Acceptance: ______________ 2. Confirmation Lessee confirms to Lessor that as at the time indicated above, being the Delivery Date: (a) the representations and warranties contained in Clause 2.1 of the Lease are hereby repeated; (b) the Aircraft is insured as required by the Lease; and (c) Lessee's authorised technical experts have inspected the Aircraft and the Aircraft Documents to ensure that the Aircraft and the Aircraft Documents conform to Lessee's requirements. The Aircraft and the Aircraft Documents are in accordance with the specifications of the Lease and satisfactory in all respects. 3. Fuel at Delivery 3.1 Fuel on board at Delivery: ____ kilos (___ gallons). 3.1 Annexed hereto is details of any damage to the Aircraft as at Delivery. 3.1 The Airframe, Engines and Parts had the following Flight Hours/Cycles at Delivery: (a) Airframe: Total hours Total landings Since last "C" Check Since last "A" Check _________ ________ ______ Flight Hours ______ Flight Hours ______ Cycles ______ Cycles (b) Engines: Position Serial No. Total Flight Total Cycles Since last shop Since last Hours visit Engine Performance Restoration Visit ____ Flight ____ Flight Hours Hours ____ Cycles ____ Cycles See attached Engine run records and disc sheets for further description of Engines at Delivery. IN WITNESS WHEREOF, Lessee has, by its duly authorised representative, executed this Certificate on the date specified in paragraph 1 above. Lessee: FRONTIER AIRLINES, INC. By: _________________________ Title: _________________________ Annexure 1 Aircraft Documents Annexure 2 Aircraft Equipment List Annexure 3 Damage Chart SCHEDULE 6 CERTIFICATE OF DIRECTOR OF FRONTIER AIRLINES, INC. I, _____________________, do hereby certify that: 1. I am a duly and acting Director of Frontier Airlines, Inc., a Colorado corporation (the "Company"). 2. Attached hereto as Exhibit A is a true, correct and complete copy of the Certificate of Incorporation of the Company, as amended to the date hereof, and such Certificate of Incorporation remains in full force and effect on the date hereof. 3. Attached hereto as Exhibit B is a true, correct and complete copy of the Articles of Association to of the Company and by-laws, as amended to the date hereof, and such Articles of Association and by-laws remain in full force and effect on the date hereof. 4. Attached hereto as Exhibit C is true, correct and complete copy of resolutions duly adopted by the Board of Directors of the Company at a meeting duly called and held in [ ] approving the execution, delivery and performance of the Aircraft Lease Agreement dated as of 15 March 1999 between Indigo Aviation AB (publ) as lessor and the Company as lessee (the "Lease") and the other Transaction Documents (as defined in the Lease) to which the Company is a party, and said resolutions have not been revoked, rescinded or modified and, at the date hereof, are in full force and effect. 5. The following persons are duly qualified and acting officers of the Company, and each of such officers certifies that the signature appearing opposite the name of each other officer is his genuine signature: 6. I do hereby certify that all of the Company's representations and warranties set forth in the Lease are true and correct at the date hereof. Title Name Signature IN WITNESS WHEREOF, the undersigned has executed this Certificate as of the ____ day of ___________. I, ________, acting as special counsel to Frontier Airlines, Inc., do hereby certify that ______________ is a duly elected, qualified and acting director of Frontier Airlines, Inc. and that the signature set forth above is his genuine signature. IN WITNESS WHEREOF, the undersigned has executed this Certificate as of the ___ day of ____________. SCHEDULE 7 FORM OF LETTER OF AUTHORITY [ Addressee ] AUTHORITY This Authority is given on _________. Pursuant to an Aircraft Lease Agreement (the Lease) dated as of 15 March 1999, made between Indigo Aviation AB (publ) as lessor (Lessor) and Frontier Airlines, Inc. as lessee (Lessee) relating to one (1) Boeing 737-3L9 aircraft bearing manufacturer's serial number 26440 and registration mark N310FL (the Aircraft), Lessee will operate the Aircraft during the term of the Lease. Lessee hereby irrevocably authorises yourselves, during the term of the Lease, to disclose to Lessor or to anyone duly appointed by it, upon request by the same, particulars of any and all outstanding charges due to or collectable by you and incurred in respect of: (i) the Aircraft; and (ii) any other aircraft being operated by Lessee on the date such request, from time to time, is made. IN WITNESS WHEREOF a duly authorised representative of Lessee has granted this Authority on the day and year first above mentioned. Signed by: for and on behalf of SCHEDULE 8 POWER OF ATTORNEY The undersigned, Frontier Airlines, Inc. (Lessee) refers to the Aircraft Lease Agreement dated as of 15 March 1999, as amended and supplemented from time to time (the Lease) between, Indigo Aviation AB (publ) (Lessor) and Lessee with respect to one (1) Boeing 737-3L9 Aircraft bearing manufacturer's serial number 26440 and registration mark N310FL (the Aircraft). In consideration of the sum of US$ 1 paid by Lessor to Lessee (the receipt and sufficiency of which is hereby acknowledged), Lessee irrevocably appoints Lessor (Attorney) as its true and lawful attorney to: Execute and to do and 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 State of Registration (as defined in the Lease) 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 Lessee 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 Lessee 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 Lessee 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 [ ]. SIGNED ON BEHALF OF FRONTIER AIRLINES, INC. By: _______________________ Title: ______________________ SCHEDULE 9 Note: This form is made on the assumption that the State of Incorporation and the State of Registration are the same [herein "State"]. FORM OF OPINION OF LESSEE COUNSEL to be addressed to [ Lessor ] and [ Lender ] We have acted as counsel in [ Country of Lessee ] as counsel to [Name of Lessee] ("Lessee") in connection with an aircraft lease agreement dated [ ] and made between [ Name of Lessor ] as Lessor and Lessee as the lessee in respect of one [ Type of Aircraft ] bearing manufacturer's serial number [ ] (the "Aircraft") (the "Lease") and owned by Lessor, and have examined a copy of the following documents; (i) the Lease; (ii) the Acceptance Certificate; (iii) the Letter(s) of Authority; (iv) the Power of Authority; (v) [ other documents ]; and (vi) [ ] and such other documents as we have considered it necessary or desirable to examine in order that we may give this opinion. The documents referred to under (i) to (v) above are referred to as the "Relevant Documents". Terms defined in the Lease shall have the same meaning herein. On the basis on the foregoing we are of the opinion that: (a) Lessee is duly incorporated in [ State ] for an indefinite period as a limited company and is a validly existing separate legal entity, which is subject to suit in its own name, in good standing, and, to the best of my knowledge, no steps have been, or are being, taken to appoint a receiver, liquidator, trustee or similar officer over Lessee, or to wind up Lessee or commence any other insolvency proceedings with respect to Lessee or to have Lessee dissolved by merger; (b) Lessee has the corporate power to enter into and perform, and has taken all necessary corporate action to authorise the entry into, performance and delivery of the Lease and the transactions contemplated by the Lease and the Lease constitutes the legal binding obligations of the Lease, enforceable against the Lessee in accordance with its terms; (c) the entry into and performance by Lessee of, and the transactions contemplated by, the Lease does not and will not: (i) conflict with any laws binding on Lessee; or (ii) conflict with the constitutional documents of Lessee; or (iii) result in the creation of any Security Interest upon any property of Lessee, pursuant to any 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 Lessee is a party or by which Lessee or its properties or assets may be bound or affected; (d) Lessee has obtained all authorizations, consents, licences, approvals and registrations necessary to be obtained from any governmental or other regulatory authorities in [ State ] to enable Lessee: (i) to enter into and perform the transactions contemplated by the Lease; (ii) to import the Aircraft into [ State ]; (iii) to conduct commercial air transport with the Aircraft in, to and from [ State ] in accordance with the applicable [ State's ] rules and regulations; (iv) to effect all payments provided for in the Lease. (e) no registration, recording, filing or notarisation in any public office or elsewhere in [ State ] is necessary and no payment of any tax or duty is necessary to ensure the validity, enforceability or admissibility in evidence of the Lease, or the priority, if any, of the respective rights of Lessor and Lender under the Lease other than [please advise if applicable] and no other instrument is required to ensure the priority, enforceability and validity of the obligations of Lessee under the Lease and the Lease is in proper legal form under the laws of [ State ] for the enforcement thereof, if applicable, in the courts of [ State ]; (f) the Aircraft may be registered on the [ State's ] aircraft registry in the name of Lessor and no other steps are necessary or desirable to record or perfect either Lessor's interest in the Aircraft in [ State ]; (g) a mortgage over the Aircraft may be registered on the aircraft registry in [State] and with [ Name of authority ] for the benefit of Lessor and will upon registration constitute a valid and perfected security over the Aircraft under the laws of [ State ]; (h) upon termination of the Lease in accordance with its terms (whether on expiry or earlier termination) Lessor would be entitled: (i) to repossess the Aircraft without requiring any further permissions or approvals of any regulatory authority in [ State ]; (ii) to de-register the Aircraft from the register of aircraft maintained by the Aviation Authority and to export the Aircraft from [ State ] without requiring any further permissions or approvals of any authority in [ State ] or any further regulators consent from Lessee or any third party, provided no mortgages are registered over the Aircraft, in which case the mortgagees have to consent to the de-registration; (i) the Relevant Documents have been properly signed and delivered on behalf of Lessee and the obligations on the part of Lessee contained therein, assuming them to be valid and binding according to the laws of Sweden, are valid and legally binding on and enforceable against Lessee under the laws of [ State ] and in the courts of [ State ]; (j) the obligations of Lessee under the Relevant Documents are direct, general and unconditional, and rank or will rank at least pari passu with all other present and future unsecured and un-subordinated obligations of Lessee, with the exception of such obligations as are mandatorily preferred by law and not by reason of any security interest; (k) under the laws of [ State ] the execution and delivery of the Relevant Documents, and the carrying out of the transactions thereby contemplated and the observance and performance by all parties of their respective obligations thereunder do not and will not result in any prejudice to or impairment or diminution of Lessor's interest in the Aircraft except for the express rights of possession of Lessee under the Lease; (l) the Lease does not grant to Lessee any title rights in the Aircraft, nor does it give Lessee any capability of passing valid title to a purchaser or to create a mortgage over the Aircraft; (m) Lessee, or any of its properties, assets, are not entitled to claim immunity from suit, execution, attachment or other legal process in [ State ] or any other jurisdiction affecting Lessee; the entry into and performance of the Lease Agreement by the company constitute private and commercial acts; (n) there is no application usury or interest limitation law in [ State ] which restricts the recovery of payments of Default Interest in accordance with the Lease; (o) Lessee is not in default under any agreement to which it is a party or by which is may be bound which 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 Lessee, threatened against it or its assets which would have a material adverse effect on the business, assets or condition (financial or otherwise) of Lessee; (p) the financial position of Lessee is represented by its audited financial statements prepared in accordance with accounting principles generally accepted in [ State ]; (q) it is not necessary under the laws and constitution of [ State ], in order to enable the Lessor to enforce its rights under the Agreement or by reason of the execution of the Agreement or the performance by each of them of its obligation thereunder, that any of them should be licensed, qualified or entitled to carry on business in [ State ]; (r) there are under the laws of [ State ] no present restrictions on Lessee to make the payments required by the Transaction Documents; (s) there are no registration, stamp or other taxes or duties of any kind payable in [ State ] by Lessor in connection with the signature, entering into, registration or performance of the Lease or the registration of title of ownership or a mortgage over the Aircraft except the following: (i) registration of mortgages in [ State ]; (ii) registration of the Lease Agreement; (ii) registration of title or ownership: [ ]; and (iv) registration of the mortgages in the [ Name of Authority ]: [ ]. (t) Lessor will not violate any law or regulation in [ State ] nor become liable to tax in [ State ] by reason of Lessor entering into the Lease with Lessee, or performing its obligations thereunder; (u) the choice of the laws of [ Applicable Law ] to govern the [ Lease/Relevant Documents ] is a valid and binding choice of law and will be recognised and applied by the courts of [ State ]; (v) Lessee's submission to the jurisdiction of the courts of [Relevant Court(s) ] in the Lease is its legally valid and binding obligation; (w) any judgement by the courts of [ Relevant Court(s) ] against Lessee which is enforceable in [ Relevant jurisdiction of Court(s)] is enforceable against Lessee in [ State ] provided [ advise conditions ]; (x) [If relevant] Lessee's submission to arbitration in accordance with the Rules of Conciliation and Arbitration of the International Chamber of Commerce in the Lease is its legally valid and binding obligation; (y) [If relevant] any award by the arbitrators against Lessee, will be enforceable and confirmed by any competent [ State ] Court, as provided by the [ State ] law concerning confirmation of arbitration award by courts, without re-examination or re-litigation of the matter; (z) there is no withholding tax or other tax to be deducted from any payment whatsoever which may be made by the Lessee to the Lessor under the Lease; the provisions in the Lease providing for the full compensation of the Lessor by the Lessee for any amount so withholding (and any amount withheld on such additional compensation) is legally binding upon Lessee and enforceable in accordance with the laws of [ State ]. SCHEDULE 10 MONTHLY AIRCRAFT UTILISATION AND STATUS REPORT To: Indigo Aviation AB (publ) From: Frontier Airlines, Inc. Aircraft Type: Boeing 737-3L9 Registration Mark: N310FL Serial Number: 26440 Month of: _____ - -------------------------------------------------------------------------------- Aircraft Total Time (Flight Hours) Since New: - -------------------------------------------------------------------------------- Aircraft Total Cycles Since New: - -------------------------------------------------------------------------------- Airframe Flight Hours Flown During Month: - -------------------------------------------------------------------------------- Airframe Cycles/Landing During Month: - -------------------------------------------------------------------------------- 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 During Month: Flight Hours During Month: - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Cycles During Month: Cycles During Month: - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Time Since Last Boroscope: Time Since Last Boroscope: - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Time Until Next Boroscope: Time Until Next Boroscope: - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Landing Gear: Time Since Time Since Cycles Since Cycles Since New: Overhaul: New: Overhaul: - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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 x US$ Per Fligh = Reserve payment During Month Hour/Cycle - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Airframe: Hours: x = - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Original Engine Hours: x = Serial Number: - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Original Engine Serial Number: Hours: x = - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Total Engines: Hours: x = - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- LLP: Hours: x = - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Landing Gear: Cycles: x = - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- APU: Hours: x = - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Total - -------------------------------------------------------------------------------- SCHEDULE 11 FORM OF QUIET ENJOYMENT LETTER From: [ Lender ] To: [ Lessee ] Dated: [ ] Dear Sirs, [ ] Aircraft bearing Manufacturer's Serial Number [ ] (the Aircraft) equipped with two (2) [ ] Engines bearing Serial Numbers [ ] and [ ] (the Engines) With reference to that certain Aircraft Lease Agreement dated [ ] between [ ] as lessor (Lessor) and [ ] as lessee (Lessee) in relation to the Aircraft and the Engines (the Lease), we, the undersigned, hereby undertake that we shall not by our own acts interfere with Lessee's rights under the Lease during the Lease Term (as defined therein), including without limitation its rights to quiet use, possession and peaceful enjoyment of the Aircraft and the Engines, provided that no Default (as defined in the Lease) shall have occurred and be continuing. - ------------------- signed for and on behalf of [Lender] SCHEDULE 12 RETURN CONDITIONS On the Redelivery Date the Aircraft will be in the same condition as at Delivery, ordinary wear and tear excepted. Location: A city in the continental United States of America (48 contiguous states) reasonably requested by Indigo. Certification: A United States Standard Certificate of Airworthiness suitable for Part 121 operations or an Export Certificate of Airworthiness as requested by Lessor. The Aircraft will be airworthy (conform to type design and be in a condition for safe operation), with all Aircraft equipment, components and systems operating in accordance with their intended use and within limits established by the Aircraft Maintenance Manual. Configuration: An all economy 136 seat interior with a 31" minimum seat pitch. Paint: The Fuselage and the Vertical Stabilizer exterior will be sanded or stripped as needed and painted white. Frontier will install next lessee's logo on the fuselage provided the logo is no more complex than Frontier's logo. If the next lessee's logo is more complex than Frontier's then Frontier and Indigo will mutually agree in writing how the next lessee's logo will be installed. Airframe: Fresh from next Block C Check, excluding hours and cycles used on the Demonstration/Ferry Flights, with a minimum of 3,000 hours remaining until the next C7 Check /Structural Inspection. A. The Aircraft will have no deferred maintenance items, unique inspections or temporary repairs at Delivery. B. Modifications and Repairs installed on the Aircraft at Delivery will have been accomplished in accordance with FAA approved data. C Aircraft will be in compliance with the Manufacturer's CPC program D: If available, any No Charge Service Bulletin Kits not installed by Present Lessee will be loaded onboard the Aircraft as cargo. E. Fuel tanks will be free from contamination. Engines: Each Engine will have no more time since last engine performance restoration visit than as of Delivery (unless otherwise agreed) and a minimum of at least 5,000 hours remaining until next anticipated performance restoration shop visit and have at least a minimum of 5,000 hours and 5,000 cycles remaining until the next LLP limiter at 3B2 Power (22,000 Lbs Thrust). Each Engine will pass a Performance Engine Run in accordance with the Aircraft Maintenance Manual. Each Engine will pass a hot and cold section borescope inspection. Lessee will notify Lessor in writing not less than six (6) months prior to the Redelivery Date to discuss and agree upon the pre-redelivery shop visit work scope, as applicable. APU: Serviceable and passing a borescope inspection. Components: Each component that is time controlled will have at least 2,250 hours or cycles remaining until next inspection/ overhaul. Each component that is calendar controlled will have 12 months remaining until its next inspection/overhaul. Condition Monitored/On Condition components will be serviceable. Landing Gear: Each Landing Gear will have at least 3,000 hours remaining until the next inspection or overhaul. Airworthiness Directives (AD's): Airworthiness Directives requiring compliance within 90 days after Redelivery will be in compliance. Airworthiness Directives that require inspection or repetitive inspection will be cleared for 3,000 hours or the maximum inspection interval if less than 3,000 hours. Demonstration Flight: Lessee will perform a one and one half hour flight demonstrating the satisfactory operation of the aircraft with no more than two observers, as designated by Lessor, on board during such Demonstration Flight. Records: Documentation delivered to lessee at Delivery will be returned to Lessor along with the up to date Aircraft Maintenance Records that the Lessee has collected during the Lease Term. Aircraft Documentation Lessee will prepare the Aircraft Documents in one location at least ten (10) days prior to redelivery of the Aircraft. The Aircraft Documents, as identified in Annexure 1 to the Acceptance Certificate, will be redelivered in their latest revision to Lessor at the Redelivery Date. SCHEDULE 13 RETURN ACCEPTANCE CERTIFICATE 1. Frontier Airlines, Inc. (Lessee) and Indigo Aviation AB (publ) (Lessor) have entered into an Aircraft Lease Agreement dated 15 March 1999, (Lease). Unless otherwise defined, capitalised terms used herein will have the meanings set forth in the Lease. 2. Lessor has this _____ day of ______ (Time: _____) at _______ received from Lessee possession of: (a) one (1) Boeing 737-3L9 Aircraft, bearing manufacturer's serial number 26440, registration mark N310FL together with two (2) CFM56-3B2 engines bearing serial numbers 726422 and 726492, 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 hours Total landings Since last "C" Check Since last "A" Check ______ _____ ______ Flight Hours _____ Flight Hour _______ Cycles _____ Cycles (b) Engines: Position Serial No. Total Flight Total Cycles Since last Since last Hours shop visit 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 remaining on turbine and HSI inspection 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 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 return: ___kilos (____ gallons) 4. Other technical information regarding the Aircraft and its components are correctly set forth on the Aircraft report attached hereto. 5. The above specified Aircraft, Engines and documents are hereby accepted by Lessor subject to: (a) the provisions of the Lease; and (b) correction by Lessee of the discrepancies specified in Annex 2 hereto (which correction Lessee hereby undertakes to perform as soon as reasonably possible). 6. Subject to Paragraph 7, the leasing of the Aircraft by Lessor to Lessee pursuant to the Lease is hereby terminated without prejudice to Lessee's continuing obligations under the Lease including, without limitation, Clauses 19 and 20. 7. Lessee represents and warrants that during the term of the Lease all maintenance and repairs to the Airframe and Engines were performed in accordance with the requirements contained in the Lease. Lessee further confirms that all of its obligations under the Lease whether accruing prior to the date hereof or which survive the termination of the Lease by their terms and accrue after the date hereof, will remain in full force and effect until all such obligations have been satisfactorily completed. Lessee represented that the documents delivered and listed in Annex 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. FRONTIER AIRLINES, INC. By: Title: INDIGO AVIATION AB (publ) By: Title: ATTACHMENTS: Annexure 1. Aircraft Documents Annexure 2. List of Discrepancies Annexure 1 AIRCRAFT DOCUMENTS Note: This Annexure 1 is to be used for reference purposes only. The Aircraft Documents will be more closely identified in Annexure 1 to the Acceptance Certificate. A. Certificates - - Certificate of Airworthiness - - Certificate of Registration - - Noise Certificate - - Radio License B. Aircraft Status Records - - Technical Log Book - - Airframe Maintenance Status Report - - Manufacturer's Service Bulletin Status Report - - Airworthiness Directive Compliance Report (terminated and repetitive) - - Local Modification Status Report List with Substantiating Data - - Last Weighing Report - - Repair Datas Structural Repairs C. Aircraft Maintenance Records - - Test Flight Reports - - Last Boeing "C" check and maintenance check Work Cards for each "C" check multiple (or segment) D. Aircraft History Records - - Aircraft Structural Repair History (if applicable) - - Service Difficulty Report (if applicable) - - Accident or Incident Report (if applicable) E. Engine Records (for each engine) - - Log Books - - Last overhaul and repair documents for each module - - Airworthiness Directive Compliance Report (terminated and repetitive) - - Manufacturer's Service Bulletin Status Report - - Engine Disk Sheet - - Engine Data Submittal Sheet - - Condition Monitoring Status Report F. APU Records - - Log Book - - Last overhaul and repair documents - - Manufacturer's Service Bulletin Status Report G. Component Records (including components installed engines and APU) - - Time Controlled Component Status Report with remaining hours and cycles (if applicable) - - Serviceability tags or back-up documentation for components replace since delivery from Boeing H. Manuals 1. Airplane Flight Manual 2. Quick Reference Handbook 1. Aircraft Operating Manual 1. Weight and Balance Manual Supplement 1. Wiring Diagram Manual (microfilm) 1. Illustrated Parts Catalog (microfilm) 1. Aircraft Maintenance Manual (microfilm) 1. CFMI Illustrated Parts Catalog 1. Vendor Manual Seats 1. Vendor Manual Galleys 1. Vendor Manual Ovens 1. Vendor Manual Coffeemakers I. Miscellaneous Technical Documents - - Maintenance Program Specifications/Requirements - - Interior Configuration Drawings - - Loose Equipment Inventory List - - Delivery documentation ex Boeing - - Export Certificate of Aircraft - - Aircraft Readiness Log - - Rigging Record Brochure - - Miscellaneous Delivery Record Brochure - - Fuel Measuring Stick Calibration Brochure - - FAA Airworthiness Directive Compliance Record Annexure 2 Discrepancies SCHEDULE 14 LEASE SUPPLEMENT LEASE SUPPLEMENT NO. 1 d ated March __, 1999, between Indigo Aviation AB (publ) (the "Lessor") and FRONTIER AIRLINES, INC. (the "Lessee"). Lessor and Lessee have previously entered into that certain Aircraft Lease Agreement dated as of March 15, 1999 (herein called the "Lease" and the defined terms therein being hereinafter used with the same meaning). The Lease provides for the execution and delivery from time to time of a Lease Supplement substantially in the form hereof for the purpose of leasing the aircraft described below under the Lease as and when delivered by Lessor to Lessee in accordance with the terms thereof. The Lease relates to the Aircraft, Parts and Engines as more specifically described below. A counterpart of the Lease is attached hereto and this Lease Supplement and the Lease shall form one document. In consideration of the premises and other good and sufficient consideration, Lessor and Lessee hereby agree as follows: 1. Lessor hereby delivers and leases to Lessee under the Lease and Lessee hereby accepts and leases from Lessor under the Lease, that certain used Boeing Model 737-3L9 Aircraft bearing FAA Registration Mark N310FL, including the Airframe bearing manufacturers serial number 26440 and the two (2) CFM INTERNATIONAL CFM 56-3B2 Engines bearing manufacturer's serial numbers 726422 and 726492 described in Schedule 1 herewith ("Delivered Aircraft"). 2. The Delivery Date of the Aircraft is the date of this Lease 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 Lease Expiry Date. 4. The amount of Rent for the Aircraft is set forth in the Lease and is payable as provided in the Lease. 5. Lessee hereby confirms to Lessor that (i) the Aircraft and each Engine installed thereon or belonging thereto have been duly marked in accordance with the terms of Clause 12.12 of the Lease, (ii) Lessee has inspected the Aircraft and the Aircraft satisfies the conditions set forth in the Lease and (iii) Lessee has accepted the Aircraft for all purposes hereof and of the Lease. 6. All of the terms and provisions of the Lease are hereby incorporated by reference in this Lease Supplement to the same extent as if fully set forth herein. 7. This Lease Supplement may be executed in any number of counterparts, each of such counterparts, except as provided on the front page of the Lease, shall for all purposes be deemed to be an original; and all such counterparts shall together constitute but one and the same Lease Supplement. 8. This Lease Supplement has been delivered in New York. SIGNATURE PAGE IN WITNESS WHEREOF, Lessor and Lessee have caused this Lease Supplement to the Lease to be duly executed as of the day and year first above written. LESSOR, INDIGO AVIATION AB (publ) By: Title: LESSEE, FRONTIER AIRLINES, INC. By: Title: EX-10 7 AIRCRAFT LEASE AGREEMENT AIRCRAFT LEASE AGREEMENT Dated as of April 16, 1999 BETWEEN C.I.T. LEASING CORPORATION as Lessor AND FRONTIER AIRLINES, INC. as Lessee Concerning: One Boeing 737-300 Aircraft With Two CFM56-3B2 Engines FAA Registration Number N312FL Manufacturer's Serial Number 24569 Items marked with "*" have been omitted pursuant to a request for confidential treatment. AIRCRAFT LEASE AGREEMENT THIS AIRCRAFT LEASE AGREEMENT, dated as of April 16, 1999 (this "Lease"), between C.I.T. LEASING CORPORATION, a Delaware corporation, and its successors and assigns ("Lessor"), and Frontier Airlines, Inc., a Colorado corporation ("Lessee"). W I T N E S S E T H : WHEREAS, Lessor owns one (1) Boeing 737-300 Aircraft more particularly described on Exhibit A hereto; and WHEREAS, Lessee desires to lease from Lessor and Lessor is willing to lease to Lessee the Aircraft upon the terms and conditions set forth in this Lease; NOW, THEREFORE, in consideration of the mutual covenants herein set forth, Lessor and Lessee hereby agree as follows: ARTICLE 1 DEFINITIONS Unless the context requires otherwise, the following terms shall have the following meanings for all purposes of this Lease and such meanings shall be equally applicable to both the singular and the plural forms of the terms defined: "Aeronautics Authority" shall mean, as the context requires, the United States Department of Transportation, the FAA and/or the Administrator of the United States Federal Aviation Administration, or any person, governmental department, bureau, commission or agency succeeding to the functions of any of the foregoing. "Aircraft" shall mean the Airframe together with the Engines, the Landing Gear, and, where applicable, shall also include the Aircraft Documents and all Capital Improvements or parts which may be made to, installed on or incorporated into the Aircraft, including, but not limited to, those required pursuant to any Airworthiness Directive. "Aircraft Documents" shall mean the items identified in Appendix I B. to the Lease Supplement and delivered to Lessee on the Delivery Date and all such other items which may be acquired or prepared by Lessee relating to its use, operation and maintenance of the Aircraft during the term of this Lease, including the Aircraft Records, all of which shall be maintained in the English language. "Aircraft Records" shall mean all historical maintenance records and other records delivered with the Aircraft for maintenance accomplished prior to the Delivery Date and current maintenance records and other records for work accomplished subsequent to the Delivery Date including, but not limited to, documents, manuals (revised up to and including the most current revisions issued by the Manufacturer), data, overhaul records, log books, original Aircraft and Engine delivery documents, Life Limited Part traceability to "zero time since new", FAA Form 8130-3 or other FAA approved serviceable parts tags, FAA forms, teardown reports for Time Controlled Parts which have been overhauled or replaced during the Term, modification records, inspection records (including NDT documentation such as x-ray and eddy current), documentation of AD compliance, time logs showing Aircraft and Engine Flight Hours and Cycles on any given date during the Term, and all other documentation pertaining to the Aircraft, Engines and Parts. "Airframe" shall mean the Boeing 737-300 aircraft (except for the Engines) more specifically described on Exhibit A hereto and the Lease Supplement, together with all Landing Gear, the APU, and any and all Parts relating thereto. "Airworthiness Directive" or "AD" shall mean any Airworthiness Directive issued by the FAA or any Manufacturer's mandatory service bulletin and in each case applicable to aircraft, engines or parts of the same type as the Aircraft, the Engines or the Parts. "APU" shall mean the auxiliary power unit installed in the Airframe. "Basic Rent" shall mean the rent for the Aircraft payable throughout the Term pursuant to Section 3.1 hereof and specified on Exhibit H hereto. "Business Day" shall mean any day other than a Saturday, Sunday or day on which commercial banking institutions in New York, New York and Denver, Colorado are authorized by law to be closed. "Capital Improvement" shall mean any permanent alteration, modification, addition, accession, replacement or other type of improvement which is made to the Airframe, Engines, or any Part thereof, including, but not limited to, the addition of any Parts or avionics, the performance of Airworthiness Directives and upgrading of Engines and aircraft flight operation or safety technology where such improvements increase the value or operating life of the Aircraft, Engines, or any Part thereof, and for which Lessor is eligible to take depreciation or cost recovery deductions based on the cost of such improvements. "Capital Improvement AD" shall have the meaning given such term in Section 9.3(b) hereof. "Capital Improvement Cost Sharing Formula" shall have the meaning given such term in Section 9.3(b) hereof. "Checks" shall mean A-Checks, B-Checks, C-Checks and D-Checks, or their equivalent, and all structural inspections and corrosion inspections, which are required to be performed on the Aircraft in connection with the Maintenance Program for the Aircraft. "Claims" shall have the meaning given such term in Section 13.1 hereof. "Cycle" shall mean one take-off and landing for the Aircraft. ""D" Check Airframe Reserve" shall have the meaning given such term in Exhibit G hereto. "Default" shall mean any event or condition which, with the lapse of time or the giving of notice or both, would constitute an Event of Default. "Delivery Date" shall mean the date on which Lessee accepts the Aircraft under the terms of this Lease, which date shall be set forth in the Lease Supplement, or such other date as may be agreed by Lessor and Lessee. Subject to the satisfaction of the conditions set forth in Section 2.3 hereof, the Delivery Date for the Aircraft is presently estimated to be on or about May 10, 1999. "Dollars" or "$" shall mean the lawful currency of the United States of America. "Engine Life Limited Parts Reserve" shall have the meaning given such term of Exhibit G hereto. "Engine Reserve" shall have the meaning given such term on Exhibit G hereto. "Engines" shall mean each of the two CFM56-3B2 engines described on Exhibit A hereto and in the Lease Supplement, or any replacement of any thereof, together with any and all Parts related thereto. "Event of Default" shall have the meaning given such term in Section 17.1 hereof. "Event of Loss" shall mean, with respect to any Item of Equipment, any of the following events: (A) the loss of such Item of Equipment or the use thereof due to theft, disappearance, destruction, damage beyond repair or rendition of such Item permanently unfit for normal use for any reason whatsoever; (B) any damage to such Item which results in an insurance settlement with respect to such Item on the basis of an actual or constructive total loss; (C) the condemnation, confiscation or seizure of, or requisition of use or the prohibition under any applicable Law of the use of the Aircraft for commercial transportation of passengers for a period in excess of 60 days, or such shorter period ending on the last day of the Term, or on the date on which an insurance settlement on the basis of total loss shall occur, of such Item of Equipment; or (D) the condemnation, confiscation or seizure of, or requisition of, title to such Item of Equipment. 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 which is part of the Aircraft. "Excusable Delay" shall mean any delay in delivery of the Aircraft hereunder not occasioned by the fault or negligence of a party hereto and due to or arising from any cause beyond such party's reasonable control, including, without limitation, (i) acts of the public enemy, civil war, insurrection or riots, or quarantine restrictions, strikes, lockouts, or labor stoppages and/or (ii) fires, floods, explosions, earthquakes, acts of nature or epidemics and/or (iii) delays relating to any maintenance work performed on the Aircraft or any part thereof prior to delivery hereunder. "Expiration Date" shall mean the last day of the Term of this Lease or such other date on which the Term of this Lease may be terminated or extended pursuant to the terms hereof. "FAA" shall mean, as the context requires, the United States Federal Aviation Administration and/or the Administrator of the United States Federal Aviation Administration, or any person, governmental department, bureau, commission or agency succeeding to the functions of either of the foregoing. "Flight Hour" shall mean each hour or part thereof, measured to two decimal places, elapsing from the moment the wheels of the Airframe leave the ground on take-off to the moment when the wheels of the Airframe touch the ground on landing. "Governmental Authority" shall mean and include (a) the FAA; (b) any national government, or political subdivision thereof or local jurisdiction therein; (c) any board, commission, department, division, organ, instrumentality, court, or agency of any entity described in (b) above, however constituted; and (d) any association, organization, or institution of which any entity described in (b) or (c) above is a member or to whose jurisdiction any such entity is subject or in whose activities any such entity is a participant but only (except for purposes of defining Law below) to the extent that any of the preceding have jurisdiction over the Aircraft or its operations. "Hereby", "herein", "hereof", "hereunder", and other like words shall refer to this Lease as originally executed or as amended, modified or supplemented pursuant to the applicable provisions hereof, including, without limitation, as supplemented by the Lease Supplement. "Indemnitee" shall mean Lessor and its affiliates, officers, directors, successors, permitted assigns, agents, employees, officers and servants. "Initial Deposit" shall have the meaning given such term in Section 3.5(a) hereof. "Insured Value" shall mean the amount set forth on Exhibit H hereto. "Item of Equipment" or "Item" shall mean the Airframe, the Landing Gear, any of the Engines, the APU or any of the Parts. "Landing Gear" shall mean the complete strut assembly, consisting of the inner and outer cylinders, of each main landing gear and the nose landing gear and all associated Parts that comprise each landing gear assembly, as listed in the Manufacturer's illustrated parts catalogue for the Airframe, but excluding rotable parts (which include, without limitation, tires, brakes, actuators and switches). "Landing Gear Reserve" shall have the meaning given such term on Exhibit G hereto. "Law" shall mean and include (a) any statute, decree, constitution, regulation, order, judgment or other directive of any Governmental Authority, (b) any treaty, pact, compact or other agreement to which any Governmental Authority is a signatory or party, (c) any judicial or administrative interpretation or application of any Law described in (a) or (b) above, and (d) any amendment or revision of any Law described in (a), (b) or (c) above. "Lease" shall mean this Aircraft Lease Agreement between Lessor and Lessee, as the same may be amended, modified or supplemented from time to time. "Lease Supplement" shall mean a Lease Supplement in substantially the form of Exhibit B hereto. "Lessee's Actual Cost" shall mean Lessee's cost incurred in performing an obligation under this Lease determined as follows: (i) if such obligation is performed by a third party, then Lessee's Actual Cost shall be the actual charges of such third party paid by Lessee (without markups or overhead by Lessee); and (ii) if Lessee elects that such obligation be performed by Lessee, then Lessee's Actual Cost shall be Lessee's cost for labor and materials. "Lien" shall mean any mortgage, pledge, lien, charge, encumbrance, lease, exercise of rights, security interest or claim. "Life Limited Part" shall mean any Item of Equipment that has a predetermined life limit, calculated in Flight Hours, Cycles or calendar time as determined by the Aeronautics Authority or the Manufacturer and which requires such Item of Equipment to be discarded upon reaching such life limit. "Maintenance Program" shall mean the FAA-approved maintenance program for the Aircraft and Engines, as the same may be modified from time to time pursuant to the terms hereof including scheduled maintenance, conditional monitored maintenance and on-condition maintenance of the Airframe, Engine and Parts of the Aircraft. Upon request by the Lessor, a copy of the Maintenance Program shall be made available to the Lessor. "Maintenance Reserves" shall mean the amounts to be paid by Lessee to Lessor pursuant to the terms of Exhibit G hereto, including, where applicable, the "D" Check Airframe Reserve, each Engine Reserve, each Engine Life Limited Parts Reserve and the Landing Gear Reserve. "Manufacturer" shall mean, in the case of the Airframe, Boeing Aircraft Company, in the case of the Engines, CFM International, Inc., and in the case of any Part, Landing Gear and APU, the manufacturer of such Part, Landing Gear or APU. "Operative Agreements" shall mean each of this Lease, the Lease Supplement, the Tax Indemnity Agreement and any other agreements, documents or certificates executed and delivered in connection with the transactions contemplated under this Lease. "Parts" shall mean any and all appliances, parts, instruments, appurtenances, accessories, furnishings, seats, and other equipment of whatever nature or any Capital Improvements (other than Engines, Landing Gear, APU and temporary replacement parts as provided in Section 9.4 hereof), which may from time to time be incorporated or installed in or attached to the Airframe or any Engine or which have been removed therefrom where title remains in the Lessor. "Past Due Rate" shall mean interest at the rate per annum equal to 18%, subject to the maximum rate permitted by Law calculated on the basis of a year of 360 days and actual days elapsed. "Permitted Liens" shall mean those Liens permitted pursuant to Section 14 hereof. "Person" shall mean an individual, partnership, corporation, business trust, joint stock company, trust, unincorporated association, joint venture, limited liability company, Governmental Authority or other entity of whatever nature. "Prior Period" shall have the meaning given such term in Paragraph (a) of Exhibit G hereto. "Related Transactions" shall mean any and all leases and financings between Lessor or any affiliate of Lessor, as lessor or secured party, and Lessee or any affiliate of Lessee, as lessee or borrower. "Rent" shall mean the Basic Rent and Supplemental Rent payable throughout the Term for the Aircraft pursuant to Article 3 hereof. "Rent Payment Date" shall mean the first day of each calendar month during the Term hereof, on which day the payment of Basic Rent is due and payable. "Rent Period" shall mean each of the consecutive calendar months throughout the Term, commencing on and including the first day of each calendar month and ending on and including the last day of each calendar month; provided that the first Rent Period shall commence on the Delivery Date and shall end on the last day of the calendar month in which the Delivery Date occurs. "Security Deposit" shall have the meaning given such term in Section 3.5(a) hereof. "Security Letter of Credit" shall have the meaning given such term in Section 3.5(f) hereof. "Supplemental Rent" shall mean all amounts, liabilities and obligations (other than Basic Rent and Maintenance Reserves) which Lessee assumes or agrees to pay to Lessor hereunder or under any other Operative Agreement or in connection herewith or therewith, whether pursuant to a letter agreement, stipulation or other agreement, including, without limitation, (a) any payment of Insured Value, (b) any payment of indemnity required by Sections 10 and 13 hereof (but excluding Maintenance Reserves), (c) any additional maintenance obligations, and (d) interest as permitted. "Tax Indemnity Agreement" shall mean the Tax Indemnity Agreement dated as of the date hereof, between Lessor and Lessee. "Taxes" shall have the meaning given such term in Section 10.1 hereof. "Term" shall have the meaning given such term in Section 3.3 hereof. "Time Controlled Part" shall mean any Item of Equipment that has a predetermined time limit or interval in accordance with the Maintenance Program or as required by the Aeronautics Authority, which requires such Item of Equipment to be discarded, overhauled, or recertified upon reaching such time limit or interval. "Transportation Act" shall mean 49 U.S.C. ss.40101 et. seq., as amended, as in effect on the date of this Lease, or any successor or substitute legislation at the time in effect and applicable. "Watch Item" shall mean any special inspection generated by airframe or component condition with inspection intervals determined by original equipment manufacturers that do not coincide with routine periodic inspection intervals, Airworthiness Directives, mandatory service bulletins, service bulletins or fleet campaign directives, where such additional inspection shall be required at an interval of less than (i) a full C Check or (ii) 3,500 Flight Hours, whichever is greater. "Wet Lease" shall mean any arrangement whereby Lessee agrees to furnish the Aircraft to a third party pursuant to which (i) Lessee's crew at all times shall maintain full operational control of the Aircraft, (ii) the Aircraft shall be operated solely by regular employees of Lessee possessing all current appropriate FAA certificates and licenses (it being understood that cabin attendants need not be regular employees of Lessee), (iii) the insurance required under Article 12 hereof shall remain in full force and effect, (iv) the Aircraft shall be maintained by Lessee in accordance with its normal maintenance practices and as required by the terms of this Lease, and (v) the term of any such Wet Lease does not extend beyond the remaining Term of this Lease. ARTICLE 2 DELIVERY AND ACCEPTANCE 2.1. Time and Place. (a) Lessor hereby agrees to lease the Aircraft and the Aircraft Documents to Lessee, and Lessee hereby agrees to lease the Aircraft and the Aircraft Documents from Lessor, pursuant to and in accordance with the terms of this Lease as supplemented by the Lease Supplement. (b) Subject to the satisfaction of the conditions set forth in Section 2.3 hereof and the occurrence of an Excusable Delay, Lessor shall deliver on the Delivery Date the Aircraft, together with all Aircraft Documents, to Lessee at Marana, Arizona. Upon such delivery and subject to all the other terms and conditions of this Lease, Lessee shall accept the Aircraft, together with the Aircraft Documents relating thereto, and thereupon the Aircraft and Aircraft Documents shall be deemed subject to this Lease. Lessee shall indicate and confirm its acceptance of the Aircraft and Aircraft Documents by the execution and delivery to Lessor of the Lease Supplement. Lessor shall not be obligated to deliver the Aircraft to Lessee unless the conditions set forth in Section 2.3 hereof are satisfied on or before May 10, 1999. (c) Lessee acknowledges that Lessor, at Lessor's cost has provided Lessee with an adequate test flight of the Aircraft. A technical representative for both Lessor and Lessee shall prepare and sign a list of discrepancies of an airworthy nature or discrepancies from the delivery requirements of Exhibit I hereto (excluding any discrepancies relating to any Time Controlled Part) in the Aircraft systems and components found during such test flight which exceed maintenance manual allowable limits. To the extent not already accomplished by Lessor, such discrepancies are to be corrected at Lessor's expense, at Lessee's Actual Cost, with all Parts necessary for such correction to be supplied by Lessor and approved by Lessor and all such corrections to be performed by Lessee with Lessee providing or procuring all labor for such purpose. Lessee agrees that it will indemnify and hold harmless Lessor and each Indemnitee from and against all claims, demands, liabilities, losses and judgments, including attorney's fees, costs and expenses incident thereto, which may be suffered by, accrued against, charged to or recoverable from Lessor and/or any Indemnitee by reason of loss of or damage to property or by reason of injury or death, or action or inaction of Lessee or any representative of Lessee during such test flight. (d) Lessor's obligation to lease the Aircraft and the Aircraft Documents hereunder to Lessee, in addition to those conditions set forth in Section 2.3 hereof, shall be conditioned upon (i) the absence of any Default or Event of Default hereunder on the Delivery Date, (ii) the absence of any materially adverse change in Lessee's financial condition from the date hereof to the Delivery Date, (iii) the absence of any Excusable Delay, and (iv) the absence of an Event of Loss having occurred with respect to the Aircraft. (e) Except as specifically stated in this Lease, including Exhibit I hereto, the Aircraft shall be delivered to Lessee "AS IS," "WHERE IS" and SUBJECT TO EACH AND EVERY DISCLAIMER OF WARRANTY AND REPRESENTATION SET FORTH IN SECTION 4.1 HEREOF. Upon the tender and delivery by the Lessor, provided the conditions precedent described in Section 2.3 have been satisfied, Lessee shall accept delivery of the Aircraft. Upon acceptance of the Aircraft, Lessee shall thereupon indicate and confirm acceptance of the Aircraft by execution and delivery of the Lease Supplement which shall be dated the Delivery Date. The execution and delivery of the Lease Supplement shall constitute conclusive and irrebuttable proof of delivery and acceptance. (f) In the event of an Event of Loss with respect to the Aircraft prior to the Delivery Date, Lessor shall promptly notify Lessee in writing. This Lease shall terminate upon receipt by Lessee of such written notice. In the event of an Excusable Delay which prevents the delivery of the Aircraft hereunder for more than sixty (60) days beyond the estimated Delivery Date, at the option of Lessor or Lessee, this Lease shall terminate upon receipt by the other party of written notice thereof from the party wishing to terminate this Lease (provided that such Excusable Delay is beyond the control of and is not occasioned by the fault or negligence of Lessee). All Security Deposits and other prepayments with respect to this Lease shall be returned to Lessee upon any such termination. Neither Lessor nor Lessee shall be liable for the failure to deliver the Aircraft hereunder due to an Excusable Delay, provided that such Excusable Delay is beyond the control of and is not occasioned by the fault or negligence of such party. 2.2. A Lease Only. At all times during the Term, full legal title to all Items of Equipment and the Aircraft Documents shall remain vested in Lessor to the exclusion of Lessee, notwithstanding the delivery of the Aircraft to, and the possession and use thereof, by Lessee. 2.3. Conditions to Delivery of the Aircraft. Lessor's obligation to deliver and lease the Aircraft to Lessee hereunder shall be subject to Lessor having received the following on or before the Delivery Date: (1) (i) an amount equal to the first month's Basic Rent and (ii) the Security Deposit; (2) written evidence of appropriate corporate action of Lessee certified by an officer of Lessee duly authorizing or ratifying the lease of the Aircraft hereunder and the execution, delivery and performance of this Lease, together with an incumbency certificate as to the Person or Persons authorized to execute and deliver said certification and the Lease on behalf of Lessee; (3) the Lease Supplement, in substantially the same form as Exhibit B, and the Tax Indemnity Agreement, each completed, duly executed and delivered by Lessee, and dated and effective as of the Delivery Date; (4) a favorable opinion signed by Lessee's General Counsel, dated the Delivery Date, in substantially the form annexed as Exhibit D hereto, and including such other matters as may be reasonably requested by Lessor or Lessor's counsel; (5) an opinion letter, substantially in the form of Exhibit E hereto, executed by an independent aircraft insurance broker reasonably acceptable to Lessor, as to Lessee's compliance with the relevant insurance provisions of this Lease and a certificate of insurance signed by such insurance broker which evidences the relevant insurance required by Article 12 hereof which certificate of insurance shall include the relevant special provisions set forth on Exhibit F hereto; (6) a certificate signed by a duly authorized officer of Lessee, dated the Delivery Date, to the effect that: (A) the representations and warranties of Lessee contained in Section 4.2 hereof, are true and correct on and as of such date as though made on and as of such date, and all authorizations and approvals of, giving of notice to, and filings and recordings with, all regulatory bodies and authorities which may be conditions to the validity or enforceability of this Lease or Lessee's performance of the terms hereof have been duly accomplished; and (B) no Default or Event of Default has occurred and is continuing or would result from the lease of the Aircraft; (7) evidence satisfactory to Lessor confirming that this Lease and the Lease Supplement have been duly filed with the FAA; (8) a favorable opinion from McAfee & Taft, special FAA counsel to Lessor, addressed to Lessor , as to completion of the due filing of this Lease, the Lease Supplement and each other agreement or instrument anticipated to be recorded with the FAA, pursuant to the Transportation Act and related rules and regarding such other matters as Lessor may reasonably request; (9) one or more Form UCC-1 Uniform Commercial Code Financing Statements signed by Lessee, as debtor, in form and substance acceptable to Lessor for filing in any and all recordation offices necessary to evidence or perfect Lessor's interest in the Aircraft and Items of Equipment; (10) evidence reasonably satisfactory to Lessor that Lessee has obtained such licenses, operator's certificates or other documents from each appropriate Governmental Authority as may be required to operate the Aircraft as an air carrier under applicable Law, including but not limited to, approval by the FAA; (11) if applicable, a duly executed Security Letter of Credit, in a form satisfactory to Lessor; and (12) such other documents or conditions or financial information as Lessor or Lessor's counsel may reasonably request, in form and substance satisfactory to Lessor and Lessor's counsel. 2.4. Aircraft Configuration, etc. The Aircraft shall be delivered "as is, where is" in the configuration used by the previous operator of the Aircraft and shall conform to the requirements set forth in Exhibit I hereto. Lessee shall be permitted to change the interior configuration, including replacement of interior Parts such as seats, seat covers, and carpeting at no cost to Lessor. All requirements necessary to bridge the Aircraft onto the Maintenance Program shall be accomplished by Lessee at the sole cost and expense of Lessee, including without limitation, replacement of hard time parts whether due to (x) accumulated time since last overhaul, or (y) lack of documentation. Notwithstanding anything herein to the contrary, Lessor, at its sole cost and expense, shall cause the Aircraft on the Delivery Date: (i) to have windshear and TCAS installed thereon; and (ii) to have a current United States Certificate of Airworthiness issued by the FAA. ARTICLE 3 RENT AND TERM 3.1. Basic Rent. Lessee covenants and agrees to pay to Lessor the Basic Rent as set forth on Exhibit H hereto throughout the Term, payable in consecutive installments on each Rent Payment Date during the Term of this Lease. 3.2. Maintenance Reserves and Supplemental Rent. Lessee shall pay to Lessor the Maintenance Reserves pursuant to the terms of Section 5.7 and Exhibit G hereof, respectively. Lessee shall pay to Lessor any and all Supplemental Rent within five (5) Business Days after demand or, if longer, such other relevant period as may be provided herein. In the event of any failure on the part of Lessee to pay any Maintenance Reserves or Supplemental Rent, Lessor shall have all rights, powers and remedies provided for herein or by law or equity or otherwise in the case of nonpayment of Basic Rent. Lessee also shall pay to Lessor, on demand, as Supplemental Rent to the extent permitted by applicable Law, interest at the Past Due Rate (i) on any part of any installment of Basic Rent not paid when due for any period for which the same shall be overdue and (ii) on any payment of Maintenance Reserves or Supplemental Rent (excluding interest at the Past Due Rate payable under clause (i) above) not paid when due until the same shall be paid, in each case commencing on the due date and including such date thereof if such payment is not received by the time specified in this Article 3. 3.3. Term. Except as otherwise provided herein, the Aircraft shall be leased to Lessee hereunder for a term of Eighty-Four (84) months, commencing on the Delivery Date and ending at 3:00 p.m. New York, New York time on the day which is the seventh (7th) annual anniversary of the Delivery Date (the "Term"). 3.4. Place of Payment. Each payment of Rent, Maintenance Reserves and the Security Deposit shall be made by Lessee to Lessor by wire transfer of immediately available funds to The Chase Manhattan Bank, N.A., 270 Park Avenue, New York, New York 10017, for The CIT Group, Account No. 116-003855, ABA No. 021-000-021, identifying the source of such payment, not later than 3:00 p.m. New York City time on the date due. If any payment hereunder is due on a day which is not a Business Day, such payment shall be due and payable on the next preceding Business Day. 3.5. Security Deposit. (a) Lessor acknowledges the receipt of Two Hundred Ten Thousand Dollars ($210,000) (the "Initial Deposit") representing partial payment of the amount described on Exhibit H hereto as the Security Deposit Amount. The Initial Deposit shall be held until the Delivery Date at which time Lessee shall provide to Lessor a security deposit (the "Security Deposit") under this Lease in the amount of the Security Deposit Amount as set forth on Exhibit H hereto. The Security Deposit shall be made in cash or in the form of a Security Letter of Credit that satisfies the requirements of Section 3.5(f) hereof. The Initial Deposit shall be promptly returned by Lessor to Lessee upon the issuance of such a Security Letter of Credit. The Security Deposit shall be nonrefundable during the Term, and shall be held by Lessor as security for (i) the timely and faithful performance by Lessee of all of Lessee's obligations under this Lease (including, but not limited to, any prepetition or postpetition obligations of Lessee in connection with any proceeding or other action involving Lessee under any bankruptcy, insolvency or reorganization Law of any jurisdiction and compliance with all return conditions specified herein and on Exhibit C hereto), (ii) all payments of Rent and Maintenance Reserves due and owing from time to time, (iii) any and all damages incurred by Lessor which may arise as a result of the breach or rejection of the Lease, whether or not in connection with a motion to lift stay or a motion to assume or reject the Lease, including, without limitation, overdue interest, costs of preservation or protection of the Aircraft and costs of repossession and (iv) all attorney's fees incurred by Lessor in connection with any of the above, whether or not litigation is instituted and whether incurred before or after the filing by or against Lessee of a petition under Chapter 7 or Chapter 11 of the Bankruptcy Code. (b) Lessee hereby grants to Lessor a s ecurity interest in the Security Deposit and in all other sums deposited pursuant to this Section 3.5. Lessee agrees to execute and file with the appropriate Governmental Authorities any and all documents necessary or reasonably requested by Lessor to evidence and perfect such security interest in favor of Lessor. (c) Upon the occurrence of an Event of Default hereunder, in addition to all of the other rights that Lessor may have under the New York Uniform Commercial Code as a secured party, Lessor may use, apply or retain all or any portion of the Security Deposit in partial payment for sums due to Lessor by Lessee, to compensate Lessor for any sums it may in its discretion advance as a result of a Default by Lessee, or to apply toward losses or expenses Lessor may suffer or incur as a result of Lessee's Default hereunder. If Lessor uses or applies all or any portion of such Security Deposit, such application shall not be deemed a cure of any Default or Event of Default, and Lessee shall within five (5) days after written demand therefor deposit with Lessor in cash an amount sufficient to restore the Security Deposit to its original sum as set forth in Exhibit H hereto and the failure of Lessee to do so shall be a material breach of this Lease by Lessee. (d) The Security Deposit shall be held by Lessor in a segregated account at Fleet Bank in New York. Provided no Default or Event of Default shall have occurred and be continuing, Lessor shall credit to the Security Deposit interest thereon at the commercial rate of interest as is customarily available to Lessor from time to time, as is in effect on the first day of each calendar quarter during the Term. Such interest shall be credited on the tenth Business Day of each calendar quarter and on the date on which the Security Deposit is returned to Lessee. Any interest earned on the Security Deposit shall become part of the Security Deposit and shall be held and applied by Lessor as provided herein. (e) Provided Lessee is not in Default under this Lease and no Event of Default shall have occurred and be continuing, the Security Deposit shall be returned to Lessee (i) promptly after the termination of this Lease in the event that this Lease is terminated prior to the Delivery Date, or (ii) within one month following the later of the Expiration Date and Lessee's return of the Aircraft in compliance with Article 16 hereof, together in either case with interest, if any, earned thereon. (f) In lieu of a cash Security Deposit, Lessee may deliver to Lessor, on or after the Delivery Date, an unconditional and irrevocable letter of credit in a form satisfactory to Lessor, in the amount of not less than the Security Deposit Amount set forth on Exhibit H, hereto and issued by an issuer bank acceptable to Lessor (the "Security Letter of Credit"). The Security Letter of Credit shall remain in full force and effect during the Term hereof and for not less than thirty (30) days following the expiration of the Term. Lessor may draw upon all or a portion of the amount of the Security Letter of Credit upon (i) the occurrence of an Event of Default hereunder or (ii) in the event that the Letter of Credit has not been renewed and a replacement letter of credit delivered to Lessor not less than thirty (30) days prior to the expiration date of such Letter of Credit, and Lessor may use, apply or retain all or any portion of the funds paid pursuant to the Security Letter of Credit to the same extent as provided in the paragraph (a) above with respect to the cash Security Deposit by delivering a certificate to the issuer stating that a drawing by Lessor is authorized under the terms of this Lease. If Lessor draws upon all or any portion of the Security Letter of Credit, such application shall not be deemed a cure of the Default or Event of Default for which such amount was applied until Lessee shall cause (within five (5) Business Days after written demand therefor) the Security Letter of Credit to be reinstated to its original amount or cause a replacement letter of credit to be issued in the amount of not less than the Security Deposit amount set forth on Exhibit H hereto, and the failure of Lessee to do so shall be a material breach of this Lease by Lessee. For the avoidance of doubt, Lessee's reinstatement of the Security Letter of Credit shall not cause the cure of any Default or Event of Default which would not have been curable in full by Lessor's drawing on the then-available stated amount of the Security Letter of Credit. After expiration of the Term of this Lease, and provided that Lessee has been discharged of its obligations hereunder, including but not limited to, return conditions pursuant to Section 16 hereof and Exhibit C hereto, Lessor shall return the Security Letter of Credit to Lessee for cancellation. 3.6 Time is of the Essence. Time and strict and punctual performance are of the essence with respect to each provision of this Lease. ARTICLE 4 REPRESENTATIONS AND WARRANTIES; COVENANTS OF THE PARTIES 4.1. Lessor's Representations and Warranties. LESSOR LEASES THE AIRCRAFT AND AIRCRAFT DOCUMENTS TO LESSEE "AS IS, WHERE IS", EXCEPT AS OTHERWISE PROVIDED HEREIN. LESSOR HAS NOT AND SHALL NOT BE DEEMED TO HAVE MADE (WHETHER BY VIRTUE OF HAVING LEASED THE AIRCRAFT AND AIRCRAFT DOCUMENTS UNDER THIS LEASE, OR HAVING ACQUIRED THE AIRCRAFT AND AIRCRAFT DOCUMENTS, OR HAVING DONE OR FAILED TO DO ANY ACT, OR HAVING ACQUIRED OR FAILED TO ACQUIRE ANY STATUS UNDER OR IN RELATION TO THIS LEASE OR OTHERWISE), AND LESSOR HEREBY SPECIFICALLY DISCLAIMS, ANY REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, AS TO THE TITLE OR LIEN STATUS (EXCEPT AS HEREIN BELOW PROVIDED), AIRWORTHINESS, CONDITION, DESIGN, OPERATION, MERCHANTABILITY, FREEDOM FROM CLAIMS OF INFRINGEMENT OR THE LIKE, OR FITNESS FOR USE FOR A PARTICULAR PURPOSE OF THE AIRCRAFT AND AIRCRAFT DOCUMENTS, OR AS TO THE QUALITY OF THE MATERIAL OR WORKMANSHIP OF THE AIRCRAFT, THE ABSENCE THEREFROM OF LATENT OR OTHER DEFECTS, WHETHER OR NOT DISCOVERABLE, OR AS TO ANY OTHER REPRESENTATION OR WARRANTY WHATSOEVER, EXPRESS OR IMPLIED (INCLUDING ANY IMPLIED WARRANTY ARISING FROM A COURSE OF PERFORMANCE OR DEALING OR USAGE OF TRADE), WITH RESPECT TO THE AIRCRAFT AND AIRCRAFT DOCUMENTS; AND LESSEE HEREBY WAIVES, RELEASES, RENOUNCES AND DISCLAIMS EXPECTATION OF OR RELIANCE UPON ANY SUCH WARRANTY OR WARRANTIES. LESSOR SHALL NOT HAVE ANY RESPONSIBILITY OR LIABILITY TO LESSEE OR ANY OTHER PERSON, WHETHER ARISING IN CONTRACT OR TORT OUT OF ANY NEGLIGENCE OR STRICT LIABILITY OF LESSOR OR OTHERWISE, FOR (i) ANY LIABILITY, LOSS OR DAMAGE CAUSED OR ALLEGED TO BE CAUSED DIRECTLY OR INDIRECTLY BY THE AIRCRAFT OR ANY ENGINE, OR PART OR BY ANY INADEQUACY THEREOF OR DEFICIENCY OR DEFECT THEREIN OR BY ANY OTHER CIRCUMSTANCE IN CONNECTION THEREWITH, (ii) THE USE, OPERATION OR PERFORMANCE OF THE AIRCRAFT OR ANY RISKS RELATING THERETO, (iii) ANY INTERRUPTION OF SERVICE, LOSS OF BUSINESS OR ANTICIPATED PROFITS OR CONSEQUENTIAL DAMAGES OR (iv) THE DELIVERY, OPERATION, SERVICING, MAINTENANCE, REPAIR, IMPROVEMENT OR REPLACEMENT OF THE AIRCRAFT. THE WARRANTIES AND REPRESENTATIONS SET FORTH IN THIS SECTION 4.1 ARE EXCLUSIVE AND IN LIEU OF ALL OTHER REPRESENTATIONS OR WARRANTIES WHATSOEVER, EXPRESS OR IMPLIED, AND LESSOR SHALL NOT BE DEEMED TO HAVE MADE ANY OTHER WARRANTIES, EXCEPT THAT: Lessor represents, warrants and covenants that it has good title to the Aircraft and Aircraft Documents, and the right and corporate power to lease the Aircraft (including all Items of Equipment) and Aircraft Documents to Lessee hereunder; and, so long as Lessee keeps and performs each and every covenant to be kept and performed by it hereunder, Lessor, or anyone claiming by or through Lessor or claiming title to the Aircraft, any Item of Equipment or the Aircraft Documents, shall not interfere with Lessee's quiet enjoyment of the Aircraft and Aircraft Documents; provided, however, that Lessor and prospective purchasers and lessees may inspect the Aircraft and Aircraft Documents at their own expense as long as such inspection does not interfere with Lessee's operation or maintenance of the Aircraft. During the term of this Lease, Lessee is authorized to enforce in its own name such rights as Lessor may have with respect to the Aircraft under any warranty (express or implied), service policy or product agreement to the extent that the same may be assigned or otherwise made available to Lessee and, to the extent that the same may not be so assigned or otherwise made available to Lessee, Lessor agrees to use reasonable efforts, at Lessee's expense, to enforce such rights as Lessor may have with respect thereto for the benefit of Lessee; provided, however, that upon the occurrence of a Default or an Event of Default all such rights shall immediately and unconditionally revert to Lessor. 4.2. Representations and Warranties of the Parties. Except as otherwise provided in this Section, each party represents and warrants to the other, as to itself, that: (a) (i) such party is a corporation duly organized, validly existing and in good standing under the Laws of the jurisdiction of its incorporation, and (ii) Lessee only represents and warrants that it (A) is and covenants that throughout the Term it will remain duly certificated as an air carrier of passengers under the laws of the United States of America; and (B) operates and will throughout the Term continue to operate the Aircraft in accordance with the rules and regulations of the FAA as an air carrier holding a certificate issued under ss. 44705 of the Transportation Act; (b) the execution and delivery by such party of this Lease, the Lease Supplement, and any other Operative Agreement the consummation by such party of the transactions contemplated herein and therein and compliance with the terms and provisions hereof and thereof are within such party's corporate powers, do not and will not result in a violation of such party's articles of incorporation or by-laws as currently in effect; and do not and will not conflict with, or result in a breach of any term or provision of, or constitute a default under, or result in the imposition of any Lien upon the Lease or any Item of Equipment under, any indenture, mortgage, or other agreement or instrument to which such party is a party or by which it or any of its properties, is or may be bound, or any existing applicable law, rule or regulation, or any judgment, order or decree, of any government, governmental instrumentality or court having jurisdiction over such party or any of its properties; (c) Lessee only represents and warrants that, upon its delivery hereunder, none of the Aircraft, Airframe, Landing Gear, Engines or any Part thereof, shall be or become subject to any Lien except for such, if any, as is permitted by Article 14 hereof; (d) this Lease, the Lease Supplement and the other Operative Agreements have each been duly authorized by such party, this Lease, the Lease Supplement and the other Operative Agreements has been duly executed and delivered by such party, and this Lease and the Tax Indemnity Agreement are and the Lease Supplement will be, upon due execution and delivery thereof, a legal, valid and binding obligation of such party, enforceable against such party in accordance with its terms, except as such enforceability may be further limited by bankruptcy; insolvency, reorganization and other laws of general application affecting the enforcement of creditors' rights; (e) Lessee only represents and warrants that Lessee has received every consent, approval or authorization of, and has given every notice to, each Governmental Authority having jurisdiction with respect to the execution, delivery or performance of this Lease (including all monetary and other obligations hereunder) that is required in order for Lessee to execute and deliver this Lease and the other Operative Agreements and each other document to which Lessee is a party, and to perform the transactions contemplated hereby and thereby and each such consent, approval or authorization is valid and effective and has not been revoked; (f) Lessee only represents and warrants that there are no suits or proceedings pending or, to the knowledge of Lessee, threatened in any court or before any regulatory commission, board or other administrative governmental agency against or affecting Lessee which will have a materially adverse effect on the current business or financial condition of Lessee; (g) Lessee only represents and warrants that, except for the filing for recordation of this Lease and the Lease Supplement with the FAA and the filing of any Uniform Commercial Code financing statements required, and the placing on the Aircraft and on each Engine of the plates containing the legends referred to in Section 5.6 hereof, no further filing or recording of this Lease or of any other document and no further action, are necessary or desirable under the Laws of any Governmental Authority in order to (i) fully protect and establish Lessor's title to, interest in and property rights with respect to the Aircraft and Aircraft Documents as against Lessee or any third party claiming through Lessee and to ensure that the property rights of Lessor therein will have priority in all respects over the claims of all creditors of Lessee, or (ii) ensure the validity, effectiveness and enforceability of this Lease, the Lease Supplement and the other Operative Agreements; (h) Lessee only represents and warrants that it has delivered to Lessor a true, complete and correct copy of the Lessee's financial statements for the period ended March 31, 1998 together with an independent auditor's report with respect thereto, and Lessor represents that it has reviewed such financial statements and, assuming they are accurate, finds such financial statements to be acceptable; (i) Lessee only represents and warrants that there are no withholding or other Taxes to be deducted from any payment to be made by Lessee under this Lease; (j) Lessee only represents and warrants that Lessee is not in default in the performance of its material obligations for the payment of indebtedness for borrowed money or on any other material lease obligations; and (k) Lessee only represents and warrants that, upon the commencement of a Chapter 11 proceeding under the Bankruptcy Code by or against Lessee, Lessor shall be entitled to the benefit of Title 11 U.S.C. Section 1110 as in effect on the date hereof with respect to the Aircraft. ARTICLE 5 POSSESSION; USE; LAWFUL INSURED OPERATIONS; MAINTENANCE; REGISTRATION AND INSIGNIA; MAINTENANCE RESERVES 5.1. Possession. During the Term, the Items of Equipment and the operations performed therewith shall, subject to applicable Laws of any Governmental Authority including, but not limited to, FAA regulations, be under the exclusive control of Lessee, subject to the rights of Lessor hereunder. Without the prior written consent of Lessor, Lessee shall not sublease or otherwise deliver, relinquish or transfer possession of the Aircraft, the Airframe, the Aircraft Documents or any Item or Items of Equipment; provided, however, that, so long as no Default or Event of Default shall have occurred and be continuing, Lessee may, without the written consent of Lessor but subject to the other provisions of this Lease: (i) deliver possession of the Aircraft, the Airframe, any Engine or any Part thereof or any Item of Equipment to the Manufacturer thereof or an FAA-certified maintenance facility for service, repair, modifications, alterations, maintenance or overhaul work required by the terms hereof; (ii) install any Engine on an airframe owned by Lessee which airframe shall be free and clear of all Liens, except: (A) Liens permitted hereby and those which apply only to the engines (other than the Engines), appliances, parts, instruments, appurtenances, accessories, furnishings and other equipment (other than Parts) installed on such airframe (but not to such airframe as an entirety); or (B) mortgage Liens or other security interests, provided, that the applicable security documents provide that such Engine shall not become subject to the Lien of such mortgage or security interest, notwithstanding the installation thereof on such airframe; (iii) install any Engine on an airframe leased to Lessee or purchased by Lessee subject to a conditional sale or other security agreement, provided that such airframe is free and clear of all Liens, except: (A) the rights of the parties to the lease or conditional sale or other security agreement covering such airframe, or their assignees; (B) Liens of the type permitted by clause (ii) above; and (C) such lease, conditional sale or other security agreement effectively provides that such Engine shall not become subject to the lien of such lease, conditional sale or other security agreement, notwithstanding the installation thereof on such airframe; or (iv) enter into a Wet Lease of the Aircraft. Lessee will not permit any Item of Equipment (other than Parts as provided herein) to be utilized on any aircraft not within Lessee's fleet of aircraft. No relinquishment of possession pursuant to the terms of this Section 5.1 shall in any way discharge or diminish any of Lessee's obligations to Lessor hereunder or constitute a waiver of Lessor's rights and remedies hereunder. 5.2. Assignment by Lessee. Lessee shall not assign any interest in this Lease or any of its rights hereunder or in any Item of Equipment, and any such purported assignment shall be void ab initio. 5.3. Use. Lessee shall use the Aircraft and any Item of Equipment solely in commercial operations for which Lessee is duly authorized and strictly in accordance with the terms of this Lease. Lessee shall not use, or permit the use of, any Item of Equipment for any purpose for which it is not suitable. The Aircraft shall always remain in passenger configuration. Lessee shall comply with FAA regulations relating to the transport of restricted articles. Lessee shall pay for and provide all electric power, oil, fuel and lubricant consumed by and required for the operation of the Aircraft. 5.4. Lawful Insured Operations. The Aircraft shall be operated at all times in compliance with all applicable Federal Aviation Regulations, including, but not limited to, Part 121 thereof. Lessee will not cause or permit the Aircraft or any Item of Equipment to be maintained, used or operated in violation of any Law or Governmental Authority having jurisdiction or contrary to any Manufacturer's operating manuals and instructions, or, in the case of the Aircraft and the Engines, in violation of any airworthiness certificate or registration relating thereto. Lessee agrees not to operate any Item of Equipment, or suffer or permit such Item to be operated (i) unless such Item is covered by insurance required by the terms of this Lease, (ii) contrary to the terms of the insurance required by the provisions of Article 12 hereof or (iii) in any area excluded from coverage by any insurance required by the terms of Article 12 hereof. 5.5. Maintenance. (a) Lessee, at its own expense, shall cause the Items of Equipment to be serviced, repaired, overhauled, tested and maintained in compliance with all applicable Federal Aviation Regulations, including, but not limited to, Part 121 thereof (i) by personnel in accordance with FAA requirements, (ii) in accordance with the Maintenance Program and the operations and maintenance manuals of the Manufacturers thereof (including, without limitation, an FAA approved or Manufacturer's recommended program for the prevention and treatment of corrosion), (iii) so as to keep such Item in as good operating condition and appearance as when delivered to Lessee hereunder, ordinary wear and tear excepted, (iv) so as to keep such Item in such operating condition as may be necessary to cause the airworthiness certificate of such Item to be maintained in good standing at all times under the applicable rules and regulations of the Aeronautics Authority, (v) so as to keep it airworthy and fit for scheduled commercial passenger service in the United States and each other jurisdiction in which Lessee will operate the Aircraft, and (vi) so that it will not discriminate against the Aircraft (as compared to other aircraft of the same type owned or operated by Lessee) in respect of the Maintenance Program and maintenance, other than withdrawal of the Aircraft from use and operation as is necessary to prepare the Aircraft for return to Lessor upon the expiration or termination of this Lease. (b) Without limiting the foregoing, Lessee shall cause, at its expense, all maintenance Checks to be performed on the Aircraft as they become due, with no fleet discrimination with respect to the Aircraft. Any damage, defects or corrosion discovered during any Check shall be permanently repaired in accordance with the Maintenance Program and the structural repair manual for the Aircraft at the sole expense of Lessee. Lessee shall provide Lessor with ten (10) days prior notice of scheduled C and D Checks. Lessor shall have the right to have representatives present during such Checks who shall consult with Lessee's representatives as to the work being performed during such Checks. Lessee, at its own expense, shall furnish Lessor upon return of the Aircraft and at such times during the Term as Lessor shall reasonably request, originals of all Aircraft Records with a certificate signed by an officer of Lessee, affirming that all the maintenance work represented by such Aircraft Records was performed by Lessee or a then FAA authorized repair station approved to maintain Boeing 737-300 type aircraft and a certificate affirming that the maintenance work represented by such records was performed in accordance with the Maintenance Program. Lessee, at its own expense, shall also maintain (in the English language) all Aircraft Documents and other materials required by the FAA, or any other applicable Aeronautics Authority, including Aircraft Documents required to be maintained in respect of each Item of Equipment, in a manner acceptable to the FAA, or any other applicable Aeronautics Authority and promptly furnish to Lessor upon Lessor's request such information as may be required to enable Lessor to file any reports required to be filed with any Governmental Authority because of Lessor's ownership of the Aircraft. All Aircraft Documents, including Aircraft Records and documentation of maintenance accomplished on the Airframe, Engines and Parts shall be in the English language and shall be retained by Lessee until the Expiration Date, at which time all Aircraft Records and Aircraft Documents shall be returned to Lessor in original form. (c) Lessee will not allow the Flight Hours:Cycle ratio for the operation of the Aircraft during the Term to fall below a ratio of 2:1. To the extent the Flight Hours:Cycle ratio falls below 2:1, the applicable rate of the Maintenance Reserves shall be adjusted in accordance with paragraph (f) of Exhibit G hereto. (d) No Time Controlled Part shall be removed from the Aircraft unless (i) such Time Controlled Part must be removed and replaced in accordance with the Maintenance Program or (ii) such Time Controlled Part is re-installed on the Aircraft within a reasonable period of time based on Lessee's schedule but in any event not to exceed 72 hours after such removal. Any Time Controlled Part which is removed in accordance with the Lessee's Maintenance Program shall be replaced with a part of the same manufacture and an equivalent or later part number equal to the replaced Part and be completely interchangeable as to the form, fit and function and shall be airworthy. 5.6. Registration and Insignia. Upon delivery of the Aircraft, Lessee agrees to place the following lease identification in the cockpit in a prominent location and to place such lease identification on each Engine on a metal plate and in a prominent location near such Engine's data plate: "Leased from C.I.T. Leasing Corporation, as owner and Lessor." Lessee agrees to make such changes to such lease identification as Lessor may reasonably request from time to time. Lessee shall not take or permit any action inconsistent with the continued registration of the Aircraft in Lessor's name under the Transportation Act. Lessee shall not remove, or cause or permit the removal of, any plate, disc or other similar device affixed to the Airframe or any Engine indicating Lessor's ownership thereof. If any of the same shall come to be removed, Lessee shall promptly affix a replacement therefor, at its own expense, it being understood that such identification should be maintained (A) in the cockpit of the Airframe, in a prominent location adjacent to the airworthiness certificate for the Aircraft, and (B) on each Engine, in a prominent location near such Engine's data plate. Lessee shall not allow the name of any other Person, association or corporation to be placed on the Airframe or any Engine as a designation that might be interpreted as a claim of ownership or of any interest therein; provided, however, that Lessee may cause the Airframe to be lettered or otherwise marked in an appropriate manner for convenience of identification of the interest of Lessee therein. 5.7. Maintenance Reserves. Lessee agrees to pay to Lessor Maintenance Reserves with respect to the Aircraft during the Term in accordance with Exhibit G hereto. All Maintenance Reserves shall be applied in accordance with the applicable provisions of Exhibit G hereto. No interest shall accrue with respect to Maintenance Reserves. 5.8. Application of Reserves Upon Aircraft Return. Any amounts remaining in the "D" Check Airframe Reserve, Engine Reserves, the Engine Life Limited Parts Reserves, Landing Gear Reserve, and any other Maintenance Reserve established from time to time hereunder after application of the monies held in any such Maintenance Reserve in accordance with Exhibit G hereto upon the return of the Aircraft pursuant to Section 16 hereof shall be retained by Lessor. 5.9. Concerning Reserves. (a) At the time Lessee pays amounts into the "D" Check Airframe Reserve, the Engine Reserves, the Engine Life Limited Parts Reserves, the Landing Gear Reserve, and any other Maintenance Reserve established from time to time, as the case may be, Lessee shall provide to Lessor a certificate as to the computation of each such payment, duly executed on behalf of Lessee by the records manager or other duly authorized employee of Lessee, certifying the number of Airframe Flight Hours and Cycles for the Aircraft during the Prior Period, the number of Engine Cycles and Engine Flight Hours for each Engine during the Prior Period, and the number of Flight Hours and Cycles for each Landing Gear during the Prior Period, as the case may be. From time to time, Lessor shall have the right, during normal business hours at its own expense, on reasonable prior notice to Lessee, to cause its agents to review the appropriate records of Lessee to determine the accuracy of such certificates. In the event a discrepancy is determined as a result of such review, Lessor shall notify Lessee in writing thereof and Lessee shall make up any deficiency in its payments to Lessor within five (5) Business Days of such notice. (b) Pursuant to the New York Uniform Commercial Code, Lessee hereby grants to Lessor a possessory security interest in the "D" Check Airframe Reserve, each Engine Reserve, such Engine Parts Reserve the Landing Gear Reserve and any other Maintenance Reserve established from time to time hereunder as security for all obligations of Lessee under this Lease, including, without limitation, the obligations of Lessee to maintain and return the Aircraft, Airframe, Engines and each Item of Equipment in the condition required by this Lease. Lessee agrees to execute and file, at Lessee's expense, with the appropriate Governmental Authorities any and all documents necessary or reasonably requested by Lessor to evidence and perfect such security interest in favor of Lessor. Upon and following an Event of Default, and in addition to all other rights Lessor may have under this Lease and as a secured party under the New York Uniform Commercial Code, Lessor may (but shall not be obligated to) use, apply or retain all or any portion of the "D" Check Airframe Reserve, the Engine Reserves, the Engine Life Limited Parts Reserves, the Landing Gear Reserve, and any other Maintenance Reserve established from time to time hereunder as follows: (i) first, to compensate Lessor for any sums it may in its discretion advance to perform any of Lessee's obligations to maintain and return the Aircraft, Airframe, Engines, Landing Gear and Aircraft Documents in the condition required under this Lease; and (ii) the balance in the "D" Check Airframe Reserve, the Engine Reserves, the Engine Life Limited Parts Reserves, the Landing Gear Reserve, and any other Maintenance Reserve established from time to time hereunder, if any, to apply toward losses, damages or expenses that Lessor may suffer or incur as a result of Lessee's failure to perform any other obligation under this Lease. In the event Lessor uses, applies or retains all or any portion of the "D" Check Airframe Reserve, the Engine Reserves, the Engine Life Limited Parts Reserves, the Landing Gear Reserve, and any other Maintenance Reserve as stated above, then Lessee shall immediately reimburse each such Reserve for all amounts used, applied or retained by Lessor. (c) Lessee acknowledges that it has no property interest in any Maintenance Reserve and agrees that Maintenance Reserves shall not be deemed property of Lessee. (d) Lessee shall not assign, hypothecate or otherwise transfer its residual interest, if any, in Maintenance Reserves. ARTICLE 6 INSPECTION; FINANCIAL AND AIRCRAFT INFORMATION 6.1. Inspection. During the Term, Lessee shall furnish to Lessor such information concerning the location, condition, maintenance, use and operation of the Items of Equipment and Aircraft Documents as Lessor may reasonably request including, without limitation, a copy of the Maintenance Program of Lessee and a copy of the related FAA approved operation specifications. Lessee shall permit any Person (including prospective purchasers or lessees of the Aircraft) designated in writing by Lessor, at Lessor's expense, to (i) visit and inspect the Items of Equipment, the Aircraft Documents, the portions of the Maintenance Program relating to the maintenance status of the Aircraft, the condition, use and operation of the Items of Equipment and the Aircraft Records maintained in connection therewith and, at Lessor's expense, to make copies of such Aircraft Records as Lessor may designate and (ii) inspect the Aircraft for corrosion, including, if necessary, removal of floor boards to facilitate such inspection. Lessor 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. Any inspection shall occur at a reasonable time, provided that such inspection does not interfere with Lessee's operating commitments. 6.2. Financial Information. (a) Lessee agrees that it will maintain its financial statements in a manner which fairly presents its financial condition and that the results of its operations and changes in its financial position will be accounted for in accordance with generally accepted accounting principles consistently applied. (b) Lessee agrees to furnish to Lessor during the Term (i) within forty-five (45) days after each fiscal quarter of Lessee, copies of the balance sheet, profit and loss statement, retained earnings statements, income statements, and cash flow statement of Lessee for such fiscal quarter, certified as true and correct by the Chief Financial Officer of Lessee, and (ii) from time to time such other information as Lessor may reasonably request. (c) Lessee agrees to furnish to Lessor during the Term (i) within ninety (90) days after the end of the fiscal year, copies of the balance sheet, profit and loss statement, retained earnings statements, income statements, and cash flow statement of Lessee for such fiscal year, certified as true and correct by the Chief Financial Officer of Lessee, (ii) comparative figures for the previous fiscal year and (iii) from time to time such other information as Lessor may reasonably request. (d) Lessee agrees to provide all other information reasonably requested by Lessor with respect to the financial condition, operations, business and property of Lessee or any of its Affiliates. 6.3. Aircraft Information. During the Term, Lessee agrees to furnish or cause to be furnished to Lessor the following information, in writing, with respect to the Aircraft: (i) on a monthly basis, within ten (10) days following the last day of each Rent Period a monthly utilization report with respect to the Aircraft, Engines, Landing Gear, APU and Parts reflecting the Flight Hours and Cycles of operation thereof, (ii) within twenty-four (24) hours of the occurrence or detection thereof, any accident or incident information with respect to the Airframe or any of the Engines in circumstances where the resulting damage to the Aircraft from such accident or incident to the Airframe or any of the Engines exceeds $100,000.00, (iii) promptly upon the request of Lessor, the status of any claims for damages (whether with respect to any Airframe or Engine or any other Item of Equipment, or against Lessor or Lessee) arising out of the use, operation, lease, sublease, sub-sublease or condition of the Airframe, Engines or any other Item of Equipment and/or the amount of taxes paid with respect thereto, (iv) upon request, those portions of the Maintenance Program relating to the maintenance status of the Aircraft, and (v) from time to time such other information as Lessor may reasonably request, including information concerning the location, condition, use and operation of the Aircraft and the Engines. 6.4 Other Information. Lessee agrees that it will furnish to Lessor: (a) immediately upon the occurrence of a Default or an Event of Default, a written notice specifying the nature of the Default or Event of Default and what action Lessee is taking or proposes to take with respect thereto; (b) such other information as Lessor may reasonably request concerning Lessee, the Airframe, Engines or any other Item of Equipment in order to enable Lessor to determine whether the covenants, terms, and provisions of this Lease and the other Operative Agreements have been complied with including, without limitation, such information requested by Lessor as may be required to enable Lessor to file any reports required to be filed with any Governmental Authority as a result of Lessor's interest in any Item of Equipment; and (c) prompt written notice of the issuance by any court or any regulatory authority of any injunction, order or decision prohibiting or having the effect of prohibiting, restraining or limiting any of the transactions contemplated by this Lease or the other Operative Agreements, or the institution of any litigation or other proceedings seeking any such injunction, order or other restraint. ARTICLE 7 COVENANTS 7.1. Lessee's Covenants. Lessee covenants and agrees that, during the Term: (a) Lessee will preserve and maintain (i) its corporate existence, and (ii) all of its rights, privileges and franchises in every jurisdiction in which the character of the property owned or the nature of the business transacted by it makes licensing or qualification necessary. (b) Lessee will pay or cause to be paid all Taxes, assessments and governmental charges or levies imposed upon it or upon its income and profits, or upon any property belonging to it, prior to the date on which penalties attach thereto and all lawful claims, which, if not paid, might become a Lien or charge upon the property of Lessee; provided, however, that Lessee shall not be required to pay any such Tax, assessment, charge, levy or claim the payment of which is being contested in good faith and by appropriate proceedings with adequate reserves. Lessee shall not permit the sale, forfeiture or loss of any Item of Equipment or interest therein in the course of or as a result of any such proceedings. (c) Lessee will operate the Aircraft and will remain duly qualified to operate the Aircraft under applicable Law. (d) Lessee undertakes to maintain in full force and effect all governmental consents, licenses, authorizations, approvals, declarations, filings and registrations obtained or effected in connection with this Lease and every document or instrument contemplated hereby and to take all such additional action as may be proper or advisable in connection herewith or therewith. Lessee further undertakes to obtain or effect any new or additional governmental consents, licenses, authorizations, approvals, declarations, filings or registrations as may become necessary for the performance of any of the terms and conditions of this Lease or any other document or instrument contemplated hereby. (e) Lessee shall not consolidate or merge with or into, or sell, lease, convey or otherwise dispose of all or substantially all of its assets in one transaction or a series of transactions to, any Person unless: (i) the corporation formed by or surviving any such consolidation or merger (if other than Lessee), or to which such sale, lease, conveyance or other disposition shall have been made, assumes in writing all of the obligations of Lessee under this Lease; (ii) immediately after the transaction no Default or Event of Default exists; (iii) the corporation formed by or surviving any such consolidation or merger, or to which such sale, lease, conveyance or other disposition shall have been made, shall have a Consolidated Net Worth (immediately after the transaction) equal to or greater than the Consolidated Net Worth of Lessee immediately preceding the transaction. "Consolidated Net Worth" means the consolidated equity of the common stockholders of Lessee and its consolidated subsidiaries determined on a consolidated basis in accordance with generally accepted accounting principles set forth in the opinions and pronouncements of the Financial Accounting Standards Board or in such other statements by such other entity as may be approved by a significant segment of the accounting profession; and (iv) the Person formed by or surviving any such consolidation or merger (if other than Lessee), or to which such sale, lease, conveyance or other disposition shall have been made, (x) is a corporation organized and existing under the laws of the United States of America, any state thereof or the District of Columbia, (y) shall, upon completion of such consolidation or merger, be an air carrier holding a certificate issued under ss. 44705 of the Transportation Act and (z) shall be a "citizen of the United States" as defined in such Act. ARTICLE 8 NO SET-OFF, COUNTERCLAIM, ETC. 8.1. No Set-off, Counterclaim, etc. This Lease is a net lease. Lessee's obligation to pay all Rent and Maintenance Reserves payable hereunder shall be absolute and unconditional and shall not be affected by any circumstance, including, without limitation, (i) any set-off, counterclaim, recoupment, defense or other right which Lessee may have against Lessor or any other Person for any reason whatsoever (whether in connection with the transactions contemplated hereby or any other transactions), including, without limitation, any breach by Lessor of its warranties, agreements or covenants contained herein, (ii) any defect in the title, registration, airworthiness, condition, design, operation, or fitness for use of, or any damage to or loss or destruction of, the Aircraft, or any interruption or cessation in the use or possession thereof by Lessee for any reason whatsoever, (iii) any Liens with respect to the Aircraft, (iv) any bankruptcy, insolvency, reorganization, (v) any Taxes, or (vi) any other circumstance, happening, or event whatsoever, whether or not unforeseen or similar to any of the foregoing. Lessee hereby waives, to the extent permitted by applicable Law, any and all rights which it may now have or which at any time hereafter may be conferred upon it, by statute or otherwise, to terminate, cancel, quit or surrender this Lease except in accordance with the express terms hereof. Without limiting any of Lessee's rights under the next sentence, each payment of Rent or Maintenance Reserves made by Lessee to Lessor shall be final and Lessee will not seek to recover any part of such payment from Lessor for any reason whatsoever except manifest error. Nothing in this Section shall be construed to prevent Lessee, after complying with this Article 8, from pursuing any claim it may have against Lessor or any other Person in such court of law or otherwise as Lessee may deem appropriate. ARTICLE 9 REPLACEMENT OF PARTS; ALTERATIONS, MODIFICATIONS AND ADDITIONS 9.1. Replacement of Parts. Lessee, at its own cost and expense, shall promptly replace all Parts which may from time to time become worn out, lost, stolen, destroyed, seized, confiscated, damaged beyond repair or permanently rendered unfit for use for any reason whatsoever. In addition, in the ordinary course of maintenance, service, repair, overhaul or testing, Lessee may remove any Part, whether or not worn out, lost, stolen, destroyed, seized, confiscated, damaged beyond repair or permanently rendered unfit for use; provided that Lessee shall replace such Part as promptly as practicable and available. All replacement Parts (a) shall be free and clear of all Liens, except those permitted under Article 14 hereof, (b) shall be in as good operating condition as, and shall have a value, utility and maintenance status 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 (c) shall have documentation certifying compliance with all applicable FAA regulations, including, without limitation, (i) FAA Form 8130-3 or other FAA approved serviceable tags indicating time since overhaul, and overhaul or repair by an FAA certified repair station, (ii) overhaul records, (iii) documentation of modification status and compliance with applicable Airworthiness Directives, and (iv) any other appropriate documentation. 9.2. Title to Replaced and Replacement Parts. All Parts removed from the Airframe and any of the Engines shall remain the property of Lessor and subject to this Lease, 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 an Engine and which meet the requirements for replacement Parts specified in Section 9.1 above, at which time title to such replaced Part shall automatically vest in Lessee. Immediately upon any replacement Part becoming incorporated, installed or attached to any Item of Equipment, such replacement Part shall become the property of Lessor and shall become subject to the terms of this Lease. 9.3. Alterations, Modifications and Additions. (a) General. Except as required below or by Section 5.5 hereof, Lessee shall not make any permanent alteration, modification or addition to the Airframe (including, but not limited to, galleys, lavatories or avionics) or any of the Engines without the prior written consent of Lessor. Lessee will make such alterations, modifications and additions to the Airframe, the Engines and the Parts as may be required from time to time to meet the applicable mandatory service bulletins of the Manufacturer and to comply with Airworthiness Directives which require inspection or terminating action during the Term, and to comply with all regulations of the FAA which require compliance during the Term. (b) Airworthiness Directives. (i) For the purpose of this Lease, Lessor and Lessee agree that the accomplishment of terminating action for any AD which requires mandatory terminating action during the Term, shall be deemed to be a Capital Improvement (a "Capital Improvement AD") with respect to the Aircraft. In the event Lessee elects to terminate any AD that does not require terminating action during the Term, Lessee shall be solely responsible for the cost of terminating such AD. (ii) Notwithstanding the foregoing paragraph (i) (except with respect to the second sentence thereof), in connection with the accomplishment of any Capital Improvement AD during the Term, Lessee shall be solely responsible for the first $150,000 of the cost of terminating each such Capital Improvement AD. With respect to terminating any Capital Improvement AD, for which the cost of such terminating action is in excess of $150,000, (x) Lessee shall be responsible for paying an amount equal to the first $150,000 plus an amount determined using the Capital Improvement Cost Sharing Formula (hereinafter defined) for any amount in excess of $150,000 and (y) Lessor shall be responsible for an amount equal to the balance thereof as a Capital Improvement to the Aircraft. Any amount in excess of the first $150,000 to terminate each such Capital Improvement AD shall be shared by Lessee and Lessor as set forth below using the following formula (the "Capital Improvement Cost Sharing Formula"): LC = AMT x (84 - NME) ---------------- 84 Where LC = Lessee's share of the cost in excess of $150,000 AMT = Amount in excess of $150,000 to terminate AD NME = Number of months Lease has been in effect The cost of accomplishing any Capital Improvement AD, shall consist of Lessee's Actual Cost of labor and materials to accomplish each such Capital Improvement AD and shall be determined exclusive of all other costs incurred during any refurbishment or other work accomplished during the same maintenance visit. If Lessee performs the accomplishment of any Capital Improvement AD at its facility with its employees, then the cost of accomplishing such Capital Improvement AD shall be calculated at Lessee's Actual Cost of labor and material without mark-up. Lessee shall be solely responsible for (x) the cost of accomplishing all AD's for which there is no terminating action, or for which the accomplishment of such terminating action is optional during the Term and (y) for the first $150,000 of the cost to terminate each Capital Improvement AD during the Term. With respect to any Capital Improvement AD for which Lessor's cost shall exceed $150,000 using the Capital Improvement Cost Sharing Formula, Lessor shall have the option to (x) instruct Lessee to pay the cost of such Capital Improvement AD up to and including $150,000 (which Lessee shall pay), and to utilize the Capital Improvement Cost Sharing formula for the cost of such Capital Improvement AD for the excess amount, or (y) in circumstances where Lessor's cost would exceed $200,000, instruct Lessee not to accomplish such Capital Improvement AD and terminate this Lease on the mandatory compliance date of the Capital Improvement AD with no further liability to Lessor under this Lease, provided, that Lessee shall be obligated to (x) pay Lessor all Rent due up to the date of such termination and (y) return the Aircraft in compliance with Section 16 except to the extent any noncompliance with Section 16 relates to such Capital Improvement AD. Notwithstanding the preceding sentence, in the event Lessor instructs Lessee not to accomplish such Capital Improvement AD, Lessee may elect to accomplish such Capital Improvement AD at its sole cost and expense, and continue this Lease in effect, with no further liability to Lessor with respect to such Capital Improvement AD accomplishment. (iii) In the case of accomplishment of a Capital Improvement AD with respect to an Engine, APU or Landing Gear during a shop visit for such Engine, APU or Landing Gear, the cost of each such Capital Improvement AD shall be determined exclusive of all other costs incurred during any refurbishment or other work accomplished during the same shop visit. (iv) With respect to any Capital Improvement AD relating to an Engine (an "Engine Capital Improvement AD") where the accomplishment of such Engine Capital Improvement AD by Lessee is the sole cause for removal of such Engine, the cost in excess of $150,000 to accomplish such Engine Capital Improvement AD shall be subject to the provisions of paragraph (b) (ii) above. Notwithstanding anything to the contrary in this Lease, the cost of performing such Engine Capital Improvement AD shall only consist of the cost of disassembly, accomplishment of such mandatory terminating action as required by such AD, reassembly, and test cell run. All costs associated with all other work accomplished on such Engine during such shop visit such as removal, transportation, refurbishment, and reinstallation shall be paid for by Lessee. (v) For the purpose of determining applicability of the AD Cost Sharing Formula in regard to any Aging Aircraft AD requiring terminating action, all service bulletins listed in such Aging Aircraft AD shall be cumulatively considered to be a single Capital Improvement AD with respect to cost to accomplish required terminating action. 9.4. Title to Parts. Subject to the provisions hereof, title to all Parts incorporated or installed in or attached or added to each Item of Equipment as the result of any alteration, modification or addition shall, without further act, vest in Lessor and become subject to this Lease; provided, however, that so long as no Default or Event of Default shall have occurred and be continuing, at any time during the Term, Lessee may remove any such Part from an Item of Equipment; provided that (A) such Part is in addition to and not in replacement of or in substitution for, any Part originally incorporated or installed in or attached to such Item at the time of delivery thereof hereunder or any Part in replacement of, or substitution for, any such original Part, (B) such Part is not required to be incorporated or installed in or attached or added to such Item by the FAA, or any other Governmental Authority or pursuant to the terms hereof, and (C) such Part can be removed from such Item without diminishing or impairing the value, utility or airworthiness which such Item would have had at such time had such alteration, modification or addition not occurred. Upon the removal by Lessee of any such Part as above provided, the area from which such Part was removed shall be restored to the better of (i) the condition such area was in immediately prior to the installation of such Part, or (ii) the condition such area is required to be in under the terms set forth in this Lease and title thereto shall, without further act, vest in Lessee, and such Part shall no longer be deemed a Part hereunder. Any Part not removed by Lessee as above provided prior to the return of the respective Item of Equipment to Lessor hereunder shall become the property of Lessor. ARTICLE 10 TAX INDEMNITY 10.1. Scope. Lessee agrees that, except as otherwise provided below, all payments by Lessee in connection with the transactions contemplated by this Lease, the Lease Supplement and the other Operative Agreements shall be free of all withholdings of any nature whatsoever (including, without limitation, withholding taxes, monetary transfer fees, or similar taxes and charges), and in the event any withholding is required, except as otherwise provided below, Lessee shall pay the same together with such additional amount as is required so that each such payment shall be, under any circumstances and in any event, in the amount as set forth or referred to herein. Lessee shall pay and hold each Indemnitee harmless from liability for any and all sales, use, business, gross or net income, personal property, license, documentation, transfer, fuel, leasing, occupational, value added, excess profits, excise, gross or net receipts, franchise, stamp, environmental and other taxes, levies, imposts, withholding taxes, charges, fees, assessments or duties of any nature, together with any penalties, fines, charges, additions to tax or interest thereon imposed by any taxing authority whether domestic or foreign (collectively, "Taxes") imposed during the Term against or in respect of Lessor, any Indemnitee or any Item of Equipment, by any Federal, state or local government or taxing authority in the United States of America, or by any foreign country or any taxing authority or governmental subdivision thereof, upon or with respect to, based upon or measured by any Item of Equipment or interest therein, or upon the purchase, ownership, delivery, leasing, possession, use, operation (including, but not limited to, landings and take-offs), return or other disposition thereof, or upon the rentals, receipts or earnings arising therefrom (including, without limitation, the Rent or the Maintenance Reserves) or otherwise with respect to or in connection with the transactions contemplated by this Lease, the Lease Supplement and the other Operative Agreements; and any out-of-pocket costs and expenses attributable to any of the foregoing incurred by any Indemnitee; provided, however, that Lessee shall have no such obligation with respect to (i) Taxes (other than sales, use, rental, value added and similar taxes) imposed by the Federal Government of the United States of America upon or with respect to, based on or measured by, the gross or net income of any Indemnitee including any minimum tax, surtax or similar tax, (ii) Taxes which are based upon or measured by the net income, capital, net worth, franchise, or similar conduct of business taxes which are imposed on any Indemnitee by any state or local taxing authority in the United States of America, the Federal Government of the United States of America, or any foreign jurisdiction where such Indemnitee is organized or doing business (other than as a result of the transactions contemplated by this Agreement), (iii) Taxes imposed as a result of a transfer or other disposition by Lessor of the Aircraft or any Part thereof or interest therein, or any interest in the Rent or the Maintenance Reserves or any part thereof, unless such sale, transfer, mortgage, pledge or disposition occurs by reason of the exercise of Lessor's remedies under this Lease after the occurrence of a Default or an Event of Default, (iv) Taxes imposed as a direct and primary result of Lessor's or any Indemnitee's gross negligence or willful misconduct, (v) Taxes which accrue or arise prior to the Delivery Date or subsequent to the Expiration Date and return of the Aircraft to Lessor pursuant to Section 16 hereof, and (vi) Taxes attributable to payments or distributions from Lessor to any Indemnitee. 10.2. Report. In case of any report or return to be made with respect to any obligation of Lessee under this Article 10 or arising out of this Article 10, Lessee will either (i) make such report or return in such manner as will show the ownership in Lessor of each Item of Equipment, and send a copy of such report or return to the relevant Indemnitee or (ii) notify the relevant Indemnitee of such requirement and make such report or return in such manner as shall be satisfactory to such Indemnitee. Lessee shall, at its own expense, duly file all required reports and returns respecting all Taxes paid or indemnified against by Lessee pursuant to Section 10.1 to the extent Lessee is permitted to do so; provided, however, that if the same must be filed by an Indemnitee, Lessee will advise such Indemnitee of the necessity of filing the same and, in sufficient time before the same are due, furnish such Indemnitee with a completed copy thereof and funds in the amount required to be submitted, together with any additional information and records relating thereto as such Indemnitee may reasonably request. Lessee shall hold such Indemnitee harmless from and against any liabilities, obligations, losses, damages, penalties, claims, actions, suits and costs arising out of any insufficiency or inaccuracy in any information in such report or return filed or supplied by Lessee. Lessee shall make available to each Indemnitee such information and records as are maintained by Lessee regarding the location, operation or use of the Aircraft. If any Indemnitee reasonably requests additional information relating to any Item of Equipment or the operation, use or location thereof, Lessee shall make available such other information and records as it maintains in the ordinary course of business. 10.3. After-Tax Nature of Indemnity. (a) Lessee further agrees that, with respect to any indemnity payment under this Lease, including, but not limited to, this Article 10 and Article 13 hereof, such indemnity payment shall include any amount necessary to hold each Indemnitee harmless on an after-tax basis from all Taxes required to be paid by such Indemnitee with respect to such indemnity payment under the Laws of any Federal, state or local government or taxing authority in the United States of America, or under the Laws of any taxing authority or governmental subdivision of a foreign country. (b) For purposes of this Section 10.3, calculations made on an after-tax basis shall be made assuming the maximum statutory rates applicable to the recipient for the relevant year, after taking into account deductions attributable to the imposition of other taxes (such as state and local taxes), which would similarly be calculated on the basis of the maximum statutory rates for which such deduction was available for the applicable year. 10.4. Payment of Taxes and Indemnities. Lessee shall, to the extent permissible, pay all Taxes directly and shall reimburse each Indemnitee for all Taxes paid or payable by such Indemnitee within ten (10) days of receipt of written notice that reimbursement for such amount is due. Lessee shall pay all indemnities and other amounts due hereunder within ten (10) days of receipt of written notice that such indemnity or other amount is due. 10.5. Contest. If a written claim is made against any Indemnitee for any Taxes for which Lessee is responsible under Section 10.1 hereof, such Indemnitee shall promptly notify Lessee. Without prejudice to any other rights Lessee may have in connection therewith (including, without limitation, any claim for damages for a failure to give notice specified in the preceding sentence), the failure to provide such notice shall not affect Lessee's obligations hereunder to such Indemnitee unless such failure shall preclude the contest of such claim. If reasonably requested by Lessee in writing within 30 days after such notification, and upon determination that the amount of the claim exceeds $25,000 and that the action to be taken will not, in the sole opinion of Lessor, result in any material danger of the sale, forfeiture or loss of, or the creation of any Lien on the Aircraft or any interest therein (or in the event of such material danger of such sale, forfeiture, loss or Lien, Lessee shall have failed to obtain a bond satisfactory to such Indemnitee in such Indemnitee's sole discretion), such Indemnitee shall, upon receipt of an indemnity reasonably satisfactory to it at the sole expense of Lessee (including without limitation, all reasonable costs, expenses, losses, legal and accountant's fees and disbursements, penalties and interest), in good faith contest the validity, applicability or amount of such Taxes by, in such Indemnitee's sole discretion, (i) resisting payment thereof, (ii) not paying the same except under protest, if protest is necessary and proper, and (iii) if payment is made, using reasonable efforts to obtain a refund thereof in appropriate administrative or judicial proceedings; provided, however, that such Indemnitee shall not be required to take any action to contest a claim unless (w) Lessee provides an opinion of tax counsel of nationally recognized standing selected by Lessee and reasonably satisfactory to such Indemnitee, to the effect that there is a reasonable basis under the standard set forth in ABA Formal Opinion 85-352 or any applicable successor thereto in law and fact for contesting such proposed adjustment, which opinion shall be obtained at Lessee's sole cost and expense, (x) in the event that the subject matter of the contest is of a continuing nature and has previously been decided adversely pursuant to the contest provisions of this Section 10.5 by the highest court to which an appeal was taken, there has been a change in the law (including, without limitation, amendments to statutes or regulations, administrative rulings and court decisions) after such claim shall have been so previously decided and such Indemnitee shall have received an opinion of independent tax counsel selected by such Indemnitee, which opinion shall be obtained at Lessee's sole expense, to the effect that, as a result of such change it is (at least) as likely as not that the position which such Indemnitee or Lessee, as the case may be, will assert in any contest of such Tax would prevail, (y) prior to the commencement of any contest, Lessee shall have delivered to such Indemnitee a written acknowledgment of its obligation to fully indemnify such Indemnitee to the extent the contest is not successful and (z) in no event shall such Indemnitee be required to appeal an adverse judicial determination to the United States Supreme Court. Any contest required pursuant to the preceding sentence shall, at the option of such Indemnitee, be conducted by such Indemnitee or Lessee in the name of Lessee or such Indemnitee. If any contest involves payment of the Tax in question, Lessee shall either make such payment directly to the appropriate authority or advance to such Indemnitee sufficient funds (on an interest-free basis) to make such payment. Lessee agrees to give such Indemnitee reasonable notice of any contest prior to the commencement thereof. If an Indemnitee shall obtain an actual refund or credit of all or any part of any Taxes paid by Lessee, such Indemnitee shall pay to Lessee the amount of such refund or credit (taking into account any tax savings resulting therefrom), net of any expenses incurred by such Indemnitee and not already paid or reimbursed by Lessee, and any interest fairly attributable thereto plus an amount equal to the Tax savings realized by such Indemnitee as a result of any payment to Lessee pursuant to this paragraph; provided, however, that such amount shall not be payable before Lessee shall have made all payments and indemnities to such Indemnitee then due under this Lease; and, provided, further, however, that the aggregate amount of all payments with respect to any Taxes made by such Indemnitee pursuant to this sentence shall not exceed the aggregate amount of all payments made by Lessee to such Indemnitee pursuant to this Article 10 with respect to such Taxes. Notwithstanding anything to the contrary herein, if a Default or Event of Default shall have occurred and be continuing, Lessee shall not be entitled, and Lessor shall not be obligated, to commence or to continue any contest hereunder. Lessee shall not be deemed to be in default under any of the indemnification provisions of this Article 10 while it or an Indemnitee diligently prosecutes such contest pursuant to this Section 10.5. Nothing contained in this Section 10.5 shall require any Indemnitee to contest or permit Lessee to contest a claim which it would otherwise be required to contest pursuant to this Section 10.5 if such Indemnitee shall waive payment by Lessee of any amount that might otherwise be payable by Lessee under Section 10.1 by way of indemnity in respect of such claim. 10.6. Lessor. The term "Lessor" for purposes of this Article 10 shall include the affiliated group of corporations and each member thereof (within the meaning of Section 1504 of the Internal Revenue Code of 1986, as amended) of which Lessor is or shall become a member if such group shall file a consolidated United States federal income tax return. 10.7. Survival. The provisions of this Article 10 shall survive the expiration or termination of this Lease. ARTICLE 11 EVENTS OF LOSS 11.1. With Respect to the Aircraft. Upon the occurrence of an Event of Loss with respect to the Aircraft, Lessee shall forthwith (and in any event within two (2) Business Days after such occurrence) give Lessor written notice of such Event of Loss, and Lessor and Lessee shall proceed diligently and cooperate fully with each other in the recovery of any and all proceeds of insurance applicable thereto. Unless Lessor elects to offer a Replacement Aircraft pursuant to (and as defined in) Section 11.4 hereof, upon the earlier of the date (a) which is 90 days after the occurrence of such an Event of Loss or (b) on which insurance proceeds are received with respect to such Event of Loss, Lessee shall pay to Lessor the Insured Value of the Aircraft. At such time as Lessor shall have received the Insured Value for such Aircraft, Lessor shall transfer to Lessee all of Lessor's right, title and interest, "as is, where is," without recourse or warranty, express or implied, in and to (i) the Aircraft, (ii) all claims for damage to the Aircraft, if any, against third persons arising from the Event of Loss (unless any insurance carrier requires that such claims be assigned to it), (iii) the Maintenance Reserves, and (iv) all rights to any insurance claims and proceeds under all insurance, except liability insurance, maintained by Lessee hereunder, all without representation, recourse or warranty of any kind whatsoever. Upon the payment of the Insured Value, all Basic Rent (if any), Supplemental Rent and Maintenance Reserves then due and owing, Lessee's obligation to pay such amount shall cease, and this Lease shall terminate. Lessee shall be entitled to receive all insurance proceeds from policies maintained by Lessee applicable to the Aircraft over and above the Insured Value, if any, as compensation for the loss of Lessee's leasehold interest in the Aircraft. 11.2. With Respect to an Engine. 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 Aircraft, Lessee shall forthwith (and in any event within two (2) Business Days after such occurrence) give Lessor written notice thereof and Lessee shall replace such Engine as soon as reasonably possible, but in any event, before the end of the Term by duly conveying to Lessor, free and clear of all Liens, title to another CFM56-3B2 engine of the same or an improved model acceptable to Lessor and suitable for installation and use on the Airframe, which engine shall have a value, utility and maintenance status at least equal to, and be in as good operating condition as, the Engine with respect to which such Event of Loss shall have occurred (considering in the aggregate, but not limited to, all life-limited engine components and time since last heavy maintenance and/or time since last hot section refurbishments), assuming such Engine was of the value and utility and in the condition and repair as required by the terms hereof immediately prior to the occurrence of such Event of Loss, and subject to an inspection by Lessor of such replacement engine and related historical records. Upon acceptance by Lessor in its sole discretion, such replacement engine and historical records shall be deemed an "Engine" and "Aircraft Records," respectively, as defined herein for all purposes hereunder. Lessee agrees to take such action and execute and deliver such documents, including, but not limited to (a) cause a warranty bill of sale, duly executed by the Seller of such Replacement Engine, to be delivered to Lessor, (b) cause a Lease Supplement subjecting such Replacement Engine to this Lease, duly executed by Lessee, to be delivered to Lessor for execution and, upon such execution, to be filed for recordation with the FAA pursuant to the Transportation Act, (c) furnish Lessor with evidence of compliance with the insurance provisions of Section 11 with respect to the Replacement Engine, (d) furnish Lessor with a certificate or certification of a qualified independent aircraft appraiser reasonably satisfactory to Lessor certifying that the Replacement Engine has a value and utility (and, provided that no Event of Default is occurring or continuing without regard to hours and cycles until overhaul) at least equal to the Engine so replaced (assuming the Engine to be replaced was in the condition and repair required by the terms hereof immediately prior to the occurrence of such Event of Loss), (e) furnish Lessor with an officer's certificate signed by an officer of Lessee certifying that, upon consummation of such replacement, no Event of Default will exist hereunder, and (f) a bill of sale, supplement hereto and legal opinions, as Lessor may reasonably request in order that any such replacement Engine shall be duly and properly titled in the name of Lessor and leased hereunder to the same extent as any Engine replaced thereby. Upon such replacement, Lessor shall transfer to Lessee all of Lessor's right, title and interest, "as is, where is," without recourse or warranty, express or implied, in and to (i) such Engine, (ii) all claims for damage to such Engine, if any, against third persons arising from the Event of Loss (unless any insurance carrier requires that such claims be assigned to it), and (iii) all rights to any insurance claims and proceeds under all insurance, except liability insurance, maintained by Lessee hereunder, all without representation, recourse or warranty of any kind whatsoever. Maintenance Reserves maintained by Lessor with respect to such Engine shall be allocated to the Engine Reserve and Engine Life Limited Parts Reserve maintained with respect to the Replacement Engine. 11.3. Application of Payments from Governmental Authorities. Payments received by Lessor or Lessee from any Governmental Authority or entity with respect to an Event of Loss resulting from the condemnation, confiscation or seizure of, or requisition of title to the Aircraft, the Airframe or an Engine, shall be retained by Lessor, if received by Lessor, or promptly paid over to Lessor, if received by Lessee, up to the Insured Value (plus any amounts of Rent and Maintenance Reserves then due and owing). At such time as Lessor has received such amounts in full, Lessor shall promptly remit the excess, if any, of such payments to Lessee. Payments received by Lessor or Lessee from any Governmental Authority or entity with respect to a requisition of use during the Term of the Aircraft, the Airframe or an Engine shall be allocated promptly between Lessor and Lessee such that Lessor shall enjoy such portion thereof as relates to periods other than the Term and Lessee shall (provided no Default or Event of Default has occurred and is continuing hereunder) promptly enjoy such portion thereof as relates to the Term or any portion of the Term, provided Lessee continues to pay Rent to Lessor as required by the terms hereof. 11.4. Application of Payments During Existence of Event of Default. Any amount referred to in this Section 11 which is payable or creditable to or retainable by Lessee shall not be paid or credited to or retained by Lessee if, at the time of such payment, credit or retention, an Event of Default shall have occurred and be continuing hereunder but shall be paid to and held by Lessor as security for the obligations of Lessee under this Lease and, if Lessor declares this Lease to be in default pursuant to Section 18 hereof, applied against Lessee's obligations hereunder as and when due and at such time as there shall not be continuing any such Event of Default, such amount shall be paid to Lessee to the extent no previously applied in accordance with the terms hereof. 11.5. Replacement Aircraft. (a) Lessor may, at i ts option, offer to lease to Lessee, as a replacement for an Airframe and Engines with respect to which an Event of Loss has occurred, a Boeing 737-300 airframe (the "Replacement Airframe") and two engines of the same make and model as such Engines (or other engines of the same or another manufacturer suitable for installation and use on the Replacement Airframe; the "Replacement Engines" and, together with the Replacement Airframe, the "Replacement Aircraft"). Such Replacement Aircraft shall be in passenger configuration, duly certified as an airworthy aircraft by the FAA and in good operating condition, but in any event in at least as good operating condition and repair as the Aircraft immediately prior to the occurrence of such Event of Loss, having a useful life and utility comparable to that of the Aircraft to be replaced immediately prior to the occurrence of such Event of Loss, and otherwise satisfactory to Lessee. Lessee shall take such action as Lessor may reasonably request to facilitate the lease of the Replacement Aircraft to Lessee hereunder. (b) For all purposes hereof, the Replacement Airframe and each Replacement Engine shall be deemed part of the property leased hereunder. The Replacement Airframe shall be deemed an "Airframe" as defined herein, each Replacement Engine shall be deemed an "Engine" as defined herein; and the Replacement Airframe and each Replacement Engine shall be deemed part of such Aircraft to the same extent as was the Airframe or Engine, as the case may be, replaced thereby. Any Engine not installed on the Airframe when such Event of Loss occurred shall continue to be the property of Lessor and leased hereunder as part of such Aircraft. Lessee's acceptance of a Replacement Aircraft shall not result in any change in Basic Rent or Insured Value. ARTICLE 12 INSURANCE 12.1. Public Liability and Property Damage Liability Insurance. Lessee, at its own expense, shall maintain in effect comprehensive third party aircraft liability insurance against bodily injury and property damage losses arising from ground, flight and taxiing exposures, including, but not limited to, passenger legal liability, cargo liability, contractual liability and products liability insurance, during the Term in an amount not less than $500,000,000 for any one occurrence with respect to the Aircraft and Items of Equipment. Such policy shall include war and allied risks in accordance with standard market practice (currently "The Extended Coverage Endorsement-AVN 52C"). Any such liability insurance shall not be subject to a deductible. All such policies shall be maintained in effect with insurers and/or reinsurers of recognized reputation and responsibility, satisfactory to Lessor. Any policies of insurance carried in accordance with this Section 12.1 and any policies taken out in substitution or replacement for any of such policies shall: (1) name Lessor and its successors and assigns, and their respective directors, officers and employees as additional insureds (the "Additional Insureds"); (2) provide that in respect of the respective interests of the Additional Insureds, such policies of insurance shall insure the Additional Insureds regardless of any breach or violation of any warranty, declarations or conditions contained in such policies by Lessee or any other Person; (3) provide that if the insurers cancel such insurance for any reason whatever, or the same is allowed to lapse for nonpayment of premium, or if there is any material change in policy terms and conditions, such cancellation, lapse or change shall not be effective until thirty (30) days after receipt by Lessor of telecopied written notice from such insurers of such cancellation, lapse or change (and with respect to war risk insurance, seven (7) days or such shorter period as shall be customary on the London market for such insurance in such area of the world, or ten (10) days in the event of nonpayment of premium); (4) provide that the Additional Insureds shall have no responsibility for any premiums, commissions, warranties or representations in connection with such insurance; (5) waive any rights of setoff, counterclaim or deduction, whether by attachment or otherwise, and all rights of subrogation against the Additional Insureds and their successors, assigns, agents, officers, employees and servants; and (6) provide that all payments shall be made in Dollars. Each liability policy shall (i) be primary without right of contribution from any other insurance which is carried by the Additional Insureds and (ii) expressly provide that all of the provisions thereof, except the limits of liability, shall operate in the same manner as if there were a separate policy covering each insured, without, however, increasing the aggregate limit of liability for the coverage or permitting claims recoverable under the hull policy to be recoverable as liability claims, and (iii) to the extent of any reinsurance, include a cut-through provision permitting Lessor to file claims and to obtain payment directly from the reinsurers. 12.2. Insurance Against Loss or Damage to the Aircraft. (a) Lessee, at its own expense, shall maintain in effect with insurers of recognized reputation and responsibility satisfactory to Lessor: (A) all-risk ground and flight aircraft hull insurance covering the Aircraft (including taxiing exposures); (B) all-risk coverage with respect to any Engines, Parts or Landing Gear while removed from the Aircraft insured for their replacement cost; and (C) war risk and hijacking (including political/non-political hijacking) and acts of terrorism coverages, if operating outside the Continental United States or Canada, including, but not limited to, coverage against the additional exposures of confiscation, expropriations, nationalization or seizure, including the government of registry (if other than the United States), including a "50/50 clause" between the all-risk hull and war risk coverages. War risk coverage shall include loss of and/or damage to the Aircraft caused by: (i) war, invasion, acts of foreign enemies, hostilities (whether war be declared or not), civil war, rebellion, revolution, insurrection, martial law, military law, military or usurped power or attempts at usurpation of power; (ii) strikes, riots, civil commotions or labor disturbances; (iii) 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; (iv) any malicious act or act of sabotage; (v) confiscation, nationalization, seizure, restraint, detention, appropriation, expropriation, requisition of title or use, by or under the order of any government (whether civil, military or de facto) or public or local authority, including by the government of registry (if other than the United States); and (vi) hijacking or any unlawful seizure or wrongful exercise of control of the Aircraft or crew in flight (including any attempt at such seizure or control) made by any Person or Persons on board the Aircraft acting without the consent of Lessee. (b) All such insurance shall be in full force and effect on a worldwide basis, subject to such territorial exclusions as exist under Lessee's War Risks and Allied Perils Insurance, shall be payable in Dollars in the United States and shall be in the amount of not less than the Insured Value set forth on Exhibit H on an agreed value basis. Any hull insurance carried in accordance with this Section 12.2 shall not contain any provision for self-insured amounts or a deductible, provided that such insurance may be subject to a deductible which does not exceed $250,000 per occurrence. Each Engine, after removal, shall be insured for not less than $3,500,000.00 on an "agreed value basis" under a ground risks policy reasonably acceptable to Lessor. Any policies carried in accordance with this Section 12.2 shall: (1) be primary without right of contribution from any other insurance which is carried by Lessor with respect to the Aircraft; (2) provide that if such insurance is canceled for any reason whatever, or the same is allowed to lapse for non-payment of premium or if there is any material change in policy terms and conditions, such cancellation, lapse or change shall not be effective until thirty (30) days after issuance to Lessor of written notice from such insurers of such cancellation, lapse or change (and, with respect to war risk insurance, such shorter period as shall be customary on the London market for such insurance in such area of the world); (3) provide that partial losses of less than $250,000.00 shall be adjusted by and payable to Lessee (so long as no Default shall have occurred and be continuing hereunder), but that in the event of a greater loss the entire insurance shall be adjusted by Lessee and Lessor and payable to Lessor as sole loss payee; (4) provide that in respect of the respective interest of the Additional Insureds in such policies the insurance shall insure the Additional Insureds regardless of any breach or violation of any warranties, declarations or conditions contained in such policies by Lessee or any other Person; (5) waive any rights of set off, counterclaim or deduction, whether by attachment or otherwise, and all rights of subrogation against the Additional Insureds and their successors, assigns, agents, officers, employees and servants; (6) provide that the Additional Insureds shall have no liability for any premiums, commission, warranties or representations in connection with such insurance; and (7) name Lessor as sole loss payee for the account of all interests. (c) Lessor is not under any duty or obligation to verify the existence or adequacy of any insurance. (d) Lessee may obtain additional hull insurance on the Aircraft, over and above the Insured Value hereunder, provided that it does not adversely affect the coverage required to be maintained hereunder. 12.3. Application of Proceeds in an Event of Loss of the Aircraft. All insurance payments received from policies maintained by Lessee as the result of the occurrence of an Event of Loss shall be applied as provided in Section 12.2(b)(3). 12.4. Application of Proceeds in the Absence of an Event of Loss. As between Lessor and Lessee, insurance payments with respect to any property damage to any Item of Equipment not constituting an Event of Loss with respect thereto will be applied in payment of repairs or for replacement property in accordance with the terms of Articles 5 and 9 hereof, if not already paid by Lessee (or to reimburse Lessee for such repairs or replacements already paid by Lessee), and any balance remaining after compliance with such Articles with respect to such loss shall be paid to Lessee or as otherwise directed by Lessee. Any amount which is payable to Lessee under this Article 12 shall not be paid to Lessee if at the time of such payment a Default or an Event of Default shall have occurred and be continuing, but shall be held by Lessor as security for the obligations of Lessee under this Lease and the other Operative Agreements to which it is a party and such amount shall be paid to Lessee at such time as there no longer exists any Default or Event of Default. 12.5. Reports, etc. Lessee's insurance broker shall be required to advise Lessor in writing promptly of any default in the payment of any premium and of any other act or omission on the part of Lessee which might invalidate or render unenforceable, in whole or in part, any insurance on the Aircraft. Not less than two (2) days prior to the Delivery Date, and thereafter at least fifteen (15) days prior to each renewal or replacement by Lessee of the insurance required hereby, Lessee will furnish to Lessor one or more original certificates each executed and delivered by an insurance broker appointed by Lessee and approved by Lessor, which together shall describe in reasonable detail insurance carried on the Aircraft and shall certify that the insurance then maintained on the Aircraft complies with the terms of this Lease. Lessee will cause each such approved insurance broker to agree to advise Lessor in writing at least thirty (30) days (seven (7) days or such lesser period as may from time to time be applicable in the case of any war risk and allied perils coverage) prior to the non-renewal or cancellation by the underwriters for any reason (including, without limitation, failure to pay the premium therefor) of any such insurance or as soon as possible in respect of "non-renewal" or automatic termination for war risk. Not less than fifteen (15) days before the expiration or termination date of any insurance required hereunder, Lessee will provide (or cause to be provided to) Lessor with written confirmation from Lessee's insurance brokers certifying that renewal certificates of insurance evidencing the renewal or replacement of such insurance pursuant to the provisions of Article 12 hereof will be issued on or prior to the termination date of the prior certificate of insurance coverage. Within seven (7) days after such renewal, Lessee will furnish (or cause to be furnished) to Lessor a certificate of such insurance coverage from such insurance broker. 12.6. Lessor's Additional Insurance. Lessor, at its option and at its sole expense, may obtain insurance with respect to the Aircraft; provided, that no such insurance shall have the effect of suspending, impairing, defeating, invalidating or rendering unenforceable or reducing, in whole or in part, the coverage of or the proceeds payable under any insurance required to be provided and maintained by Lessee pursuant to this Article 12. Lessee shall have no right to any proceeds of any insurance policies maintained by Lessor. 12.7. Lessee's Additional Insurance. Lessee, at its option and at its sole expense, may obtain additional insurance with respect to the Aircraft provided that no such insurance shall have the effect of suspending, impairing, defeating, invalidating or rendering unenforceable or reducing, in whole or in part, the coverage of or the proceeds payable under any insurance required to be provided and maintained pursuant to this Article 12. Lessor shall have no right to any proceeds of any additional insurance policies maintained by Lessee. 12.8. Insurance Against Year 2000 Risks and Liability. Any policies of insurance required pursuant to Section 12.1 hereof (Public Liability and Property Damage Liability Insurance) and Section 12.2 hereof (Insurance Against Loss or Damage to the Aircraft), consistent with industry practice and the renewal of Lessee's current insurance policies, shall within forty-five (45) days after the date hereof include endorsement coverage for Year 2000 risks and liability (currently "The Date Recognition Limited Coverage Endorsement - AVN 2001/2002" or its equivalent), which shall have been obtained by Lessee by truthful, accurate, and complete response to insurer and/or reinsurer inquiry, including, but not limited to that required by the then current "Aerospace Date Recognition Conformity Questionnaire" or any similar questionnaires from such insurer and/or reinsurer. ARTICLE 13 GENERAL INDEMNIFICATION 13.1. Scope. Lessee agrees to indemnify, reimburse and hold harmless each Indemnitee from and against any and all claims, damages, losses, liabilities, demands, suits, judgments, causes of action, legal proceedings, whether civil or criminal, penalties, fines and other sanctions, and any reasonable attorney's fees and other reasonable costs and expenses in connection herewith or therewith, including any of the foregoing arising or imposed with or without Lessor's fault or negligence (whether passive or active) or under the doctrine of strict liability (any and all of which are hereafter referred to as "Claims") which in any way may result from, pertain to or arise in any manner out of (a) the Aircraft or this Lease, or the breach of any representation, warranty or covenant made by Lessee hereunder, or (b) the condition, manufacture, purchase as a result of the exercise of remedies under this Lease, lease, acceptance under this Lease, rejection under this Lease, possession under this Lease, return under this Lease, disposition or use, or operation of the Aircraft either in the air or on the ground, or (c) any defect in the Aircraft (whether or not discovered or discoverable by Lessee or Lessor) arising from the material or any articles used therein or from the design, testing, or use thereof or from any maintenance, service, repair, overhaul, or testing of the Aircraft, whether or not the Aircraft is in the possession of Lessee, and regardless of where the Aircraft may then be located, or (d) the Operative Agreements and any other transaction, approval, or document contemplated by this Lease or given or entered into in connection herewith; provided, however, that Lessee shall not indemnify any Indemnitee for any Claims set forth in Section 13.5 hereof. Upon payment in full to any party indemnified hereunder of any indemnities contained in this Article 13 by Lessee, Lessee shall be subrogated to all rights and remedies which such indemnified party has or may have against Manufacturers of the relevant Item of Equipment or any other Person. If any Indemnitee or Lessee has knowledge of any Claim for which Lessee is obligated to indemnify under this Article 13, it shall give prompt written notice thereof to Lessee or such Indemnitee, as the case may be, but failure to give such notice shall not relieve Lessee of its obligations hereunder and no payment by Lessee to any Indemnitee pursuant to this Article 13 shall be deemed to constitute a waiver or release of any right or remedy which Lessee may have against such Indemnitee for any actual damages as a result of the failure by such Indemnitee to give Lessee such notice. 13.2. Lessee's Release. Lessee hereby waives, and releases each Indemnitee from, any Claims (whether existing now or hereafter arising) for or on account of or arising or in any way connected with injury to or death of personnel of Lessee or loss or damage to property of Lessee or the loss of use of any property which may result from or arise in any manner out of or in relation to the ownership, leasing, condition, use or operation of the Aircraft, either in the air or on the ground, or which may be caused by any defect in the Aircraft from the material or any article used therein or from the design or testing thereof, or use thereof, or from any maintenance, service, repair, overhaul or testing of the Aircraft regardless of when such defect may be discovered, whether or not the Aircraft is at the time in the possession of Lessee, and regardless of the location of the Aircraft at any such time. 13.3. Repayment. If an Indemnitee shall obtain a repayment of any Indemnified Amount previously paid to it by Lessee, such Indemnitee shall, so long as there exists no Default or Event of Default, promptly pay to Lessee the amount of such repayment, together with the amount of any interest received by such Indemnitee on account of such repayment. 13.4. Timing of Payment. Subject to the provisions of Sections 13.3 and 13.5 hereof, Lessee shall pay directly to each Indemnitee all amounts due under this Article 13 within five (5) Business Days of the receipt of written notice by Lessee from such Indemnitee that such payment is due. 13.5. Exclusion. Notwithstanding the foregoing provisions of this Article 13, Lessee shall not be obligated to make any payment by way of indemnity in respect of any Claim against an Indemnitee which (i) results from or arises out of the willful misconduct or gross negligence of such Indemnitee, (ii) arises out of the period before the Delivery Date or after the Expiration Date and the return of the Aircraft in accordance with the provisions hereof (but, in each case, not arising simultaneously therewith), and (iii) Taxes and other amounts which are indemnified pursuant to Article 10 hereof. 13.6. After-Tax Nature of Indemnity. Lessee agrees that, with respect to any payment or indemnity hereunder, such payment or indemnity shall include any amount necessary to hold the Indemnitee harmless on an after-tax basis from all Taxes (as defined in Article 10 hereof) required to be paid by such Indemnitee with respect to such payment or indemnity under the Laws of any Federal, state or local government or taxing authority in the United States of America, or under the Laws of any taxing authority or governmental subdivision of a foreign country. For purposes of this Section 13.6, calculations made on an after-tax basis shall be made assuming the maximum statutory rates applicable to the recipient for the relevant year, after taking into account deductions attributable to the imposition of other taxes (such as state and local taxes), which would similarly be calculated on the basis of the maximum statutory rates for which such deduction was available for the applicable year. 13.7. Survival. The indemnities contained in this Article 13 shall continue in full force and effect notwithstanding the expiration or termination of this Lease and are expressly made for the benefit of and shall be enforceable by each Indemnitee. ARTICLE 14 LIENS 14.1. Permitted Liens. Lessee shall not, directly or indirectly create, incur, assume or suffer to exist any Lien on or with respect to this Lease, any Item of Equipment or any interest therein, except (i) the respective rights of Lessor and Lessee as herein provided, (ii) Liens which result from Lessor's own acts or from claims against Lessor not to be paid or indemnified against by Lessee hereunder, (iii) Liens for Taxes not yet due or being contested in accordance with Article 10 hereof and so long as adequate reserves are maintained with respect to such Liens, and (iv) inchoate materialmen's, mechanics', workman's, repairmen's, employees' or other like Liens arising in the ordinary course of business and for amounts the payment of which is either not yet delinquent or is being contested in good faith by appropriate proceedings. Lessee shall not be permitted to contest any Lien if such contest gives rise to a danger of the sale, forfeiture or loss of any Item of Equipment or any interest therein in the course of or as a result of any such proceedings. Lessee shall promptly, at its own expense, take such action as may be necessary to duly discharge any such Lien not excepted above if the same shall arise at any time with respect to any Item of Equipment. 14.2. Engine Liens. Notwithstanding anything in this Lease to the contrary, Lessor hereby agrees for the benefit of each lessor, conditional seller, indenture trustee or secured party of any engine leased to or purchased by Lessee which is subject to a lease, conditional sale agreement, trust indenture or other security agreement that Lessor will not acquire or claim, as against such lessor, conditional seller, indenture trustee or secured party, any right, title or interest in any engine as the result of any such engine being installed on the Airframe at any time while such engine is subject to such lease, conditional sale agreement, trust indenture or other security agreement and owned by such lessor or conditional seller or subject to a trust indenture or security interest in favor of such indenture trustee or secured party. No Engine shall be installed on any airframe unless the lease, conditional sale agreement, trust indenture or other security agreement applicable to such airframe contains a similar acknowledgment on the part of the lessor, conditional seller, indenture trustee or secured party thereunder with respect to the Engines. ARTICLE 15 FAA RECORDATION AND FURTHER ASSURANCES 15.1. FAA Recordation. (a) Lessor shall, at its own expense, cause this Lease and the Lease Supplement to be kept, filed and recorded in the offices of the FAA. Lessee shall, at its own expense, cause any and all additional instruments which shall be executed pursuant to the terms hereof to be kept, filed and recorded in the offices of the FAA so far as permitted by applicable Law or regulations. Neither Lessee nor Lessor shall file or record with the FAA any exhibit hereto which specifically states that it will be omitted from the copy of this Lease to be filed and recorded with the FAA. (b) If at any time subsequent to the initial recordation of title under this Lease, any filing or recording is reasonably necessary to protect the interest of Lessor, Lessee, at the cost and expense of the party requesting such action, shall cause this Lease, any financing statements with respect hereto, and any and all additional instruments which shall be executed pursuant to the terms hereof, to be kept, filed and recorded and to be reexecuted, refiled and re-recorded in the appropriate office or offices pursuant to applicable Laws, to perfect, protect and preserve the rights and interests of Lessor hereunder and in the Aircraft or any Item of Equipment. At the reasonable request of Lessor, Lessee shall furnish to Lessor an opinion of counsel or other evidence satisfactory to Lessor of each such filing or refiling and recordation or re-recordation. Lessee will cooperate with making any such filing or providing any such opinion which is to be accomplished or furnished in order to protect the interests of Lessor, in each case at Lessor's cost and expense. 15.2. Further Assurances. Each party hereto shall, at its respective expense, promptly and duly execute and deliver to the other party such further documents and promptly take such further action not inconsistent with the terms hereof as the other party may from time to time reasonably request in order to more effectively carry out the intent and purpose of this Lease or to perfect and protect the rights of Lessee and Lessor and, with respect to Lessor, remedies created or intended to be created hereunder. ARTICLE 16 RETURN OF ITEMS AND RECORDS 16.1. Time and Place. On the Expiration Date and unless the Aircraft has suffered an Event of Loss, Lessee, at its own expense, shall return the Aircraft with all Items of Equipment and the "Loose Equipment" as specified in the Lease Supplement relating to the Aircraft, Exhibit C and Schedule I to Exhibit B hereto by delivering the same forthwith, to Lessor at such location within the continental United States, as Lessor may request. At the time of return, the Airframe shall have installed thereon the two Engines and shall be in the same interior appointments and configuration as it was in on the Delivery Date with respect thereto, unless modified with Lessor's approval, as set forth in Section 2.4, or otherwise. 16.2. Condition. Notwithstanding anything to the contrary herein, Lessee shall return the Aircraft to Lessor in such condition that the Aircraft shall comply with the conditions set forth on Exhibit C hereto. Lessor shall be given ample time and opportunity to inspect the Aircraft, the Aircraft Documents and any other relevant information to insure that the Aircraft has been returned in compliance with the conditions set forth in Exhibit C hereto and shall be entitled to take a two (2) hour acceptance test flight prior to redelivery of the Aircraft at Lessee's sole cost and expense. 16.3. Corrections and Subsequent Corrections. In the event that the Aircraft or any Engine fails upon the return thereof hereunder to conform to any return condition requirement imposed by this Lease and particularly Section 16.2 and Exhibit C hereof, and without prejudice to the right of Lessee to claim that the Aircraft did comply with such return condition requirement, Lessee shall, at the sole option of Lessor, either (i) continue the Lease in effect, including the obligation to pay Basic Rent hereunder, until such time as Lessee brings the Aircraft up to the condition required by Section 16.2 hereof, or (ii) return the Aircraft to Lessor and thereafter reimburse Lessor for all costs reasonably incurred by Lessor to have any such nonconformance corrected, at such time as Lessor may deem appropriate at commercial rates then charged by the Person selected by Lessor to perform such correction. Any direct expense incurred by Lessor for such correction shall become Supplemental Rent payable by Lessee within thirty (30) days following the submission of a written statement by Lessor to Lessee, identifying the Items corrected and setting forth the expense of such correction. Lessee's obligations to pay such Supplemental Rent shall survive the expiration or termination of this Lease. 16.4. Fuel. Upon the return of the Aircraft, Lessor shall measure the quantity of fuel on board the Aircraft. The Aircraft shall be returned with the same amount of fuel on board the Aircraft as on the Delivery Date as set forth on the Lease Supplement. If the quantity of fuel measured is less than the amount of fuel on board the Aircraft on the Delivery Date, Lessee shall reimburse Lessor for the cost of refueling the Aircraft to the same quantity as was on board the Aircraft on the Delivery Date. 16.5. Legal Status Upon Return. At the time of the return of the Aircraft, the Aircraft shall be: (i) free and clear of all Liens, (ii) duly certified as an airworthy aircraft by the FAA with a current and valid airworthiness certificate applicable to the Aircraft, (iii) equipped and in full airworthy condition for operation according to all applicable FAA standards (including compliance with the requirements of FAR Part 121 in effect on the Delivery Date) required to allow the Aircraft to be operated for commercial transportation of passengers under applicable rules and regulations of the FAA, (iv) duly registered in the name of Lessor with the FAA, (v) in full compliance with the Maintenance Program, (vi) in full compliance with all applicable federal aviation regulations and all FAA Airworthiness Directives which by their terms require compliance on or before the Expiration Date and (vii) in compliance with the requirements of FAA Stage III regulations, without waiver or performance restriction. ARTICLE 17 EVENTS OF DEFAULT 17.1. Lessee's Defaults. Any one or more of the following events shall constitute an "Event of Default": (a) Lessee shall fail to make any payment of Rent or payments required pursuant to Sections 5.7 and Exhibit G hereof when due hereunder and such failure shall continue for three (3) Business Days; or (b) Lessee shall fail to procure and maintain any insurance required by Article 12 hereof or shall operate the Aircraft outside the scope of the insurance coverage maintained with respect to the Aircraft or the Aircraft shall be operated by an entity other than Lessee; or (c) Lessee shall fail to comply with Section 3.5 hereunder relating to the Security Deposit or the letter of credit issued pursuant thereto shall have been withdrawn or shall expire and such letter of credit shall not have been replaced within five (5) Business Days; or (d) Lessee shall fail to accept delivery of the Aircraft pursuant to Section 2.1 hereunder; or (e) Lessee shall fail to comply with Section 14 hereunder relating to Permitted Liens; or (f) Lessee shall fail to perform or observe in any material respect any of the covenants, conditions or agreements performed or observed by it under Article 5 (except payments required pursuant to Section 5.7 and Exhibit G hereof) or 16 hereof and such failure shall continue for a period in excess of ten (10) Business Days after written notice thereof is given by Lessor to Lessee of such failure; or (g) Lessee shall fail to perform or observe in any material respect any other of the covenants, conditions, or agreements to be performed or observed by it hereunder and such failure shall continue for a period in excess of thirty (30) days after written notice thereof is given by Lessor to Lessee of such failure; or (h) Any representation or warranty made by Lessee herein, in any other Operative Agreement or in any document or certificate furnished to Lessor in connection herewith or pursuant hereto shall prove to have been incorrect in any material respect when made; or (i) Lessee voluntarily suspends substantially all of its airline operations or the franchises, concessions, permits, rights or privileges required for the conduct of the business and operations of Lessee are revoked, canceled or otherwise terminated, or if the operation specifications of the Lessee are surrendered to the FAA or otherwise withdrawn or suspended, or Lessee ceases to be an air carrier holding a certificate issued under ss. 44705 of the Transportation Act, or as a result of any of the foregoing the preponderant business activity of Lessee shall cease to be that of a passenger carrier; or (j) (i) Lessee shall commence any case, proceeding or other action (A) under any existing or future Law of any jurisdiction, domestic or foreign, relating to bankruptcy, insolvency, reorganization or relief of debtors, seeking to have an order for relief entered with respect to it, or seeking to adjudicate it a bankrupt or insolvent, or seeking reorganization, arrangement, adjustment, winding-up, liquidation, dissolution, composition or other relief with respect to it or its debts, or (B) seeking appointment of a receiver, trustee, custodian or other similar official for it or for all or any substantial part of its assets, or Lessee shall make a general assignment for the benefit of its creditors, or (ii) there shall be commenced against Lessee any case, proceeding or other action of a nature referred to in clause (i) above which (A) results in the entry of an order for relief or any such adjudication or appointment or (B) remains undismissed, undischarged or unbonded for a period of sixty (60) days, or (iii) there shall be commenced against Lessee any case, proceeding or other action seeking issuance of a warrant of attachment, execution, distraint or similar process against all or any substantial part of its assets which results in the entry of an order for any such relief which shall not have been vacated, discharged, or stayed or bonded pending appeal within sixty (60) days from the entry thereof, or (iv) Lessee shall take any action in furtherance of, or indicating its consent to, approval of, or acquiescence in, any of the acts set forth in clause (i), (ii), or (iii) above, or (v) Lessee shall generally not, or shall be unable to, or shall admit in writing its inability to, pay its debts as they become due; or (k) Lessee shall default in the payment of any obligation for the payment of borrowed money, for the deferred purchase price of property or for the payment of rent or hire under any lease of aircraft which has an aggregate principal amount or lease payment of Five Hundred Thousand Dollars ($500,000) or more (determined in the case of borrowed money by the amount outstanding under the agreement pursuant to which such borrowed money was borrowed, in the case of a deferred purchase price by the remaining balance, and in the case of a lease by the present discounted value of the remaining rent or hire payable thereunder (ignoring any fair market renewal option not yet exercised)) when the same becomes due if the effect of such nonpayment is to cause or allow an acceleration of such indebtedness, and such default in payment shall continue for a period of thirty (30) days; or Lessee shall default in the performance of any other term, agreement or condition contained in any material agreement or instrument under or by which any such obligation is created, evidenced or secured, if such default results in the acceleration of such obligation; or (l) A final judgment for the payment of money not covered by insurance in excess of Two Hundred Fifty Thousand ($250,000), or final judgments for the payment of money not covered by insurance in excess of One Million Dollars ($1,000,000) in the aggregate, shall be rendered against Lessee and the same shall remain undischarged for a period of ninety (90) days during which (i) execution thereof shall not be effectively stayed by agreement of the parties involved, or stayed by court order or the pendency of an appeal or (ii) execution thereof shall not be adequately bonded or (iii) attachments or other Liens, except for security interests permitted hereunder, shall be asserted against Lessee's interest in the Aircraft or this Lease; or (m) Lessee shall default in the performance or observance of any covenant, term or condition contained in any Related Transaction and (i) shall not have caused such default to be cured within any applicable grace period provided by the applicable documents, and (ii) the effect of such default is to cause (after notice or lapse of time or both), or to permit the lessor or secured party under such Related Transaction to terminate such Related Transaction; or (n) Lessee shall fail to provide in any material respect the information to be provided by it pursuant to Section 6.3 hereof and such failure shall continue for a period in excess of three (3) days after written notice thereof is given by Lessor to Lessee of such failure; or (o) Lessee shall at any time fail to maintain the Items of Equipment in an airworthy condition, not promptly take an action necessary to, or shall not promptly correct any discrepancy which renders the Aircraft or any Item of Equipment unairworthy, or the certificate of airworthiness with respect to the Aircraft shall have expired or shall have been withdrawn; or (p) This Lease shall cease to be or shall be asserted by Lessee not to be, valid and binding on and enforceable against Lessee or shall cease to be in full force and effect for any reason as a result of any action or inaction of Lessee or Lessee shall have repudiated its obligations hereunder. Lessee hereby acknowledges that the occurrence of any one of the foregoing Events of Default would represent a material default in the performance of its obligations under this Lease. ARTICLE 18 RIGHTS AND REMEDIES 18.1. Remedies. Upon the occurrence of any Event of Default and at any time thereafter so long as the same shall be continuing, Lessor may, at its option and without notice to Lessee, declare this Lease to be in default and at any time thereafter, Lessor may exercise one or more of the following remedies as Lessor, in its sole discretion, shall elect, to the extent available and permitted by, and subject to compliance with any mandatory requirements of, applicable Law then in effect: (a) Demand that Lessee, and Lessee shall upon the written demand of Lessor and at Lessee's expense, immediately return the Aircraft to Lessor in the manner specified in such notice, in which event such return shall not be delayed for purposes of complying with the return conditions specified in Section 16 hereof (none of which conditions shall be deemed to affect Lessor's right to possession of the Aircraft) or delay for any other reason. Notwithstanding the foregoing, at Lessor's option, Lessee shall be required thereafter to take such actions as would be required by the provisions of this Lease if the Aircraft were being returned at the end of the Term hereof and Lessor agrees to cooperate with Lessee's required actions. In addition, Lessor, at its option and to the extent permitted by applicable Law, may enter upon the premises where all or any part of the Aircraft is located and take immediate possession of and, at Lessor's sole option, remove the same (and/or any engine which is not an Engine but which is installed on the Airframe, subject to the rights of the owner, lessor or secured party thereof) by summary proceedings or otherwise, all without liability accruing to Lessor for or by reason of such entry or taking of possession whether for the restoration of damage to property, or otherwise, caused by such entry or taking, except damages caused by gross negligence or willful misconduct. Notwithstanding anything herein to the contrary, Lessor may institute any proceeding at law or equity. (b) Sell at private or public sale, as Lessor may determine, or hold, use, operate or lease to others the Aircraft and the Aircraft Documents as Lessor in its sole discretion may determine, all free and clear of any rights of Lessee. At any public sale of the Aircraft, Aircraft Documents, Airframe, Engine or any Part, Lessor may bid for and purchase such property. (c) Whether or not Lessor shall have exercised, or shall thereafter at any time exercise, any of its rights under paragraph (a) or paragraph (b) of this Section 18.1, Lessor, by fifteen (15) days written notice to Lessee specifying a payment date, may demand that Lessee pay to Lessor, and Lessee shall pay to Lessor, on the payment date reasonably specified in such notice, as liquidated damages for loss of a bargain and not as a penalty (in lieu of the Basic Rent due for the period commencing after the date specified for payment in such notice), any unpaid Rent or Maintenance Reserves for the Aircraft (prorated in the case of Basic Rent on a daily basis) to and including the payment date specified in such notice, plus the amount, if any, by which the aggregate Basic Rent for the remainder of the Term, discounted periodically (equal to installment frequency) to present worth at the interest rate of four percent (4%) per annum, exceeds the fair market rental value (determined pursuant to the Appraisal Procedure, as defined below) of the Aircraft for the remainder of the Term, after discounting such fair market rental value periodically (equal to installment frequency) to present worth as of the payment date specified in such notice at the interest rate of four percent (4%) per annum; provided, however, that if prior to issuance of such written notice by Lessor to Lessee, Lessor leases the Aircraft to a third party for the remainder of the Term, for an amount which exceeds such fair market rental value as so determined then such amount shall be utilized in lieu of such fair market value in making the foregoing calculation with respect to the Aircraft. For purposes of this Section 18.1(c), "Appraisal Procedure" shall mean the following procedure for determining the "fair market rental value" of the Aircraft. "Fair market rental value" shall mean the value determined by an appraisal completed on an "as is" and "where is" basis. Lessor shall select an internationally recognized independent aircraft appraiser, such as Avitas, Avmark or B.K. Associates, who shall make a determination of fair market rental value. The fees and expenses of the appraiser shall be paid by Lessee. (d) In the event that Lessor, pursuant to Section 18.1(b) above, shall have relet the Aircraft under a lease which extends at least to the date upon which the Term would have expired but for Lessee's default, Lessor, in lieu of exercising its rights under Section 18.1(c) above with respect to the Aircraft, may, if it shall so elect, demand that Lessee pay Lessor, and Lessee shall pay Lessor, as liquidated damages for loss of a bargain and not as a penalty (in lieu of the Basic Rent for the Aircraft due after the time of reletting) any unpaid Rent and Maintenance Reserves for the Aircraft due up to the date of reletting, plus the amount, if any, by which the aggregate Basic Rent would have become due over the Term, discounted periodically (equal to installment frequency) to present worth as of the date of reletting at the interest rate of four percent (4%) per annum, exceeds the aggregate basic rental payments to become due under the reletting from the date of such reletting to the date upon which the Term for the Aircraft would have expired but for Lessee's default, discounted periodically (equal to installment frequency) to present worth as of the date of the reletting at the interest rate of four percent (4%) per annum. (e) Proceed by appropriate court action or actions either at law or in equity, to enforce performance by Lessee of the applicable covenants of this Lease and to recover damages for the breach thereof and to rescind this Lease. (f) Terminate this Lease by written notice, which notice shall be effective upon dispatch, and repossess the Aircraft and Aircraft Documents. (g) Keep and set-off all amounts paid as the "D" Check Airframe Reserve, the Engine Reserves, the Engine Life Limited Parts Reserves, the Landing Gear Reserve and any other amounts held by Lessor hereunder, or under any other Operative Agreement, all as liquidated damages and not as a penalty. 18.2. Further Rights. In addition to the foregoing, Lessee shall be liable during or after the exercise of any of the aforementioned remedies for any and all accrued and unpaid Rent and Maintenance Reserves, together with interest on such unpaid amounts at the Past Due Rate, and for all reasonable legal fees and other costs and expenses incurred by reason of the occurrence of any Event of Default (whether or not litigation is commenced) or the exercise of Lessor's remedies with respect thereto, including all costs and expenses incurred in connection with the return of any Item of Equipment in accordance with the terms of Article 16 hereof or in placing such Item in the condition and with airworthiness certificates as required by said Article, subject to the provisions of Section 16.3. 18.3. Remedies Cumulative. No remedy referred to in this Article 18 is intended to be exclusive, but each shall be cumulative and in addition to any other remedy referred to above or otherwise available to Lessor at law or in equity; and the exercise or beginning of exercise by Lessor of any one or more of such remedies shall not preclude the simultaneous or later exercise by Lessor of any or all of such other remedies. No express or implied waiver by Lessor of any Event of Default shall in any way be, or be construed to be, a waiver of any future or subsequent Event of Default. 18.4. Concerning Remedies. (a) In effecting any repossession of the Aircraft, the Aircraft Documents, the Airframe, an Engine or a Part, Lessor and its representatives and agents, to the extent permitted by Law, shall: (i) have the right to enter upon any premises where it reasonably believes the Aircraft, the Aircraft Documents, the Airframe, an Engine or any Part to be located; (ii) not be liable, in conversion or otherwise, for the taking of any personal property of Lessee which is in or attached to the Aircraft, the Airframe, an Engine or any Part which is repossessed; provided, however, that Lessor shall return to Lessee all personal property of Lessee or any third party which was on the Aircraft at the time Lessor repossessed the Aircraft; (iii) not be liable or responsible, in any manner, for any inadvertent damage or injury to any of Lessee's property in repossessing and holding the Aircraft, the Airframe, an Engine or any Part, except for that caused by or in connection with Lessor's gross negligence or willful acts; (iv) have the right to maintain possession of and dispose of the Aircraft, the Aircraft Documents, the Airframe, an Engine or any Part on any premises owned by Lessee or under Lessee's control; and (v) have the right to obtain a key to any premises at which the Aircraft, the Aircraft Documents, the Airframe, an Engine or any Part may be located from the landlord or owner thereof. (b) If reasonably required by Lessor, Lessee, at its sole expense, shall assemble and make the Aircraft, the Airframe, each Engine or any Part available at a place designated by Lessor in accordance with Article 16 hereof. Lessee hereby agrees that, in the event of the return to or repossession by Lessor of the Aircraft, the Aircraft Documents, the Airframe, an Engine or any Part, any rights in any warranty (express or implied) heretofore assigned to Lessee or otherwise held by Lessee shall without further act, notice or writing be assigned or reassigned to Lessor, if assignable. Lessee shall be liable to Lessor for all reasonable expenses, disbursements, costs and fees incurred in (i) repossessing, storing, preserving, shipping, maintaining, repairing and refurbishing the Aircraft, the Airframe, an Engine or any Part to the condition required by Article 16 hereof, and (ii) preparing the Aircraft, the Airframe, an Engine or any Part for sale or lease, advertising the sale or lease of the Aircraft, the Airframe, an Engine or any Part and selling or releasing the Aircraft, the Airframe, an Engine or any Part. Lessor is hereby authorized and instructed, at its option, to make reasonable expenditures which Lessor considers advisable to repair and restore the Aircraft, the Airframe, an Engine or any Part to the condition required by Article 16 hereof, all at Lessee's sole expense. (c) If Lessor is required to give prior notice to Lessee of any of the foregoing acts, Lessee hereby covenants and agrees that a notice sent to it by Lessor in writing in the manner set forth in Section 19.2 hereof, at least ten (10) days before the date of any such act shall be deemed to be reasonable notice of such act. ARTICLE 19 MISCELLANEOUS 19.1. Construction, Applicable Law; Jurisdiction. (a) Any provision of this Lease which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. The parties to this Lease shall use their best efforts to substitute for such void provision a valid, legal and enforceable provision which will approach as closely as possible the intention of such void provision. To the extent permitted by Law, Lessee hereby waives any provisions of Law which renders any provisions hereof prohibited or unenforceable in any respect. This Lease shall constitute an agreement of lease, and nothing herein shall be construed as conveying to Lessee any right, title or interest in the Aircraft or any Engine or Part except as a lessee only. No term or provision of this Lease may be changed, waived, discharged or terminated orally, but only by a written instrument signed by the party against which the enforcement of the change, waiver, discharge or termination is sought. The headings and captions in this Lease are for convenience of reference only and shall not define or limit any of the terms or provisions hereof. Whenever required by the context hereof, the singular shall include the plural and vice versa. Reference to this Lease shall mean this Lease as amended or supplemented from time to time. (b) THIS LEASE SHALL IN ALL RESPECTS BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO CONTRACTS MADE AND TO BE PERFORMED ENTIRELY WITHIN SUCH STATE, WITHOUT REGARD TO CONFLICT OF LAW PRINCIPLES. (c) Lessee hereby irrevocably consents that any legal action or proceeding against it or any of its assets with respect to this Lease may be brought in any jurisdiction where Lessee or any of its assets may be found, or in any court of the State of New York or any Federal Court of the United States of America located in New York, New York, United States of America, or both, as Lessor may elect, and by execution and delivery of this Lease, 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. Lessee irrevocably consents to the service of process out of any of the aforementioned courts in any such action or proceeding by the mailing of copies thereof by registered or certified airmail, postage prepaid, to Lessee at its address set forth in Section 19.2 hereof. The foregoing, however, shall not limit the right of Lessor to serve process in any other manner permitted by Law or to bring any legal action or proceeding or to obtain execution of judgment in any jurisdiction. Lessee further agrees that final judgment against Lessee in any action or proceeding in connection with this Lease shall be conclusive and may be enforced in any other jurisdiction within or outside the United States of America by suit on the judgment, a certified or exemplified copy of which shall be conclusive evidence of the fact and the amount of Lessee's indebtedness. Lessee hereby irrevocably waives, to the fullest extent permitted by law, any objection which Lessee may now or hereafter have to the laying of venue of any suit, action or proceeding arising out of or relating to this Lease brought in the State of New York, and hereby further irrevocably waives any claim that any such suit, action or proceeding brought in the State of New York has been brought in an inconvenient forum. 19.2. Notices. All notices provided for herein shall be in writing and shall be deemed to have been given when delivered personally, when telexed or telecopied, when deposited with an overnight courier service, or, if deposited in the United States mail, when received, addressed as follows: If to Lessee: Frontier Airlines, Inc. 12015 East 46th Avenue, Suite 200 Denver, Colorado 80239-3116 Attn: Director, Aircraft Management Telecopy No. (303) 371-7007 With a copy to the General Counsel Telecopy No. (303) 371-9669 If to Lessor: C.I.T. Leasing Corporation c/o The CIT Group/Capital Finance, Inc. 1211 Avenue of the Americas New York, New York 10036 Attn: Al Oliver Vice President Telecopy No. (212) 536-9401 With a copy to the General Counsel Telecopy No. (212) 536-1388 or to such other address as any party may designate for itself by written notice to the other party. 19.3. Lessor's Right to Perform. If Lessee fails to perform any of its obligations hereunder, Lessor may (but shall not be obligated to) discharge such obligation, and the amount of the expenses of Lessor incurred in connection with such discharge shall be payable by Lessee upon demand, together with interest at the Past Due Rate from the date such expenses were incurred. 19.4. Counterparts. This Lease may be executed simultaneously in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. To the extent, if any, that this Lease 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 may be created through the transfer or possession of any counterpart other than the counterpart which has been marked "Original" on the signature page thereof. All counterparts other than the "Original" shall be marked "Duplicate" or "Duplicate Original." 19.5. Assignment by Lessor. Lessor, at Lessor's expense, shall have the absolute right to transfer or assign to any Person, firm, corporation or other entity any or all of Lessor's rights, obligations, benefits and interests under this Lease, including, without limitation, the right to receive Rent and Maintenance Reserves or any other payment due under this Lease, the right to transfer or assign title to any Item of Equipment or to transfer or assign the right to purchase any Item of Equipment and the right to make all waivers and agreements, to give all notices, consents and releases, to take all action upon the occurrence of any Event of Default, or to do any and all other things which Lessor is or may become entitled to do under this Lease; provided, however, that Lessee acknowledges that, if Lessor should sell or transfer to a third party all of Lessor's interest under this Lease and in the Items of Equipment, Lessor shall thereupon be relieved of all of its obligations hereunder and Lessor's transferee shall succeed to all of Lessor's rights, interests and obligations under this Lease as though Lessor's transferee had been the initial lessor hereunder; provided, however, that, in the event of a transfer or assignment of a security interest in any Item of Equipment, Lessor shall remain liable hereunder. Any assignment, pledge or other conveyance, for security or otherwise, of this Lease by Lessor shall be subject to Lessee's rights under this Lease and shall not be effective unless and until Lessee shall have been given notice of such assignment identifying the assignee or transferee hereof and Lessee shall have received confirmation in writing, reasonably acceptable to Lessee, that such transferee accepts all responsibilities of Lessor under this Lease, including but not limited to, confirmation of Lessee's right to quiet enjoyment of the Aircraft as set forth in Section 19.11 hereof. Any assignment by Lessor shall be made subject to the assignee's agreement to maintain all Maintenance Reserves in one or more escrow accounts unless otherwise expressly agreed by Lessee. The agreements, covenants, obligations and liabilities contained herein, including, but not limited to, all obligations to pay Rent and Maintenance Reserves and indemnify an Indemnitee are made for the benefit of each Indemnitee and their respective successors and assigns. 19.6. Survival. The representations, warranties, covenants, agreements and indemnities of Lessee set forth in this Lease, and Lessee's obligations hereunder, shall survive the Expiration Date to the extent required for full performance and satisfaction thereof. 19.7. Entire Agreement. This Lease (including all Exhibits hereto), each Lease Supplement executed pursuant hereto and the other Operative Agreements constitute the entire agreement between Lessor and Lessee regarding the Aircraft and there are no other prior or contemporaneous written or oral understandings between Lessor and Lessee with regard to the subject matter hereof and thereof. 19.8. Successors and Assigns. This Lease shall be binding on and shall inure to the benefit of Lessee, Lessor and their respective successors and permitted assigns. 19.9. Brokers. Lessee and Lessor each agree to indemnify and hold each other harmless from and against any and all claims, suits, damages, costs and expenses (including, but not limited to, reasonable attorneys' fees) asserted by any agent, broker or other third party for any commission or compensation of any nature whatsoever based upon the lease of the Aircraft; provided, however, that Lessee or Lessor, as the case may be, shall be solely responsible for all claims, suits, damages, costs and expenses asserted by any agent, broker or other third party for any commission or compensation of any nature whatsoever, where such agent, broker or third party was retained by Lessee or Lessor, as the case may be. 19.10. Transaction Costs. Whether or not the transactions contemplated hereby are consummated, each party hereto agrees to pay its own costs and expenses incurred in connection with the preparation, execution and delivery of this Lease and any other documents delivered in connection herewith, including without limitation the fees, expenses and disbursements of legal counsel to such party. In addition, Lessor agrees to pay the attorneys' fees, expenses, and disbursements of the counsel identified in Section 2.3(8). Each of Lessor and Lessee agrees to pay the reasonable costs and expenses of the other party incurred in connection with the entering into or giving or withholding of any future waiver, supplement or amendment or other action with respect to the Lease or any other document delivered in connection therewith that it may request, except that from and after (i) the occurrence and continuation of an Event of Default, or (ii) the filing by or against Lessee of a petition under Chapter 7 or Chapter 11 of the United States Bankruptcy Code or any other circumstances described in Section 17.1(j) hereof, all of such costs shall be borne by Lessee irrespective of whether such costs are incurred after the commencement or inception of any such filing or the occurrence of any other circumstance described in Section 17.1(j) hereof and whether or not litigation is commenced with respect thereto. 19.11. Quiet Enjoyment. Lessor covenants that so long as an Event of Default shall not have occurred and be continuing, Lessee shall quietly enjoy the Aircraft and all rents, revenues, profits and income thereto, without interference by Lessor or by any Person lawfully claiming by or through Lessor; provided, however that Lessor and prospective purchasers and lessees may inspect the Aircraft and Aircraft Documents at their own expense as long as such inspection does not unreasonably interfere with Lessee's operation or maintenance of the Aircraft. 19.12. Time Is of the Essence. Time and strict and punctual performance are of the essence with respect to each provision of this Lease. 19.13. Confidentiality. Lessee and Lessor agree to and shall keep confidential this Lease and the terms hereof, all Aircraft Documents and other data or materials relating to the Aircraft supplied to Lessee by Lessor, or at the request of Lessor, hereunder and will not disclose, transfer or otherwise impart any such information to any other Person, except (i) as may be required by Law or pursuant to any litigation, (ii) to its affiliates, permitted assigns, officers, executives, employees and agents, (iii) to its financial, accounting or legal advisors who are under a duty to or agree to hold such information confidential, or (iv) with respect to any information which is generally available to the public at the time of disclosure. 19.14. DISCLAIMER OF CONSEQUENTIAL DAMAGES. LESSEE AND LESSOR EACH AGREE THAT IT SHALL NOT BE ENTITLED TO RECOVER, AND HEREBY DISCLAIMS AND WAIVES ANY RIGHT THAT IT MAY OTHERWISE HAVE TO RECOVER, CONSEQUENTIAL DAMAGES AS A RESULT OF ANY BREACH OR ALLEGED BREACH BY LESSOR OR LESSEE, AS THE CASE MAY BE, OF ANY OF THE AGREEMENTS, REPRESENTATIONS OR WARRANTIES OF LESSOR OR LESSEE, AS THE CASE MAY BE, CONTAINED IN THIS LEASE. 19.15. Tax Treatment. Lessor and Lessee acknowledge that this Lease is to be treated as a lease for Federal income tax purposes. 19.16 Waiver of Jury Trial. LESSEE AND LESSOR HEREBY WAIVE TRIAL BY JURY IN ANY JUDICIAL PROCEEDING TO WHICH THEY ARE BOTH PARTIES INVOLVING, DIRECTLY OR INDIRECTLY, ANY MATTER (WHETHER SOUNDING IN TORT, CONTRACT OR OTHERWISE) IN ANY WAY ARISING OUT OF, RELATED TO, OR CONNECTED WITH THIS LEASE OR THE RELATIONSHIP ESTABLISHED HEREUNDER. 19.17. Dating. Although this Lease is dated for convenience and for the purpose of reference as of the date first set forth above, this Lease shall be effective on the latest date of execution by the parties hereto. IN WITNESS WHEREOF, Lessor and Lessee have each caused this Lease to be duly executed by their authorized officers as of the date first above written. C.I.T. LEASING CORPORATION, Lessor By:______________________________ Title:___________________________ FRONTIER AIRLINES, INC., Lessee By:______________________________ Title: EXHIBIT A to AIRCRAFT LEASE AGREEMENT DESCRIPTION OF AIRCRAFT AND ENGINES 1. One Boeing 737-3L9 Aircraft bearing FAA Registration Number N312FL and Manufacturer's serial number 24569, together with two (2) CFM56-3B2 engines, bearing Manufacturer's serial numbers 725373 and 724422, respectively. B-3 EXHIBIT B to AIRCRAFT LEASE AGREEMENT FORM OF LEASE SUPPLEMENT THIS LEASE SUPPLEMENT dated _________ __, 1999 (this "Lease Supplement"), between C.I.T. LEASING CORPORATION, as Lessor ("Lessor"), and FRONTIER AIRLINES, INC., as Lessee ("Lessee"). W I T N E S S E T H : WHEREAS, Lessor and Lessee have heretofore entered into that certain Aircraft Lease Agreement, dated as of April 16, 1999 (the "Lease"), which provides for the execution and delivery of a Lease Supplement in substantially the form hereof for the purpose of leasing the Items of Equipment in accordance with the terms thereof; NOW, THEREFORE, in consideration of the premises, and pursuant to Article 2 of the Lease, Lessor and Lessee hereby agree as follows: 1. All capitalized terms used herein which are defined in the Lease shall have, for all purposes hereof, the respective meanings given them in the Lease. 2. Lessor hereby delivers and leases to Lessee, and Lessee hereby accepts and leases from Lessor under the Lease, as hereby supplemented, the Items of Equipment as follows: A. Aircraft: One (1) Boeing 737-3L9 Aircraft consisting of the following: (i) Airframe Registration No. N312FL Manufacturer's Serial No. 24569 (ii) Engines: Two (2) CFM56-3B2 engines (each of which engines has 750 or more rated takeoff horsepower or the equivalent thereof), installed on said Airframe, bearing, respectively, the following Manufacturer's Serial Nos.: Engine Manufacturer's Position Serial No. 1 725373 2 724422 (iii) Other Equipment and Manuals: Such other Equipment (if any) and Manuals as are described in Appendix I hereto. B. Maintenance Status: (i) Airframe: Total Airframe Hours: 22,040 Total Airframe Cycles: 21,111 (ii) Engines: Position 1 Manufacturer's Serial No.: 725373 1. Total Hours: 19,423 2. Total Cycles: 18,767 Position 2 Manufacturer's Serial No.: 724422 1. Total Hours: 17,117 2. Total Cycles: 17,113 Lessee confirms that the Items of Equipment have been examined by its duly appointed and authorized representatives and the Aircraft Documents conform to the information set forth above. 3. The Delivery Date of the Items of Equipment is the date of this Lease Supplement, as set forth in the opening paragraph hereof, and the Items of Equipment are hereby delivered and accepted on such date at _____ a.m. ____________________ Time at __________________. 4. The term "Insured Value" for the Aircraft shall be as set forth on Exhibit H to the Lease. 5. The amount of fuel on board the Aircraft at the time of delivery is _____________________. 6. Lessee hereby confirms to Lessor that (i) the Aircraft and each Engine installed thereon or belonging thereto have been duly marked in accordance with the terms of Section 5.6 of the Lease, (ii) Lessee has accepted the Aircraft for all purposes hereof and of the Lease, (iii) Lessee has inspected the Aircraft and the Aircraft satisfies all of the delivery conditions set forth in the Lease (including, without limitation, those set forth on Exhibit I to the Lease), (iv) the information set forth herein and on Appendix 1 hereto pertaining to the Aircraft are correct as of the date hereof, and (v) this Lease Supplement has been duly executed and delivered by Lessee. 7. All of the terms and provisions of the Lease are hereby incorporated by reference in this Lease Supplement to the same extent as if fully set forth herein. 8. This Lease Supplement may be executed in any number of counterparts, each of which counterparts, except as otherwise provided in Section 19.4 of the Lease, shall for all purposes be deemed to be an original; and all such counterparts shall together constitute but one and the same Lease Supplement. 9. THIS LEASE SUPPLEMENT SHALL IN ALL RESPECTS BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO CONTRACTS MADE AND TO BE PERFORMED ENTIRELY WITHIN SUCH STATE, WITHOUT REGARD TO CONFLICT OF LAW PRINCIPLES. IN WITNESS WHEREOF, Lessor and Lessee have each caused this Lease Supplement to be duly executed by their authorized officers on the date first above written. C.I.T. LEASING CORPORATION, Lessor By:_________________________________ Title:______________________________ FRONTIER AIRLINES, INC., Lessee By:_________________________________ Title:______________________________ APPENDIX I TO LEASE SUPPLEMENT A. AVIONICS INVENTORY1 MAJOR AVIONICS EQUIPMENT QTY P/N MODEL Marker Receiver 1 522-2996-018 5124 Dual VHF Nav Receiver 2 822-0761-001 51RV-4B Transceiver Rad Alt 2 622-3890-021 860F-4 Tape Reproducer 1 RDAX 7308-D1 SELCAL Decoder 1 N1401C Transceiver Weather Radar 1 622-132-106 GPW Computer 1 965-0648-004 DME Transceiver 2 622-2921-006 860E-5 ATC Transponder 2 622-7878-201 TPR720 ADF Receiver 2 777-1492-005 51Y-7 Flight Manage Comp 1 168925-06-001 U5-OE HF Transceiver 1 622-5377-001 D5722 VHF Transceiver 2 622-5219-004 VHF 700 Cockpit Voice Recorder 1 93A100-80 Flight Data Recorder 1 980-4100DXUN Flight Data Acquisition Unit 1 ED41A210 APPENDIX I TO LEASE SUPPLEMENT B. MANUALS INCLUDED WITH AIRCRAFT2 APPENDIX I TO LEASE SUPPLEMENT C. LOOSE EQUIPMENT3 Item Description Quantity APPENDIX I TO LEASE SUPPLEMENT D. COMPONENTS MAINTAINED ON HARD TIME4 Part Time Remaining No. Nomenclature Interval To Overhaul EXHIBIT C to AIRCRAFT LEASE AGREEMENT RETURN CONDITION REQUIREMENTS In addition to the requirements set forth in Article 16 of the Lease, on or before the Expiration Date, or earlier termination of the Lease, Lessee, at Lessee's expense, shall return the Aircraft to Lessor, at any airport in the continental United States as selected by Lessor, and in compliance with all of the following provisions: GENERAL (1) The Aircraft shall be airworthy and have therefore been maintained and operated in accordance with Articles 5 and 9 of the Lease 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 Lessee. (2) The Aircraft exterior shall be washed and the interior shall be clean. The cockpit shall be clean with paint and placards in good condition. (3) The Aircraft shall have installed the full complement of Engines (as used herein the term "Engines" includes engines for which title will be transferred to Lessor pursuant to Article 11 of the Lease) and other Items of Equipment as would remain installed on the Aircraft were Lessee to continue operating the same in continued regular passenger service, each such Item functioning in accordance with its intended use. (4) The Aircraft shall comply with the Manufacturer's original FAA approved type certificate specifications, as revised up to the Expiration Date, together with any modifications installed in accordance with supplemental type certificates approved by the FAA and acceptable to Lessor. (5) The Aircraft, Engines, Landing Gear, APU, and Parts (appliances) shall comply with all applicable FARs and Airworthiness Directives affecting such model aircraft, engines, landing gears, auxiliary power units, and parts (appliances) which by their terms require compliance on or before the Expiration Date, notwithstanding any waiver, deviation or time extension obtained by Lessee from the FAA or otherwise. Any alternate method of compliance obtained by Lessee to comply with any AD shall have been approved by the FAA without restriction or limitation, and shall be acceptable to the FAA for use by any other operator of the Aircraft. (6) The Aircraft shall have a current and effective FAA certificate of airworthiness and shall comply with all FAR requirements for passenger operation as a transport category commercial aircraft in accordance with all applicable FARs, including without limitation FAR Part 121. (7) Cockpit windows shall have no crazing or delamination that exceed maintenance manual allowable limits, and passenger compartment windows shall have no crazing . All equipment and furnishings in the interior of the Aircraft which are defective, damaged, or excessively worn shall be repaired or replaced by Lessee. (8) The Aircraft shall have no leakage of fuel, oil, hydraulic fluid, or water. (9) The Aircraft and Engines shall be in compliance with all Manufacturer's service bulletins issued at the time of return, to the same extent that Lessee has accomplished such service bulletins on similar model aircraft and engines of the same manufacture in Lessee's fleet, without discrimination. (10) The Aircraft (including each Engine, Landing Gear, APU, and Part) shall not have any open, deferred or placarded maintenance items or Watch Items, nor shall they have any Flight Hour, Cycle, or calendar time extensions, waivers, or non-transferable alternate methods of compliance. (11) At the end of the Term, upon the request of Lessor, Lessee shall obtain an Export Certificate of Airworthiness for the Aircraft for export to such country as designated by Lessor. Lessor shall be responsible for the cost of modifying the Aircraft to comply with the import requirements of such other country. (12) Prior to the Expiration Date, all repairs accomplished during the Term of a temporary or interim nature, including repairs using blind fasteners (except to the extent that the use of blind fasteners is considered a permanent repair in accordance with the Manufacturer's structural repair manual for the Aircraft) and those requiring repetitive inspections or future upgrading, shall be upgraded to a permanent repair and all external doublers (scab patches) installed during the Term (except to the extent that installation of a doubler is the only approved repair or where a flush repair is not practical due to inaccessibility of the area), shall be replaced with flush repairs, all in accordance with the applicable Manufacturer's maintenance manual, structural repair manual, or other FAA approved data. (13) Lessee shall deliver to Lessor, at no cost to lessor, all service bulletin kits furnished without charge by a Manufacturer for installation on the Aircraft which have not been so installed together with appropriate instructions for installation provided with such kits. In the event such installation kits were purchased or manufactured by Lessee, Lessor shall have the exclusive right to purchase such kits at Lessee's Actual Cost for a period of one hundred eighty (180) days after return of the Aircraft and the non-exclusive right to purchase such kits thereafter. AIRFRAME (1) Lessee shall provide documentation evidencing full compliance with the Manufacturer's recommended corrosion prevention and control program ("CPCP"), or such other corrosion prevention and control program approved by the FAA for the Aircraft. (2) The Aircraft shall be returned fresh from Lessee's next due "C" Check pursuant to Lessee's Maintenance Program which shall include all structural inspection requirements which would require accomplishment within 3,500 Flight Hours or Cycles, or within 15 calendar months after the Expiration Date, and with all discrepancies permanently repaired. The "C" Check shall include all lesser Checks. Lessee shall give Lessor not less than ten (10) days prior written notice of the commencement date of such "C" Check. During the performance of such "C" Check, Lessor shall be entitled to have representatives present in order to verify that such "C" Check complies with the requirements set forth herein. (3) The time remaining to the next scheduled Airframe block overhaul ("D" Check, or an equivalent Check in the event the Maintenance Program uses different terminology) shall not be less than fifty percent (50%) of the allowable time (Flight Hours, Cycles, and calendar time) between such scheduled block overhauls. (4) Each of the Time Controlled Parts (excluding those which are internal Engine Parts and internal Landing Gear Parts (as delineated in the Boeing 737-300 MPD) but including any Life Limited Parts) on (i) the Aircraft, (ii) the Engines and (iii) the Landing Gear, shall have remaining the same amount of time (whether Flight Hours, Cycles or calendar time) with respect to its next regularly scheduled overhaul, restriction, or other required maintenance, as was remaining on the Delivery Date. In the event any of the Time Controlled Parts fail to meet the requirements set out in the preceding sentence, either Lessee or Lessor shall pay to the other party a financial adjustment for any such Time Controlled Part as determined by the following formula: FA = TRD -- TRR x CO TBO Where FA = Financial adjustment to be paid pursuant to this Section. The financial adjustment shall be paid by Lessee to Lessor if the value for FA is determined to be positive in accordance with the formula set out above. The value of the financial adjustment shall be paid by Lessor to Lessee if the value for FA is determined to be negative in accordance with the formula set out above. TRD = Time remaining at the Delivery Date to the next regularly scheduled overhaul, restriction, or other required maintenance, for the applicable Time Controlled Part. TRR = Time remaining at the date of return of the Equipment to the next regularly scheduled overhaul, restriction, or other required maintenance, for the applicable Time Controlled Part. TBO = Average time between regularly scheduled overhauls, restrictions, or other required maintenance for the applicable Time Controlled Part. CO = Average cost of the overhaul, restriction, or other required maintenance for the applicable Time Controlled Part. INTERIOR (1) The Aircraft, shall be in the same configuration (including, but not limited to, interior seating configuration, galleys and lavatories) as when such Aircraft was originally delivered to Lessee hereunder, unless otherwise consented to by Lessor, in its sole discretion. ENGINES AND APU (1) Immediately prior to the return of the Aircraft, which shall be after the redelivery flight for the Aircraft, Lessee shall accomplish a complete hot and cold section borescope inspection of each Engine and the APU, to be performed at Lessee's expense by Lessee's representative or an agency of Lessee's choosing, in accordance with the Manufacturer's maintenance manual. All defects discovered as a result of such inspections, which exceed the maintenance manual allowable limits for an installed engine or APU, as applicable, shall be corrected at Lessee's expense. Any defect that requires reinspection prior to the next full "C" Check or 3,500 Flight Hours, whichever is greater, shall be considered a Watch Item and shall be corrected at Lessee's expense. (2) Each Engine shall have (i) a minimum of 3,000 Cycles remaining to its next scheduled removal, and (ii) a maximum of 3,000 Flight Hours accumulated since its most recent Engine restoration shop visit. The average of the life remaining for all of the Life Limited Parts in each Engine shall not be less than 50% of the average of the total allowable life for such Engine Life Limited Parts, provided, however, that no individual Life Limited Part shall have less than 3,000 Cycles remaining to its respective life limit. (3) Each Engine shall be capable of developing full rated take-off power at the critical maximum outside air temperature without exceeding the maximum limits for all parameters (temperature, fuel flow, rotor speed, etc.) as per the Manufacturer's specifications. A full take-off power engine run-up shall be performed in the presence of Lessor's representatives immediately prior to the return of the Aircraft, in accordance with the performance test in the maintenance manual, or other comparable test (as agreed to by Lessor), using temperature corrected charts. Each Engine shall have a minimum of 20(degree) EGT margin and the test results shall not exceed the corrected limits in the charts for any parameter. (4) The APU of the Aircraft shall be in serviceable condition. INSPECTION (1) On, or immediately prior to the Expiration Date, Lessee shall perform a redelivery check flight of the Aircraft of not more than two (2) hours duration with Lessor's representatives on board, who will determine which systems shall be operated. All discrepancies found during such check flight which exceed maintenance manual allowable limits shall be corrected by Lessee at Lessee's expense. Lessee shall be responsible for all expenses associated with such flight and shall furnish the necessary crews and fuel. (2) Lessor shall inspect the Aircraft and Aircraft Documents (the "Final Inspection") prior to the Expiration Date. The Final Inspection will occur during the "C" Check required pursuant to this Exhibit C and shall include the opening or removal of panels as reasonably required by Lessor, and access to all compartments and bays. All discrepancies discovered during such Final Inspection which exceed maintenance manual allowable limits shall be permanently repaired by Lessee. Lessor shall be given the opportunity to conduct all activity necessary to verify that the Aircraft complies with the requirements set forth herein. The Final Inspection of the Aircraft Documents shall commence on a date as mutually agreed by Lessor and Lessee. To the extent that any repairs to the Aircraft, or correction of discrepancies found in the Aircraft Documents, extend beyond the Expiration Date, the Term shall be deemed to have been automatically extended, and the obligation to pay Rent hereunder continued on a daily basis until the Final Inspection and repairs or corrections have been satisfactorily concluded. (3) All Aircraft Documents and other current and historical records delivered with the Aircraft on the Delivery Date, and all other Aircraft Documents acquired or prepared by Lessee during the Term shall be returned with the Aircraft. Notwithstanding anything to the contrary herein, (i) to the extent any maintenance tasks have been repeated, Lessee shall only be required to retain, and include in the Aircraft Documents to be returned to Lessor at the Expiration Date, the most recent Aircraft Records with respect to each such repetitive task and (ii) to the extent log books document maintenance performed on the Aircraft, such log books shall be required to be retained (and included in the Aircraft Documents to be returned to Lessor at the Expiration Date) for a period of twelve (12) months, or the time period required by the Aeronautics Authority, whichever is greater. All discrepancies found in the Aircraft Documents shall be corrected, and any missing Aircraft Documents shall be reconstructed by Lessee at Lessee's sole cost and expense prior to the return of the Aircraft. All Aircraft Documents shall be in the English language. In the event any Aircraft Documents are not provided to Lessor or are not in the English language, on the Expiration Date, the Aircraft shall be deemed not to meet the return conditions and the Term shall be deemed to have been automatically extended, and the obligation to pay Rent hereunder continued on a daily basis until the final inspection and corrections have been satisfactorily concluded. (4) All Aircraft and Engine systems (including galleys, passenger and cargo compartments) shall be fully operational for their intended functions. Lessor shall operationally check all systems prior to the return of the Aircraft and all defects found shall be permanently repaired by Lessee, at Lessee's expense prior to return of the Aircraft. (5) In the event the Aircraft has been maintained on a maintenance program other than an FAA approved maintenance program, Lessee, at Lessee's expense, shall cause the Aircraft to be bridged onto an FAA approved maintenance program, or onto the Manufacturer's recommended maintenance program in accordance with the Maintenance Planning Data Document (MPD), or its equivalent. EXHIBIT D to AIRCRAFT LEASE AGREEMENT LESSEE'S COUNSEL OPINION [Letterhead of Lessee's Counsel] [Date of Delivery Date] C.I.T. Leasing Corporation 1211 Avenue of the Americas New York, New York 10036 Re: Aircraft Lease Agreement dated as of April 16, 1999 between C.I.T. Leasing Corporation, as Lessor, and Frontier Airlines, Inc., as Lessee, Relating to the Lease of One Boeing 737-300 Aircraft, Manufacturer's Serial No. 24569 and U.S. Registration No. N312FL Dear Sirs: I act as General Counsel for Frontier Airlines, Inc., a corporation duly organized and validly existing under the laws of the State of Colorado. I have reviewed the Aircraft Lease Agreement dated as of April 16, 1999 (the "Lease") between Lessee and C.I.T. Leasing Corporation (the "Lessor"). Except as otherwise defined herein, the terms used herein shall have the meanings set forth in the Lease. You have requested that I render an opinion in connection with the transactions governed by the Lease. I have examined originals or copies, certified or otherwise identified to my satisfaction of such documents, corporate records and other instruments as I have deemed necessary or advisable and have relied upon such representations of officers and employees of the Lessee as I have considered reasonable, prudent and advisable for the purpose of rendering this opinion. I have assumed the genuineness of all signatures and the authenticity of all documents submitted to me as originals and the conformity to original documents of all documents submitted to me as copies or facsimiles. Based upon the foregoing, I am of the opinion that: 1. The Lessee is a corporation duly organized and validly existing in good standing under the laws of the State of Colorado, is duly qualified to hold property and to transact business as a company and is duly qualified to carry on business in each jurisdiction in which it conducts business and has full power and authority to carry on its business as presently conducted, to hold property under lease and to enter into and to perform its obligations under the Lease, as supplemented by the Lease Supplement, and each other document related thereto to which the Lessee is a party. The Lessee is a "Certificated Air Carrier" within the meaning used by the Transportation Act, as amended, operating pursuant to a certificate issued under such Act. 2. The execution, delivery and performance by the Lessee of the Lease and Lease Supplement have been duly authorized by all necessary corporate action on the part of the Lessee, do not and will not require any approval of the shareholders of the Lessee or consent of any trustee or holder of any indebtedness or obligation of the Lessee, and the execution and delivery of the Lease and Lease Supplement, the consummation of the transactions contemplated therein, and compliance by the Lessee with the terms and provisions thereof, do not contravene any Law applicable to the Lessee, or result in the breach of, or constitute any default under, or result in the creation of any lien, charge or encumbrance upon any property of the Lessee under any credit agreement or instrument, corporate charter or bylaw or other agreement to which the Lessee is a party or by which the Lessee or its properties or assets are bound or affected. The Lease and Lease Supplement have been duly executed and delivered by the Lessee. 3. The Lessee has received every consent, approval or authorization of, and has given every notice to, each Governmental Authority having jurisdiction with respect to the execution, delivery and performance of the Lease, the Lease Supplement and the other Operative Agreement (including all monetary and other obligations thereunder), that is required for the Lessee to execute and deliver the Lease, the Lease Supplement and the other Operative Agreements and to perform the transactions covered thereby to be performed on or prior to the Delivery Date. 4. The Lease, the Lease Supplement and the other Operative Agreements have been duly executed and delivered by the Lessee and constitutes the legal, valid and binding agreement of the Lessee enforceable against the Lessee in accordance with its terms, except as enforcement thereof may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws affecting the enforcement of creditors' rights generally, as well as awards by courts of relief in lieu of the remedy of specific performance of contractual provisions and by general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law) as a court having jurisdiction may impose and by laws which may affect some of such remedies but which do not make the available remedies inadequate for the substantial realization of the benefits provided therein. 5. There are no actions, suits or proceedings pending or, to my knowledge, threatened against or affecting the Lessee in any court or before any governmental commission, arbitrator, board or authority which, if determined adversely to the Lessee, could have a material adverse effect on the current business or financial condition of the Lessee or on the ability of the Lessee to perform its obligations under the Lease and the other Operative Agreements to which it is a party. 6. The Lessee is not in default under any indenture, mortgage or loan agreement of which I have knowledge and to which the Lessee is now a party or by which it is bound nor is the Lessee in default under any other agreement or instrument of a material nature of which I have knowledge and to which the Lessee is now a party or by which it is bound; nor to my knowledge is the Lessee in violation of any law, order, injunction, decree, rule or regulation applicable to the Lessee of any court or administrative body, which violation could materially and adversely affect the business, property or assets, operations or condition, financial or otherwise, of the Lessee; and no event has occurred and is continuing which, under the provisions of any such indenture, mortgage or loan agreement, with the lapse of time or the giving of notice, or both, would constitute a default thereunder. 7. Except for the filing of the Lease and the Lease Supplement for recordation with the FAA, the placing on the Aircraft and on each Engine of the plates containing the legends referred to in Section 5.6 of the Lease and the filing of a UCC-1 with the Colorado Secretary of State, no further filing, recording or notarization of the Lease or of any other document, and no further action is necessary or advisable, under the laws of any Governmental Authority in order to (a) fully establish and protect Lessor's title to, interest in and property right with respect to the Aircraft and each Engine as against the Lessee or any third party and to ensure that the property rights of Lessor therein will have priority in all respects over the claims of all creditors of the Lessee, and (b) ensure the validity, effectiveness and enforceability of the Lease. Lessor is entitled to the benefit of Section 1110 of the Bankruptcy Code as in effect on the date hereof. I do not purport to be an expert on and do not purport to be generally familiar with or qualified to express legal opinions based on any law other than the laws of Colorado and the Federal laws of the United States of America, accordingly, I express no legal opinion herein based upon the laws of any other state. However, for the purposes of this opinion, I have assumed that the laws of the State of New York are identical to those of the State of Colorado. Yours very truly, EXHIBIT E to AIRCRAFT LEASE AGREEMENT [LETTERHEAD OF APPROVED INSURANCE BROKER] [Date of Delivery Date] C.I.T. Leasing Corporation 1211 Avenue of the Americas New York, New York 10036 Re: Insurance Coverage for One Boeing 737-3L9 Aircraft under Aircraft Lease Agreement dated as of ________ __, 1999 between C.I.T. Leasing Corporation and Frontier Airlines, Inc. having Manufacturer's Serial No. 24569 and U.S. Registration No. N312FL Gentlemen: This report is delivered to you pursuant to the provisions of Section 2.3(5) of the Aircraft Lease Agreement dated as of _______ __, 1999 (the "Lease") between C.I.T. Leasing Corporation (the "Lessor") and Frontier Airlines, Inc. (the "Lessee"). We are the firm of independent aircraft insurance brokers (the "Approved Insurance Broker") who have been appointed by Lessee to deliver this report pursuant to Section 2.3(5) of the Lease and we understand that Lessor has not objected to such appointment. Except as otherwise defined herein, the terms used herein shall have the meanings set forth in the Lease. We have reviewed the Lease and particularly Article 12 and Exhibit E thereof. We are also fully familiar with the Certificate of Insurance dated _________________, 1999 issued to you by the Approved Insurers as well as the policies of insurance evidenced thereby. We have attached such Certificate of Insurance setting forth the coverage applying to the Aircraft. In our opinion the insurance policies carried on the Aircraft described in our Certificate of Insurance dated _____________________, 1999 are subject to terms and conditions which are normal for the market and comply in all material respects with Article 12 and Exhibit E of the Lease. We agree to advise Lessor in writing promptly of any default in the payment of any premium and any other act or omission on the part of Lessee of which we have knowledge and which might invalidate or render unenforceable, in whole or in part, any insurance required under the Lease on the Aircraft, and we further agree to advise you in writing at least thirty (30) days (seven (7) days or such lesser period as from time to time may be applicable in the case of war risk and allied perils insurance) prior to any lapse, termination or cancellation of any such insurance or as soon as possible in respect of non-renewal or automatic termination for War Risk. Very truly yours, [APPROVED INSURANCE BROKER] By:_____________________________ Title:____________________________ EXHIBIT F to AIRCRAFT LEASE AGREEMENT SPECIAL PROVISIONS TO CERTIFICATE OF INSURANCE The "special provisions" section of the Insurance Certificate shall provide as follows: 1. In accordance with the Aircraft Lease Agreement dated as of April __, 1999 (the "Lease") between Lessor and Lessee, it is agreed to include Lessor and its successors and assigns, and their respective directors, officers and employees as additional insureds (the "Additional Insureds"), designate Lessor as owner of the Aircraft, and designate Lessor as loss payee (but without imposing upon the Additional Insureds any obligation imposed upon Lessee, including, without limitation, the liability to pay any premiums). 2. It is agreed that in respect of the interests of the Additional Insureds, in the insurance coverage provided hereby, such insurance coverage shall not be invalidated by any action or inaction of Lessee, and shall insure the Additional Insureds, regardless of any breach or violation of any warranty, declaration or condition contained in such insurance coverage by Lessee or any other Person. 3. It is agreed that if the insurance coverage provided hereby is canceled for any reason whatsoever, or is adversely changed in any way with respect to the interests of the Additional Insureds, or if such insurance is allowed to lapse for nonpayment of premium, such cancellation, adverse change or lapse shall not be effective as to the Additional Insureds, for thirty (30) days (and, with respect to war risk insurance, seven (7) days or such shorter period as shall be customary on the London market for such insurance in such area of the world, or ten (10) days in the event of nonpayment of premium) after receipt by Lessor of written notice of such prospective cancellation, change or lapse. 4. It is agreed that, as against the Additional Insureds, the Insurers waive any rights of setoff, counterclaim or any other deduction, whether by attachment or otherwise, and agree to waive rights of subrogation against the Additional Insureds. 5. The coverage provided hereunder is primary without right of contribution from any other insurance which may be carried by the Additional Insureds and, with respect to liabilities coverage, shall operate as if it were a separate policy for each insured, without, however increasing the aggregate limit of liability for the coverage or permitting claims recoverable under the hull policy to be recoverable as liability claims. It is agreed that the Additional Insureds have a right to carry insurance in excess of the amounts, provided such additional insurance does not reduce or otherwise affect the coverage or amounts of insurance required to be covered by Lessee under Article 12 of the Lease. 6. A 50/50 clause is in effect between the all risk hull and war risk coverages. 7. To the extent of any reinsurance, the insurance coverage provided hereunder includes a cut-through provision permitting the Additional Insureds to file claims and to obtain payment directly from the reinsures. The "coverage" section of the Insurance Certificate shall include the following description: Description of War Risk Coverage: Loss of and/or damage to each Aircraft caused by: 1. 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; 2. Strikes, riots, civil commotions or labor disturbances; 3. 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; 4. Any malicious act or act of sabotage; 5. Confiscation, nationalization, seizure, restraint, detention, appropriation, expropriation, requisition of title or use, by or under the order of any government (whether civil, military or de facto) or public or local authority, including by the government of registry (if other than the United States); 6. Hijacking or any unlawful seizure or wrongful exercise of control of the Aircraft or crew in flight (including any attempt at such seizure or control) made by any person or persons on board the Aircraft acting without the consent of Lessee. [This Exhibit to be Omitted from FAA Filing Copy] EXHIBIT G to AIRCRAFT LEASE AGREEMENT MAINTENANCE RESERVES Lessee agrees to pay to Lessor Maintenance Reserves in the aggregate amount of * per Flight Hour and * per Cycle, payable on a monthly basis, allocated as follows (which "D" Check Airframe Reserve, Engine Reserves, Landing Gear Reserve and Engine Life Limited Parts Reserves, will not be pooled or commingled): (a) Airframe Reserve. Lessee agrees to pay Lessor within ten (10) days following the last day of each Rent Period (the "Prior Period" provided that, at the end of the first Rent Period, the Prior Period shall mean the Delivery Date up to the last day of the first Rent Period) during the Term an amount equal to * times the number of Flight Hours of operation of the Airframe (excluding, for purposes of this paragraph (a), Landing Gear and the APU) for such Prior Period (hereinafter referred to as the ""D" Check Airframe Reserve"). In the event that Lessee is obligated to perform a "D" Check (or its equivalent structural inspection) on the Airframe during the Term of this Lease, the "D" Check Airframe Reserve shall be used to cover Lessee's Actual Costs incurred in completing with respect to the Airframe, all routine and non-routine "D" Check tasks (or its equivalent) but shall not be used to cover modifications, interior reconfiguration, the accomplishment of service bulletins, the accomplishment of Airworthiness Directives, any deferred maintenance items and any repair of Time Controlled Parts accomplished during the "D" Check (or its equivalent structural inspection) (for purposes of this paragraph (a), costs and expenses for which the Lessee will be reimbursed hereunder are referred to as ""D" Check Airframe Reimbursable Expenses"). In connection with the performance of any part of such "D" Check (or its equivalent structural inspection), Lessee shall present written evidence satisfactory to Lessor as to the workscope to be performed and payment installments relating to the performance thereof in connection with such "D" Check (or its equivalent structural inspection) and the amount of such "D" Check Airframe Reimbursable Expenses for approval by Lessor. Upon receipt of such written evidence (which shall include evidence of payment by Lessee for such "D" Check Airframe Reimbursable Expenses claimed by Lessee), and provided there then exists no Default or Event of Default, Lessor shall reimburse Lessee by paying to the Maintenance Provider from the "D" Check Airframe Reserve, an amount equal to the lesser of (i) the amount of such "D" Check Airframe Reimbursable Expenses or (ii) the amounts then held in the "D" Check Airframe Reserve. If such portion of the cost of the "D" Check for the Airframe to be paid out of the "D" Check Airframe Reserve exceeds the balance in the "D" Check Airframe Reserve, Lessee will be required to pay such excess amount. (b) Engine Reserves. Lessee agrees to pay to Lessor within ten (10) days following the last day of each Rent Period (the "Prior Period" provided that, at the end of the first Rent Period, the Prior Period shall mean the Delivery Date up to the last day of the first Rent Period) during the Term an amount equal to * times the number of Flight Hours of operation during such Prior Period for each Engine (each, an "Engine Reserve" and collectively, the "Engine Reserves"). A separate Engine Reserve shall be established and maintained with respect to each Engine. Upon the accomplishment of any Heavy Engine Maintenance (as hereinafter defined) accomplished during a Covered Engine Shop Visit (as hereinafter defined) for any Engine during the Term, then the Engine Reserve with respect to such Engine shall be used to reimburse Lessee, or pay at Lessee's direction, for Lessee's Actual Cost incurred in completing such maintenance (for purposes of this paragraph (b), Lessee's Actual Cost so incurred is referred to as "Engine Reimbursable Expenses"). As used herein, "Heavy Engine Maintenance" shall be defined as any overhaul, refurbishment, hot section inspection, replacement of internal time-limited parts, disassembly, assembly and testing required thereof for each such engine, but excluding shipping and freight charges, engine removal and installation charges, accomplishment of Airworthiness Directives and Aeronautics Authority requirements, and replacement, repair or overhaul of external engine parts. As used herein, "Covered Engine Shop Visit" shall be defined as a shop visit requiring a major disassembly of an engine and the removal and reinstallation of internal rotating parts where such shop visit was not the result of foreign object damage ("F.O.D."), ingestion, accident, faulty maintenance or installation, incident, improper operations, abuse, neglect, misuse, elective parts replacement, Airworthiness Directive compliance, Aeronautics Authority regulation compliance or covered by Manufacturer's service bulletins or which is reimbursable by a claim under the Manufacturer's warranties or by insurance (with deductibles being treated as reimbursable by insurance for this exclusion). Upon the accomplishment of any such Heavy Engine Maintenance during a Covered Engine Shop Visit, Lessee shall present written evidence satisfactory to Lessor as to the completion of such Heavy Engine Maintenance to such Engine and the costs associated therewith for approval by Lessor. Such Heavy Engine Maintenance shall include a Build Standard (as hereinafter defined) to be mutually agreed upon by Lessor and Lessee. As used herein, "Build Standard" shall be defined as a reassembly of an Engine using parts that will allow a minimum number of Flight Hours and Cycles of operation until the next scheduled removal. Upon receipt of such written evidence (which shall include evidence of payment by Lessee for such Engine Reimbursable Expenses claimed by Lessee), and provided there then exists no Default or Event of Default, Lessor shall reimburse Lessee, or pay to such other Person as may be directed by Lessee, an amount equal to the lesser of (i) the amount of the Engine Reimbursable Expenses with respect to such Engine or (ii) the amount then held in the Engine Reserve established for such Engine. Lessee acknowledges that the amounts held with respect to an Engine in an Engine Reserve may be applied only with respect to such Engine. If the cost of any Heavy Engine Maintenance accomplished during a Covered Engine Shop Visit for an Engine exceeds the balance in the Engine Reserve established for such Engine, Lessee will be required to pay such excess amount for such Engine. (c) Landing Gear Reserve. Lessee agrees to pay to Lessor within ten (10) days following the last day of each Rent Period (the "Prior Period" provided that, at the end of the first Rent Period, the Prior Period shall mean the Delivery Date up to the last day of the first Rent Period) during the Term an amount equal to * times the number of Flight Hours of operation of the Airframe during such Prior Period for all Landing Gear on the Aircraft (the "Landing Gear Reserve"). In the event Lessee is obligated to perform an overhaul of any Landing Gear in accordance with the Maintenance Program for the Aircraft (excluding overhaul because of accident, incident, abuse, misuse or elective parts replacement) then the Landing Gear Reserve shall be used to reimburse Lessee, or pay at Lessee's direction for Lessee's Actual Cost incurred in completing such overhaul (for purposes of this paragraph (c), Lessee's Actual Cost so incurred is referred to as "Landing Gear Reimbursable Expenses"). Upon accomplishment of any such overhaul, Lessee shall present written evidence satisfactory to Lessor as to the completion of such overhaul and the costs associated therewith for approval by Lessor. Upon receipt of such written evidence (which shall include evidence of payment by Lessee for such Landing Gear Reimbursable Expenses claimed by Lessee), and provided there then exists no Default or Event of Default, Lessor shall disburse from the Landing Gear Reserve with respect to such Landing Gear as the Lessee shall direct an amount equal to the lesser of (i) the amount of the Landing Gear Reimbursable Expenses or (ii) the amount then held in the Landing Gear Reserve with respect to the Landing Gear. Lessee shall be solely responsible for the costs of an overhaul of the Landing Gear in excess of any balance in the Landing Gear Reserve. (d) Engine Life Limited Parts Reserves. Lessee agrees to pay to Lessor within ten (10) days following the last day of each Rent Period (the "Prior Period," provided that, at the end of the first Rent Period, the Prior Period shall mean the Delivery Date up to the last day of the first Rent Period) during the Term an amount equal to * times the number of Cycles of operation during such Prior Period for each Engine (each, an "Engine Life Limited Parts Reserve" and collectively, the "Engine Life Limited Parts Reserves"). A separate Engine Life Limited Parts Reserve shall be established and maintained with respect to each Engine. Upon the replacement of any Engine Life Limited Part in any Engine during a Term, the Engine Life Limited Parts Reserve with respect to such Engine shall be used to reimburse Lessee, or pay at Lessee's direction for Lessee's Actual Cost incurred to purchase such Engine Life Limited Part (for purposes of this paragraph (d), Lessee's Actual Cost so incurred is referred to as "Engine Life Limited Parts Reimbursable Expenses"), provided, however, Lessee shall not use such Engine Life Limited Parts Reserve to reimburse Lessee for the cost of any other expenses associated with the replacement of such Engine Life Limited Part, including the cost of shipping and freight charges, engine disassembly, reassembly, and testing required thereof, engine removal and installation charges, accomplishment of Airworthiness Directives and Federal Aviation Regulation requirements, and replacement, repair or overhaul of external engine parts or if due to foreign object damage ("FOD"), ingestion, accident, faulty maintenance or installation, incident, improper operations, abuse, neglect, misuse, elective parts replacement or covered by Manufacturer's service bulletins or which is reimbursable by a claim under the Manufacturer's service bulletins or which is reimbursable by a claim under the Manufacturer's warranties or by insurance (with deductibles being treated as reimbursable by insurance for this exclusion). Upon the purchase and installation into an Engine of any such Engine Life Limited Part, Lessee shall present written evidence satisfactory to Lessor as to the purchase and installation of such Engine Life Limited Part for approval by Lessor. Upon receipt of such written evidence, and provided there then exists no Default or Event of Default, Lessor shall reimburse Lessee, or pay to such other Person as may be directed by Lessee, an amount equal to the lesser of (i) the amount of the Engine Life Limited Parts Reimbursable Expenses with respect to such Engine or (ii) the amount then held in the Engine Life Limited Part Reserve established for such Engine. Lessee acknowledges that the amounts held with respect to an Engine in any given Engine Life Limited Part Reserve may be applied only with respect to such Engine. If the cost of any Engine Life Limited Part purchased for an Engine exceeds the balance in the Engine Life Limited Part Reserve established for such Engine, Lessee will be required to pay such excess amount for such Engine. (e) It is intended by Lessor and Lessee that maintenance on the Aircraft will be performed by the Maintenance Provider pursuant to the Maintenance Program. Notwithstanding anything to the contrary contained in this Exhibit G, any maintenance on the Aircraft and the extent and nature of such maintenance to be performed shall be conducted by the Lessee or at a FAA approved facility reasonably acceptable to Lessor and Lessor shall be entitled to have representatives present during the performance of such maintenance to oversee such performance. With respect to the Engines only, if the Maintenance Provider provides maintenance thereon, Lessor shall not be responsible for any delay by such Maintenance Provider in the performance of such maintenance. If, however, Lessor requires another maintenance provider selected by Lessor to provide maintenance with respect to an Engine, and if engine maintenance provided by such third party is delayed for more than 90 days, then Lessor will provide to Lessee a substitute engine until redelivery to Lessee of the Engine being serviced. (f) Notwithstanding anything to the contrary herein, the Maintenance Reserves set forth herein are based on maintenance costs relating thereto based on an assumed Flight Hour:Cycle ratio of 2:1. To the extent the actual Flight Hour:Cycle ratio falls below 2:1 then the applicable rate of the Maintenance Reserves will be increased by Lessor (no more frequently than annually) in correlation with the reduced Flight Hour:Cycle ratio. (g) Notwithstanding anything to the contrary contained in this Exhibit G, Lessor may, at any time, request in writing an adjustment of any Maintenance Reserve if, in the reasonable opinion of Lessor, the actual maintenance cost (determined as of the six month period prior to such notice unless otherwise agreed by Lessor and Lessee) of any of the Items for which Maintenance Reserves are established or any such items with respect to other aircraft owned or leased by Lessee exceed the amount in the Maintenance Reserve for such Item. Lessor agrees to consult with Lessee regarding any such proposed increase. In the event that Lessor and Lessee are unable to agree on an appropriate increase in Maintenance Reserves within thirty (30) days after the date of such request, Lessor shall have the right to terminate this Lease effective as of the last day of the then-current Rent Period, unless otherwise agreed by Lessor and Lessee; provided, however, that Lessor may adjust upward, but not downward, any Maintenance Reserve if Lessee changes its Maintenance Program in such a manner as would require an increase in such Maintenance Reserve to meet revised Maintenance Program standards. [This Exhibit to be Omitted from FAA Filing Copy] EXHIBIT H to AIRCRAFT LEASE AGREEMENT CERTAIN PRICING TERMS (a) Lessee shall pay * to Lessor as rental for the Aircraft ("Basic Rent") for each Rent Period in advance on each Rent Payment Date . (b) The Security Deposit Amount shall equal * (c) The Insured Value shall equal * I-2 EXHIBIT I to AIRCRAFT LEASE AGREEMENT DELIVERY CONDITIONS On the Delivery Date, the Aircraft shall be delivered to Lessee in "as-is, where-is" condition and shall conform to the following requirements: (1) The Aircraft shall have a valid FAA registration number and duly registered with the FAA in the name of Lessor. (2) The Aircraft, Engines, Landing Gear, APU, and Parts (appliances) shall comply with all applicable Airworthiness Directives affecting such model aircraft, engines, landing gears, auxiliary power units, and parts (appliances) which by their terms require compliance on or before the Delivery Date, notwithstanding any waiver, deviation or time extension obtained by Lessor from the FAA or otherwise. (3) The Aircraft shall have a current and effective FAA certificate of airworthiness and shall comply with all FAR requirements for passenger operation as a transport category commercial aircraft in accordance with all applicable FARs, including without limitation, FAR Part 121, except to the extent such requirements relate to bridging the Aircraft onto Lessee's Maintenance Program. (4) The Aircraft shall be in full compliance with the Manufacturer's recommended corrosion prevention and control program ("CPCP"), or such other corrosion prevention and control program approved by the FAA for the Aircraft, and with all structural inspection ("SI") items current. (5) To the extent not already accomplished by Lessor, all discrepancies found and listed by Lessor's and Lessee's technical representatives, as a result of the test flight described in Section 2.1(c) of the Lease, shall be corrected by Lessee at Lessor's expense, pursuant to Section 2.1(c) of the Lease. (6) Immediately prior to the delivery of the Aircraft, Lessor shall accomplish a complete hot and cold section borescope inspection of each Engine and the APU, to be performed at Lessor's expense by Lessor's representative or an agency of Lessor's choosing, in accordance with the Manufacturer's maintenance manual. All defects discovered as a result of such inspections, which exceed the maintenance manual allowable limits for an installed Engine or APU, as applicable, shall be corrected at Lessor's expense. Any defect that requires reinspection prior to the next full "C" Check or 3,500 Flight Hours, whichever is greater, shall be considered a Watch Item and shall be corrected at Lessor's expense. (7) The Aircraft shall be equipped with fully functional TCAS and windshear equipment. (8) All Aircraft Documents and other current and historical records shall be delivered 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, log books, original Aircraft and Engine delivery documents, 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 as of the Delivery Date. TABLE OF CONTENTS Page ARTICLE 1 DEFINITIONS................................................... 1 ARTICLE 2 DELIVERY AND ACCEPTANCE....................................... 7 2.1. Time and Place....................................... 7 2.2. A Lease Only......................................... 9 2.3. Conditions to Delivery of the Aircraft............... 9 2.4. Aircraft Configuration, etc.......................... 10 ARTICLE 3 RENT AND TERM................................................. 11 3.1. Basic Rent........................................... 11 3.2. Maintenance Reserves and Supplemental Rent........... 11 3.3. Term................................................. 11 3.4. Place of Payment..................................... 11 3.5. Security Deposit..................................... 11 3.6 Time is of the Essence............................... 13 ARTICLE 4 REPRESENTATIONS AND WARRANTIES; COVENANTS OF THE PARTIES...... 13 4.1. Lessor's Representations and Warranties.............. 13 4.2. Representations and Warranties of the Parties........ 15 ARTICLE 5 POSSESSION; USE; LAWFUL INSURED OPERATIONS; MAINTENANCE; REGISTRATION AND INSIGNIA; MAINTENANCE RESERVES............... 16 5.1. Possession........................................... 16 5.2. Assignment by Lessee................................. 17 5.3. Use.................................................. 17 5.4. Lawful Insured Operations............................ 18 5.5. Maintenance.......................................... 18 5.6. Registration and Insignia............................ 19 5.7. Maintenance Reserves................................. 20 5.8. Application of Reserves Upon Aircraft Return......... 20 5.9. Concerning Reserves.................................. 20 ARTICLE 6 INSPECTION; FINANCIAL AND AIRCRAFT INFORMATION................ 21 6.1. Inspection........................................... 21 6.2. Financial Information................................ 21 6.3. Aircraft Information................................. 22 6.4 Other Information.................................... 22 ARTICLE 7 COVENANTS..................................................... 23 7.1. Lessee's Covenants................................... 23 ARTICLE 8 NO SET-OFF, COUNTERCLAIM, ETC................................. 24 8.1. No Set-off, Counterclaim, etc........................ 24 ARTICLE 9 REPLACEMENT OF PARTS; ALTERATIONS, MODIFICATIONS AND ADDITIONS..................................................... 25 9.1. Replacement of Parts................................. 25 9.2. Title to Replaced and Replacement Parts.............. 25 9.3. Alterations, Modifications and Additions............. 25 9.4. Title to Parts....................................... 28 ARTICLE 10 TAX INDEMNITY................................................. 28 10.1. Scope................................................ 28 10.2. Report............................................... 29 10.3. After-Tax Nature of Indemnity........................ 30 10.4. Payment of Taxes and Indemnities..................... 30 10.5. Contest.............................................. 30 10.6. Lessor............................................... 32 10.7. Survival............................................. 32 ARTICLE 11 EVENTS OF LOSS................................................ 32 11.1. With Respect to the Aircraft......................... 32 11.2. With Respect to an Engine............................ 32 11.3. Application of Payments from Governmental Authorities.......................................... 33 11.4. Application of Payments During Existence of Event of Default........................................... 34 11.5. Replacement Aircraft................................. 34 ARTICLE 12 INSURANCE..................................................... 34 12.1. Public Liability and Property Damage Liability Insurance............................................ 34 12.2. Insurance Against Loss or Damage to the Aircraft..... 35 12.3. Application of Proceeds in an Event of Loss of Aircraft............................................. 36 12.4. Application of Proceeds in the Absence of an Event of Loss........................................ 37 12.5. Reports, etc......................................... 37 12.6. Lessor's Additional Insurance........................ 37 12.7. Lessee's Additional Insurance........................ 38 12.8. Insurance Against Year 2000 Risks and Liability...... 38 ARTICLE 13 GENERAL INDEMNIFICATION....................................... 38 13.1. Scope................................................ 38 13.2. Lessee's Release..................................... 39 13.3. Repayment............................................ 39 13.4. Timing of Payment.................................... 39 13.5. Exclusion............................................ 39 13.6. After-Tax Nature of Indemnity........................ 39 13.7. Survival............................................. 40 ARTICLE 14 LIENS......................................................... 40 14.1. Permitted Liens...................................... 40 14.2. Engine Liens......................................... 40 ARTICLE 15 FAA RECORDATION AND FURTHER ASSURANCES........................ 41 15.1. FAA Recordation...................................... 41 15.2. Further Assurances................................... 41 ARTICLE 16 RETURN OF ITEMS AND RECORDS................................... 41 16.1. Time and Place....................................... 41 16.2. Condition............................................ 42 16.3. Corrections and Subsequent Corrections............... 42 16.4. Fuel................................................. 42 16.5. Legal Status Upon Return............................. 42 ARTICLE 17 EVENTS OF DEFAULT............................................. 43 17.1. Lessee's Defaults.................................... 43 ARTICLE 18 RIGHTS AND REMEDIES........................................... 45 18.1. Remedies............................................. 45 18.2. Further Rights....................................... 47 18.3. Remedies Cumulative.................................. 48 18.4. Concerning Remedies.................................. 48 ARTICLE 19 MISCELLANEOUS................................................. 49 19.1. Construction, Applicable Law; Jurisdiction........... 49 19.2. Notices.............................................. 50 19.3. Lessor's Right to Perform............................ 50 19.4. Counterparts......................................... 50 19.5. Assignment by Lessor................................. 51 19.6. Survival............................................. 51 19.7. Entire Agreement..................................... 51 19.8. Successors and Assigns............................... 52 19.9. Brokers.............................................. 52 19.10. Transaction Costs.................................... 52 19.11. Quiet Enjoyment...................................... 52 19.12. Time Is of the Essence............................... 52 19.13. Confidentiality...................................... 52 19.14. DISCLAIMER OF CONSEQUENTIAL DAMAGES.................. 53 19.15. Tax Treatment........................................ 53 19.17. Dating............................................... 53 Exhibits Exhibit A Description of Aircraft and Engines Exhibit B Form of Lease Supplement Exhibit C Return Condition Requirements Exhibit D Lessee's Counsel Opinion Exhibit E Letter of Insurance Broker Exhibit F Special Provisions to Certificate of Insurance Exhibit G Maintenance Reserves Exhibit H Certain Pricing Terms Exhibit I Delivery Conditions EX-10 8 AIRCRAFT LEASE AGREEMENT AIRCRAFT LEASE AGREEMENT between Indigo Aviation AB (publ) as Lessor and Frontier Airlines, Inc as Lessee Dated as of 2nd of June 1999 Aircraft Make and Model: One Boeing 737-3S1 Aircraft Manufacturer's Serial Number: 24856 Aircraft Registration Mark: N372TA (to be changed to N311FL) Engines Make and Model: CFM56-3C1 Engines Serial Numbers: 724667 and 725630 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 Lender on the receipt set forth on the signature page of such original counterpart. Items marked with "*" have been omitted pursuant to a request for confidential treatment. TABLE OF CONTENTS 1. DEFINITIONS................................................................2 1.1 Definitions............................................................2 1.2 Construction..........................................................11 2. REPRESENTATIONS AND WARRANTIES............................................14 2.1 Lessee's Representations and Warranties...............................14 2.2 Lessor's Representations and Warranties...............................17 2.3 Survival of Representations and Warranties............................18 3. CONDITIONS PRECEDENT......................................................19 3.1 Lessor's Conditions Precedent.........................................19 3.2 Waiver................................................................20 3.3 Lessee's Conditions Precedent.........................................20 3.4 Waiver................................................................21 4. DELIVERY CONDITION AND INSPECTION OF AIRCRAFT.............................22 4.1 Lessee Selection of Aircraft..........................................22 4.2 Condition at Delivery.................................................22 4.3 Lessee Inspection and Acceptance Flight...............................22 4.4 Delivery of Aircraft to Lessee........................................22 4.5 Lessee's Failure to take Delivery.....................................22 5. LEASE TERM................................................................24 5.1 Lease Term............................................................24 5.2 Expiry Date...........................................................24 5.3 Survival of Certain Lessee Obligations................................25 5.4 Risk .25 6. DELIVERY..................................................................26 6.1 Location and Time of Delivery.........................................26 6.2 Delay or Failure in Delivery..........................................26 7. RENT......................................................................27 7.1 Basic Rent Period.....................................................27 7.2 Time of Payment of Basic Rent.........................................27 7.3 Amount of Basic Rent..................................................27 7.4 Maintenance Reserves..................................................27 7.5 Supplemental Rent for Excess Cycles...................................27 8. SECURITY DEPOSIT..........................................................28 8.1 Security Deposit......................................................28 8.2 Letter of Credit......................................................28 8.3 Lessor's Rights.......................................................28 9. MAINTENANCE RESERVES......................................................30 9.1 Amount................................................................30 9.2 Payments..............................................................30 9.3 Adjustment............................................................30 9.4 Release of Maintenance Reserves.......................................30 9.5 Costs in Excess of Maintenance Reserves...............................32 9.6 Reimbursement after Expiry Date.......................................32 10. PAYMENTS.................................................................33 10.1 Account for Lessee Payments..........................................33 10.2 Default Interest.....................................................33 10.3 Absolute Obligations.................................................33 10.4 Application of Payments to Lessor....................................34 10.5 Currency Indemnity...................................................34 10.6 Set-off..............................................................35 10.7 Time for Payments....................................................35 11. LESSOR'S COVENANTS.......................................................36 11.1 Quiet Enjoyment......................................................36 11.2 Lessor Obligations Following Expiry Date.............................36 12. LESSEE'S COVENANTS.......................................................37 12.1 Duration.............................................................37 12.2 Information..........................................................37 12.3 Lessor Visits........................................................38 12.4 Periodic Estoppel Certificates.......................................39 12.5 Airport and Navigation Charges.......................................39 12.6 Operation of Aircraft................................................40 12.7 Areas of Operation...................................................40 12.8 Non-Prejudicial Action...............................................40 12.9 Non-Representation of Lessor.........................................41 12.10 Inspection..........................................................41 12.11 Registration........................................................41 12.12 Name Plates.........................................................42 12.13 Geneva Convention...................................................42 12.14 Merger and Shareholding.............................................43 12.15 Ownership...........................................................43 12.16 Maintenance of Principal Business Place.............................43 12.17 Maintenance of Flight Records.......................................44 13. POSSESSION...............................................................45 13.1 No Relinquishment of Possession......................................45 13.2 Copy of Sublease.....................................................48 13.3 Lessee Primarily Liable..............................................48 13.4 Recognition of Rights................................................48 14. SECURITY INTERESTS.......................................................49 14.1 Title................................................................49 14.2 No Security Interests................................................49 14.3 Base of Aircraft.....................................................49 14.4 Notice to Lessor.....................................................49 14.5 Procure Release......................................................49 15. MAINTENANCE AND REPAIR...................................................50 15.1 General Obligations..................................................50 15.2 Specific Obligations.................................................51 16. REPLACEMENT OF PARTS.....................................................53 16.1 Replacement of Parts.................................................53 16.2 Title to Replacement Parts...........................................53 16.3 Pooling of Parts.....................................................54 16.4 Alterations..........................................................54 16.5 Removal of Parts.....................................................55 16.6 Substitution of Engine...............................................55 16.7 Temporary Removal of Parts...........................................56 16.8 Parts Incapable of Transfer..........................................57 17. MANUFACTURER'S WARRANTIES................................................58 17.1 Authorization........................................................58 17.2 Proceeds.............................................................58 17.3 Agreements with Manufacturers........................................59 17.4 No Operation Contrary to Warranties..................................59 18. DISCLAIMERS..............................................................60 18.1 General..............................................................60 18.2 As Is, Where Is......................................................60 18.3 Waiver of Warranty of Description....................................61 18.4 Lessee Acknowledgement...............................................61 18.5 Lessee Waiver........................................................61 18.6 Lessee Examination of Aircraft.......................................61 18.7 No Lessor Liability for Losses.......................................62 18.8 Exclusion............................................................62 18.9 Waiver...............................................................62 18.10 No Waiver...........................................................63 18.11 Confirmation........................................................63 19. INDEMNITIES..............................................................64 19.1 General Indemnity....................................................64 19.2 Exception to General Indemnity.......................................64 19.3 Time of Payment......................................................65 19.4 Survival of General Indemnity........................................65 19.5 Notice to Lessee.....................................................65 20. TAXATION.................................................................66 20.1 Gross-up.............................................................66 20.2 Tax Indemnity........................................................66 20.3 Value Added Taxes....................................................67 20.4 Taxation of Indemnity Payments.......................................68 20.5 Benefit of Indemnities...............................................68 20.6 Lessor Indemnification...............................................68 20.7 Survival of Tax Indemnities..........................................68 20.8 Mitigation and Co-operation..........................................68 20.9 Furnishing Forms.....................................................69 21. INSURANCE................................................................70 21.1 Insurances...........................................................70 21.2 Reinsurance..........................................................70 21.3 Requirements.........................................................70 21.4 Insurance Covenants..................................................71 21.5 Renewal of Insurances................................................72 21.6 Failure to Insure....................................................73 21.7 Continuation of Insurances...........................................73 21.8 Application of Insurance Proceeds....................................73 21.9 Pursuit of Claims....................................................74 22. TOTAL LOSS AND REQUISITION...............................................75 22.1 Total Loss Prior to Delivery.........................................75 22.2 Total Loss After Delivery............................................75 22.3 Total Loss of Engines................................................76 22.4 Requisition..........................................................76 23. REDELIVERY...............................................................78 23.1 Redelivery of Aircraft...............................................78 23.2 Final Inspection.....................................................79 23.3 Discrepancies........................................................79 23.4 Non-compliance.......................................................79 23.5 Acknowledgement......................................................80 23.6 Storage etc..........................................................80 24. EVENTS OF DEFAULT........................................................81 24.1 Notice...............................................................81 24.2 Events...............................................................81 24.3 Lessor's Rights......................................................84 24.4 Default Payments.....................................................85 24.5 Cumulative Rights....................................................86 25. ASSIGNMENT AND TRANSFER..................................................87 25.1 By Lessee............................................................87 25.2 By Lessor............................................................87 25.3 Assignment to Lender.................................................87 25.4 Lessee Co-operation..................................................87 25.5 Lessor Includes Lessor's Assignee and Lender.........................88 26. MISCELLANEOUS PROVISIONS.................................................89 26.1 Rights Cumulative, Waivers...........................................89 26.2 Delegation...........................................................89 26.3 Expenses.............................................................89 26.4 Time of Essence......................................................90 26.5 Entire Agreement.....................................................90 26.6 Further Assurances...................................................90 26.7 Language.............................................................90 26.8 Variation............................................................90 26.9 Invalidity of any Provision..........................................90 26.10 Survival............................................................91 26.11 Reimbursement.......................................................91 26.12 Press Releases......................................................91 26.13 Power of Attorney...................................................91 26.14 Usury Laws..........................................................91 26.15 Confidentiality.....................................................92 26.16 Counterparts........................................................92 26.17 Bankruptcy..........................................................92 27. NOTICES..................................................................94 28. GOVERNING LAW AND JURISDICTION...........................................95 28.1 New York Law.........................................................95 28.2 Non-exclusive Jurisdiction in New York...............................95 28.3 Service of Process Agent.............................................95 28.4 Waiver...............................................................95 SCHEDULES Schedule 1 Aircraft Specification 97 Annexure 1Aircraft Documents 100 Schedule 2 Certain Business Terms 103 Schedule 3 Insurance Requirements 106 Schedule 4 Delivery Conditions 112 Schedule 5 Acceptance Certificate 115 Schedule 6 Officer's Certificate 118 Schedule 7 Letter of Authority 120 Schedule 8 Power of Attorney 121 Schedule 9 Opinion of Lessee Counsel 123 Schedule 10 Monthly Aircraft Utilisation and Status Report 128 Schedule 11 Letter of Quiet Enjoyment 131 Schedule 12 Return Conditions 132 Schedule 13 Return Acceptance Certificate 135 Annexure 1Aircraft Documents 138 Annexure 2Discrepancies 141 Schedule 14 Lease Supplement 142 THIS AGREEMENT is made as of 2nd of June 1999. BETWEEN: (1) INDIGO AVIATION AB (PUBL) a Swedish limited liability company whose address and principal place of business is at Sodra Forstadsgatan 4, S-211 43 Malmo, Sweden, ("Lessor"); and (2) FRONTIER AIRLINES, INC. a Colorado corporation whose address and principal place of business is at 12015 E. 46th Avenue, Denver, Colorado, United States of America ("Lessee"). WHEREAS Owner Trustee holds title to the Aircraft for the benefit of Lessor; Owner Trustee, as headlessor, leases the Aircraft to Lessor under the terms of the Headlease Agreement; In consideration of and subject to the mutual covenants, terms and conditions contained in this Agreement, Lessor hereby agrees to lease to Lessee and Lessee hereby agrees to lease from Lessor the Aircraft for the Lease Term and the parties further agrees as follows: DEFINITIONS 1.1 Definitions In this Agreement the following words and expressions have the following meanings unless the context otherwise requires: Acceptance Certificate means a certificate of acceptance substantially in the form set out in Schedule 5; Agreed Value has the meaning ascribed to it in Schedule 2; Aircraft means the Airframe, the Engines, the Parts and the Aircraft Documents, collectively. As the context requires, the Aircraft may also mean the Airframe, any Engine, any Part, the Aircraft Documents or any part thereof individually; Aircraft Documents means the documents, data and records referred to in Annexure 1 to Schedule 1 of this Agreement and, at Delivery, more closely identified in Annexure 1 to the Acceptance Certificate and all additions, renewals, revisions and replacements from time to time made to any of the foregoing in accordance with this Agreement; Airframe means the airframe described in Schedule 1 together with all Parts relating thereto (except Engines or engines); 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 Lessee to Lessor, or at the request of Lessor, to Lender, of all of Lessee'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 favour of Lessor, Owner Trustee or 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 7.3; Basic Rent Period means each period ascertained in accordance with Clause 7.1; 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 London, New York and Stockholm; "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 the Maintenance Program; Conditions Precedent means the conditions specified in Clause 3; CPCP means corrosion prevention 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; "D" Check means a "C7" Check plus structural items (a complete "block" system, zonal, corrosion and structural inspection in accordance with the MPD); Damage Notification Threshold has the meaning ascribed to it in Schedule 2; Default means any Event of Default or any event which with the lapse of time or giving of notice or making of any determination, would constitute an Event of Default; Default Rate means, for the relevant period, 3% percent above the rate of interest at the start of that relevant period publicly quoted by Chase Manhattan Bank N.A as its prime rate; Delivery means delivery of the Aircraft by Lessor to Lessee pursuant to Clause 6 Delivery Date means the date on which Delivery occurs; Delivery Location means San Salvador, El Salvador or such other location as Lessor and Lessee may agree; 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 Lessor elects to tender to Lessee, whether or not installed on the Airframe on the Delivery Date, such engines being described as to serial numbers on the Acceptance Certificate; 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 Lessee pursuant to this Agreement; Engine Agreed Value has the meaning ascribed to it in Schedule 2; Engine Manufacturer means CFM International; 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 24.2; Expiry Date means the date determined in accordance with Clause 5.2; FAA means the Federal Aviation Administration of the Department of Transportation of the United States of America and any successor thereof; 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 and any successor regulation thereto; Federal Aviation Act means Title 49 Subtitle VII of the U.S. Code, as amended, modified or replaced from time to time; Final Inspection has the meaning given to it in Clause 23.2; Financial Indebtedness means any indebtedness in respect of: (a) moneys 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 leave the ground at take off until the wheels of the Aircraft next touch the ground at landing; Geneva Convention means the Convention on the International Recognition of Rights in Aircraft signed in 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, state or local 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; Headlease Agreement means the aircraft headlease agreement entered into between Owner Trustee and Lessor dated as of even date hereof and which is being filed with FAA simultaneously herewith; Indemnitees means Lessor, Owner Trustee, Lender or any other person identified by Lessor 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; Insurances has the meaning ascribed to it in Clause 21.1; Landing Gear means the landing gear assembly of the Aircraft, including all life limited parts; Lease Expiry Date has the meaning ascribed to it in Schedule 2; Lease Term has the meaning ascribed to it in Schedule 2; Lender means any person or persons notified by Lessor to Lessee as providing financing to Owner Trustee or Lessor 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); Lessor Lien means: (a) any Security Interest from time to time created by or through Lessor 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 Lessor not related to the transactions contemplated by or permitted under this Agreement; (c) any Security Interest in respect of the Aircraft for Lessor Taxes; (d) any Security Interest in respect of the Aircraft existing prior to Delivery; (e) any Security Interest arising as a result of any act or omission of Lessor that constitutes a breach by Lessor of this Agreement; or (f) any Security Interest that results from any indebtedness, liability or other obligation arising by, through or under Lessor or any of the Indemnitees and that is not indemnified against by Lessee under this Agreement; Lessor Taxes means Taxes: (a) imposed as a result of activities of Lessor in the jurisdiction imposing the liability unrelated to this Agreement or the operation of the Aircraft by Lessee; (b) imposed on the net income, profits or gains of Lessor (but excluding for the avoidance of doubt, taxes directly related to payment made under this Agreement); 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; Letter of Credit has the meaning ascribed to it in Clause 8.2; LIBOR means the rate per annum which is the offered rate (if any) appearing on page 3750 of the Telerate screen (or any replacement page) which displays British Bankers Association Interest Settlement Rates for deposits in Dollars equal, or as close as practicable, to the period for which such rate is to be determined at 11:00 a.m. (London time) on the relevant date; LLP means life limited part; Loss means any and all loss, liability, obligation, action, claim, suits, proceeding, judgement, penalty, fine, damages, fee, cost, disbursement and expense and Losses shall be construed accordingly; Maintenance Facility means a FAA approved maintenance facility or such other maintenance facility as Lessor may, in its absolute descretion, from time to time approve in writing; Maintenance Program means Lessee's maintenance program as approved by the Aviation Authority provided in compliance with the MPD or such other maintenance program as Lessor may, in its absolute discretion, approve in writing; Maintenance Reserves means all amounts payable pursuant to Clause 9.1; Manufacturer means the Boeing Company, a Delaware Corporation with its principal office in Seattle, State of Washington, United States of America; Minimum Liability Coverage has the meaning ascribed to it in Schedule 2; Monthly Report means a report substantially in the form of Schedule 10; Mortgage means a mortgage over the Aircraft created for the benefit of Lender; MPD mean the Maintenance Planning Document 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 Lessor (or any parent company, subsidiary, associate or affiliate of Lessor) and Lessee (or any subsidiary, associate or affiliate of Lessee); Overhaul means the full refurbishment of the Aircraft, an Engine, the APU, a Landing Gear, a module or a Part, as the case may be, in which such equipment has been disassembled, cleaned, thoroughly inspected, repaired, reworked or had a replacement of parts, reassembled, and tested to the tolerances and standards specified by the applicable manufacturer's overhaul procedures manual or equivalent; Owner Trustee means First Security Bank, National Association; Part means, whether or not for the time being installed in or attached to the Airframe or any Engine: (a) any component, furnishing or equipment (other than a complete Engine) installed or attached to the Airframe or any Engine 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 Lessee pursuant to this Agreement; Permitted Air Carrier has the meaning ascribed to it in Clause13.1.1; Permitted Lien means: (a) any lien for Lessee 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) any Lessee liens arising out of judgements 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 Lessor Lien; and (e) any Security Interest over the Aircraft created by Lessee with th written consent of Lessor, 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 Lessor or Lender) of the sale, forfeiture or other loss of the Aircraft or any interest therein; Prior Owner means TACA International Airlines; 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; Redelivery Location means a location in the continental US reasonably requested by Lessor or such other location as Lessor and Lessee may agree; Rent means Basic Rent and Supplemental Rent; Rent Date means the day preceding each Basic Rent Period; Replacement Engine means an engine complying with Clause 16.6; Return Conditions means the conditions specified in Schedule 12; Scheduled Delivery Date has the meaning ascribed to it in Schedule 2; Security Deposit has the meaning ascribed to it in Schedule 2; Security Interest means any encumbrance or security interest, however and wherever created or arising, including without limitation, any right of ownership, security, mortgage, charge, pledge, lien, encumbrance, assignment, hypothecation or any other agreement or arrangement conferring security; Side Letter means the Side Letter No. 1 to this Agreement between Lessor and Lessee (a copy of which has not been included in the FAA counterpart of this Agreement); State of Incorporation means the State of 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; Supplemental Rent means any and all amounts, liabilities and obligations (other than Basic Rent) which Lessee assumes, agrees or is otherwise obligated to pay Lessor hereunder including Maintenance 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; 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 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 Lessee and/or operation thereof for a period of thirty (30) consecutive days or longer; (e) any sale of the Aircraft in connection with a Lessee bankruptcy whether by an administrator, trustee or court; (f) any other occurrence not permitted under this Agreement that deprives Lessee of use and possession for a period of thirty (30) 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 paragraph (c) in the definition of Total Loss, the date on which the referred to therein takes effect; (d) in the case of paragraph (d) in the definition of Total Loss, the final day of the said period of thirty (30) consecutive days; (e) in the case of paragraph (e) in the definition of Total Loss, the date on which the Aircraft is sold; and (f) in case of paragraph (f) above the definition of Total Loss, the final day of the said period of thirty (30) consecutive days; Total Loss Proceeds means the proceeds of any insurance or any other compensation or similar payment arising in respect of a Total Loss; Transaction Documents means (a) this Aircraft Lease Agreement; (b) the Acceptance Certificate; (c) the Assignment of Insurances; (d) the acknowledgement by Lessee of the security assignment or the pledge of, inter alia, this Agreement in favour of the Lender and any documents duly executed pursuant to any of the foregoing by Lessee or Lessor; (e) the Lease Supplement; and (f) the Side Letter; 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; 1.2 Construction 1.2.1 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) Lessor or Lessee include any assignee or successor in title to the Lessor or the Lessee respectively (subject to the provisions of Clause 25); (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). (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". 1.2.2 Headings are for ease of reference only. 1.2.3 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. 2. REPRESENTATIONS AND WARRANTIES 2.1 Lessee's Representations and Warranties Lessee represents and warrants to Lessor as of execution of this Agreement and each other Transaction Document, as of the Delivery Date and as of each date on which Rent is paid hereunder each of the following representations and warranties. (i) Corporate Status: Lessee 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. (ii) 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 Lessee 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. (iii)Binding: Lessee's Board of Directors has authorized Lessee 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 Lessee and represent the valid, enforceable and binding obligations of Lessee 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 Lessee at Delivery, the same will apply to the Acceptance Certificate. (iv) No Breach: The execution and delivery of the Transaction Documents, the consummation by Lessee of the transactions contemplated herein and by the other Transaction Documents and compliance by Lessee with the terms and provisions hereof do not and will not contravene any law applicable to Lessee, or result in any breach of or constitute any default under or result in the creation of any Security Interest upon any property of Lessee, pursuant to any 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 Lessee is a party or by which Lessee or its properties or assets may be bound or affected. When executed by Lessee at Delivery, the same will apply to the Acceptance Certificate. (v) Filings: Except for the filing or recording of this Agreement with the FAA, 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 Registration to evidence the interests of Owner Trustee, Lessor and Lender in the Aircraft or any Transaction Document. (vi) Licenses: Lessee holds, all licenses, certificates and permits from all applicable Government Entities for the conduct of its business as a certified air carrier and performance of its obligations under the Transaction Document. (vii)No Suits: There are no suits, arbitrations or other proceedings pending or threatened against Lessee before any court or administrative agency against or affecting Lessee that, if adversely determined, would have a material adverse effect on the financial condition or business of Lessee or its ability to perform its obligations under this Agreement or any other Transaction Document. (viii) No Withholding: Under the laws of the State of Incorporation or the State of Registration, Lessee will not be required to deduct any withholding or other Tax from any payment it may make under this Agreement. (ix) No restrictions on Payments: As of the date of execution of this Agreement, there are under the laws of the State of Incorporation no present restrictions on Lessee to make the payments required by this Agreement. (x) General Obligations: The obligations of Lessee under this Agreement are direct, general and unconditional obligations of Lessee and rank or will 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. (xi) Tax Returns: All necessary returns have been delivered by Lessee to all relevant taxation authorities in the State of Incorporation and Lessee is not in default in the payment of any taxes due and payable. (xii)No Material Adverse Effect: Lessee 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 Lessee threatened against it or its assets that would have a material adverse effect on the business, assets or condition (financial or otherwise) of Lessee. (xiii) No Default under this Agreement: At the time of execution of this Agreement, no Default has occurred and is continuing. (xiv)Financial Statements: The balance sheet and other financial statements for Lessee for the financial year which ended 31st of March 1998 were prepared in accordance with accounting principles consistently applied and generally accepted in the State of Incorporation. (xv) 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 Lessee or any of its assets. (xvi)Continuation of Business: Lessee 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. (xvii) 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. (xviii) Information: All information furnished by or on behalf of the Lessee 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 Lessee have been disclosed to the Lessor. (xix)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 duly certified US Air Carrier. (xx) Principal Place of Business: Lessee's principal place of business and chief executive office are located at the address specified in the preamble of this Agreement. (xxi)Flight Records: Lessee's flight records are located at Lessee's principal place of business on the address stated in Clause 27. (xxii) Year 2000 Compliance: Lessee has (i) initiated a review and assessment of all areas within its business and operations (including those affected by suppliers and vendors) that could be adversely affected by the "Year 2000 Problem" (this is, the risk that computer applications used by Lessee, or its suppliers, customers and vendors, may be unable to recognise and perform properly date-sensitive functions involving certain dates prior to, on and any date after December 31, 1999), (ii) developed a plan for addressing the Year 2000 Problem on a time basis, and (iii) is in the process of implementing such plan. 2.2 Lessor's Representations and Warranties Lessor represents and warrants to Lessee as of the Delivery Date each of the following representations and warranties. (i) Title to Aircraft: Lessor 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 Interest except for the Security Interests of Owner Trustee and Lessor under the Headlease Agreement and of Lender. (ii) Organisational Status: Lessor is a company created and validly existing under the laws of Sweden, and has the organisational 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 a party. (iii)Trust Agreement: The Trust Agreement dated as of even date herwith, by and between Owner Trustee and Lessor (the "Trust Agreement") has been duly authorized, validly executed and delivered on the part of Lessor, is legally binding upon Lessor, and creates a legally enforceable trust (as hereinafter defined 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. (iv) 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 Lessor of this Agreement, except as will have been duly effected as of the Delivery Date. (v) Binding: This Agreement and the other Transaction Documents to which Lessor is a party have been duly executed and delivered by Lessor and represent the valid, enforceable and binding obligations of Lessor except as enforceability may be limited by bankruptcy, insolvency, reorganization or other laws of general application affecting the enforcement of creditors' rights. (vi) No Breach: The execution and delivery of the Transaction Documents, the consummation by Lessor of the transactions contemplated herein and compliance by Lessor with the terms and provisions hereof do not and will not contravene any law applicable to Lessor, or result in any breach of or constitute any default under or result in the creation of any Security Interest upon any property of Lessor, 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 Lessor is a party or by which Lessor or its properties or assets may be bound or affected. 2.3 Survival of Representations and Warranties All of the foregoing Lessee's and Lessor's representations and warranties shall survive the execution and delivery of this Agreement and the Delivery of the Aircraft. 3. CONDITIONS PRECEDENT 3.1 Lessor's Conditions Precedent Lessor's obligation to deliver and lease the Aircraft to Lessee under this Agreement is subject to satisfaction of each of the following conditions. 3.1.1 Receipt by Lessor from Lessee on or prior to the Delivery Date of the following, each in form and substance reasonably satisfactory to Lessor: (i) Officer's Certificate: A certificate of an officer of Lessee substantially in the form of Schedule 6; (ii) Consents: Evidence that all governmental or other consents, licenses, approvals and authorizations required for the execution, delivery and performance by Lessee of the Transaction Documents have been obtained or made and are in full force and effect; (iii)Accounts: The balance sheet and other financial statements of Lessee for the financial year ended March 31 1998; (iv) Licences: Copies of Lessee's air transport license and air operator's certificate issued by the US Department of Transportation and FAA, respectively; (v) Transaction Documents: Originals of the Transaction Documents (duly executed by all parties other than Lessor); (vi) Insurances: Evidence that the Insurances are in place together with an insurance broker's letter of undertaking (in a form acceptable to Owner Trustee, Lessor and Lender) addressed to Owner Trustee, Lessor and Lender; (vii) Opinions: Legal opinions from: (a) Counsel to Lessee addressed to Owner Trustee, Lessor and Lender substantially in the form of Schedule 9 and otherwise in a form and substance acceptable to Owner Trustee, Lessor and Lender; and (b) Special FAA counsel to Lessee addressed to Owner Trustee, Lessor and Lender confirming that this Agreement and other appropriate documents have been filed with the FAA; (viii) Security: Receipt by Lessor of the Security Deposit and the Letter of Credit; (ix) Authority: A letter of authority substantially in the form of Schedule 7 duly executed by Lessee to such addressees as requested by Lessor; (x) Power of Attorney: A power of attorney in the form of Schedule 8 duly executed by Lessee; and (xi) Others: Any other documents, approvals, consents, certificates that Lessor or Lender may reasonably require. 3.1.2 The representations and warranties of Lessee under Clause 2.1 shall be correct and would be correct if repeated on Delivery. 3.1.3 No Default shall have occurred and be continuing. 3.2 Waiver The Lessor's Conditions Precedent are for the sole benefit of Lessor and may be waived or deferred by Lessor in whole or in part and with or without conditions. If any of the Conditions Precedent are not satisfied on the Delivery Date and Lessor (in its absolute discretion) nonetheless agrees to deliver the Aircraft to Lessee, Lessee shall ensure that such Conditions Precedent are fulfilled within fifteen (15) days after the Delivery Date, and Lessor may treat the failure of Lessee to do so as an Event of Default. 3.3 Lessee's Conditions Precedent Lessee's obligation to accept and lease the Aircraft from Lessor under this Agreement is subject to satisfaction of each of the following conditions. 3.3.1 The Aircraft is substantially and materially in the condition set forth in Schedule 4. 3.3.2 The receipt by Lessee from Lessor on or prior to the Delivery Date of the following, each in form and substance reasonably satisfactory to Lessee: (i) Evidence of Authority: Certified copies of evidence of appropriate action approving the execution, delivery and performance of the Transaction Documents by Lessor and of the person or persons authorized to sign the Transaction Documents on behalf of Lessor or any other documents to be delivered to Lessee by Lessor; (ii) Specimen signatures: A certificate of an officer of Lessor setting out the names and signatures of the persons authorized to sign on behalf of Lessor the Transaction Documents and any documents to be delivered by Lessor pursuant hereto contemporaneously herewith; and (iii)Transaction Documents: Originals of this Agreement and the Side Letter (duly executed by Lessor). 3.3.3 The representations and warranties of Lessor under Clause 2.2 shall be correct and would be correct if repeated on Delivery. 3.4 Waiver The Lessee's Conditions Precedent are for the sole benefit of Lessee and may be waived or deferred by Lessee in whole or in part and with or without conditions. 4. DELIVERY CONDITION AND INSPECTION OF AIRCRAFT 4.1 Lessee Selection of Aircraft IN ADDITION TO THE DISCLAIMERS IN CLAUSE 18, LESSEE REPRESENTS AND WARRANTS TO LESSOR THAT LESSEE HAS USED ITS OWN JUDGEMENT IN SELECTING THE AIRCRAFT AND HAS DONE SO BASED ON ITS SIZE, DESIGN AND TYPE. LESSEE ACKNOWLEDGES THAT LESSOR IS NEITHER A MANUFACTURER OF THE AIRCRAFT NOR A DEALER IN THE AIRCRAFT. 4.2 Condition at Delivery In addition to the disclaimers in Clause 18, Lessor has advised Lessee that at Delivery the Aircraft will be substantially and materially in the condition set forth in Schedule 4, provided that this confirmation expires as at Delivery. 4.3 Lessee Inspection and Acceptance Flight Lessor will arrange with Prior Owner for Lessee to perform such ground inspection of the Aircraft prior to the Scheduled Delivery Date as is reasonable. Lessor will procure that Lessee may have up to two (2) observers on board the Aircraft during delivery acceptance flight from Prior Owner to Lessor. Lessee acknowledges that, as between it and Lessor, 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. 4.4 Delivery of Aircraft to Lessee Subject to Lessee having complied with the conditions set out in Clause 4.2, or the waiver thereof by Lessor, Lessor will deliver the Aircraft to Lessee at the Delivery Location. Provided that the Aircraft is in the condition required by Clause 4.2, upon the tender of the Aircraft by Lessor to Lessee, Lessee will accept the Aircraft and the date of tender by Lessor to Lessee will be deemed to be the Delivery Date for all purposes under this Agreement, including, but not limited to, the commencement of Lessee's obligation to pay Rent hereunder. Lessee shall execute and deliver the Acceptance Certificate to Lessor on the Delivery Date. 4.5 Lessee's Failure to take Delivery If Lessee fails to (i) comply with the conditions contained in Clauses 3.1 so as to allow Delivery to take place upon tender or (ii) take delivery of the Aircraft when properly tendered for Delivery by Lessor in the condition required hereunder, Lessee will indemnify Lessor for all costs and expenses, directly or indirectly, incurred by Lessor as a result thereof. 5. LEASE TERM 5.1 Lease Term Lessor shall lease the Aircraft to Lessee and Lessee shall take the Aircraft on lease in accordance with this Agreement for the duration of the Lease Term. 5.2 Expiry Date The Expiry Date shall be the Lease Expiry Date subject to the following provisions: (i) If Lessor, acting in accordance with Clause 3.2, notifies Lessee that it is terminating this Agreement, Lessee shall immediately redeliver the Aircraft in accordance with Clause 23 and the Expiry Date shall be the date upon which the Aircraft has been redelivered in accordance with the terms hereof and Lessee has complied with all its obligations hereunder; (ii) If Lessor, upon an Event of Default, exercises its rights in accordance with Clause 24.3 and terminates the leasing of the Aircraft to Lessee under this Agreement, Lessee shall immediately redeliver the Aircraft in accordance with Clause 23 and the Expiry Date shall be the date upon which the Aircraft has been redelivered in accordance with the terms hereof and Lessee has complied with all its obligations hereunder; (iii)If the Aircraft or the Airframe suffers a Total Loss prior to Delivery, the Expiry Date shall be the Total Loss Date; (iv) If the Aircraft or the Airframe suffers a Total Loss after Delivery, the Expiry Date shall be the date upon which Lessee has paid to Lessor the Agreed Value and all other sums due from Lessee to Lessor hereunder; (v) If Clause 23.4 becomes applicable, the Expiry Date shall be the date when any non-compliance referred to in Clause 23.4 has been fully rectified and Lessor shall have accepted redelivery of the Aircraft and Lessee shall have complied with all its obligations hereunder; and (vi) Under any other circumstances, the Expiry Date shall be the date upon which the Aircraft is redelivered in accordance with Clause 23 and the Return Acceptance Receipt has been duly executed and delivered by Lessor in accordance with that clause. 5.3 Survival of Certain Lessee Obligations 5.3.1 For the avoidance of doubt, in respect of Clauses 5.2 (i), (ii), (v) and (vi) the obligations of Lessee in respect of payment of Rent and all other obligations shall continue to be payable and valid in respect of those days prior to the redelivery to Lessor of the Aircraft in the condition required under Clause 23.1, and in respect of Clause 5.2 (iv) such obligations shall continue until payment of the Total Loss Proceeds. 5.3.2 The obligations of Lessee set forth in Clauses 12.5, 12.17, 19, 20 and 21.7 and any other obligations of Lessee that were due to have been performed but have not been fully performed prior to the termination of the Agreement pursuant to this Clause 5.3, will survive the Expiry Date. 5.4 Risk 5.4.1 Throughout the Lease Term and until redelivery of the Aircraft in the condition required under Clause 23.1, Lessee shall bear all risks of loss, theft, damage, confiscation and destruction of or to the Aircraft and every part thereof. 5.4.2 If the Aircraft is lost, stolen, confiscated, damaged, destroyed or otherwise rendered unfit and unavailable for use, Lessor 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 Lessor, its employees or agents. 6. DELIVERY 6.1 Location and Time of Delivery Lessor will deliver the Aircraft to Lessee at the Delivery Location on or about the Scheduled Delivery Date, which is the date when Prior Owner shall deliver the Aircraft to Lessor. Lessor will notify Lessee from time to time and in as timely manner as is possible of any changes to the Scheduled Delivery Date. 6.2 Delay or Failure in Delivery 6.2.1 Lessee and Lessor expressly acknowledge that Delivery of the Aircraft to Lessee is subject to and conditioned upon delivery of the Aircraft by Prior Owner to Lessor. Lessor will not be liable for any loss or expense, or any loss of profit, arising from any delay or failure in Delivery to Lessee unless such delay or failure arises as a direct consequence of the gross negligence or wilful default of Lessor, and in no event will Lessor be liable for any delay or failure that is caused by any failure, breach or delay on the part of Prior Owner. 6.2.2 If a delay, not caused by Lessor's or Lessee's breach of this Agreement, causes Delivery to be delayed beyond seventy-five (75) days after the Scheduled Delivery Date either party will have the right to terminate this Agreement by giving the other party written notice within ten (10) Business Days after such date and this Agreement will terminate on the date of receipt of such notice. In the event of such termination, neither party will have any further obligation or liability to the other under this Agreement, except that Lessor will repay to Lessee under this Agreement any prepaid Rent the amount of Security Deposit, if paid, and return the Letter of Credit. If either party does not give notice of termination within such ten (10) Business Days, both parties lose all rights to terminate under this Clause 6.2.2, unless otherwise agreed by the parties. 7. RENT 7.1 Basic Rent Period The first Basic Rent Period shall commence on the day following Delivery and each subsequent Basic Rent Period shall commence on the date succeeding the last day of the previous Rent Period within the Lease Term. Each Basic Rent Period shall end on the date immediately preceding the numerically corresponding day one (1) month thereafter, except that: (i) if there is no such numerically corresponding day in that month, it shall end on the last day of that month; and (ii) if a Basic Rent Period would otherwise end after the Expiry Date, it shall end on the Expiry Date and the Rent for such Basic Rent Period will be prorated on the basis of a thirty (30) day month. 7.2 Time of Payment of Basic Rent Lessee shall pay Basic Rent to Lessor or to its order in advance on each Rent Date. Lessee shall initiate payment adequately in advance of each Rent Date to ensure that Lessor 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. 7.3 Amount of Basic Rent The Basic Rent payable on each Rent Date during the Lease Term shall be the amount set out as Basic Rent in Schedule 2. 7.4 Maintenance Reserves Lessee will pay to Lessor Maintenance Reserves in accordance with Clause 9 as Supplemental Rent, based on Lessee's use of the Aircraft during the Lease Term. 7.5 Supplemental Rent for Excess Cycles Lessee shall pay to Lessor Supplemental Rent based on Lessee's operation of the Aircraft in the amount and at the times set forth in Schedule 2. 8. SECURITY DEPOSIT 8.1 Security Deposit Lessee shall pay to Lessor a Security Deposit in the amount and at the times set forth in Schedule 2. The Security Deposit will serve as security for the performance by Lessee of its obligations under the Transaction Documents and the Other Agreements. Upon Lessor's receipt of the additional Security Deposit set forth in Clause 8.2 the initial deposit set forth in this Clause 8.1 will be credited to the payment of Rent during the Lease Term. 8.2 Letter of Credit Lessee shall provide Lessor with an additional Security Deposit in the form of an irrevocable, assignable, standby letter of credit in favour of Lessor in the amount and issued by a major US Bank and in the form and substance acceptable by Lessor. The Letter of Credit will serve as security for the performance by Lessee of its obligations under the Transaction Documents and the Other Agreements. 8.3 Lessor's Rights 8.3.1 If an Event of Default shall have occurred and be continuing, in addition to all rights and remedies accorded to Lessor elsewhere in this Agreement or under applicable law in respect of the Security Deposit or Letter of Credit, Lessor may immediately, or at any time thereafter, without prior notice to Lessee, apply all or part of the Security Deposit or Letter of Credit in or towards the payment or discharge of any matured obligation owed by Lessee under the Transaction Documents or the Other Agreements, in such order as Lessor sees fit, and/or exercise any of the rights of set-off described in Clause 10.6 against all or part of the Security Deposit or Letter of Credit. 8.3.2 If Lessor exercises the rights described in Clause 8.3.1, Lessee shall, following a demand in writing from Lessor, immediately restore the Security Deposit (if applicable) or Letter of Credit to the level at which it stood immediately prior to such exercise. 8.3.3 Lessee acknowledges that Lessor may commingle all or any part of the Security Deposit with its general funds and that no interest shall accrue in favour of Lessee in respect of the Security Deposit. 8.3.4 Lessor's obligations in respect of return of the Security Deposit and Letter of Credit shall be those of debtor and not those of a trustee or other fiduciary. 9. Maintenance reserves 9.1 Amount Lessee shall during the Lease Term pay Maintenance Reserves to Lessor in the amount set forth in Schedule 2. 9.2 Payments 9.2.1 Lessee shall pay the Maintenance Reserves in respect of each calendar month during which the Maintenance 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. 9.2.2 Lessee acknowledges that Lessor may commingle all or any part of the Maintenance Reserves with its general funds and that no interest shall accrue in favour of Lessee in respect of the Maintenance Reserves. 9.2.3 Lessor's obligations to release the Maintenance Reserves as set out hereinafter shall be those of debtor and not those of a trustee or other fiduciary. 9.3 Adjustment The amount payable by Lessee to the Maintenance Reserves shall be subject to escalation in accordance with the terms set forth in Schedule 2. 9.4 Release of Maintenance Reserves 9.4.1 Airframe Maintenance Reserves Lessor will reimburse Lessee from the actual Airframe Maintenance Reserves, if paid by Lessee, provided that no Default has occurred and is continuing, for the actual cost of the structural inspection portion of completed scheduled "D" Checks 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 Clause 9.4.5 below. 9.4.2 Engine Maintenance Reserves Lessor will reimburse Lessee from the actual Engine Maintenance Reserves, if paid by Lessee, provided that no Default has occurred and is continuing, for the actual cost of completed Engine Performance Restoration Visits to the extent the work performed during such Engine Performance Restoration Visits consisted of the replacement of life/time limited components and/or performance restoration, with work performed for all other causes excluded, including those causes set forth in Clause 9.4.5 below. Reimbursement will be made up to the amount in the Engine Maintenance Reserve applicable to such Engine. 9.4.3 Landing Gear Maintenance Reserves Lessor will reimburse Lessee from the actual Landing Gear Maintenance Reserves, if paid by Lessee, provided that no Default has occurred and is continuing, 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 9.4.5. Reimbursement will be made up to the amount in the Landing Gear Maintenance Reserve at the time for the Landing Gear Overhaul. 9.4.4 APU Maintenance Reserves Lessor will reimburse Lessee from the actual APU Maintenance Reserves, if paid by Lessee, provided that no Default has occurred and is continuing, 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 9.4.5 Reimbursement will be made up to the amount in the APU Maintenance Reserve at the time for the APU performance restoration. 9.4.5 Exclusion Each of the following causes shall be excluded from this Clause 9.4: 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). 9.4.6 Remaining balance For the avoidance of doubt, Lessee has no right to payment of any amount from the Maintenance Reserves not paid in cash by Lessee and, subject to Clause 9.6, any remaining balances of the Maintenance Reserves on the Expiry Date, after application of the foregoing provisions, shall be retained by Lessor as its sole property. 9.5 Costs in Excess of Maintenance Reserves Lessee 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. 9.6 Reimbursement after Expiry Date Lessee may not submit any invoice for reimbursement from the Maintenance Reserves after the Expiry Date unless on or prior to such date Lessee has notified Lessor in writing that such outstanding invoice will be submitted after the Expiry Date and the anticipated amount of such invoice. So long as Lessee has provided such notice to Lessor, Lessee may then submit such outstanding invoice at any time within three (3) months after the Expiry Date; provided, however, if Lessee contests any such invoice and provides Lessor 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. Payments 10.1 Account for Lessee Payments All payments by Lessee to Lessor under this Agreement will be made for value on the due date in dollars and in same day funds to: Nordbanken Account No. 3968-77 720 42 S.W.I.F.T.: NBBK SESS S-105 71 Stockholm Cover through: Bank of America, New York, NY S.W.I.F.T.: BOFA US3N For the account of: Indigo Aviation AB (publ) or to such other account as Lessor may from time to time notify to Lessee in writing. 10.2 Default Interest If Lessee fails to pay any amount payable under this Agreement on the due date, Lessee shall pay to Lessor on demand from time to time interest both before and after judgement 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 Lessee to Lessor, at the Default Rate. All such interest will accrue on a day-to-day basis and be compounded weekly and calculated on the basis of a 360 day year. 10.3 Absolute Obligations This Agreement is a net lease and Lessee's obligations under this Agreement are absolute and unconditional, irrespective of any contingency or circumstance whatsoever, including (but not limited to): (i) any right of set-off, counterclaim, recoupment, reimbursement, defense or other right which Lessor or Lessee may have against the other or against any other person; (ii) 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 Lessee's use, operation or possession of the Aircraft; (iii)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; (iv) any insolvency, bankruptcy, reorganisation, arrangement, readjustment of debt, dissolution, liquidation or similar proceedings by or against Lessor or Lessee or any other person; (v) any invalidity, illegality, unenforceability or lack of due authorization of, or other defect in, this Agreement; and (vi) 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 Lessee under this Agreement. 10.4 Application of Payments to Lessor If any sum paid to Lessor or recovered by Lessor in respect of the liabilities of Lessee under this Agreement is less than the amount then due, Lessor may apply that sum to amounts due under this Agreement in such proportions and order and generally in such manner as Lessor may determine. 10.5 Currency Indemnity If under any applicable law, whether as a result of judgement against Lessee or the liquidation of Lessee 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 the currency in which it is payable pursuant to this Agreement ("contractual currency"), Lessee shall, 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, as a separate and independent obligation, fully indemnify Lessor against the amount of the shortfall. For the purposes of this sub-Clause "rate of exchange" means the rate at which the Lessor is able on the relevant date to purchase the contractual currency in London or any other place Lessor may reasonably choose with the other currency. 10.6 Set-off Lessor may set-off any matured obligation owed by Lessee under the Transaction Documents or any Other Agreements against any obligation, whether or not matured, owed by Lessor to Lessee. 10.7 Time for Payments If any payment due under this Agreement other than a payment of Rent (see Clause 7.2) would otherwise be due on a day that is not a Business Day, it shall be due on the next succeeding Business Day. 11. Lessor's covenants 11.1 Quiet Enjoyment Provided no Default has occurred and is continuing, Lessor shall not, and no one claiming by or through the acts or omissions of Lessor or Owner Trustee shall, interfere with the quiet use, possession and enjoyment of the Aircraft by Lessee during the Lease Term. Lessor will cause Lender to confirm, substantially in the form of Schedule 11 or such other form as Lender may reasonably require, that it will not interfere with the quiet use, possession and enjoyment of the Aircraft by Lessee during the Lease Term, provided no Default has occurred and is continuing. 11.2 Lessor Obligations Following Expiry Date Within five (5) Business Days after: (i) redelivery of the Aircraft to Lessor in accordance with and in the condition required by this Agreement; or (ii) payment received by Lessor of the Agreed Value following a Total Loss after the Delivery Date; or in each case such later time as Lessor is reasonably satisfied that Lessee has irrevocably paid to Lessor all amounts that may then be outstanding or become payable under the Transaction Documents and the Other Agreements, Lessor shall (provided that no Default has occurred and is continuing): (a) pay to Lessee an amount equal to the balance of the Security Deposit, if any, paid by Lessee under this Agreement and then held by Lessor; and (b) pay to Lessee the amount of any Rent received in respect of any period falling after the Redelivery Date or the date of payment of the Agreed Value, as the case may be; provided, however, if there is a dispute between Lessor and Lessee as to the amount due to Lessee, Lessor shall nevertheless pay to Lessee such amount as in Lessor's reasonable judgement is not in dispute or is in excess of the amount Lessor's claim is due; and (c) return the Letter of Credit. 12. Lessee's covenants 12.1 Duration Lessee 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 Lessee. 12.2 Information 12.2.1 Lessee shall notify Lessor 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. 12.2.2 Lessee shall furnish to Lessor: (i) as soon as available, but not in any event later than ninety (90) days after the last day of each financial year of Lessee, 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 Lessee, 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 Lessor 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 end of each month a Monthly Report in the form of Schedule 10, detailed technical reports following completion of each "C" Check and other information reasonably requested by Lessor concerning the location, condition, use and operation of the Aircraft; and (v) such other information and documents regarding Lessee's business and financial condition as Lessor may from time to time reasonably request. 12.2.3 Lessee shall promptly notify Lessor in writing: (i) 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; (ii) of any suit, arbitration or proceeding before any court, administrative agency or Government Entity which, if adversely determined, would materially adversely affect Lessee's financial condition, affairs, operations or its ability to perform under this Agreement; (iii)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; (iv) 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; (v) 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 Lessor or to a loss or liability in excess of the Damage Notification Threshold; and (vi) of any other event in respect of the Aircraft which in the reasonable opinion of the Lessee might reasonably be expected to involve the Lessor in any loss or liability. (vii)promptly notify Lessor in the event Lessee 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 Lessee will not be year 2000 compliant (as described in Clause 2.1 (xxii)) on a timely basis, except to the extent that such failure could not reasonably be expected to have a materially adverse effect. 12.3 Lessor Visits Lessor may visit, upon reasonable notice, Lessee's premises to discuss Lessee's general affairs and finances with Lessee's principal officers. 12.4 Periodic Estoppel Certificates Lessee will, within ten (10) Business Days after receipt of written notice from Lessor (which will not occur more often than four (4) times in any calendar year), execute, acknowledge and deliver to Lessor a written statement as to each of the following: (i) 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; (ii) acknowledging that there are not, to Lessee's knowledge, any uncured defaults on the part of Lessor hereunder, or specifying such defaults if there are any claimed by Lessee; and (iii)acknowledging that Lessee has no claims against Lessor by reason of the condition of the Aircraft as of the Delivery Date or arising subsequent thereto to the date of such statement. If Lessee does not deliver such statement within such time-limit, the statements set forth in this Clause 12.4 will be deemed correct and binding upon Lessee. 12.5 Airport and Navigation Charges 12.5.1 Lessee 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, and will indemnify and hold harmless Lessor in respect of the same. This indemnity will continue in full force and effect notwithstanding the termination or expiration of this Agreement. Lessee 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. 12.5.2 If requested by Lessor, Lessee will provide Lessor with a list of the airports to which the Aircraft or Lessee's other aircraft are regularly operated. Lessee hereby authorises any Aviation Authority, any airport or any other creditor claiming rights on the Aircraft or Lessee's other aircraft to confirm the status of Lessee's payments to such creditor for the Aircraft and its other aircraft, as and when requested by Lessor. To evidence this authority, Lessee will at Lessor's request execute one or more authorities substantially in the form of Schedule 7. 12.6 Operation of Aircraft Lessee 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, Lessee 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 Lessee 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 Lessor or its interest in the Aircraft. In particular, Lessee 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 Lessee's own employees and for experimental flights; provided, however, prior to any such flights Lessee shall notify Lessor and shall deliver to Lessor evidence that insurance coverage is in effect for such flights. 12.7 Areas of Operation Lessee 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 the Insurances or (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. 12.8 Non-Prejudicial Action Lessee shall not do anything that, or omit to do anything the omission of which, prejudices any right Lessor may have against either the Manufacturer or the manufacturer or supplier of any part of the Aircraft in respect of the Aircraft or any part thereof. 12.9 Non-Representation of Lessor Lessee shall not at any time represent Lessor, Owner Trustee or Lender as carrying goods or passengers in the Aircraft or as being in any way connected or associated with any operation or carriage being undertaken by Lessee or as having any operational interest in or responsibility for the Aircraft. 12.10 Inspection Lessor may at all reasonable times on reasonable notice inspect, or appoint an inspector (including Lender) 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 Lessee 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 Lessee as an airline. Lessee agrees to reimburse the out-of-pocket expenses of Lessor 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 Lessee shall in all cases pay or reimburse Lessor for the costs of such inspection or survey if Lessor is required by law or change of law to make an inspection or survey. Lessor 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. Lessee shall provide Lessor with such information regarding the present and anticipated location and regarding the condition of the Aircraft as Lessor may reasonably require. For the purposes mentioned in this Clause 12.10 and subject to the limitations herein contained, Lessor and any inspector may gain access to the Aircraft, including the Aircraft Documents. Lessee 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 Lessor, Lessor may at the cost and expense of Lessee, itself arrange for such repairs to be carried out. Lessee shall on demand reimburse the costs and expenses incurred by Lessor in effecting such repairs. 12.11 Registration 12.11.1 Lessee shall at its own expense procure 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 Lender (iii)Lessor's interest, by filing the Lease Supplement according to Schedule (iv) Lessee as operator of the Aircraft and maintain or provide the maintenance of such registration throughout the Lease Term. Lessee 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. Lessee will not take any action or omit to take any action that will invalidate any such registration or recordation. Lessee shall provide Lessor as soon as available with evidence of such registration. 12.11.2 Lessee shall at its own expense provide that at all times during the Lease Term, the Aircraft possesses a valid current FAA Certificate of Airworthiness, 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. 12.12 Name Plates On the Delivery Date or as soon thereafter as is reasonably practicable, Lessee 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 Lessor stating the Aircraft type, manufacturer's serial number and current registration letters of the Aircraft and denoting the name of (i) Lessor as lessor (ii) Owner Trustee as owner trustee and (iii) Lender as mortgagee. Except as above provided Lessee 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 Lessee (or any person to which possession of the Airframe or any Engine is delivered or transferred in accordance with Clauses 13 and 14) from placing its customary colours and insignia on the Airframe. 12.13 Geneva Convention Whenever the State of Registration is a signatory state that has ratified the Geneva Convention, Lessee 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, Lessor and Lender to the Aircraft by every other signatory state that has ratified the Geneva Convention. 12.14 Merger and Shareholding Lessee 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 federal state thereof, if applicable, and the new entity has executed and delivered to Lessor an agreement in form and substance acceptable to Lessor 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 Lessee and the creditworthiness of such new entity does not, in Lessor'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. Lessee will give Lessor prior written notice of any such proposed sale or change in operation together with a non-refundable processing fee in the amount as set forth in Schedule 2 and a request of Lessor's approval. Lessee shall reimburse Lessor within ten (10) days of Lessor's invoice for all out-of-pocket expenses incurred by Lessor as a result of such proposed merger whether or not Lessor approves and whether or not it actually occurs. 12.15 Ownership Title to the Aircraft will be and remain vested in Owner Trustee. Lessee will have no right, title or interest in the Aircraft except as provided for in this Agreement. Lessee 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. 12.16 Maintenance of Principal Business Place Lessee 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 Clause 27. Lessee shall hold and preserve such records and files concerning the Transaction Documents and shall permit representatives of Lessor at any time during normal business hours to inspect and make abstracts from such records and files. Lessee shall give Lessor at least thirty (30) days prior written notice of any change in Lessee's principal place of business and chief executive office, and shall co-operate with Lessor in executing and delivering all such documents as Lessor may reasonably request which are required or desirable as a result of such change of principal place of business of Lessee. 12.17 Maintenance of Flight Records Lessee 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 27 and shall hold and preserve such records at such address and permit inspection of such records by the FAA, Lessor, Owner Trustee and Lender. Lessee shall give Lessor at least thirty (30) days prior written notice of change in location of the flight records of the Aircraft. 13. Possession 13.1 No Relinquishment of Possession Lessee 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) Lessee continues to be fully responsible to Lessor for all its obligations hereunder and (iii) Lessee in advance, obtains written acknowledgement(s) of 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 Lessor, Lessee may: 13.1.1 subject any Engine to normal interchange or pooling agreements or arrangements in each case customary in the airline industry and entered into by Lessee in the ordinary course of its business with a commercial air operator which is approved by Lessor in writing and on terms and conditions that Lessor 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, Lessee shall forthwith substitute, or procure the substitution of, a Replacement Engine therefor in accordance with and which satisfies the conditions of Clause 16.6; 13.1.2 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 16.4 and 16.5; 13.1.3 install an Engine on an airframe owned by Lessee and operated by and under the operating control of flight crew engaged by Lessee 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; 13.1.4 install an Engine on an airframe operated by Lessee that is owned by or leased or subleased to Lessee 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 13.1.3 and (ii) Lessee 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 Lessor (it being understood that an agreement from such sublessor or secured party to substantially the same effect as the agreement of Lessor set forth in the final sentence of Clause 13.4 shall be deemed to be satisfactory to Lessor), whereby such Lessor 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; 13.1.5 install an Engine on an airframe owned by Lessee, leased or subleased to Lessee, or purchased by Lessee, subject to any security agreement under circumstances where neither Clause 13.1.1 nor 13.1.2 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 Lessee and in such event Lessee shall, as promptly as possible and in any event within fifteen (15) days substitute a Replacement Engine therefor in accordance with Clause 16.6 and which satisfies the conditions specified in Clause 16.6; 13.1.6 sublease the Aircraft or Airframe to any person provided that the Aircraft or Airframe is operated by, and remains throughout the term of such sublease under the operational control of, flight crew engaged by Lessee, 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 the Expiry Date; (iv) the relevant sublessee shall acknowledge that its rights are subordinate to Lessor's rights under this Agreement and the rights of Lender under any finance document or security document entered into between Owner Trustee or Lessor in relation to the Aircraft; 13.1.7 sublease the Aircraft or Airframe to any wholly-owned subsidiary of Lessee on terms that the Aircraft or Airframe is not operated by, and does not remain under the operational control of, flight crew engaged by Lessee provided that the following conditions are satisfied in relation to any such sublease hereunder: (i) no Default has occurred and is continuing; (ii) the proposed sublessee and the proposed form of the sublease is approved by Lessor and Lender in writing, which approval will not be unreasonably withheld or delayed provided all the following conditions set out in this Clause 13.1.7 are satisfied; (iii)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 Lessor and/or Owner Trustee and/or Lender and the sublessee shall acknowledge that its rights are subordinate to Owner Trustee's, Lessor's and Lender's rights under this Agreement (provided that the sublease shall not permit further subleasing); (iv) the Insurances are in full force and effect in accordance with the terms of this Agreement and, if the sublessee is to maintain such insurances during the term of such sublease, it shall have furnished to Lessor all such documents, evidence and information relating to such insurances which Lessee is required to furnish or cause to be provided to Lessor under this Agreement; (v) if the Aviation Authority for the duration of the sublease is to be other than the FAA, Lessor and Lender approves the change of registration and Lessor receives (x) an opinion of counsel in the State of Registration in form and substance reasonably satisfactory to Lessor and the Lender which opinion must, at least, address the satisfactory recognition of Owner Trustee's ownership of, and Lender's Security Interest in the Aircraft and (y) evidence that all actions recommended in such opinion have been or will be duly taken. 13.2 Copy of Sublease No less than three (3) Business Days after the execution of any sublease entered into by Lessee under Clause 13.1.6 or Clause 13.1.7 Lessee shall provide Lessor with a copy of such executed sublease. 13.3 Lessee Primarily Liable Notwithstanding anything contained in Clause 13.1, Lessee shall remain primarily liable hereunder for the performance of all of the terms of this Agreement to the same extent as if such transfer or sublease had not occurred. No interchange agreement, sublease or other relinquishment of possession of the Airframe or any Engine permitted by this Clause 13 shall in any way discharge or diminish any of Lessee's obligations hereunder. 13.4 Recognition of Rights If Lessee shall have obtained from the sublessor or secured party of any engine subleased to Lessee or owned by Lessee subject to any Security Interest, a written agreement complying with the terms of sub-paragraph (ii) of Clause 13.1.4, Lessor hereby agrees for the benefit of such sublessor or secured party that Lessor 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 Lessor shall, at the request of Lessee, confirm such agreement in writing for any such sublessor or secured party. 14. Security interests 14.1 Title Lessee shall not do, or permit to be done, any act, which might reasonably be expected to jeopardise the interest of Owner Trustee, Lessor or Lender. Lessee shall make clear to all third parties that legal title to the Aircraft is owned by Owner Trustee or the relevant title holder advised by Owner Trustee. 14.2 No Security Interests Lessee shall not create, incur or permit to subsist over the Aircraft or any part thereof or over the Transaction Documents any Security Interest other than Permitted Liens. 14.3 Base of Aircraft Lessee shall not keep or habitually base the Aircraft or any part thereof outside the State of Registration for any continuous period exceeding ten (10) days. 14.4 Notice to Lessor Lessee shall notify Lessor: (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 Lessor, of the location of the Airframe and each Engine including an Engine that is not for the time being installed on the Airframe. 14.5 Procure Release Lessee 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. 15. Maintenance and repair 15.1 General Obligations 15.1.1 Lessee shall, or procure that any sublessee will, at its own expense at all times during the Lease Term: (i) maintain, service, repair, Overhaul and test the Aircraft and all Parts thereon and equipment thereon and the Engines and all Parts and equipment therein (whether or not such Parts and equipment are the property of Lessor), or procure the same, in accordance with the applicable requirements of the FAA 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 FAA's requirements, in which case the FAA'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 (a) the airworthiness certification of the Aircraft with the Aviation Authority to be maintained in good standing at all times during the Lease Term (b) the issuance of a standard certificate of airworthiness for transport category aircraft issued by the FAA in accordance FAR Part 21 and, (c) the Aircraft to be placed on the operations specifications of a U.S. airline in accordance with Part 121 of the FAR's; (ii) maintain, service, repair, Overhaul and test the Aircraft and the Engines, in the same manner and with the same care as used by Lessee with respect to similar aircraft and engines operated by Lessee and without in any way adversely discriminating against the Aircraft and the Engines; and (iii)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 Lessor to examine such records, logs and other materials at any reasonable time upon reasonable notice. 15.1.2 The performer of such maintenance and repairs as stated in this Clause 15.1 shall be approved by the Lessor with such approval not to be unreasonably withheld. 15.2 Specific Obligations Without limiting Clause 15.1, Lessee agrees that the performance by Lessee or any sublessee of such maintenance and repairs as stated therein 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 Lessee schedules to adopt within the Lease Term for the major part of its fleet of aircraft of the same make as the Aircraft. It is the intent of the parties that the Aircraft will not be discriminated from the rest of Lessee's fleet in service bulletin compliance (including method of compliance) or other maintenance matters. Lessee 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 CPCP 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 Documents. 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; and (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. 16. Replacement of parts 16.1 Replacement of Parts Lessee 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 16.4 or 16.5 In addition, Lessee 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 Lessee shall, except as otherwise provided in Clause 16.7, 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 16.7, be in as good operating condition as, and shall have a value, age, configuration and utility at least equal to, the replaced Parts, 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 Lessee. 16.2 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 Lessee, 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 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. 16.3 Pooling of Parts Any Part removed from the Airframe or any Engine as provided in Clause 16.1 or 16.2 may be subjected to a normal pooling arrangement customary in the airline industry entered into in the ordinary course of Lessee'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 16.1 and 16.2 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 Lessee, 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 16.1 and 16.2 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 16) 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 16.1 and 16.2 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. 16.4 Alterations Lessee 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 or recommended service bulletins of the Manufacturer. In addition, Lessee 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 Lessee may deem desirable in the proper conduct of its business, including, removal of Parts (for purposes of this Clause 16.4, Obsolete Parts) which Lessee 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, Lender nor Lessor shall be required under any circumstances to pay directly for any alteration, modification or addition to the Aircraft or to reimburse Lessee for the cost thereof. Any other alterations other than those permitted according to Clause 16.5 require Lessor's prior written consent, which consent shall not be unreasonably withheld or delayed. 16.5 Removal of Parts Notwithstanding the foregoing, so long as no Default shall have occurred and be continuing, Lessee 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 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 16.4 or 16.5, 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 Lessee, free and clear of all rights of Owner Trustee, Lender and Lessor 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. 16.6 Substitution of Engine In addition to its rights under Clause 13, Lessee shall have the right at its option at any time, on at least thirty (30) days prior written notice to Owner Trustee, Lender and Lessor, to substitute or procure the substitution of an engine of the same make and model as the Engine specified in Schedule 1 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 substitute engine, the substitution of which is in accordance with the provisions of this Clause 16.6 and which complies with the requirements of this Clause 16.6 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 Lessor, assuming that such Engine was in the condition and repair required to be maintained by the terms of this Agreement and Lessee shall deliver such documents including a bill of sale and opinion of counsel as to title and recordation with the FAA, as Lessor 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: (i) title to the replaced Engine shall thereupon vest in Lessee free and clear of all rights of Owner Trustee, Lender and Lessor, and the replaced Engine shall cease to be subject to this Agreement and shall no longer be deemed an Engine hereunder; and (ii) 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. 16.7 Temporary Removal of Parts Lessee shall be entitled, so long as no Default shall have occurred which has not been remedied or waived to the reasonable satisfaction of Lessor, to substitute, replace or renew any Part with a part that does not satisfy the requirements of Clause 16.1 or 16.2 provided that: (i) there shall not have been available to Lessee, 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 16.1 and 16.2; (ii) it would have resulted in an unreasonable disruption of the operation of the Aircraft or the business of Lessee as an airline to have grounded the Aircraft until such time as a substitute or replacement part complying with the requirements of Clause 16.1 and 16.2 became available for installation in or on the Aircraft; (iii)Lessee shall have notified Lessor 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; and (iv) 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) Lessee shall remove any such part not complying with the requirements of Clause 16.1 and 16.2 and replace or substitute the same with a Part complying with such requirements. 16.8 Parts Incapable of Transfer If any replacement Part is incapable of becoming the property of Owner Trustee free of all Security Interests (other than Permitted Liens) as required by Clause 16 the part which it has replaced shall, unless Lessor shall otherwise agree in writing, be kept and maintained by the Lessee or any sublessee, as the case may be, until the Expiry Date and be placed on the Aircraft in good working order before the Aircraft is redelivered to the Lessor on the Expiry Date. 17. Manufacturer's warranties 17.1 Authorization 17.1.1 With effect from Delivery, Lessor authorises Lessee to exercise such rights as Lessor 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 or supplier subject to Lessee notifying Lessor in writing of any warranty claim of a material nature and keeping Lessor continuously informed of the development of such warranty claim To the extent that the same may not be available to Lessee, Lessor agrees to, at the sole cost and expense of Lessee, enforce such rights as Lessor may have with respect thereto for the benefit of Lessee. Lessor shall also have the right, rather than enforcing or making such claim on behalf of Lessee under such warranties, to appoint Lessee as its agent for such purpose, and in such instance, Lessee 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. Lessee shall not be entitled to exercise its authorisation hereunder while a Default is continuing (during which time all such rights shall revert to Lessor and Lessor hereby agrees to exercise and enforce such rights during such period). 17.1.2 Lessee shall give Lessor prompt written notice of any warranty claim that is settled with Lessee 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 Lessor otherwise consents in writing. Any cash payments to Lessee in respect of warranty claims that (either with Lessor'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 Lessee 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 Lessor's account. 17.2 Proceeds So long as no Default has occurred and is continuing, Lessor agrees, subject to Clause 17.1, to co-operate with Lessee to cause any proceeds from any warranty referred to in Clause 17.1 to be paid directly to Lessee, and, if any such proceeds are nonetheless paid to Lessor, Lessor agrees to remit promptly such proceeds to Lessee. However, while a Default is continuing, Lessor may immediately: (i) retain for its own account any such proceeds previously paid to Lessor which would have been remitted to Lessee under this Clause 17.2 in the absence of such Default or Event of Default; and (ii) cause any proceeds of any pending claims to be paid to Lessor, rather than to Lessee. Once the Default is cured, Lessor shall reimburse Lessee to the extent that it would have been obliged to under this Clause 17.2 had no such Default occurred. 17.3 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 Lessee, Lessee will: (i) apply the proceeds of any claim under such agreement in accordance with Clause 17.2; and (ii) 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 Lessor. 17.4 No Operation Contrary to Warranties Lessee shall not operate the Aircraft contrary to the terms of any warranty referred to in Clause 17.1.1, provided that Lessor has advised Lessee of the terms of such warranties. 18. Disclaimers 18.1 General LESSOR AND LESSEE AGREE THAT THE DISCLAIMERS, WAIVERS AND CONFIRMATIONS SET FORTH IN CLAUSES 18.2 THROUGH 18.11 BELOW SHALL APPLY AS BETWEEN LESSOR AND LESSEE AT ALL TIMES DURING THE LEASE TERM WITH EFFECT FROM LESSEE'S ACCEPTANCE OF THE AIRCRAFT BY EXECUTION OF THE ACCEPTANCE CERTIFICATE, WHICH SHALL BE CONCLUSIVE EVIDENCE THAT LESSEE 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 LESSEE (SAVE AS EXPRESSLY NOTED ON THE ACCEPTANCE CERTIFICATE) AND ARE IN SUITABLE CONDITION FOR DELIVERY TO AND ACCEPTANCE BY LESSEE. 18.2 As Is, Where Is PRIOR TO DELIVERY HEREUNDER, LESSEE HAD THE OPPORTUNITY TO INSPECT THE AIRCRAFT, ACCORDINGLY, LESSEE UNCONDITIONALLY ACKNOWLEDGES AND AGREES THAT NEITHER OWNER TRUSTEE, LENDER OR LESSOR, NOR ANY OF THEIR RESPECTIVE OFFICERS, DIRECTORS, EMPLOYEES 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 DOCUMENTS), DESIGN, WORKMANSHIP, MATERIALS, MANUFACTURE, CONSTRUCTION, OPERATION, STATE, MERCHANTABILITY, PERFORMANCE, FITNESS FOR ANY PARTICULAR USE OR PURPOSE (INCLUDING THE ABILITY TO OPERATE OR REGISTER THE AIRCRAFT OR USE THE AIRCRAFT DOCUMENTS 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, (iii) ANY IMPLIED WARRANTY ARISING FROM COURSE OF PERFORMANCE, COURSE OF DEALING OR USAGE OF TRADE, OR (iv) 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. 18.3 Waiver of Warranty of Description LESSEE 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 LENDER OR LESSOR 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, LENDER OR LESSOR FOR DAMAGES OR RELIEF ARISING OUT OF THE FAILURE OF THE AIRCRAFT TO CONFORM TO SUCH DESCRIPTIONS OR SPECIFICATIONS, NOTWITHSTANDING ANY ASSURANCES FROM LESSOR, THE DIFFICULTY OF DISCOVERING ANY DEFECT OR ITS ASSUMPTION THAT ANY NONCONFORMITY WOULD BE CURED. 18.4 Lessee Acknowledgement LESSEE AGREES THAT IT IS LEASING THE AIRCRAFT "AS IS, WHERE IS AND WITH ALL FAULTS". 18.5 Lessee Waiver Lessee hereby waives as between itself and Lessor and agrees not to seek to establish or enforce any rights and remedies, express or implied (whether statutory or otherwise) against Lessor, Owner Trustee, Lender or the Aircraft relating to any of the matters mentioned in Clause 18.1 through 18.6 and the leasing thereof by Lessor to Lessee. 18.6 Lessee Examination of Aircraft DELIVERY BY LESSEE TO LESSOR OF THE ACCEPTANCE CERTIFICATE IS CONCLUSIVE PROOF AS BETWEEN LESSOR AND LESSEE THAT LESSEE'S TECHNICAL EXPERTS HAD EXAMINED AND INVESTIGATED THE AIRCRAFT, ENGINES AND EACH PART THEREOF AND DETERMINED THAT (i) EACH WAS AIRWORTHY AND IN GOOD WORKING ORDER AND REPAIR AND (ii) THE AIRCRAFT, ENGINES, EACH PART THEREOF AND THE AIRCRAFT DOCUMENTS WERE WITHOUT DEFECT (WHETHER OR NOT DISCOVERABLE AT DELIVERY) AND IN EVERY WAY SATISFACTORY TO LESSEE. 18.7 No Lessor Liability for Losses Lessee agrees that Lessor will not be liable to Lessee, any sublessee or any person, whether in contract, 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 Lessor or Owner Trustee or their agents or representatives excepting only Lessor's or Owner Trustee or their respective agents' or representatives' gross negligence or wilful misconduct. 18.8 Exclusion Neither Owner Trustee, Lender, nor Lessor shall have any obligation or liability whatsoever to Lessee, any sublessee or any other person whether arising in contract, tort or otherwise and whether arising by reference to negligence or strict liability of Lessor, Owner Trustee or Lender or otherwise for: (i) 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; (ii) the use, operation or performance of the Aircraft or any risks relating thereto; (iii)any interruption of service, loss of business or anticipated profits or any other direct, indirect or consequential loss or damage; or (iv) 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. 18.9 Waiver Lessee hereby waives, as between itself and Owner Trustee, Lender and Lessor, all its rights in respect of any warranty or representation, express or implied, on the part of Owner Trustee, Lender or Lessor and all claims against Owner Trustee, Lender or Lessor howsoever and whenever arising at any time in respect of or out of the matters referred to in Clause 18. 18.10 No Waiver Nothing in this Clause 18 or elsewhere in this Agreement will be deemed to be an waiver by Lessee of any rights it may have against the Manufacturer, the Engine Manufacturer or any other person. 18.11 Confirmation Lessee confirms that the foregoing provisions of this Clause 18 and the following provisions in Clause 19 have been taken into account by both parties in negotiating the rent and other amounts payable under this Agreement. 19. Indemnities 19.1 General Indemnity Lessee 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: (i) 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 not such Losses may be attributable to any defect in the Aircraft, any Engine or any Part or to their respective design, testing or use or otherwise, and regardless of when the same arises (but excluding any injuries or claims which arise prior to Delivery) 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); (ii) that may at any time be suffered or incurred as a consequence of any breach of the Transaction Documents by the Lessee or by misrepresentation of or breach of warranty by Lessee; and (iii)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 Lessee, or anyone acting by or through Lessee, of any obligation of confidentiality owed to any person in respect of any of the matters referred to in this Clause 19.1 (iii), 19.2 Exception to General Indemnity The indemnity provided for in Clause 19.1 will not extend to 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 Lessor Taxes, a Lessor Lien or a wilful breach by Lessor of its obligations under any of the Transaction Documents; or (iii) constitutes a Tax or liability for Taxes. 19.3 Time of Payment Lessee will pay an Indemnitee for Losses within ten (10) Business Days after receipt of a written demand therefor from such Indemnitee accompanied by a written statement describing in reasonable detail the basis for such indemnity. 19.4 Survival of General Indemnity Notwithstanding anything in this Agreement to the contrary, the provisions of Clause 19.1 shall survive the Expiry Date for two (2) years and continue in full force and effect notwithstanding any breach by Lessor or Lessee of the terms of this Agreement, the termination of the lease of the Aircraft to Lessee under this Agreement or the repudiation by Lessor or Lessee of this Agreement. 19.5 Notice to Lessee Lessor shall promptly after obtaining actual knowledge thereof notify the Lessee of any claim as to which indemnification is sought; provided that a failure to so notify will not diminish or relieve Lessee of any obligations hereunder, unless such failure materially adversely affects Lessee's defence of such claim and directly results in a material increase in liability of the Lessee in respect of such claim or prevents it from materially reducing liability therefor, in which case the Lessee shall not be required to indemnify such Indemnitee for the amount by which such liability was increased or not reduced. 20. Taxation 20.1 Gross-up 20.1.1 All payments by Lessee under or in connection with this Agreement shall be made in full without any set-off or counterclaim, free and clear of and without deduction or withholding for or on account of all Taxes, except Lessor Taxes, unless Lessee is required by law to make any such deduction or withholding. 20.1.2 If any Taxes, except Lessor Taxes, are required to be deducted or withheld from any amount payable hereunder, Lessee shall pay to Lessor 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 the net payment received by Lessor on the date of such payment, after deduction or withholding for all such Taxes, will be equal to the amount that Lessor would have received if such Taxes had not been deducted or withheld. 20.1.3 If any payment is made by Lessee under Clause 19.2 and Lessor 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 Lessor in respect of or calculated with reference to the deduction or withholding giving rise to such payment, Lessor 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 Lessor 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 Lessee such amount as Lessor shall reasonably have determined to be attributable to the relevant deduction or withholding. 20.2 Tax Indemnity 20.2.1 Lessee shall indemnify Lessor on demand against all Taxes (other than Lessor Taxes) levied or imposed against or upon Lessor, Lessee or the Aircraft directly or indirectly in connection with the importation, exportation, registration, ownership, leasing, subleasing, 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 Lessor Lien; or (ii) arises in respect of the period ending prior to Delivery and commencing immediately after the Expiry Date; or (iii)is directly attributable to Lessor's gross negligence or wilful misconduct; or (iv) relates to any deduction or withholding on any payment to be made to Lessor that is covered by Clause 20.1; or (v) imposed as a direct result of the sale, transfer or assignment or other disposition of the Aircraft or this Agreement by Lessor, other than by Lessor to Lessee, or by any party claiming by or through Lessor and except (a) 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 (b) any Taxes imposed by the State of Registration. 20.2.2 If Lessor becomes aware of any claim against Lessor for any Loss that Lessee is required to pay or indemnify against pursuant to this Clause 20.2, Lessor shall as soon as is reasonably practicable notify Lessee in writing of such claim. If requested in writing by Lessee that it wishes Lessor to contest such claim, Lessor will consult with Lessee with a view to determining whether there are grounds for contesting such claim. Lessor will consider in good faith any representation made by Lessee in this respect. Lessor 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 Lessor shall bring such proceedings in the event that tax counsel reasonably acceptable to Lessor in the relevant jurisdiction provides Lessor 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 Lessee. Further Lessor 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 20.2 shall be paid to or on behalf of Lessor or, if so directed by Lessor, directly to the relevant taxing authority, promptly after receipt by Lessee of a written demand therefor. 20.3 Value Added Taxes The Rent and other amounts payable by Lessee 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, Lessee will pay all such tax or duty and indemnify Lessor against any claims for the same and any related claims, losses or liabilities. 20.4 Taxation of Indemnity Payments 20.4.1 Notwithstanding any other provision of this Agreement, if and to the extent that any sums payable to any Indemnitee by Lessee 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) Lessee 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. 20.4.2 If and to the extent that any sums constituting (directly or indirectly) an indemnity to an Indemnitee but paid by Lessee to any person other than such Indemnitee are treated as taxable in the hands of such Indemnitee, Lessee 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. 20.5 Benefit of Indemnities All rights expressed to be granted to each Indemnitee (other than Lessor) under this Agreement are given to Lessor on behalf of that Indemnitee. 20.6 Lessor Indemnification Without prejudice to Clause 20.5, Lessor shall be entitled (but not obliged) to indemnify Indemnitees (other than Lessor) on terms equivalent to the indemnities given by Lessee under this Agreement and the obligations of Lessee to Lessor shall extend to reimbursement of Lessor of any amount properly paid by Lessor to such other Indemnitee provided always that nothing in this Clause 20.6 shall operate to increase the obligations or liabilities of Lessee. 20.7 Survival of Tax Indemnities Notwithstanding anything in this Agreement to the contrary, the provisions of Clause 19 shall survive the Expiry Date and continue in full force and effect notwithstanding any breach by Lessor or Lessee of the terms of this Agreement, the termination of the lease of the Aircraft to Lessee under this Agreement or the repudiation by Lessor or Lessee of this Agreement. 20.8 Mitigation and Co-operation In any case where Lessee 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, Lessor shall at the written request of Lessee, without limiting, reducing or otherwise qualifying the rights of Lessor and the Security Interest of Lender, consult with Lessee in good faith as to such steps which Lessor and Lessee can mutually accept and agree upon in order to mitigate or avoid the effects of such circumstances. In case Lessor and Lessee can not agree within a period of thirty (30) days after Lessee has made a written request, Lessor shall not have any further obligation towards Lessee. 20.9 Furnishing Forms Lessor agrees to furnish, and to procure that any other Indemnitee furnishes to Lessee, or to such other person as Lessee may designate, at Lessee's 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 Lessee may be required to indemnify against hereunder, unless such Indemnitee reasonable determines that furnishing such forms may have an adverse effect on either the business, tax status, tax liability or operations of such Indemnitee. 21. Insurance 21.1 Insurances 21.1.1 Lessee shall, at its own expense, maintain in full force and effect during the Lease Term insurances in respect of the Aircraft that, subject to this Clause 21, comply with the requirements set out in Schedule 3 (the Insurances). 21.1.2 The Insurances shall be effected through brokers of international standing and repute in the London or New York aviation insurance markets as may be approved by Lessor, such approval not to be unreasonably withheld. 21.1.3 For the avoidance of doubt it is understood that the Insurances to be provided for by Lessee are not Lessor's sole remedy and protection under this Agreement as the obligations of Lessee are in excess of the requirements of the Insurances. 21.2 Reinsurance Any reinsurance will be maintained with reinsurers and brokers approved by Lessor, such approval not to be unreasonably withheld. Such reinsurance will contain each of the following terms and will in all other respects (including amount) be satisfactory to Lessor: (i) The same terms as the original insurance; (ii) A cut-through and assignment clause satisfactory to Lessor; (iii)Payment will be made notwithstanding (a) any bankruptcy, insolvency, liquidation or dissolution of any of the original insurers and/or (b) that the original insurers have made no payment under the original insurance policies. 21.3 Requirements The current requirements as to the Insurances are as specified in this Clause 21 and in Schedule 3. Lessor and 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 international airline practice, and (b) the interests of Lessor and Lender continue to be protected. Lessee shall procure that such changes are effected. 21.4 Insurance Covenants Lessee shall: (i) 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; (ii) comply with the terms and conditions of each policy of the Insurances and not do, consent or agree to any act or omission which: (a) invalidates or may invalidate the Insurances; or (b) renders or may render void or voidable the whole or any part of any of the Insurances; or (c) brings any particular insured liability within the scope of an exclusion or exception to the Insurances; (iii)not make any modification or alteration to the Insurances material and adverse to the interests of any of the Indemnitees; (iv) be responsible for any deductible under the Insurances; (v) provide any other information and assistance in respect of the Insurances that Lessor 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; and (vi) not create any Security Interests over the Insurances except pursuant to the Assignment of Insurances; (vii)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; (viii) 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; (ix) 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 (x) furnish to Lessor: (a) not later than seven (7) days prior to the Scheduled Delivery Date 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 and a letter of undertaking by the insurance broker providing evidence of insurance coverage pursuant to this Agreement; (b) on request, confirmation of payment by, or at the direction of the Lessor of each sum payable under or in connection with any required policy; (c) on request, such evidence as the Lessor may require of the Lessee's compliance with its obligations under this Agreement; and (d) any notice received from the insurers or the insurance brokers (within three (3) Business Days of receipt) relating to or in connection with any cancellation of the Insurances or any material alteration of the Insurances. 21.5 Renewal of Insurances Lessee shall commence renewal procedures at least thirty (30) days prior to expiry of any of the Insurances, and provide to Lessor: (i) confirmation of completion of renewal at least fifteen (15) days prior to each expiry date of any of the Insurances; (ii) certificates of insurance and a brokers' letter of undertaking in a form acceptable to Lessor 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 (iii)any other information as Lessor may reasonable request be provided by the insurance broker at least fifteen (15) days before such expiry. 21.6 Failure to Insure If Lessee fails to maintain the Insurances in compliance with this Agreement, Lessee shall: (i) 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 (ii) immediately notify Lessor of the non-compliance of the Insurances and provide Lessor with full details of any steps which Lessee 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 Lessor under this Agreement: (a) to pay the premiums due or to effect and maintain insurances satisfactory to Lessor and substantially the same as the Insurances required hereunder or otherwise remedy Lessee's failure in such manner, including to effect and maintain an "owner's interest" policy, as Lessor considers appropriate. Any sums so expended by Lessor will become immediately due and payable by Lessee to Lessor together with interest thereon at the Default Rate, from the date of expenditure by Lessor up to the date of reimbursement by Lessee; and (b) 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 Lessor until the failure is remedied to Lessor's satisfaction. 21.7 Continuation of Insurances Lessee agrees to effect and maintain at Lessee'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 Lessee or Lessor continues to have any interest in the Aircraft. 21.8 Application of Insurance Proceeds As between Lessor and Lessee: (i) all insurance payments received as the result of a Total Loss occurring during the Lease Term will be paid to Lessor or to Lender pursuant to the terms of any security given by Owner Trustee and Lessor; (ii) 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 Lessor and applied in payment (or to reimburse Lessee) for repairs or replacement property, upon Lessor being satisfied that the repairs or replacement have been effected in accordance with this Agreement; and (iii)notwithstanding Clauses 21.8 (i) or 21.8 (ii) 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 Lessor to be applied toward payment of any amounts which may be or become payable by Lessee in such order as Lessor sees fit or as Lessor may elect. 21.9 Pursuit of Claims The parties shall co-operate 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 Lessor shall be paramount. 22. Total loss and requisition 22.1 Total Loss Prior to Delivery If a Total Loss occurs prior to Delivery, 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 Lessor will repay to Lessee any prepaid Rent, the amount of Security Deposit, if paid, and return the Letter of Credit under this Agreement. 22.2 Total Loss After Delivery 22.2.1 If a Total Loss occurs after Delivery, Lessee shall pay the Lessor on or prior to the earlier of: (i) thirty (30) days after the Total Loss Date; and (ii) the date of receipt of insurance proceeds in respect of such Total Loss, the aggregate of (x) the Agreed Value and (y) Rent and all other amounts accrued under this Agreement to the date of payment and (z) interest on the Agreed Value accruing on a daily basis at the Default Rate for the period, if any, from the Total Loss Date to the date of payment. 22.2.2 Subject to the rights of any insurers or other third parties, upon irrevocable payment in full to Lessor of the Agreed Value and all other amounts which may be or become payable to Lessor under this Agreement, Lessor shall direct Owner Trustee to transfer to Lessee all of Owner Trustee's and Lessor'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 Lessor Liens), and Lessor shall procure the execution and delivery of such bills of sale and other instruments as Lessee may reasonably request to evidence such transfer, free and clear of all rights of Owner Trustee and Lessor and (y) any other rights in respect of the Aircraft or any part thereof or any further requisition or insurance proceeds in respect thereof. Lessee shall indemnify Owner Trustee and Lessor for all fees, expenses and Taxes incurred by Owner Trustee and Lessor in connection with any such transfer. 22.2.3 If a Total Loss of the Aircraft or the Airframe occurs during the Lease Term, Lessee's obligation to pay Rent shall continue in full force and effect until the date of payment of the Agreed Value and all other amounts due under this Agreement 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 Lessee (as to indemnity or otherwise) under this Agreement; and Lessor and, if not already recovered, Lessee shall proceed diligently and co-operate fully with each other in the recovery of the Total Loss Proceeds. 22.3 Total Loss of Engines 22.3.1 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), Lessee shall give Lessor prompt written notice thereof and Lessee shall replace the Destroyed Engine as soon as reasonably possible by procuring that Owner Trustee acquires, at Lessee's expense, title to another engine complying with the requirements of Clause 16.6. Such Replacement Engine shall upon acquisition by Owner Trustee be an Engine as defined herein. 22.3.2 Lessee agrees to take such action as Lessor may reasonably request in order that any such Replacement Engine shall be the property of Owner Trustee, and leased hereunder on the same terms as the Destroyed Engine. Lessee's obligation to pay Rent shall continue in full force and effect, but an amount equal to the Total Loss Proceeds received by Lessor or Lender, as the case may be, with respect to the Destroyed Engine, less any cost, expenses, Taxes or duties incurred in connection with the collection thereof, shall, subject to Lessor's right to deduct therefrom any amounts then due and payable by Lessee under this Agreement, be paid to Lessee. 22.3.3 Immediately upon the effectiveness of such substitution, and without further act, title to the replaced Engine shall thereupon vest in Lessee, in an as-is, where-is condition, free and clear of all rights and Security Interests of Owner Trustee, Lender and Lessor and shall no longer be deemed an Engine hereunder. 22.4 Requisition 22.4.1 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 Lessee will not be released from any of its other obligations under the Agreement (other than operational obligations with which Lessee 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, Lessee shall be entitled to any hire paid by the requisitioning authority in respect of the Lease Term; (iii)Lessee 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. 22.4.2 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 Lessor 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 Lessee satisfies the Return Conditions provided that: (i) the obligations of Lessee including in respect of payment of Rent including Maintenance Reserves, if any, 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, Lessee 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 22.2 shall apply), Lessee shall be obliged to redeliver the Aircraft to Lessor in accordance with Clause 23; (iii)provided no Default or Event of Default is continuing, Lessee shall be entitled to receive and retain any requisition payments made in respect of the Aircraft; and (iv) Lessee shall indemnify Lessor for any Losses which Lessor suffers (Lessor undertakes to use its reasonable best efforts to mitigate such Losses) as a result of Lessee returning the Aircraft to Lessor after the Expiry Date. 23. Redelivery 23.1 Redelivery of Aircraft On the Redelivery Date, Lessee shall, unless a Total Loss has occurred, redeliver the Aircraft and the Aircraft Documents to Lessor at Lessee's cost and expense at the Redelivery Location. If the Aircraft has been damaged and is being repaired in a timely manner, then the term of the lease will be extended and Lessee'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 Lessor will make insurance proceeds available to accomplish such repairs as provided in Clause 22. When the repairs are completed, the Aircraft shall be redelivered to Lessor. At the time of the redelivery of the Aircraft: (i) the Aircraft shall be free and clear of all Security Interests other than Lessor Liens; (ii) all maintenance to the Aircraft due for performance on or before the Redelivery Date shall have been completed in accordance with this Agreement; (iii) the Aircraft shall be in compliance with the Return Conditions; (iv) the Aircraft shall comply with such other reasonable requirements as Lessor may request that Lessee has had timely notice of and that Lessor has agreed to pay for; provided, however, that if compliance with Lessor'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 Lessee's compliance with Lessor's request; and (v) any service bulletin kits which are allocated to the Aircraft at no charge by the Manufacturer and not delivered to Lessor as at the Redelivery Date will be shipped to a location specified by Lessor at Lessee's cost. For the avoidance of doubt, Lessee will not be responsible for any inaccuracy or incompleteness in the Aircraft Documents that pertains to any period prior to Delivery, provided always that the foregoing shall not in any way be construed as a waiver by Lessor of Lessee's obligations to keep, maintain and update the Aircraft Documents during the Lease Term in accordance with the other provisions of this Agreement. 23.2 Final Inspection Immediately prior to redelivery of the Aircraft, Lessee shall make the Aircraft available to Lessor for inspection (Final Inspection) at the 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 Lessor 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. 23.3 Discrepancies Lessee 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. When Lessee has complied with the provisions of this Clause 23.3, Lessee shall redeliver the Aircraft to Lessor at Lessee's cost and expense at the Redelivery Location. 23.4 Non-compliance 23.4.1 To the extent that, at the time of Final Inspection, the condition of the Aircraft does not comply with this Agreement (except Clause 23.1 (iv)), Lessee shall at Lessor's option: (i) 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 Lessee shall be required to pay Rent to Lessor during that period at the rate equal to two (2) times the daily Basic Rent (Basic Rent per month divided by thirty (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 Lessor; or (ii) redeliver the Aircraft to Lessor and indemnify Lessor, and provide cash to Lessor in an amount reasonably satisfactory to Lessor as security for that indemnity, against the cost of putting the Aircraft into the condition required by this Agreement. 23.4.2 Lessor's option in Clause 23.4 is not available to Lessor provided that (i) Lessee has notified Lessor of its intent to rectify the non-compliance prior to the Redelivery Date and (ii) Lessee will in the reasonable opinion of Lessor be able to rectify such non-compliance on or before Redelivery Date. 23.4.3 For the avoidance of doubt, Lessor shall not be entitled to exercise its option under Clause 23.4.1 and Lessee shall suffer no loss or penalty to the extent that the Aircraft does not, on Final Inspection, comply with Clause 23.1 (iv) but is otherwise in compliance with the Return Conditions. 23.5 Acknowledgement Provided Lessee has complied with its obligations under this Agreement, following redelivery of the Aircraft by Lessee to Lessor at the Redelivery Location, the parties shall execute an acknowledgement confirming that Lessee has redelivered the Aircraft to Lessor in accordance with this Agreement substantially in the form of Schedule 13. 23.6 Storage etc. Notwithstanding the performance in full by Lessee of all its obligations under this Clause 23, Lessor may require Lessee to continue to lease the Aircraft from Lessor for a period of up to thirty (30) days from the Expiry Date. During this period, Lessee will have no obligations under this Agreement except to park and store the Aircraft in accordance with Manufacturer's recommended short term storage program at one of Lessee's storage facilities and to continue insurances in respect of the Aircraft at Lessee's cost. Such parking and storage is being made at the risk of Lessor and Lessee shall have no liability for Losses except for any Losses arising out of Lessee's gross negligence or wilful misconduct arising during such period. Lessee also agrees during this period to ferry/fly the Aircraft to such location as Lessor may require. Lessee will not otherwise utilise the Aircraft during this period. Any out of pocket costs or expenses incurred by Lessee during this period with respect to the Aircraft for storage, insurance or such ferry/flight shall be reimbursed by Lessor to Lessee promptly after demand and upon receipt by Lessor of an invoice and documentation, reasonably satisfactory to Lessor, of such costs and expenses. 24. Events of default 24.1 Notice Lessee will promptly notify Lessor if Lessee becomes aware of the occurrence of any Default. 24.2 Events Each of the following events will constitute an Event of Default and a material breach of this Agreement: (i) Non-payment: Lessee fails to pay any amount payable by it under the Transaction Documents or the Other Agreements in the currency in which such sum fell due in respect of payments of Rent or Maintenance Reserves, if any, 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; (ii) Insurance: Insurance cover on or with respect to the Aircraft for the benefit of Lessor (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 (iii)Delivery: Lessee fails to take Delivery of the Aircraft when obligated to do so under the terms of this Agreement; or (iv) Redelivery: Lessee fails to return the Aircraft to Lessor on the Redelivery Date in accordance with Clause 23; or (v) Breach: Lessee defaults in the due performance and observance of any other obligations contained in the Transaction Documents and such default is not remedied within fourteen (14) days of becoming aware of such default; or (vi) Representation: Any representation, warranty or statement made or deemed to be made by Lessee 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 Lessor considers material when made or deemed to be made or if the effects or consequences of the incorrect, inaccurate or misleading representation, warranty or statement are capable of cure and Lessee fails to cure such effects or consequences within twenty (20) days after becoming aware of such default; or (vii)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 Lessor) 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 Lessor may prejudice the rights of Lessor under this Agreement or in the reasonable opinion of Lessor may have a material adverse effect on Lessee's obligation to perform its obligations under this Agreement; or (viii) Registration: (a) the Registration of the Aircraft is cancelled other than as a result of an act or omission of Lessor or another Indemnitee including Owner Trustee and Lessor or an affiliate of the Owner Trustee and Lessor; (b) Lessee ceases to be an US Air Carrier authorised to transport passengers in common carrier; or (c) the Aircraft ceases to be "based and primarily used in the United States" within the meaning of the 14 Code of Federal Regulations 47.9: or (ix) Possession: Lessee abandons the Aircraft or the Engines, or Lessee 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 (x) Discontinuation: Lessee threatens to or temporarily or permanently discontinues business or sells or otherwise disposes of all or substantially all of its assets; or (xi) Adverse Change: A material adverse change occurs in the financial condition of Lessee which in the reasonable opinion of Lessor may have a material negative impact on Lessee's ability to perform its obligations hereunder; or (xii)Cross Default: Any Financial Indebtedness of Lessee (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 Lessee (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 (xiii) Insolvency: Lessee 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 (xiv)Proceedings: Any proceedings, resolutions, filings or other steps are instituted or threatened with respect to the Lessee or a substantial part of Lessee's property relating to the bankruptcy, liquidation, reorganisation or protection from creditors of Lessee. If instituted by Lessee or done by the Lessee, 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 (xv) Judgements: Any order, judgement or decree is entered by any court of competent jurisdiction appointing a receiver, trustee or liquidator of Lessee or a substantial part of its property or if a substantial part of its property is to be sequestered. If instituted by Lessee or done by the Lessee, 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 (xvi)Air Navigation Charges: Any competent authority has unpaid Air Navigation Charges due from Lessee (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 ten (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 (xvii) Airport Charges: Any airport has unpaid Airport Charges due from Lessee (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 ten (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; (xviii) Other Default: An Event of Default is continuing unremedied under any Other Agreement between Lessee and Lessor or another lessor or sublessor that either (i) shares the same general partner or controlling shareholder with Lessor or (ii) whose beneficiary shares the same general partner or controlling shareholder with Lessor; or (xix)Sublessee: Any approved sublessee acts so as to prevent present or future performance by Lessee of its obligations under this Agreement. 24.3 Lessor's Rights 24.3.1 Upon the occurrence of any Event of Default, all rights of Lessee under this Agreement and with respect to the Aircraft will immediately cease and terminate, but without prejudice to the continuing obligations of Lessee under this Agreement. Without prejudice and in all cases in addition to any other rights of Lessor under this Agreement or under applicable law, Lessor may upon the occurrence of any Event of Default exercise all or any of the following rights at its option: (i) require that Lessee immediately move the Aircraft to a location specified by Lessor; (ii) for Lessee's account do anything that may reasonably be required to cure any default and recover from Lessee all reasonable costs, including reasonable legal fees and expenses incurred in doing so and interest thereon at the Default Rate; or (iii)proceed by appropriate court action or actions to enforce performance of this Agreement or to recover damages for the breach of this Agreement; or (iv) enter upon the premises where the Airframe or any or all Engines or any or all Parts are located or believed to be located and take immediate possession of and remove such Airframe, Engine or Parts without the necessity for first instituting proceedings, or by summary proceedings or otherwise, and Lessee shall comply therewith, all without liability to Lessor for or by reason of such entry or taking possession, whether for the restoration or damage to property caused by such taking or otherwise; (v) apply all or any portion of the Security Deposit, the Letter of Credit and any other security deposit held by Lessor pursuant to any Other Agreements to any amounts due. 24.3.2 Whether or not Lessor shall have exercised, or shall thereafter any timer exercise, any of its rights under Clause 24.3.1 (i) or (iv) above with respect to all or any part of the Aircraft, Lessor, by written notice to Lessee specifying payment date not earlier than ten (10) days from the date of such notice, may demand that Lessee pay to Lessor, and Lessee shall pay Lessor, 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 payment date specified in such notice plus the present value of the remaining instalments of Rent during the Lease 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, Lessee shall be liable for the amounts set forth in Clause 24.4 (ii) and (iii). 24.3.3 If an Event of Default occurs, Lessor may sell or re-lease or otherwise deal with the Aircraft at such time and in such manner as Lessor considers appropriate in a commercially reasonable manner, free and clear of any interest of Lessee as if this Agreement had never been entered into and as if Lessee had never made any payments hereunder. While an Event of Default is continuing, Lessee will not operate the Aircraft without the consent of Lessor. 24.3.4 If an Event of Default has occurred and is continuing, Lessor may take all steps necessary to de-register the Aircraft in and export the Aircraft from the State of Registration. 24.4 Default Payments Lessee 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 attorney's fees and disbursements) incurred by Lessor 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 23.1 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 Lessor for any loss of or damage to Lessor's residual interest in the Aircraft. All costs and expenses referred to in the preceding sentence shall be payable by Lessee upon demand by Lessor 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. 24.5 Cumulative Rights Except as otherwise expressly provided above, no remedy referred to in this Clause 24 is intended to be exclusive, but each shall be cumulative and in addition to any other remedy referred to above or otherwise available to Lessor at law or in equity. The exercise or beginning of exercise by Lessor of any one or more of such remedies shall not preclude the simultaneous or later exercise by Lessor of any or all such other remedies. No express or implied waiver by Lessor 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. 25. Assignment and transfer 25.1 By Lessee No assignment, novation, transfer or Security Interest may be made by Lessee in any of its rights with respect to the Aircraft, Engine, Parts, this Agreement or the other Transaction Documents (other than Permitted Liens). 25.2 By Lessor Subject to Lessee's rights pursuant to this Agreement, Lessor may at any time and without Lessee's consent sell, assign or transfer its rights and interest hereunder and under the other Transaction Documents to a third party, (Lessor's Assignee). Lessor will in good faith co-operate with Lessee to ensure minimum practical disturbance or cost in connection with such assignment or transfer of rights and interest hereunder. Lessee agrees to co-operate in good faith with Lessor in such sale, assignment or transfer and provide Lessor and Lessor's Assignee with such reasonable assistance as Lessor may require, including but not limited to assisting in any of Lessor's and Lessor's Assignee's efforts to minimise 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 Lessee's cost, Lessee will continue to name Owner Trustee, Lessor and Lender as additional insureds in accordance with the insurance requirements set out in Clause 21. 25.3 Assignment to Lender Subject to Lessee's rights under this Agreement, Owner Trustee may at any time grant Security Interests over the Aircraft and the benefit of this Agreement, the other Transaction Documents and any other agreement related to the Aircraft to any Lender as security for Owner Trustee's obligations to such Lender. Owner Trustee's rights to grant any such Security Interests shall be subject only to receipt by Lessee of an acknowledgement from or on behalf of Lender relating to quiet enjoyment by Lessee of the Aircraft as referred to in Clause 25.4.2. 25.4 Lessee Co-operation 25.4.1 On request by Lessor, Lessor's Assignee, Owner Trustee or Lender, Lessee will, at Lessee's sole expense, promptly execute all such documents as Lessor, Lessor's Assignee, Owner Trustee or Lender may reasonably require (including such estoppel certificate as referred to in Clause 12.4 to confirm Lessee's obligations under this Agreement and the other Transaction Documents), to obtain Lessee's confirmation that no Default is outstanding and for the purpose of perfecting and ensuring and maintaining the perfection of any Security Interest granted by Owner Trustee over the Aircraft, this Agreement, the other Transaction Documents or any other agreement related to the Aircraft. Lessee will promptly provide all other reasonable assistance and co-operation at Lessor's expense to Lessor, Lessor's Assignee, Owner Trustee or Lender in connection with any of the matters referred to in this Clause 25 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 State of Registration or the provision of any appropriate counsel's opinions in relation to Lessee's obligations. 25.4.2 Lessor will obtain for the benefit of Lessee an acknowledgement from any Lessor's Assignee or Lender, so long as no Default has occurred and is continuing hereunder, such person will not interfere with Lessee's quiet, peaceful use and enjoyment of the Aircraft, substantially in the form of Schedule 11 or such other form as Lessor's Assignee or Lender may reasonably require. 25.5 Lessor Includes Lessor's Assignee and Lender Wherever the term "Lessor" is used in this Agreement in relation to any of the provisions relating to registration, title, disclaimer, indemnity and insurance respectively, the term "Lessor" will be deemed to include Lessor's Assignee and Lender. 26. Miscellaneous provisions 26.1 Rights Cumulative, Waivers The rights of Lessor under this Agreement are cumulative, may be exercised as often as Lessor considers appropriate and are in addition to Lessor's rights under the general law. The rights of Lessor against Lessee 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 Lessor'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. 26.2 Delegation Lessor 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 Lessor in its absolute discretion thinks fit. 26.3 Expenses So long as the Aircraft is tendered for Delivery to Lessee pursuant to this Agreement, Lessee shall pay to Lessor on demand: (i) all reasonable expenses including legal, professional, and out-of-pocket expenses incurred or payable by Lessor in connection with any amendment to or extension of or other documentation requested by Lessee in connection with, or the granting of any waiver or consent under this Agreement or the monitoring of compliance by Lessee with this Agreement, but in the case of such monitoring of compliance, only if upon such monitoring Lessee is found to be in Default under this Agreement; and (ii) all expenses including legal, survey and other costs payable or incurred by Lessor following a Default in connection with the enforcement of or preservation of any of Lessor's rights under this Agreement, or in respect of the repossession of the Aircraft. All expenses payable pursuant to this Clause 26.3 shall be paid in the currency in which they are incurred by Lessor. 26.4 Time of Essence The time stipulated in this Agreement for all payments by Lessee to Lessor and for the prompt performance of Lessee's other obligations under this Agreement will be of the essence for this Agreement. 26.5 Entire Agreement The Transaction Documents are the sole and entire agreements between Lessor and Lessee in relation to the leasing of the Aircraft, and supersede all previous agreements in relation to that leasing. 26.6 Further Assurances The parties shall take such action as Lessor and Lessee 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. 26.7 Language All notices to be given under this Agreement will be in English. All documents delivered to Lessor 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. 26.8 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 Lessor and Lessee. 26.9 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. 26.10 Survival All indemnities and other obligations of Lessee 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. 26.11 Reimbursement If Lessee defaults in the performance of any of its obligations under this Agreement that can be rectified by the spending of money, Lessor shall be entitled (but not obliged) to expend money to rectify such matter and Lessee shall reimburse Lessor on demand the money so expended. Any expenditure by Lessor pursuant to this Clause 26.11 shall not prejudice the rights of Lessor in respect of any Default or Event of Default. 26.12 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. 26.13 Power of Attorney Lessee hereby irrevocably appoints Lessor as its attorney for the purpose of putting into effect the intent of this Agreement following an Event of Default, including without limitation, the return, repossession, deregistration and exportation of the Aircraft. To evidence this appointment, Lessee has executed the power of attorney in the form of Schedule 8. Lessee will take all steps required under the laws of the State of Registration to provide such power of attorney to Lessor. 26.14 Usury Laws Notwithstanding anything to the contrary in the Transaction Documents, Lessee 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 Lessor in connection with the Transaction Documents. During any period of time in which the then applicable highest lawful rate is lower than the Default Interest rate, Default Interest will accrue and be payable at such highest lawful rate; however, if at later times such highest lawful rate is greater than the Default Interest rate, then Lessee will pay Default Interest at the highest lawful rate until the Default Interest which is paid by Lessee equals the amount of interest which would have been payable in accordance with the interest rate set forth in Schedule 2. 26.15 Confidentiality The Transaction Documents and all non-public information obtained by either party about the other are confidential and are between Lessor and Lessee only and the commercial terms and other material provisions of this Agreement 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, Lessee and Lessor will co-operate with one another to obtain confidential treatment as to the commercial terms and other material provisions of this Agreement; 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. 26.16 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 facsimile will be deemed effective as delivery of an originally executed counterpart. Any party delivering an executed counterpart of this Agreement by facsimile 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. 26.17 Bankruptcy It is the intention of the parties that the Lessor 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 Lessor 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. 27. 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: Lessor: INDIGO AVIATION AB (PUBL) Address: Sodra Forstadsgatan 4, SE-211 43 Malmo, Sweden Attention: Legal Department Facsimile: +46 40 302350 Lessee: FRONTIER AIRLINES, INC. Address: 12015 e. 46th Avenue, Denver Colorado, United States of America Attention: General Counsel Facsimile: (303) 371 9669 28. Governing law and jurisdiction 28.1 New York Law This Agreement 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). 28.2 Non-exclusive Jurisdiction in New York 28.2.1 Each of Lessor and Lessee (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 Districts Court for the Southern District of New York for the purposes of any suit, action, or other proceeding arising out of this agreement of 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 defence or otherwise any claim that it is not personally subject to the jurisdiction of the abovenamed courts; that the suit, action or proceedings 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. 28.3 Service of Process 28.3.1 With respect to actions, suits and proceedings brought in the courts named in Clause 28.2. each of Lessor and Lessee hereby waives personal service of process and agrees that service of process may be made upon certified or registered mail, return receipt requested, at the address specified in Clause 27 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. 28.4 Waiver Lessee and Lessor hereby waive the right to a trial by jury. SCHEDULES Page 144 SIGNATURE PAGE Page 96 SIGNATURE PAGE IN WITNESS whereof the parties hereto have executed this Agreement on the date showed at the beginning of this Agreement. SIGNED on behalf of INDIGO AVIATION AB (PUBL) 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 737-3S1 Serial Numbers 24856 Current Registration N372TA New Registration Mark N311FL Line Number 1911 Date of Manufacture September, 1990 Engines CFM International CFM56-3C1 @ 22,000 lbs APU Garrett GTCP85-129E Present Operator TACA International Airlines SA WEIGHTS Lbs. Max Taxi Weight 137,500 Max Take Off Weight 137,000 Max Landing Weight 116,600 Max Zero Fuel Weight 106,500 Basic Empty Weight 71,436 Max Fuel capacity 5,311 US Gallons INTERIOR CONFIGURATION Seating 136 Y Galleys G1, G2, G4B, G7 Driessen Lavatories 1 Forward, 2 Aft AIRFRAME AND ENGINE STATUS (As of May 10 , 1999) AIRFRAME Total Hours 26,480 Total Cycles 17,493 Time since C-Check 0 hours Time to next D-Check July 2006 AIRFRAME MAINTENANCE PROGRAM CHECK SCHEDULE C1 Check 3,800 hours C2 Check 7,600 hours C3 Check 11,400 hours C4 Check 15,200 hours D1 Check 22,400 hours C7 Check 26,600 hours ENGINES (As of May 10, 1999) Serial Number 725630 724667 Total Hours 22,807 24,821 Total Cycles 14,593 16,282 Cycles Remaining 3,955 Con Suppt 3,537 HPT Disk Hours Since Shop Visit LANDING GEAR (As of May 10, 1999) Right Main CSO 3,194 Left Main CSO 3,194 Nose CSO 3,194 Overhaul limit MLG 16,000 cycles /NLG 16,000 cycles NAVIGATIONAL, COMMUNICATION, ELECTRONIC SYSTEMS, FURNISHING & EQUIPMENT LIST DESCRIPTION MANUFACTURER MODEL OR QTY PART NUMBER Flight Control Computer Sperry/Honeywell 4051600-913 2 Mode Control Panel 4051601-937 1 Autothrottle Computer Smiths Industries 735SUE6-9 1 Passenger Address Collins 346-2B 1 CVR Sundstrand 980-4100GQUS 1 HF Communication Collins 628T-2A 1 VHF Communication Collins 622-5219-004 2 Electric Altimeter Smiths 2057-01-1 2 Digital Air Data ComputerHoneywell HG 480 E1 2 EHSI Colour Collns 622-7999-013 2 EADI Colour Collins 622-7998-013 2 TRU Honeywell HG1050AD05 2 GPWS Sundstrand 965-0648-004 1 FMC Lear Siegler 168925-05-01 1 VHF Nav Collins 622-3257-001 2 ATC Collins 622-7878-201 2 DME Collins 622-2921-006 2 ADF Collins 777-1492-005 1 Marker Collins 51 Z4 1 Radio Altimeter Collins 622-3890-020 2 WX-Radar Collins 622-5129-105 1 DFDR AlliedSignal 980-4100DXUS 1 DFDAU Sundstrand 965-0657-003 1 ACARS Man. Unit Teledyne 2229385-35 1 Transponder Collins 622-7878-201 2 TCAS Honeywell 4066010-903 1 SGU Collins 622-8000-006 2 Annexure 1 AIRCRAFT DOCUMENTATION Note: This Annexure 1 is to be used for reference purposes only. The Aircraft Documents will be more closely identified in Annexure 1 to the Acceptance Certificate. A. Certificates - - Certificate of Airworthiness - - Certificate of Registration - - Noise Certificate - - Radio License B. Aircraft Status Records - - Technical Log Book - - Airframe Maintenance Status Report - - Manufacturer's Service Bulletin Status Report - - Airworthiness Directive Compliance Report (terminated and repetitive) - - Local Modification Status Report List with Substantiating Data - - Last Weighing Report - - Repair Datas Structural Repairs C. Aircraft Maintenance Records - - Test Flight Reports - - Last Boeing "C" check and maintenance check Work Cards for each "C" check multiple (or segment) D. Aircraft History Records - - Aircraft Structural Repair History (if applicable) - - Service Difficulty Report (if applicable) - - Accident or Incident Report (if applicable) E. Engine Records (for each engine) - - Log Books - - Last overhaul and repair documents for each module - - Airworthiness Directive Compliance Report (terminated and repetitive) - - Manufacturer's Service Bulletin Status Report - - Engine Disk Sheet - - Engine Data Submittal Sheet - - Condition Monitoring Status Report F. APU Records - - Log Book - - Last overhaul and repair documents - - Manufacturer's Service Bulletin Status Report G. Component Records (including components installed engines and APU) - - Time Controlled Component Status Report with remaining hours and cycles (if applicable) - - Service ability tags or back-up documentation for components replace since delivery from Boeing H. Manuals 1. Airplane Flight Manual 2. Quick Reference Handbook 1. Aircraft Operating Manual 1. Weight and Balance Manual Supplement 1. Wiring Diagram Manual (microfilm) 1. Illustrated Parts Catalog (microfilm) 1. Aircraft Maintenance Manual (microfilm) 1. CFMI Illustrated Parts Catalog 1. Vendor Manual Seats 1. Vendor Manual Galleys 1. Vendor Manual Ovens 1. Vendor Manual Coffeemakers I. Miscellaneous Technical Documents - - Maintenance Program Specifications/Requirements - - Interior Configuration Drawings - - Loose Equipment Inventory List - - Delivery documentation ex Boeing - - Export Certificate of Aircraft - - Aircraft Readiness Log - - Rigging Record Brochure - - Miscellaneous Delivery Record Brochure - - Fuel Measuring Stick Calibration Brochure - - FAA Airworthiness Directive Compliance Record SCHEDULE 2 CERTAIN BUSINESS TERMS 1. Agreed Value Agreed Value means * 2. Basic Rent The Basic Rent payable on each Rent Date during the Lease Term shall be * . 3. Damage Notification Threshold Damage Notification Threshold means * . 4. Engine Agreed Value Engine Agreed Value means for each engine * . 5. Lease Expiry Date Means the date falling 72 months from the Delivery Date. 6. Lease Term Means the period commencing on the Delivery Date and ending on the Lease Expiry Date; 7. Letter of Credit The Lessee shall provide the Lessor with an additional Security Deposit in form of an irrevocable, assignable standby letter of credit in the amount of * issued at least three days prior to Scheduled Delivery Date by a major US Bank in a form and substance acceptable by Lessor (the Letter of Credit). 8. Maintenance Reserves Lessee shall during the Lease Term pay the following Maintenance Reserves to Lessor: (i) Airframe Maintenance Reserve * for each Flight Hour that the Airframe is operated; (ii) Engine Maintenance Reserve, Refurbishment and LLP's * for each Flight Hour that each Engine is operated; (iii) Landing Gear Maintenance Reserve * for each Flight Hour that the Aircraft is operated; (iv) APU Maintenance Reserve * for each Flight Hour that the APU is operated. The amounts payable by Lessee to the Maintenance Reserves as set out herein shall be subject to escalation on each of the anniversary dates of the first day of the Lease Term at a rate of two and a half percent (2.5%) per year. 9. Minimum Liability Coverage Minimum Liability Coverage means * on each occurrence. 10. Scheduled Delivery Date Scheduled Delivery Date means on or about __ June 1999 or such other date as the parties may mutually agree and Lessor may be able to deliver the Aircraft to Lessee. 11. Security Deposit Lessee has paid to Lessor a cash Security Deposit in the amount of * and shall provide Lessor with additional Security Deposit according to Clause 8 of this Schedule 2. The cash Security Deposit of * will be credited to the first payment of Rent payable by Lessee during the Lease Term. The Security Deposit will be non-refundable in the event of failure by Lessee to take delivery of the Aircraft in accordance with this Agreement. 12. Supplemental Rent for Excess Cycles If on each of the anniversary dates of the first day of the Lease Term, based on the previous twelve (12) months period (or portion thereof) of the Lease Term the Aircraft has been operated more Cycles than the number of Cycles which would result from an average Flight Hour/Cycle ratio of one point five (1.5) Flight Hours to one (1) Cycle, Lessee will pay Lessor as Supplemental Rent * for each Cycle the Aircraft actually operated during such twelve (12) months period (or portion thereof) in excess of the number of Cycles which result from an average Flight Hour/Cycle ratio of one point five (1.5) Flight Hours to one (1) Cycle. A calculation will be made as of the last day of each anniversary of the first day of the Lease Term each year and such Supplemental Rent will be due and payable by Lessee on the date on which the next Maintenance Reserve payment is due (in accordance with Clause 9.2) following such Flight Hour/Cycle calculation period. SCHEDULE 3 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; (b) an All Risk Hull Insurance Policy on each Engine when not installed on the Aircraft on an agreed value basis not less than the Engine Agreed Value; (c) 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; (d) 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; (e) 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 Lessor on the basis of advice received from an independent insurance adviser believe that the relevant liabilities shall be unlimited or that such limit should be revised upwards, it shall be replaced by unlimited liability or 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 Lessor shall not be obliged by this Clause to effect and maintain insurance in respect of any inability to recover from any manufacturer of the Airline, 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 Lender, if none, to Lessor or at the request of Lessor to 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 Lender, the Owner Trustee, the Lessor and the Lessee. The relevant policy shall provide that such payments shall only 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. 103 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$500,000 (or the minimum deductible amount carried under the airline's insurance policy if less than US$500,000). (d) Customary Risks: cover at least such risks as are customarily insured against in the airline industry for any amount not less than 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 additional assured; (g) provides that non 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 the 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 Lender; and (k) specifically refers to any security document entered into in favour of the Lender or any loan agreement. 1.4 Terms of All Insurances All Insurances will: (a) Dollars: provide cover denominated in dollars; (b) World-wide: operate on a world-wide basis subject to such limitations and exclusions as the parties and the insurance market may agree; (c) Acknowledgement: 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 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 Lessee, or any other person provided that such additional assureds regardless of any breach or violation by Lessee, 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 Lessor, 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; (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 Lender as loss payee in the case of a Total Loss; (ii) the 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 Lessor 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 Lender notifies the insurance brokers or the insurers that an Event of Default has occurred, in which event the loss payee shall be the Lender; (j) specifically refer to each loan agreement or charge between the Lessor and any Lender. 1.5 Deductibles Lessee shall be responsible for any and all deductibles under the Insurances. 1.6 AVN 67B Notwithstanding the foregoing, if Lessee 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 4 DELIVERY CONDITIONS The Aircraft will be delivered "AS IS, WHERE IS" at the Delivery Location and will conform to the conditions outlined in this Schedule 4. The actual condition of the Aircraft at Delivery will be documented on the Acceptance Certificate as noted in Schedule 5 of the Aircraft Lease Agreement. Certification: A United States Standard Certificate of Airworthiness suitable for Part 121 operations. The Aircraft will be airworthy (conform to type design and be in a condition for safe operation), with all Aircraft equipment, components and systems operating in accordance with their intended use and within limits established by the Aircraft Maintenance Manual. Configuration: An all economy 136 seat interior with a 31" minimum seat pitch. (Note. Lessee may sell seats for its own account , provided replacement seats acceptable to Lessor are installed, title is transferred to Lessor and the replacement seats are returned with the Aircraft at Redelivery) Paint: The exterior will be painted in Lessee's white base colour and green lettering. Lessee will provide the tail decals. Airframe: Fresh from next Block C Check, excluding hours and cycles used on the Demonstration/ Ferry Flights, with a minimum of 18,000 hours remaining until the next due C7 Check/ Structural Inspection. A. The Aircraft will have no deferred maintenance items, unique inspections or temporary repairs at Delivery. B. Modifications and Repairs installed on the Aircraft at Delivery will have been accomplished in accordance with FAA approved data. C. The Aircraft will be in compliance with the Manufacturer's CPC program. D. If available, any No Charge Service Bulletin Kits not installed by Prior Owner will be loaded onboard the Aircraft as cargo. F. Fuel tanks will be free from contamination. Engines: Each of the installed engines will be fresh from the shop visit with at least 3,500 cycles remaining on the most limiting LLP and sufficient EGT margin/performance to facilitate operation until the next scheduled removal for LLP replacement under normal operating conditions at 3B2 Power (22,000 Lbs Thrust). Based upon the current shop visit workscope, ESN 725630 will have 3,955 cycles remaining on its most restrictive LLP and ESN 724667 will have 3,537 cycles remaining on its most restrictive LLP at 3B2 Power (22,000 Lbs Thrust). Each Engine will pass a Performance Engine Run in accordance with the Aircraft Maintenance Manual. Each Engine will pass a hot and cold section borescope inspection. APU: Serviceable and passing a borescope inspection. Components: Unless otherwise agreed, each component that is time controlled will have at least 3,000 flight hours or cycles remaining until next inspection/overhaul. Each component that is calendar controlled will have at least 12 months remaining until its next inspection/ overhaul. Condition Monitored/On Condition components will be serviceable. Landing Gear: Each Landing Gear will have at least 12,000 cycles remaining until the next inspection or overhaul. Airworthiness Directives (AD's): Airworthiness Directives requiring compliance on or before Delivery will be in compliance. Demonstration Flight: Prior Owner will perform a one and one half hour flight demonstrating the satisfactory operation of the Aircraft with no more than two Lessee observers, as designated by Lessor, on board during such Demonstration Flight. Records: Documentation required to maintain a United States Standard Certificate of Airworthiness will be in English or translated into English prior to delivery. Aircraft Documentation: The Aircraft Documents will be identified in Annexure 1 to the Acceptance Certificate. SCHEDULE 5 ACCEPTANCE CERTIFICATE This Acceptance Certificate is delivered, on the date set out below by FRONTIER AIRLINES, INC. (Lessee), to INDIGO AVIATION AB (PUBL)(Lessor), pursuant to the Aircraft Lease Agreement dated 2nd of June 1999 between Lessor and Lessee (the Lease). Capitalized terms used in this Certificate shall have the meanings given to such terms in the Lease. 1. Details of acceptance Lessee hereby confirms to Lessor that Lessee has at _____o'clock on this ___ day of ______, at _____ accepted the following, in accordance with the provisions of the Lease: (a) Airframe Type: _____ Reg.: _____ S/N: _____ (b) Engines Type: _____ S/N No.1: _____ S/N No. 2: _____ (c) APU: MSN Total Flight Hours Flight Hours/ Cycles Flight Hours/Cycles remaining until next HSI remaining on turbine and inspection 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) Equipment Check List: as per list signed by Lessor and Lessee and attached hereto; and (f) Aircraft Documents List: as per list signed by Lessor and Lessee and attached hereto; and (g) Place of Acceptance: ______________ 2. Confirmation Lessee confirms to Lessor that as at the time indicated above, being the Delivery Date: (a) the representations and warranties contained in Clause 2.1 of the Lease are hereby repeated; (b) the Aircraft is insured as required by the Lease; and (c) Lessee's authorised technical experts have inspected the Aircraft and the Aircraft Documents to ensure that the Aircraft and the Aircraft Documents conform to Lessee's requirements. The Aircraft and the Aircraft Documents are in accordance with the specifications of the Lease and satisfactory in all respects. 3. Fuel at Delivery 3.1 Fuel on board at Delivery: ____ kilos (___ gallons). 3.1 Annexed hereto is details of any damage to the Aircraft as at Delivery. 3.1 The Airframe, Engines and Parts had the following Flight Hours/Cycles at Delivery: (a) Airframe: Total hours Total landings Since last "C" Check Since last "A" Check _________ ________ ______ Flight Hours ______ Flight Hours ______ Cycles ______ Cycles (b) Engines: Position Serial No. Total Flight Total Since last Since last Hours Cycles shop visit Engine Performance Restoration Visit ____ Flight ____ Flight Hours Hours ____ Cycles ____ Cycles See attached Engine run records and disc sheets for further description of Engines at Delivery. IN WITNESS WHEREOF, Lessee has, by its duly authorised representative, executed this Certificate on the date specified in paragraph 1 above. Lessee: FRONTIER AIRLINES, INC. By: _________________________ Title: _________________________ Annexure 1 Aircraft Documents Annexure 2 Aircraft Equipment List Annexure 3 Damage Chart SCHEDULE 6 CERTIFICATE OF DIRECTOR OF FRONTIER AIRLINES, INC. I, _____________________, do hereby certify that: 1. I am a duly and acting Director of Frontier Airlines, Inc., a Colorado corporation (the "Company"). 2. Attached hereto as Exhibit A is a true, correct and complete copy of the Certificate of Incorporation of the Company, as amended to the date hereof, and such Certificate of Incorporation remains in full force and effect on the date hereof. 3. Attached hereto as Exhibit B is a true, correct and complete copy of the Articles of Association to of the Company and by-laws, as amended to the date hereof, and such Articles of Association and by-laws remain in full force and effect on the date hereof. 4. Attached hereto as Exhibit C is true, correct and complete copy of resolutions duly adopted by the Board of Directors of the Company at a meeting duly called and held in [ ] approving the execution, delivery and performance of the Aircraft Lease Agreement dated as of __ June 1999 between Indigo Aviation AB (publ) as lessor and the Company as lessee (the "Lease") and the other Transaction Documents (as defined in the Lease) to which the Company is a party, and said resolutions have not been revoked, rescinded or modified and, at the date hereof, are in full force and effect. 5. The following persons are duly qualified and acting officers of the Company, and each of such officers certifies that the signature appearing opposite the name of each other officer is his genuine signature: 6. I do hereby certify that all of the Company's representations and warranties set forth in the Lease are true and correct at the date hereof. Title Name Signature [ ] [ ] ---------------------- IN WITNESS WHEREOF, the undersigned has executed this Certificate as of the ____ day of ___________. I, ________, acting as special counsel to Frontier Airlines, Inc., do hereby certify that ______________ is a duly elected, qualified and acting director of Frontier Airlines, Inc. and that the signature set forth above is his genuine signature. IN WITNESS WHEREOF, the undersigned has executed this Certificate as of the ___ day of ____________. SCHEDULE 7 FORM OF LETTER OF AUTHORITY [ Addressee ] AUTHORITY This Authority is given on _________. Pursuant to an Aircraft Lease Agreement (the Lease) dated as of __ June 1999, made between Indigo Aviation AB (publ) as lessor (Lessor) and Frontier Airlines, Inc. as lessee (Lessee) relating to one (1) Boeing 737-3S1 aircraft bearing manufacturer's serial number 24856 and registration mark N311FL (the Aircraft), Lessee will operate the Aircraft during the term of the Lease. Lessee hereby irrevocably authorises yourselves, during the term of the Lease, to disclose to Lessor or to anyone duly appointed by it, upon request by the same, particulars of any and all outstanding charges due to or collectable by you and incurred in respect of: (i) the Aircraft; and (ii) any other aircraft being operated by Lessee on the date such request, from time to time, is made. IN WITNESS WHEREOF a duly authorised representative of Lessee has granted this Authority on the day and year first above mentioned. Signed by: - ------------------------- for and on behalf of [ ] SCHEDULE 8 POWER OF ATTORNEY The undersigned, Frontier Airlines, Inc. (Lessee) refers to the Aircraft Lease Agreement dated as of __ June 1999, as amended and supplemented from time to time (the Lease) between, Indigo Aviation AB (publ) (Lessor) and Lessee with respect to one (1) Boeing 737-3S1 Aircraft bearing manufacturer's serial number 24856 and registration mark N311FL (the Aircraft). In consideration of the sum of US$ 1 paid by Lessor to Lessee (the receipt and sufficiency of which is hereby acknowledged), Lessee irrevocably appoints Lessor (Attorney) as its true and lawful attorney to: Execute and to do and 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 State of Registration (as defined in the Lease) 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 Lessee 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 Lessee 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 Lessee 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 [ ]. SIGNED ON BEHALF OF FRONTIER AIRLINES, INC. By: _______________________ Title: ______________________ SCHEDULE 9 Note: This form is made on the assumption that the State of Incorporation and the State of Registration are the same [herein "State"]. FORM OF OPINION OF LESSEE COUNSEL to be addressed to [ Lessor ] and [ Lender ] We have acted as counsel in [ Country of Lessee ] as counsel to [ Name of Lessee ] ("Lessee") in connection with an aircraft lease agreement dated [ ] and made between [ Name of Lessor ] as Lessor and Lessee as the lessee in respect of one [ Type of Aircraft ] bearing manufacturer's serial number [ ] (the "Aircraft") (the "Lease") and owned by Lessor, and have examined a copy of the following documents; (i) the Lease; (ii) the Acceptance Certificate; (iii) the Letter(s) of Authority; (iv) the Power of Authority; (v) [ other documents ]; and (vi) [ ] and such other documents as we have considered it necessary or desirable to examine in order that we may give this opinion. The documents referred to under (i) to (v) above are referred to as the "Relevant Documents". Terms defined in the Lease shall have the same meaning herein. On the basis on the foregoing we are of the opinion that: (a) Lessee is duly incorporated in [ State ] for an indefinite period as a limited company and is a validly existing separate legal entity, which is subject to suit in its own name, in good standing, and, to the best of my knowledge, no steps have been, or are being, taken to appoint a receiver, liquidator, trustee or similar officer over Lessee, or to wind up Lessee or commence any other insolvency proceedings with respect to Lessee or to have Lessee dissolved by merger; (b) Lessee has the corporate power to enter into and perform, and has taken all necessary corporate action to authorise the entry into, performance and delivery of the Lease and the transactions contemplated by the Lease and the Lease constitutes the legal binding obligations of the Lease, enforceable against the Lessee in accordance with its terms; (c) the entry into and performance by Lessee of, and the transactions contemplated by, the Lease does not and will not: (i) conflict with any laws binding on Lessee; or (ii) conflict with the constitutional documents of Lessee; o (iii) result in the creation of any Security Interest upon any property of Lessee, pursuant to any 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 Lessee is a party or by which Lessee or its properties or assets may be bound or affected; (d) Lessee has obtained all authorizations, consents, licences, approvals and registrations necessary to be obtained from any governmental or other regulatory authorities in [ State ] to enable Lessee: (i) to enter into and perform the transactions contemplated by the Lease; (ii) to import the Aircraft into [ State ]; (iii) to conduct commercial air transport with the Aircraft in, to and from [ State ] in accordance with the applicable [ State's ] rules and regulations; (iv) to effect all payments provided for in the Lease. (e) no registration, recording, filing or notarisation in any public office or elsewhere in [ State ] is necessary and no payment of any tax or duty is necessary to ensure the validity, enforceability or admissibility in evidence of the Lease, or the priority, if any, of the respective rights of Lessor and Lender under the Lease other than [please advise if applicable] and no other instrument is required to ensure the priority, enforceability and validity of the obligations of Lessee under the Lease and the Lease is in proper legal form under the laws of [ State ] for the enforcement thereof, if applicable, in the courts of [ State ]; (f) the Aircraft may be registered on the [ State's ] aircraft registry in the name of Lessor and no other steps are necessary or desirable to record or perfect either Lessor's interest in the Aircraft in [ State ]; (g) a mortgage over the Aircraft may be registered on the aircraft registry in [State] and with [ Name of authority ] for the benefit of Lessor and will upon registration constitute a valid and perfected security over the Aircraft under the laws of [ State ]; (h) upon termination of the Lease in accordance with its terms (whether on expiry or earlier termination) Lessor would be entitled: (i) to repossess the Aircraft without requiring any further permissions or approvals of any regulatory authority in [ State ]; (ii) to de-register the Aircraft from the register of aircraft maintained by the Aviation Authority and to export the Aircraft from [ State ] without requiring any further permissions or approvals of any authority in [ State ] or any further regulators consent from Lessee or any third party, provided no mortgages are registered over the Aircraft, in which case the mortgagees have to consent to the de-registration; (i) the Relevant Documents have been properly signed and delivered on behalf of Lessee and the obligations on the part of Lessee contained therein, assuming them to be valid and binding according to the laws of Sweden, are valid and legally binding on and enforceable against Lessee under the laws of [ State ] and in the courts of [ State ]; (j) the obligations of Lessee under the Relevant Documents are direct, general and unconditional, and rank or will rank at least pari passu with all other present and future unsecured and un-subordinated obligations of Lessee, with the exception of such obligations as are mandatorily preferred by law and not by reason of any security interest; (k) under the laws of [ State ] the execution and delivery of the Relevant Documents, and the carrying out of the transactions thereby contemplated and the observance and performance by all parties of their respective obligations thereunder do not and will not result in any prejudice to or impairment or diminution of Lessor's interest in the Aircraft except for the express rights of possession of Lessee under the Lease; (l) the Lease does not grant to Lessee any title rights in the Aircraft, nor does it give Lessee any capability of passing valid title to a purchaser or to create a mortgage over the Aircraft; (m) Lessee, or any of its properties, assets, are not entitled to claim immunity from suit, execution, attachment or other legal process in [ State ] or any other jurisdiction affecting Lessee; the entry into and performance of the Lease Agreement by the company constitute private and commercial acts; (n) there is no application usury or interest limitation law in [ State ] which restricts the recovery of payments of Default Interest in accordance with the Lease; (o) Lessee is not in default under any agreement to which it is a party or by which is may be bound which 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 Lessee, threatened against it or its assets which would have a material adverse effect on the business, assets or condition (financial or otherwise) of Lessee; (p) the financial position of Lessee is represented by its audited financial statements prepared in accordance with accounting principles generally accepted in [ State ]; (q) it is not necessary under the laws and constitution of [ State ], in order to enable the Lessor to enforce its rights under the Agreement or by reason of the execution of the Agreement or the performance by each of them of its obligation thereunder, that any of them should be licensed, qualified or entitled to carry on business in [ State ]; (r) there are under the laws of [ State ] no present restrictions on Lessee to make the payments required by the Transaction Documents; (s) there are no registration, stamp or other taxes or duties of any kind payable in [ State ] by Lessor in connection with the signature, entering into, registration or performance of the Lease or the registration of title of ownership or a mortgage over the Aircraft except the following: (i) registration of mortgages in [ State ]; (ii) registration of the Lease Agreement; (ii) registration of title or ownership: [ ]; and (iv) registration of the mortgages in the [ Name of Authority ]: [ ]. (t) Lessor will not violate any law or regulation in [ State ] nor become liable to tax in [ State ] by reason of Lessor entering into the Lease with Lessee, or performing its obligations thereunder; (u) the c hoice of the laws of [ Applicable Law ] to govern the [ Lease/Relevant Documents ] is a valid and binding choice of law and will be recognised and applied by the courts of [ State ]; (v) Lessee's submission to the jurisdiction of the courts of [ Relevant Court(s) ] in the Lease is its legally valid and binding obligation; (w) any judgement by the courts of [ Relevant Court(s) ] against Lessee which is enforceable in [ Relevant jurisdiction of Court(s)] is enforceable against Lessee in [ State ] provided [ advise conditions ]; (x) [If relevant] Lessee's submission to arbitration in accordance with the Rules of Conciliation and Arbitration of the International Chamber of Commerce in the Lease is its legally valid and binding obligation; (y) [If relevant] any award by the arbitrators against Lessee, will be enforceable and confirmed by any competent [ State ] Court, as provided by the [ State ] law concerning confirmation of arbitration award by courts, without re-examination or re-litigation of the matter; (z) there is no withholding tax or other tax to be deducted from any payment whatsoever which may be made by the Lessee to the Lessor under the Lease; the provisions in the Lease providing for the full compensation of the Lessor by the Lessee for any amount so withholding (and any amount withheld on such additional compensation) is legally binding upon Lessee and enforceable in accordance with the laws of [ State ]. SCHEDULE 10 MONTHLY AIRCRAFT UTILISATION AND STATUS REPORT To: Indigo Aviation AB (publ) From: Frontier Airlines, Inc. Aircraft Type: Boeing 737-3S1 Registration Mark: N311FL Serial Number: 24856 Month of: _____ - -------------------------------------------------------------------------------- Aircraft Total Time (Flight Hours) Since New: - -------------------------------------------------------------------------------- Aircraft Total Cycles Since New: - -------------------------------------------------------------------------------- Airframe Flight Hours Flown During Month: - -------------------------------------------------------------------------------- Airframe Cycles/Landing During Month: - -------------------------------------------------------------------------------- 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 During Month: Flight Hours During Month: - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Cycles During Month: Cycles During Month: - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Time Since Last Boroscope: Time Since Last Boroscope: - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Time Until Next Boroscope: Time Until Next Boroscope: - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Landing Gear: Time Since Time Since Cycles Since Cycles Since Overhaul: New: Overhaul: New: - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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 x US$ Per Flight = Reserve During Month Hour/Cycle payment - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Airframe: Hours: x = - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Original Engine Hours: x = Serial Number: - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Original Engine Hours: x = Serial Number: - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Total Engines: Hours: x = - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- LLP: Hours: x = - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Landing Gear: Cycles: x = - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- APU: Hours: x = - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Total - -------------------------------------------------------------------------------- SCHEDULE 11 FORM OF QUIET ENJOYMENT LETTER From: [ Lender ] To: [ Lessee ] Dated: [ ] Dear Sirs, [ ] Aircraft bearing Manufacturer's Serial Number [ ] (the Aircraft) equipped with two (2) [ ] Engines bearing Serial Numbers [ ] and [ ] (the Engines) With reference to that certain Aircraft Lease Agreement dated [ ] between [ ] as lessor (Lessor) and [ ] as lessee (Lessee) in relation to the Aircraft and the Engines (the Lease), we, the undersigned, hereby undertake that we shall not by our own acts interfere with Lessee's rights under the Lease during the Lease Term (as defined therein), including without limitation its rights to quiet use, possession and peaceful enjoyment of the Aircraft and the Engines, provided that no Default (as defined in the Lease) shall have occurred and be continuing. - ------------------- signed for and on behalf of [Lender] SCHEDULE 12 RETURN CONDITIONS On the Redelivery Date the Aircraft will be in the same condition as at Delivery, ordinary wear and tear excepted. Location: A city in the continental United States of America (48 contiguous states) reasonably requested by Lessor. Certification: A United States Standard Certificate of Airworthiness suitable for Part 121 operations or an Export Certificate of Airworthiness as requested by Lessor. The Aircraft will be airworthy (conform to type design and be in a condition for safe operation), with all Aircraft equipment, components and systems operating in accordance with their intended use and within limits established by the Aircraft Maintenance Manual. Configuration: An all economy 136 seat interior with a 31" minimum seat pitch. Paint: The Fuselage and the Vertical Stabilizer exterior will be sanded or stripped as needed and painted white. Lessee will install next lessee's logo on the fuselage provided the logo is no more complex than Lessee's logo. If the next lessee's logo is more complex than Lessee's then Lessee and Lessor will mutually agree in writing how the next lessee's logo will be installed. Airframe: Fresh from next due Block C Check, excluding hours and cycles used on the demonstration / Ferry Flights, with a minimum of 15,000 hours remaining until the next due C7 Check /Structural Inspection. A. The Aircraft will have no deferred maintenance items, unique inspections or temporary repairs at Redelivery. B. Modifications and Repairs installed on the Aircraft since Delivery will have been accomplished in accordance with FAA approved data. C Aircraft will be in compliance with the Manufacturer's CPC program D: If available, any No Charge Service Bulletin Kits not installed by Present Lessee will be loaded onboard the Aircraft as cargo. E. Fuel tanks will be free from contamination. Engines: Each Engine will have at least 3,000 hours and cycles remaining until next anticipated performance restoration shop visit and have at least a minimum of 3,000 hours and 3,000 cycles remaining until the next LLP limiter at 3B2 Power (22,000 Lbs Thrust). Each Engine will pass a Performance Engine Run in accordance with the Aircraft Maintenance Manual. Each Engine will pass a hot and cold section borescope inspection. In addition, at redelivery, if the remaining life on any LLP installed in each Engine is higher than the remaining life on such LLP at the time of Delivery, and if Lessee has not fully recovered its additional investment in LLP's by way of reserve abatement as provided in the Side Letter, then Lessor will compensate Lessee. If the remaining life on any LLP is lower than at the time of Delivery, Lessee will compensate Lessor, provided that in any event, Lessee meets the minimum redelivery condition as set forth above, such compensation will be based upon the CFMI catalogue price for each LLP and will be capped at a maximum compensation, either way, of US$ 500,000 for both Engines. APU: Serviceable and passing a borescope inspection. Components: Each component that is time controlled will have at least 3,000 hours or cycles remaining until next inspection/ overhaul. Each component that is calendar controlled will have at least 12 months remaining until its next inspection/overhaul. Condition Monitored/On Condition components will be serviceable. Landing Gear: Each Landing Gear will have at least 12,000 cycles remaining until the next inspection or overhaul. Airworthiness Directives (AD's): Airworthiness Directives requiring compliance on or before Redelivery will be in compliance. Demonstration Flight: Lessee will perform a one and one half hour flight demonstrating the satisfactory operation of the aircraft with no more than two observers, as designated by Lessor, on board during such Demonstration Flight. Records: Documentation delivered to lessee at Delivery will be returned to Lessor along with the up to date Aircraft Maintenance Records that the Lessee has collected during the Lease Term. Aircraft Documentation Lessee will prepare the Aircraft Documents in one location at least ten (10) days prior to redelivery of the Aircraft. The Aircraft Documents, as identified in Annexure 1 to the Acceptance Certificate, will be redelivered in their latest revision to Lessor at the Redelivery Date. SCHEDULE 13 RETURN ACCEPTANCE CERTIFICATE 1. Frontier Airlines, Inc. (Lessee) and Indigo Aviation AB (publ) (Lessor) have entered into an Aircraft Lease Agreement dated __ June 1999, (Lease). Unless otherwise defined, capitalised terms used herein will have the meanings set forth in the Lease. 2. Lessor has this _____ day of ______ (Time: _____) at _______ received from Lessee possession of: (a) one (1) Boeing 737-3S1 Aircraft, bearing manufacturer's serial number 24856, registration mark N311FL together with two (2) CFM56-3C1 engines bearing serial numbers 724667 and 725630, 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 hours Total landings Since last "C" Check Since last "A" Check ______ _____ ______ Flight Hours _____ Flight Hour _______ Cycles _____ Cycles (b) Engines: Position Serial No. Total Flight Total Cycles Since last Since last Hours shop visit 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 remaining on turbine HSI 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 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 return: ___kilos (____ gallons) 4. Other technical information regarding the Aircraft and its components are correctly set forth on the Aircraft report attached hereto. 5. The above specified Aircraft, Engines and documents are hereby accepted by Lessor subject to: (a) the provisions of the Lease; and (b) correction by Lessee of the discrepancies specified in Annex 2 hereto (which correction Lessee hereby undertakes to perform as soon as reasonably possible). 6. Subject to Paragraph 7, the leasing of the Aircraft by Lessor to Lessee pursuant to the Lease is hereby terminated without prejudice to Lessee's continuing obligations under the Lease including, without limitation, Clauses 19 and 20. 7. Lessee represents and warrants that during the term of the Lease all maintenance and repairs to the Airframe and Engines were performed in accordance with the requirements contained in the Lease. Lessee further confirms that all of its obligations under the Lease whether accruing prior to the date hereof or which survive the termination of the Lease by their terms and accrue after the date hereof, will remain in full force and effect until all such obligations have been satisfactorily completed. Lessee represented that the documents delivered and listed in Annex 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. FRONTIER AIRLINES, INC. By: Title: INDIGO AVIATION AB (PUBL) By: Title: ATTACHMENTS: Annexure 1. Aircraft Documents Annexure 2. List of Discrepancies Annexure 1 AIRCRAFT DOCUMENTS Note: This Annexure 1 is to be used for reference purposes only. The Aircraft Documents will be more closely identified in Annexure 1 to the Acceptance Certificate. A. Certificates - - Certificate of Airworthiness - - Certificate of Registration - - Noise Certificate - - Radio License B. Aircraft Status Records - - Technical Log Book - - Airframe Maintenance Status Report - - Manufacturer's Service Bulletin Status Report - - Airworthiness Directive Compliance Report (terminated and repetitive) - - Local Modification Status Report List with Substantiating Data - - Last Weighing Report - - Repair Datas Structural Repairs C. Aircraft Maintenance Records - - Test Flight Reports - - Last Boeing "C" check and maintenance check Work Cards for each "C" check multiple (or segment) D. Aircraft History Records - - Aircraft Structural Repair History (if applicable) - - Service Difficulty Report (if applicable) - - Accident or Incident Report (if applicable) E. Engine Records (for each engine) - - Log Books - - Last overhaul and repair documents for each module - - Airworthiness Directive Compliance Report (terminated and repetitive) - - Manufacturer's Service Bulletin Status Report - - Engine Disk Sheet - - Engine Data Submittal Sheet - - Condition Monitoring Status Report F. APU Records - - Log Book - - Last overhaul and repair documents - - Manufacturer's Service Bulletin Status Report G. Component Records (including components installed engines and APU) - - Time Controlled Component Status Report with remaining hours and cycles (if applicable) - - Serviceability tags or back-up documentation for components replace since delivery from Boeing H. Manuals 1. Airplane Flight Manual 2. Quick Reference Handbook 1. Aircraft Operating Manual 1. Weight and Balance Manual Supplement 1. Wiring Diagram Manual (microfilm) 1. Illustrated Parts Catalog (microfilm) 1. Aircraft Maintenance Manual (microfilm) 1. CFMI Illustrated Parts Catalog 1. Vendor Manual Seats 1. Vendor Manual Galleys 1. Vendor Manual Ovens 1. Vendor Manual Coffeemakers I. Miscellaneous Technical Documents - - Maintenance Program Specifications/Requirements - - Interior Configuration Drawings - - Loose Equipment Inventory List - - Delivery documentation ex Boeing - - Export Certificate of Aircraft - - Aircraft Readiness Log - - Rigging Record Brochure - - Miscellaneous Delivery Record Brochure - - Fuel Measuring Stick Calibration Brochure - - FAA Airworthiness Directive Compliance Record Annexure 2 Discrepancies SCHEDULE 14 LEASE SUPPLEMENT LEASE SUPPLEMENT NO. 1 dated June __, 1999, between Indigo Aviation AB (publ) (the "Lessor") and FRONTIER AIRLINES, INC. (the "Lessee"). Lessor and Lessee have previously entered into that certain Aircraft Lease Agreement dated as of June __, 1999 (herein called the "Lease" and the defined terms therein being hereinafter used with the same meaning). The Lease provides for the execution and delivery from time to time of a Lease Supplement substantially in the form hereof for the purpose of leasing the aircraft described below under the Lease as and when delivered by Lessor to Lessee in accordance with the terms thereof. The Lease relates to the Aircraft, Parts and Engines as more specifically described below. A counterpart of the Lease is attached hereto and this Lease Supplement and the Lease shall form one document. In consideration of the premises and other good and sufficient consideration, Lessor and Lessee hereby agree as follows: 1. Lessor hereby delivers and leases to Lessee under the Lease and Lessee hereby accepts and leases from Lessor under the Lease, that certain used Boeing Model 737-3S1 Aircraft bearing FAA Registration Mark N372TA (to be changed to N311FL), including the Airframe bearing manufacturers serial number 24856 and the two (2) CFM INTERNATIONAL CFM 56-3C1 Engines bearing manufacturer's serial numbers 724667 and 725630 described in Schedule 1 herewith ("Delivered Aircraft"). 2. The Delivery Date of the Aircraft is the date of this Lease 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 Lease Expiry Date. 4. The amount of Rent for the Aircraft is set forth in the Lease and is payable as provided in the Lease. 5. Lessee hereby confirms to Lessor that (i) the Aircraft and each Engine installed thereon or belonging thereto have been duly marked in accordance with the terms of Clause 12.12 of the Lease, (ii) Lessee has inspected the Aircraft and the Aircraft satisfies the conditions set forth in the Lease and (iii) Lessee has accepted the Aircraft for all purposes hereof and of the Lease. 6. All of the terms and provisions of the Lease are hereby incorporated by reference in this Lease Supplement to the same extent as if fully set forth herein. 7. This Lease Supplement may be executed in any number of counterparts, each of such counterparts, except as provided on the front page of the Lease, shall for all purposes be deemed to be an original; and all such counterparts shall together constitute but one and the same Lease Supplement. 8. This Lease Supplement has been delivered in New York. SIGNATURE PAGE IN WITNESS WHEREOF, Lessor and Lessee have caused this Lease Supplement to the Lease to be duly executed as of the day and year first above written. LESSOR, INDIGO AVIATION AB (PUBL) By: Title: LESSEE, FRONTIER AIRLINES, INC. By: Title: EX-10 9 SEVERANCE AGREEMENT March 10, 1999 Samuel D. Addoms 1900 Fairfax Street Denver, CO 80220 RE: Severance Agreement Dear Sam: Frontier Airlines, Inc. (the "Company") considers it essential to the best interests of its shareholders to foster the continuous employment of key management personnel. In order to induce you to remain in the employ of the Company and in consideration of your agreement set forth in Section 3 hereto, the Company agrees that you shall receive the severance benefits set forth in this letter agreement ("Agreement") in the event your employment with the Company is terminated as set forth below. 1. Term of Agreement. This Agreement shall commence on the date hereof and shall continue in effect until all payments and deliveries required hereunder are made or are no longer applicable. 2. Compensation Upon Termination. If your employment as Chief Executive Officer of the Company is terminated (i) involuntarily, except in circumstances where such termination is due to your willful misconduct or gross neglect of duty, (ii) by your resignation with the prior consent of the Company's Board of Directors (the "Board"), (iii) by your disability, or (iv) by your death (each a "Termination"), then you shall be entitled to the benefits provided below: (A) For each of the two years following a Termination, the Company shall pay to you (or your estate), in equal monthly installments, your then current annual base salary. (B) For the period commencing two years following a Termination and ending on your 65th birthday (or in the event you die prior to such date, the date on which you would have become 65 years old), the Company shall pay to you (or your estate), in equal monthly installments, $50,000 per year. (C) On the date of a Termination, the Company shall issue to you (or your estate) a stock option or warrant to purchase 100,000 shares of the Company's Common Stock with an exercise price equal to the market price of such Common Stock as of the date of the Termination. The stock option or warrant shall be exercisable for a period of five years. (D) The Company shall provide to you and your spouse free lifetime positive space air transportation on the Company's airline and shall ensure that any successor airline to the Company provides such air transportation. (E) The Company shall provide to you and your eligible dependents group health, life insurance and any other benefits as are provided from time-to-time by the Company to its officers and at rates to you as are charged to such officers. (F) The Company shall also pay to you all legal fees and expenses incurred by you in successfully obtaining or enforcing any right or benefit provided by this Agreement or in connection with any tax audit or proceeding to the extent attributable to the application of Section 4999 of the Internal Revenue Code of 1986, as amended (the "Code") to any payment or benefit provided hereunder. (G) In the event that you become entitled to the payments (the "Severance Payments") provided under paragraphs (A), (B), (C), (D), (E) and (F) above and if any of the Severance Payments will be subject to the tax (the "Excise Tax") imposed by Section 4999 of the Code, the Company shall pay to you upon demand, an additional amount (the "Gross-Up Payment") such that the net amount retained by you, after deduction of any Excise Tax on the Severance Payments and any federal income tax and Excise Tax upon the Gross-Up Payment, shall be equal to the Severance Payments. For purposes of determining whether any of the Severance Payments will be subject to the Excise Tax and the amount of such Excise Tax, (i) the Severance Payments shall be treated as "parachute payments" within the meaning of Section 280G(b)(2) of the Code, and all "excess parachute payments within the meaning of Section 280G(b)(2) of the Code, and all Excess parachute payments" within the meaning of Section 280G(b)(1) shall be treated as subject to the Excise Tax, unless in the opinion of tax counsel selected by the Company's independent auditors and acceptable to you such other payments or benefits (in whole or in part) do not constitute parachute payments, or such excess parachute payments (in whole or in part) represent reasonable compensation for services actually rendered within the meaning of Section 280G(b)(4) of the Code in excess of the base amount within the meaning of Section 280G(b)(3) of the Code, or are otherwise not subject to the Excise Tax, (ii) the amount of the Severance Payments which shall be treated as subject to the Excise Tax shall be equal to the lesser of (A) the total amount of the Severance Payments or (B) the amount of excess parachute payments within the meaning of Section 280G(b)(1) (after applying clause (i), above), and (iii) the value of any non-cash benefits or any deferred payment or benefit shall be determined by the Company's independent auditors in accordance with the principles of Sections 280G(d)(3) and (4) of the Code. For purposes of determining the amount of the Gross-Up Payment, you shall be deemed to pay federal income taxes at the highest marginal rate of federal income taxation in the calendar year in which the Gross-Up Payment is to be made. In the even that the Excise Tax is subsequently determined to be less than the amount taken into account hereunder at the time of termination of your employment, you shall repay to the Company at the time that the amount of such reduction in Excise Tax is finally determined the portion of the Gross-Up Payment attributable to such reduction (plus the portion of the Gross-Up Payment attributable to the Excise Tax and federal income tax imposed on the Gross-Up Payment being repaid by you if such repayment results in a reduction in Excise Tax and/or a federal income tax deduction) plus interest on the amount of such repayment at the rate provided in Section 1274(b)(2)(B) of the Code. In the event that the Excise Tax is determined to exceed the amount taken into account hereunder at the time of the termination of your employment (including by reason of any payment the existence or amount of which cannot be determined at the time of the Gross-Up Payment), the Company shall make an additional gross-up payment in respect of such excess (plus any interest payable with respect to such excess) at the time that the amount of such excess is finally determined. (ii) You shall not be required to mitigate the amount of any payment provided for in this Section 2 by seeking other employment or otherwise, nor shall the amount of any payment or benefit provided for in this Section 2 be reduced by any compensation earned by you as the result of employment by another employer, by retirement benefits, by offset against any amount claimed to be owed by you to the Company, or otherwise. (iii)In addition to all other amounts payable to you under this Section 2, you shall be entitled to receive all benefits payable to you under any other plan or agreement relating to retirement benefits. 3. Consulting; Non-Competition. (i) During the period beginning on the date of your Termination and ending on your 65th birthday (or such earlier date on which you die or become disabled), you shall remain reasonably available to provide consulting services to the Company. (ii) During the period beginning on the date of your Termination and ending on your 65th birthday, you shall not become employed by, or provide consulting services to, any air carrier that competes with the Company without the Company's prior written permission. Should you provide such consulting services without the Company's prior written permission, all Severance Payments shall thereupon immediately terminate. 4. Successors: Binding Agreement. (i) This Agreement shall be binding against any successor (whether direct or indirect, by purchase, merger, consolidation, reorganization or otherwise) to all or substantially all of the business and/or assets of the Company. (ii) This Agreement shall inure to the benefit of and be enforceable by your personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees. If you should die while any amount would still be payable to you hereunder if you had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to your devises, legatee or other designee or, if there is no such designee, to your estate. 5. Notices. For the purpose of this Agreement, notices and all other communications provided for in the Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered mail, return receipt requested, postage prepaid, addressed to the respective addresses set forth on the first page of this Agreement, provided that all notices to the Company shall be directed to the attention of the Board with a copy to the Secretary of the Company, or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notice of change of address shall be effective only upon receipt. 6. Miscellaneous. No provision of this Agreement may be modified, waived or discharged unless such waiver, modification or discharge is agreed to in writing and signed by you and such officer as may be specifically designated by the Board. No waiver by either party hereto at any time of any breach by the other party hereto of, or compliance with, any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not expressly set forth in this Agreement. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of Colorado. All references to Sections of the Code shall be deemed also to refer to any successor provisions to such Sections. Any payments provided for hereunder shall be paid net of any applicable withholding required under federal, state or local law. 7. Validity. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 8. Counterparts. This Agreement may be executed in several counterparts, each of which shall be deemed to be an original, but all of which together will constitute one and the same instrument. If this letter sets forth our agreement on the subject matter hereof, kindly sign and return to the Company the enclosed copy of this letter which will then constitute our agreement on this subject. Sincerely yours, FRONTIER AIRLINES, INC. By: B. LaRae Orullian Chair of the Board By: Arthur T. Voss Vice President and General Counsel ACCEPTED AND AGREED TO as of this, the 10th day of March, 1999 Samuel D. Addoms EX-10 10 SPACE AND USE AGREEMENT SPACE AND USE AGREEMENT Continental Airlines, Inc. ("CONTINENTAL"), by its execution of this Space and Use Agreement ("The Agreement"), grants to Frontier Airlines, Inc. (the COMPANY"), under the terms and conditions stated herein, certain rights and privileges, including the right to occupy and use the space referred to herein as the "PREMISES." COMPANY, by its execution hereof, hereby accepts and receives the PREMISES and the obligations, liabilities and responsibilities provided for herein. COMPANY covenants and agrees to abide by and carry out all the terms, conditions and provisions hereof. "COMPANY," as used herein, shall include, unless stated otherwise, the directors, officers, employees, agents, customers and invitees of COMPANY and all parties representing COMPANY, those for whom COMPANY is liable and responsible, and all parties represented by COMPANY. 1. EFFECTIVE DATE January 1, 1999 2. COMPANY: The name, address and telephone number of the COMPANY are as follows: NAME: Frontier Airlines, Inc. ADDRESS: 12015 East 46th Avenue Denver, CO 80239 TELEPHONE: 303-371-7400 ATTENTION: Joan Osterman 3. DESCRIPTION OF PREMISES: Certain maintenance hangar space (approx. 59,706 sq. ft.) within the Denver International Airport, being more fully described on Exhibit A, attached hereto and made a part of, as well as reasonable right of ingress and egress. 4. USE OF PREMISES: COMPANY is hereby granted the right to use the PREMESISES, in accordance with the terms and conditions stated herein, for the following purposes: Exclusion use of the PREMISES (Exhibit A) for the purpose of maintenance space in accordance with the terms and conditions of this Agreement, and for no other purpose. Company is permitted, on a space available basis, the common use of training rooms, break rooms, locker room/restrooms, loading dock, parking areas, and a pro-rata share of apron space. 5. PROPERTY OWNER: City and County of Denver, hereinafter referred to as "OWNER," has granted to CONTINENTAL, the right to use the PREMISES and certain other rights and privileges under the following Lease, hereinafter referred to as the "BASE LEASE": Lessor: City and County of Denver Lessee: Continental Airlines, Inc. Dated: January 8, 1993 CONTINENTAL warrants and represents that as of the date hereof, the BASE LEASE is in full force and effect. 6. CONSIDERATION/RENTAL: In consideration for the rights granted by CONTINENTAL hereby, COMPANY, agrees to pay $1,200,000.00 annually to Continental Airlines, Inc., in monthly installments of $100,000.00 paid in advance on the first day of each calendar month. COMPANY further agrees to pay as additional rental any increases in rental charges to CONTINENTAL under the BASE LEASE or any amendments thereto. Payment shall be delivered to CONTINENTAL at: CONTINENTAL AIRLINES, INC CREDIT MANAGEMENT P.O. BOX 100023 HOUSTON, TX 77212 ATTENTION: OUTSIDE SALES & SERVICE - DEN Hangar Sublease 7. TERM: This Agreement shall commence January 1, 1999 and shall continue through January 1, 2004, unless otherwise terminated in accordance with the terms and provisions hereof. Either party hereto shall have the right to terminate this Agreement without cause at any time by giving the other party three hundred sixty-five (365) days prior written notice of its intention to do so. If, at the expiration of the Term, COMPANY fails to vacate the PREMISES, then COMPANY shall be deemed a holdover tenant on all of the terms and conditions of this Agreement (except that, without limiting the rights provided to CONTINENTAL under this Agreement for a breach by COMPANY, the monthly rental payable by COMPANY shall be two hundred percent (200%) of the monthly rent provided for herein) and CONTINENTAL reserves the right to evict COMPANY without further process of law. 8. NOTICE: unless expressly required or permitted herein to be oral, all notices, requests, consents and approvals required to be given to or by either party shall be in writing, and shall be transmitted either by a commonly recognized national delivery service or deposited as prepaid, certified, registered or express United States mail addressed as follows, or to the last address provided in accordance herewith: TO CONTINENTAL: TO COMPANY: Vice President Frontier Airlines, Inc. Corporate Real Estate Properties & Facilities Continental Airlines, Inc. 12015 East 46th Avenue 1600 Smith St. - Dept. HQSPF Denver, CO 80239 Houston, TX 77002 9. SECURITY DEPOSIT: Concurrently with the execution of this Agreement, COMPANY shall deliver to CONTINENTAL, as a Security Deposit, $100,000.00, which amount may be commingled with other funds belonging to CONTINENTAL and shall bear no interest. After a default by COMPANY, CONTINENTAL may apply any or all of the Security Deposit to cure such default as provided in Section 17 hereof. 10. ADDITIONAL RENTAL/CHARGES/FEES: A) The COMPANY shall be solely responsible for and shall pay when due directly to the OWNER any and all fees, assessments, taxes and charges of any kind whatsoever assessed in connection with COMPANY'S operations, including but not limited to any applicable taxes and property facility charges. 11. INSURANCE COVERAGE REQUIREMENTS: Without limiting COMPANY's obligation to indemnify CONTINENTAL as provided for in this Agreement, COMPANY shall procure and maintain, at its own cost, at all times during the term of this Agreement, insurance of the following types and in amounts not less than those indicated, with responsible insurers satisfactory to CONTINENTAL providing the following coverage: DESCRIPTION A. Aviation and Comprehensive General Per Occurrence and with Liability to include operations and aggregate as applicable: Premises Liability $1,000,000,000* combined single limits covering bodily injury, property damage *or COMPANY limits if higher B. Worker's Compensation Statutory C. Employer's Liability $1,000,000 12. SPECAIL PROVISIONS: a) CONTINENTAL will use reasonable efforts to provide janitorial, maintenance, and utility services for the common use PREMISES (with exception to gas and electricity to entire PREMISES), but should not be held liable if such services are interrupted from time to time. b) COMPANY will be solely responsible for the cost of all tenant improvements. All tenant improvements are subjects to the prior written consent of the Vice President, Corporate Real Estate. 13. BAILMENT During the term of this Agreement, an employee or agent of COMPANY shall at all times be in charge of and in custody and control of all aircraft and other property belonging to or in the control of COMPANY on or in the vicinity of the PREMISES, and the parties hereby stipulate and agree that this agreement does not confer upon CONTINENTAL any control over or obligation of bailment with respect to any aircraft or other equipment owned or operated by COMPANY, and does not subject CONTINENTAL to any of the liabilities of an OWNER, user, lessor or operator of any aircraft or other equipment owned or operated by COMPANY. 14. SUBJECT TO BASE LEASE COMPANY covenants and agrees, for the benefit of CONTINENTAL and OWNER, that it shall not, by its use and occupancy of the PREMISES, violate any of the provisions of the BASE LEASE as such BASE LEASE has been and/or may from time to time be amended, or cause CONTINENTAL to be in default thereof, and that it shall faithfully perform and discharge all of the obligations of CONTINENTAL (except for payment of rental) thereunder, to the extent that such BASE LEASE terms are applicable to the PREMISES or this Agreement COMPANY further covenants that this Agreement shall be, in all respects, subject and subordinate to the BASE LEASE, and any mortgages or other lien instruments that may affect the PREMISES or CONTINENTAL'S interest therein, and nothing contained in this Agreement shall be deemed to confer upon COMPANY any right which are not granted by or are in conflict with the BASE LEASE. Not withstanding anything contained herein, (a) this Agreement shall not be deemed to grant to the COMPANY any rights or privileges which CONTINENTAL does not have under the BASE LEASE, and (b) any act or omission of CONTINENTAL require by the BASE LEASE shall in no event be deemed a violation of this Agreement. 15. ACCEPTANCE OF PREMISES COMPANY HAS INSPECTED THE PREMISES AND ACKNOWLEDGES THAT CONTINENTAL HAS MADE NO REPRENSENTATIONS AS TO THE CONDITION THEREOF. COMPANY ACCEPTS THE PREMISES IN ITS PRESENT CONDITION, AS-IS, WITH ALL FAULTS, LATENT OR KNOWN. CONTINENTAL MAKES NO WARRANTIES, GUARANTEES OR REPRENSENTAIONS OF ANY KIND, EITHER EXPRESS OR IMPLIED, ARISING BY LAW OR OTHERWISE, PERTAINING TO THIS AGREEMENT OR THE PROPERTY DESCRIBED HEREIN. COMPANY HEREBY WAIVES AND CONTINENTAL EXPRESSLY DISCLAIMS ALL WARRANTIES, GUARANTEES AND REPRESENTATIONS, EXPRESS OR IMPLIED, ARISING BY LAW OR OTHERWISE, INCLUDING NUT NOT LIMITING THE GENERALITY OF THE FOREGOING, ANY IMPLIED WARRANTY OF FITNESS FOR A PARTICULAR PURPOSE OR REGARDING THE CONDITION OF THE PROPERTY. IN NO EVENT SHALL CONTINENTAL=S LIABILITY OF ANY KIND UNDER THIS AGREEMENT INCLUDE ANY SPECIAL, INCIDENTAL, CONSEQUENTIAL OR EXEMPLARY DAMAGES EVEN IF CONTINENTAL SHALL HAVE BEEN ADVISED OF THE POSSIBILITY OF POTENTIAL LOSS OR DAMAGE. 16. PAYMENTS If the term of this Agreement shall commence or end on any day other than the first and last day, respectively, of a calendar month, the consideration due for a portion of a month shall be prorated on a per-diem basis, and the first payment shall be due on or before the effective date hereof. Any unpaid or past due amounts shall bear interest from the date due until paid, at 1-1/2% per month, or, at CONTINENTAL's option, the maximum rate allowable by law, which interest shall be considered as part of the rental payable hereunder. Acceptance by Continental of any partial payment, including endorsement of a check, shall not be deemed to be an accord and satisfaction. Continental may accept such check or payment without prejudice to it's right to recover the balance due or to pursue any other remedy available to it. 17. USE OF SECURITY DEPOSIT A. If at any time during the term of this Agreement, any of the rent herein reserved, or any other amounts due from COMPANY shall be overdue or unpaid, or in the event of failure by COMPANY to keep and perform any of the terms, covenants and conditions of this Agreement to be kept and performed by COMPANY, then CONTINTENTAL, at its option, may appropriate and apply the entire Security Deposit, or any portion thereof (I) to the payment of such overdue amounts, and (ii) as compensation to CONTINENTAL for any loss or damage sustained or suffered by CONTINENTAL due to such breach on the part of COMPANY. Should CONTINENTAL withdraw any amount from the Security Deposit as provided herein, COMPANY shall remit to CONTINENTAL, upon written demand therefor, an amount sufficient to fully replenish the Security Deposit. B. COMPANY'S failure to remit any increase in, or any replenishment of the Security Deposit, as required herein, within five (5) days of written notice of funds due, shall constitute a default hereunder, entitling CONTINENTAL to immediately invoke the remedies available to it by law and this Agreement, including immediate termination of this Agreement. C. Within thirty (30) days after expiration or other termination of this Agreement, and upon vacation of the PREMISES and satisfaction of any and all events of default by COMPANY, including payment of all amounts due and past due, the Security Deposit shall be returned in full to COMPANY. D. In the event any bankruptcy, insolvency, reorganization or other creditor-debtor proceedings shall be instituted by or against COMPANY, the Security Deposit shall be deemed to be applied first to any rents and/or other charges due CONTINENTAL for all periods prior to the institution of such proceedings, and the balance, if any, of Security Deposit may be retained by CONTINENTAL in partial liquidation of CONTINENTAL'S damages. E. COMPANY covenants and agrees that it shall not assign or encumber a r attempt to assign or encumber the Security Deposit, and that CONTINENTAL shall not be bound by any such assignment, encumbrance or attempt to assign or encumber. 18. UTILITIES CONTINENTAL shall furnish the PREMISES with utilities and services to the extent that they are furnished to Continental under the BASE LEASE. Continental shall not be liable for, and COMPANY hereby releases and waives any claims against CONTINENTAL resulting from any failure or interruption of such services. COMPANY shall pay Continental, as additional rent, for any extraordinary electrical, gas or water consumption, and any utility costs attributed to equipment installed by COMPANY. 19. CONDUCT AND WASTE COMPANY, in its use of the PREMISES, covenants and agrees that it shall: A. Conduct its operations in an orderly and proper manner. COMPANY shall not create, generate or permit the creation or generation of vibrations that might tend to damage the PREMISES; loud noises; the emission of steam, gases or unpleasant or noxious odors; nor in any manner annoy, disturb or be offensive to other tenants of the PREMISES and common areas. B. Be responsible for the conduct, appearance and behavior of its officers, employees, agents, contractors, customers and invitees on and in the vicinity of the PREMISES, and upon objection from CONTINENTAL or OWNER, shall immediately make every reasonable effort to eliminate any unsatisfactory conduct, appearance or behavior. C. Not allow garbage, debris or other waste materials (whether solid, liquid or gaseous) to collect or accumulate on or in the PREMISES or in access or service areas. COMPANY shall remove debris and other waste materials form the PREMISES in accordance with all applicable regulations governing such activity. COMPANY shall keep all lobbies, vestibules and steps with in the PREMISES free from dirt and rubbish. D. It is intended that the standards and obligations imposed by this section shall be maintained and complied with by COMPANY in addition to its compliance with any present and future governmental laws, rules and regulations. 20. SECURITY COMPANY shall adopt and enforce appropriate procedures to prevent unauthorized access to CONTINENTAL'S operations areas and aircraft, on the part of its passengers, employees, vendors, licenses, and invitees. Such procedures shall include, without limitation, a requirement that all COMPANY's employees visibly display a photographic identification badge on their person at all times while within an area covered by this Agreement which is not open to the general public, and a requirement that all passengers and other persons who are present in such an area be in the COMPANY of, and escorted by, a properly identified employee of COMPANY. COMPANY further agrees to indemnify, defend and hold CONTINENTAL harmless with respect to any fine, levy or penalty which may be imposed upon CONTINENTAL by the Federal Aviation Administration or any other government authority for violation of any law or regulation pertaining to aircraft or airport security as a result of ant act or omission on the part of COMPANY, such indemnity to include all attorney's fees and other costs of defense incurred in connection therewith. 21. GOVERNMENTAL REQUIREMENTS COMPANY covenants and agrees, at its sole expense, including payment of fees and deposits, to procure from all governing authorities asserting jurisdiction over the operations of COMPANY, all licenses, certificates, permits or other authorization which may be necessary for the conduct of its operations. COMPANY shall at all times promptly observe, comply with and execute the provisions of any and all present and future federal, state and local laws. Rules, regulations, requirements, orders and directions which may pertain or apply to the operations of COMPANY and its occupancy of the PREMISES. 22. RULES, REGULATIONS AND ADMINISTRATION COMPANY shall be responsible for initiating, maintaining and supervising safety precautions and programs necessary to prevent injury to persons and damage to property in, on or about the PREMISSES, and shall observe and obey all present and future rules and regulations issued by CONTINENTAL and OWNER for the conduct of tenants and subtenants at the PREMISES, including but not limited to those regulating preservation and security of the PREMISES. 23. MAINTENANCE AND REPAIRS A. Any construction, addition to, or alteration of the PREMISES required by COMPANY shall be made by COMPANY at its sole cost and expense, only upon prior written approval by CONTINENTAL, and if required under the BASE LEASE, OWNER, and shall, upon expiration or termination of this Agreement, at CONTINENTAL's option, be promptly removed, with any damage caused thereby repaired, at COMPANY's sole cost and expense. B. COMPANY covenants and agrees to maintain the PREMISES, and shall at its sole cost and expense, make any installations, non-structural repairs, replacements, redecorating and other maintenance necessary to keep the PREMISES, and all equipment, fixtures, furnishings and signs therein, in a clean, neat and orderly condition, save and except (I) normal wear and tear that could not have been prevented by, reasonable repair and maintenance; and (ii) damage by fire or other casualty and acts of God or other events of Force Majeure. All maintenance and repair work undertaken by COMPANY shall be performed in a good and workmanlike manner, in accordance with standards of the facility and of a quality and class not inferior to the original material and workmanship, leaving the PREMISES free of liens for labor and materials. C. In the event that, within ten (10) days of receipt of written notice from CONTINENTAL or OWNER that a repair is necessary, COMPANY fails to commence and diligently continue to complete such repair, CONTINENTAL, without obligation to do so, may make such repair, and COMPANY shall promptly reimburse CONTINENTAL for all costs and expenses incurred thereby. D. COMPANY covenants and agrees to maintain the PREMISES and conduct its operations in such a manner that at no time shall it do or permit to be done any act or thing in, on or in the vicinity of the PREMISES which will invalidate or conflict with any fire and casualty insurance policies covering the PREMISES, or any part thereof, or which may create a hazardous condition or otherwise increase the risk normally attendant upon the operations contemplated hereunder. COMPANY shall promptly observe and comply with all present and future rules, regulations and orders of the Fire Underwriters Association or of any other board or organization which may exercise similar functions. E. Any increase in fire or casualty insurance premiums attributable to COMPANY's acts or omissions under this Agreement, shall be promptly reimbursed by COMPANY, upon receipt of CONTINENTAL's and/or OWNER's invoice therefor. 24. SURRENDER Upon expiration or other termination of this Agreement in accordance with the provisions herein, COMPANY shall remove all signs, trade fixtures and any other personal property, repair all damage caused by removal, and surrender the PREMISES in the clean, neat and orderly condition required herein. In the event COMPANY fails to surrender possessions as required herein, CONTINENTAL may reenter and repossess the PREMISES without further notice, any personal property therein being deemed abandoned by COMPANY. COMPANY hereby waives service of any notice of intention to reenter and right to redeem that may be granted by applicable law. 25. RIGHT OF ENTRY CONTINENTAL reserves the right for itself and OWNER to enter upon the PREMISES at any time during an emergency to take such action as may be required for the protection of persons and property, and for any other reasonable purpose, including without limitation, as access to and egress from areas other than the PREMISES, and to perform such functions as may be necessary for the maintenance and operation of the PREMISES, for inspection, repairs, alterations and improvements, and showing to prospective tenants. Such activity shall not be cause for abatement of any amount payable to CONTINENTAL by COMPANY, and the term of this Agreement shall not thereby extend. CONTINENTAL shall make a reasonable effort to minimize interference with COMPANY's operations during such activity. 26. TAXES AND FEES COMPANY agrees to pay, before they become delinquent, all taxes (both general and special), and all assessments, fees and charges of any kind whatsoever, levied or assessed against the leasehold estate created hereby in the PREMISES, any property of COMPANY located thereon, and any business conducted by COMPANY thereon. COMPANY agrees to use its best efforts to cause the leasehold estate in the PREMISES, and its personal property and business operations to be assessed and taxed separately from the BASE LEASE and the PREMISES. On demand by CONTINENTAL, COMPANY shall furnish CONTINENTAL with satisfactory evidence that such payments required from COMPANY have been made. In the event that Continental shall be assessed any taxes or fees relative to the leasehold estate in the PREMISES or any of COMPANY's leasehold improvements, equipment, furniture, fixtures, personal property or business operations, COMPANY shall reimburse such amount to CONTINENTAL within five (5) days after receipt of a written statement thereof. 27. FORCE MAJEURE Notwithstanding anything to the contrary herein contained, neither party shall be deemed in violation of this Agreement if it is prevented from performing any of its obligations hereunder, except making rental and any other payments due, by any labor or industrial dispute; civil disturbance; vandalism or act of a public enemy; shortage of labor, energy or material; court order, regulation, action or non-action of any governmental authority; weather condition; natural disaster; act of God; or other circumstance not reasonably within its control, and which, with the exercise of due diligence, it is unable to overcome; provided, however, that nothing in this Section 27 shall extend the time for performance by COMPANY unless the time for performance by CONTINENTAL is extended for such reason under the BASE LEASE. Each party shall give the other immediate notice of such interruption, shall make all reasonable efforts to eliminate it as soon as possible, and at its conclusion, shall resume performance in accordance with its obligations hereunder. Neither party shall be required by the foregoing to settle or compromise any strike or other labor dispute. 28. RELATIONSHIP The relationship between COMPANY and CONTINENTAL shall be that of independent contractor for all purposes and nothing herein shall be construed to create or imply an employer/employee, agency, partnership, joint venture or other relationship, it being acknowledged that each of the parties is engaged in its own separate and distinct business, and is not under the control of the other party in the performance of the agreements herein contained. No person employed by either shall be held or construed to be an employee or agent of the other under any circumstances. Each party assumes full responsibility for any and all liability to its own employees on account of injury, or death resulting therefrom, sustained in the course of their employment. Each party, with respect to its own employees, accepts full and exclusive liability for payment of Workers' Compensation and employer's liability insurance premiums with respect to such employees, and for payment of all taxes, contributions or other payments for unemployment compensation or old age benefits, pensions, or annuities now or hereafter imposed upon employers by any government or agency thereof asserting jurisdiction in respect of such employees measured by the wages, salaries, compensation or other remuneration paid to such employees, and agrees to make such payments and to make and file all reports and returns and to do everything necessary to comply with the laws imposing such taxes, contributions or payments. 29. INDEMNIFICATION A. RELEASE COMPANY hereby covenants and agrees that, anything in this Agreement to the contrary notwithstanding, CONTINENTAL shall not be liable for (a) any acts or omissions of, or for any condition resulting from, the operations or activities of any person, firm or corporation, or its officers, directors, agents, employees, customers, invitees, vendors, or contractors relating to or arising out of this Agreement, or (b) any loss or damage to any property or the death or injury of any persons (including property of COMPANY, or its officers, directors, employees, agents, customers, vendors, contractors or invitees). Occasioned by theft, fire acts of God, or any governmental body or authority, injunction, riot, war, other tenants or the PREMISES, or any other matter beyond the control of CONTINENTAL, or any damage or inconvenience which may arise through repair, or alteration of the PREMISES, or failure to make repairs, or unavailability of utilities or for any cause whatsoever, except the gross negligence or willful misconduct of CONTINENTAL. B. INDEMNITY Anything in this Agreement to the contrary notwithstanding, and without limiting COMPANY's obligation to provide insurance pursuant to insurance provisions herein, COMPANY covenants and agrees that it shall protect, indemnify, defend and hold harmless, CONTINENTAL, its parent and subsidiaries, OWNER and their respective predecessors and former, present and future directors, officers, employees, agents, successors and assigns (the "Indemnitees"), From and against all liabilities, losses damages, penalties, claims, costs, charges and expenses, causes of action and judgments of any nature whatsoever, including, without limitation, fees and disbursements of counsel incurred by any Indemnitee in any action or proceeding between COMPANY and any Indemnitee, or between any Indemnitee and any third party or otherwise which may be imposed upon or incurred by the Indemnitees by reason or arising out of ant of the following (even if caused by the ordinary negligence of any Indemnitee, but not if caused by the gross negligence or willful misconduct of the Indemnitees): 1) Any occupancy, management or use of the PREMISES, or common areas or the service areas, parking areas, or pedestrian areas in the vicinity of the PREMISES, by COMPNAY or any of its directors, officers, agents, contractors, servants, employees, licensees, invitees, successors and assigns; 2) Any act of omission of COMPANY or any of its directors, officers, agents, contractors, servants, employees, licensees, invitees, successors and assigns; 3) Any accident, injury to or death of any person, or damage to or destruction of any property occurring on or in the vicinity of the PREMISES caused by COMPANY or any of its employees, agents, subcontractors or invitees, including but not limited to aircraft, interference with CONTINENTAL's operations, and loss of use; 4) Any failure on the part of COMPANY to comply with any of the covenants, agreements, terms or conditions contained in this Agreement, the BASE LEASE or any law, rule, regulation, requirement, order or directive for which it is responsible; CONTINENTAL shall promptly notify COMPANY of any such claim asserted against it and forward copies of all papers or legal process served upon it in connection with any action or proceeding brought against any Indemnitee by reason of any such claim. C. CITY HELD HARMLESS In addition to the provisions of Section 29 herein, Lessee shall indemnify, defend, keep and hold City, including Board and the City's officers, agents, servants, and employees, harmless from any and all costs, liability, damage, or expense (including costs of suit and fees and reasonable expenses of legal services) claimed by anyone by reason of injury to or death of persons or damage to or destruction of property including property of Lessee, sustained in, on, or about the demised premises or arising out of Lessee's use or occupancy thereof, or as a proximate result of the acts or omissions of Lessee, its agents, servants, or employees. 30. ENVIRONMENTAL OPERATIONS COMPANY covenants and agrees: A. That it shall not cause or permit any Hazardous Material to be brought upon the PREMISES without the written consent of CONTINENTAL and OWNER, and shall advise CONTINENTAL of any known or suspected environmental contamination; B. That its operations shall at all times remain in compliance with: 1) CONTINENTAL's and OWNER's written restrictions and requirements governing the identification and use of chemical and petroleum products; 2) All orders and regulations promulgated by the Occupational, Safety and Health Administration and by the Environmental Protection Agency, and all other federal, state and local laws, rules, regulations, requirements, orders and directive governing safety, the environment and hazardous and toxic substances; C. That it shall: 1) secure at its own expense, all required permits, licenses and authorizations necessary for such compliance; 2) advise CONTINENTAL and OWNER of any notice of potential or actual non-compliance; 3) immediately upon receipt, provide CONTINENTAL and OWNER with copies of any notice or notices relating to non-compliance: 4) allow CONTINENTAL's and OWNER's designated representative the unrestricted right to inspect and review its on-premises operations and equipment. Unless necessary in an emergency situation, neither CONTINENTAL's nor OWNER's representatives shall purposefully interfere with or inhibit COMPANY's operation. D. That all notices, copies and correspondence relating to this Section shall be delivered as described in the NOTICE provision of this Agreement to the following address, or to any address subsequently provided by proper notice. Copies of such material shall be hand-delivered to CONTINENTAL's on-site representative upon request: Continental Airlines, Inc. Environmental Affairs 2929 Allen Parkway, Suite 1401 Houston, TX 77019 E. As used herein, the term "Hazardous Material" includes any hazardous, explosive, radioactive, or toxic substance, material, or waste which is or becomes regulated by any local governmental authority, the state in which the Sublease PREMISES is located or the United States, including, without limitation, any material or substance which is (a) defined or listed as a "hazardous waste," "extremely hazardous waste," "restricted hazardous waste," "Hazardous substance," "hazardous material," "pollutant," or "contaminant" under any Law, (b) a radioactive material, (c) a polychlorinated biphenyl, (d) asbestos or an a asbestos derivative, (e) urea formaldehyde foam insulation, or (f) radon gas. 31. INSURANCE ENDORSEMENTS COMPANY shall cause the required insurance coverage to be duly and properly endorsed by it insurance underwriters to provide that: A. CONTINENTAL, OWNER, and their respective officers, directors, agents and employees are named as additional insured thereunder to the extent of COMPANY's obligation to indemnify them under this Agreement, where allowed by law. B. The policies shall include a standard cross liability clause. C. COMPANY's insurance shall be primary insurance and that any other insurance policy or policies of CONTINTENTAL and OWNER are noncontributory, secondary or excess insurance. D. COMPANY's policy expressly insures COMPANY's contractual liability assumed by COMPANY under this Agreement. E. COMPANY's insurers waive all right of subrogation against CONTINENTAL and OWNER, and their respective directors, officers, agents and employees and their insurers. F. CONTINENTAL shall be given thirty (30) days prior, written notice of any cancellation, or other material or adverse change. G. COMPANY's insurers agree that COMPANY's breach of any warranty set forth in its policy of insurance will not invalidate the insurance as to CONTINENTAL and OWNER. Upon execution of this Agreement, and upon any reasonable request by CONTINENTAL, COMPANY shall forthwith supply CONTINENTAL with certificates of insurance as evidence of the insurance coverage and endorsements required herein. COMPANY agrees that the terms of these insurance requirements may be revised, and the minimum coverages may be increased upon the written demand of CONTINENTAL, which demand shall be based on reasonable and justifiable grounds. 32. SURVIVAL OF TERMS Termination of this Agreement or any part thereof by notice, expiration of term or otherwise, shall not relieve COMPANY of any liabilities or obligations accrued on or prior to the date of termination, and the indemnities and insurance provisions contained or referred to herein shall remain in effect and shall survive the expiration or other termination of this Agreement. 33. TERMINATION Without limiting any rights of CONTINENTAL to terminate this Agreement as may be afforded by operation of law, this Agreement shall also be terminated at the option of CONTINENTAL, as follows: A. Immediately upon the termination or expiration of the BASE LEASE or any portion thereof relating to the PREMISES, or upon expiration or termination of CONTINENTAL's right to grant to COMPANY the right to occupy and use the PREMISES as contemplated herein, in which event COMPANY shall have no claim for the unexpired term hereof; provided, CONTINENTAL during the term hereof agrees to take no action which would cause expiration or termination of the BASE LEASE, except that CONTINENTAL shall not be limited from exercising any option set forth in the BASE LEASE triggered upon the occurrence of any condemnation, fire or other casualty to the PREMISES or to the BUILDING of which the PREMISES are a part. B. Immediately and without notice to COMPANY in the event that COMPNAY files a voluntary petition in bankruptcy or that proceedings in bankruptcy shall be instituted against COMPANY and not dismissed within one hundred twenty (120) days, or that a court shall take jurisdiction of COMPANUY or its assets pursuant to proceedings brought under the provisions of any federal reorganization act, or that a receiver of COMPANY's assets shall be appointed and such taking or appointment shall not be stayed or vacated within a period of thirty (30) days. C. Immediately upon written notice to COMPANY, if COMPANY fails to pay any installment of rent or additional rent within ten (10) days after such amount is due. D. Immediately upon written notice to COMPANY, if COMPANY fails to perform, keep, and observe any the covenants, terms and conditions which COMPANY is obligated herein to perform, keep and observe, except that termination shall be stayed as long as COMPANY cannot reasonably cure such default immediately, and as long as COMPANY is diligently proceeding to cure such default (but in no event shall termination be stayed for more than 60 days). E. Immediately by either party upon the acquisition or condemnation of the PREMISES by eminent domain, in which event COMPANY shall have no claim (I) for the unexpired term hereof, or (ii) any part of the award made for the PREMISES, but may claim any award or its personal property. F. Abandonment of the PREMISES by COMPANY for more than 48 hours, unless due to circumstances beyond COMPANY's reasonable control. In the event that this Agreement is terminated in accordance with the foregoing prior to the expiration of the term hereof, or during any extension thereof, CONTINENTAL may relet the PREMISES for any term and under any conditions it may deem satisfactory, which shall not affect or impair CONTINENTAL's right to recover actual damages occasioned by any default by COMPANY. 34. NON-DISCRIMINATION AND EQUAL OPPORTUNITY COMPANY, for itself, its successors in interest and assigns, as a part of the consideration hereof, as a covenant running with the land, covenants and agrees that it shall not discriminate by segregation or otherwise against any person the use of the PREMISES, or any services. Privileges, accommodations, or activities provided by COMPANY, and to be bound by and to perform in accordance with all applicable provisions and requirements of all federal, state and local laws, executive orders and regulations issued pursuant thereto, including without limitation, and to the extent applicable to this Agreement, the provisions contained within: A. The Fair Labor Standards Act. B. The Equal Opportunity clause set forth in 41 CFR Parts 60-1 et seq., pursuant to the requirements of Section 202 of Executive Order 11246, as amended, and the implementing regulations of the Office of Federal Contract Compliance Programs. C. Contractual requirements of the Rehabilitation Act of 1973 as set forth in 41 CFR Sec 60-741.4; and of the Vietnam Era Veterans Readjustment Act of 1974 as set forth in 41 CFR Sec. 60-250.4. D. The requirements of the Occupational Safety and Health Act and regulations issued thereunder; E. Titles I, II, III, IV, and V of the Americans with Disabilities Act of 1990 As the foregoing may be amended or replaced, which provisions are incorporated herein by reference as if set forth in full. By execution of this Agreement each party represents and warrants compliance with the aforementioned regulations and will furnish proof thereof on demand. F. COMPANY covenants and agrees to release, indemnify, hold harmless and defend OWNER and CONTINENTAL, its parent and subsidiaries and their representative directors, officers, employees, agents, successors and assigns from and against any and all claims, liabilities, losses, expenses, damages, causes of action and judgment of any nature whatsoever, including but not limited to reasonable attorney, consultant and expert fees, costs and related expenses; and including, but not limited to clean-up or other curative measures ordered by the Occupational, Safety and Health Administration or the Environmental Protection Agency or any other federal, state or local agency or entity asserting jurisdiction; arising out of the discharge, disbursal, release orescape of any hazardous substance, toxic chemical pollutant, contaminant or irritant, in solid, liquids or gaseous form, arising out of or in any manner connected with any act or omission of COMPANY or its directors, officers, agents, contractors, servants, employees, licensees, invitees, successors and assigns. G. COMPANY further covenants and agrees to: 1) Indemnify and defend CONTINENTAL and OWNER from and against any and all claims, liabilities, losses and judgments arising out of COMPANY's failure to comply with these provisions; and 2) Include and require inclusion of these provisions in all agreements regarding the PREMISES, including, without limitation, those of its contractors, subcontractors, successors and assigns. 35. NON-DISCRIMINATION BREACH In the event of any breach of any of the above non-discrimination covenants, CONTINENTAL shall have the right to terminate this Agreement and to reenter and repossess the PREMISES, and hold the same as if this Agreement had never been made or issued. This provision shall not be effective until the procedures of Title 49, CFR Part 21 are followed and completed, including exercise or expiration of appeal rights. 36. SEVERABILITY If any term or provision of this Agreement or the application thereof to any person or circumstance shall, to any extent, be declared invalid or unenforceable by a court of competent jurisdiction, such invalidity shall not affect or impair the remainder if this Agreement or its application to any other person or circumstance, and this Agreement shall not be affected or impaired under any circumstance or in any jurisdiction where such provision remains valid. 37. COLORADO LAW THIS AGREEMENTSHALL BE CONTRUED AND PERFORMANCE THEREOF SHALL BE DETERMINED ACCORDING TO THE LAWS OF THE STATE OF COLORADO 38. TIME IS OF THE ESSENCE The parties expressly agree that time is the essence of this Agreement and of every provision hereof. Failure by a party to complete performance within the time specified, or within a reasonable time if no time is specified herein, shall, without prejudice of any other rights or remedies, relieve the other party of any obligation to accept such performance. 39. QUIET ENJOYMENT CONTINTENTAL agrees that upon payment of the rents and other payment due, and performance of the covenants and agreements on the part of COMPANY to be performed hereunder, COMPANY shall peaceably have and enjoy the PREMISES subject to an event of Force Majeure and to the terms and conditions herein. 40. LIENS COMPANY shall not allow any condition to exist o situation to develop whereby any party would be entitled, as a matter of law, to a lien against the PREMISES, and agrees to indemnify, release, defend and hold CONTINENTAL and OWNER harmless from and against any and all costs, expenses and claims arising therefrom. 41. WAIVER No waiver by either party at any time of any of the terms, conditions, covenants or agreements herein or of any forfeiture, including any delay, failure or omission of CONTINENTAL to reenter the PREMISES, shall be deemed to taken as a waiver at any time thereafter of the same or any other term, condition, covenant, or agreement herein contained, nor of the strict and prompt performance thereof. No notice shall be required to restore or revive any right, power, privilege, option or remedy after waiver, and no right, power, privilege, option or remedy shall be construed as being exhausted or discharged by the exercise thereof in one or more instances. Each and all of the rights, powers, privileges, options and remedies given to either party by this Agreement shall be cumulative, and no one of them shall be exclusive of the other or exclusive of any remedies provided by law.-- 42. ASSIGNMENT This Agreement and the rights and obligations created hereunder may not be assigned or delegated by COMPANY without the prior written consent of CONTINENTAL and OWNER. (If OWNER's consent is required under the BASE LEASE); but, subject to the foregoing, this Agreement and the rights and obligations of the parties hereby created, shall be binding upon and inure to the benefit of the parties hereto, their respective successors, assigns and legal representatives. CONTINENTAL reserves the right to assign or transfer its interest hereunder without notice. 43. CAPTIONS The captions of the articles and sections of this Agreement are inserted for convenience only, and are not intended and shall not be construed to affect in any manner the terms and conditions hereof, or the interpretations or construction thereof. 44. APPROVAL BY OWNER The parties hereto agree that this Agreement is subject to the consent and approval of OWNER. If written consent thereto is denied, either party may, at its option, but without limiting any rights that may exist for any breach of this Agreement shall thereafter become null and void, and the parties shall become discharged form all liabilities hereunder attributable to the period of time after such rescission. 45. ENTIRE AGREEMENT This Agreement, including any exhibits and inclusions by reference, contains the entire understanding between the parties hereto, and supersedes and revokes all previous negotiations, arrangements, letters in intent, offers, proposals representations, and information conveyed, whether oral or in writing, between the parties hereto or their respective representatives or any person purporting to represent either. COMPANY acknowledges that it has not been induced to enter into this Agreement by any representation or construction of this Agreement, and agrees that CONTINENTAL shall have no liability for any consequences arising as a result of such representation. No amendment, change or addition to this Agreement shall be binding upon either party hereto unless in writing and signed by the parties hereto and approved by the Manager of Aviation. WITNESS THEREOF, the parties hereto have caused this Agreement to be executed as of the effective date hereof. CONTINENTAL AIRLINES, INC. FRONTIER AIRLINES, INC. BY:_________________________ BY:_____________________ TITLE:______________________ TITLE:__________________ DATE:______________________ DATE:__________________ CITY AND COUNTY OF DNEVER BY:_________________________ TITLE:______________________ DATE:______________________ EX-23 11 CONSENT OF INDEPENDANT AUDITORS The Board of Directors Frontier Airlines, Inc. We consent to the incorporation by reference in the registration statements Nos. 333-13333 and 333-31389 on For S-8 and Nos. 333-07699 and 333-58867 on Form S-3 of Frontier Airlines, Inc. of our report dated June 2, 1999, except as to Note 11, which is as of June 16, 1999, with respect to the balance sheets of Frontier Airlines, Inc. as of March 31, 1999 and 1998, and the related statements of operations, stockholders' equity and cash flows for each of the years in the three year period ended March 31, 1999, which report appears in March 31, 1999 Form 10-K of Frontier Airlines, Inc. KPMG LLP Denver, Colorado June 21, 1999 EX-27 12 FINANCIAL DATA SCHEDULE
5 12-mos Mar-31-1999 Apr-01-1999 Mar-31-1999 42,289,072 0 17,129,998 199,960 1,203,916 94,208,538 13,391,368 4,657,590 119,620,295 68,720,840 0 0 0 16,141 44,374,508 119,620,295 220,607,710 220,607,710 0 195,927,715 (1,107,130) 0 700,635 25,086,490 (5,479,570) 30,566,060 0 0 0 30,566,060 2.14 1.98
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